** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **(Mark One)**                                                                                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                          |   |   |
| **ý**                                                                                                                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                          |   |   |
| ** **                                                                                                                                                                                                                                                    | **For the quarterly period  ended      May 31, 2005** |
|                                                                                                                                                                                                                                                          |   |   |
| **OR**                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                          |   |   |
| **o**                                                                                                                                                                                                                                                         | ** ** | **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** | ** ** | **333-119701** |
|----------------------------|------------|----------------|
| ** **                 | ** ** | **333-119701** |

 

**RefcoGroup Ltd., LLCRefco Finance Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 
| **Delaware  Delaware**                                                           | ** ** | **52-2169014  20-1400416**            |
|----------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                 |       | (I.R.S. Employer  Identification No.) |
|                                                                             |       |                                  |
| **One  World Financial Center  200 Liberty Street, Tower A  New York, New York** | ** ** | **10281**                             |
| (Address of  Principal Executive Offices)                                        |       | (Zip Code)                            |

 

**(212) 693-7000**

(Registrants’ Telephone Number, Including Area Code)

 

**NotApplicable**

(Former Name,Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes   ý  No   o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct).   Yes   o  No   ý

 

**Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date. **As of July 14, 2005, Refco Finance Inc.had 1,000 shares of its common stock outstanding. Refco Group Ltd., LLC is asingle member limited liability company, and its sole member is New Refco GroupLtd., LLC.

 

 

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**REFCO GROUP LTD.,LLCREFCO FINANCE INC.**

**Table of Contents**

 
| ** ** | ** **            | **Page No.**                                                                                                                                              |
|------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Part I.    | Financial Information |                                                                                                                                                      |
|       |                  |                                                                                                                                                      |
|       | Item 1.               | Financial Statements (unaudited)                                                                                                                          |   |
|       |                  |                                                                                                                                                      |   |
|       |                  | Consolidated  Balance Sheets as of  May 31, 2005 (unaudited) and February 28, 2005                                                              | 1 |
|       |                  |                                                                                                                                                      |   |
|       |                  | Consolidated  Statements of Income for the three months ended  May 31, 2005 (Successor) and 2004 (Predecessor) (unaudited)                           | 2 |
|       |                  |                                                                                                                                                      |   |
|       |                  | Consolidated  Statements of Changes in Member’s Equity  for the three months ended May 31, 2005 (Successor) and  2004 (Predecessor) (unaudited) | 3 |
|       |                  |                                                                                                                                                      |   |
|       |                  | Consolidated Statements of Cash Flows for  the three months ended  May 31, 2005 (Successor) and 2004 (Predecessor) (unaudited)                       | 4 |
|       |                  |                                                                                                                                                      |   |
|       |                  | Notes to the  Consolidated Financial Statements (unaudited)                                                                                               | 5 |
|       |                  |                                                                                                                                                      |   |
|       | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                               | 22 |
|       |                  |                                                                                                                                                      |   |
|       | Item 3.               | Quantitative and  Qualitative Disclosures About Market Risk                                                                                               | 39 |
|       |                  |                                                                                                                                                      |   |
|       | Item 4.               | Controls and Procedures                                                                                                                                   | 40 |
|       |                  |                                                                                                                                                      |   |
| Part II.   | Other Information     | 41                                                                                                                                                        |
|       |                  |                                                                                                                                                      |   |
|       | Item 1.               | Legal Proceedings                                                                                                                                         | 41 |
|       |                  |                                                                                                                                                      |   |
|       | Item  2.              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                              | 41 |
|       |                  |                                                                                                                                                      |   |
|       | Item 3.               | Defaults Upon Senior  Securities                                                                                                                          | 41 |
|       |                  |                                                                                                                                                      |   |
|       | Item 4.               | Submission of Matters to  a Vote of Security Holders                                                                                                      | 41 |
|       |                  |                                                                                                                                                      |   |
|       | Item  5.              | Other  Information                                                                                                                                        | 41 |
|       |                  |                                                                                                                                                      |   |
|       | Item 6.               | Exhibits                                                                                                                                                  | 41 |

 

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**PART I****– FINANCIAL INFORMATION**

## ** **

## **ITEM1**.                  FINANCIAL STATEMENTS

 

**REFCO GROUP LTD., LLC AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                       | ** ** | **May 31, 2005** | ** ** | **February 28, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                                                                       | ** ** | **(unaudited)**       | ** ** | ** **                 | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands)**    | ** ** |
| Cash and cash  equivalents                                                                                       |       | $                     | 405,029    |                       | $          | 522,621 |   |
| Cash and  securities segregated under federal and other regulations:                                             |       |                  |       |                       |       |
| Cash and cash  equivalents                                                                                       |       | 1,053,218             |       | 1,102,539                  |       |
| Securities  purchased under agreements to resell                                                                 |       | 67,013                |       | 58,650                     |       |
| Securities  purchased under agreements to resell                                                                 |       | 46,551,374            |       | 30,235,871                 |       |
| Deposits with  clearing organizations and others                                                                 |       | 2,519,147             |       | 2,439,653                  |       |
| Receivables from  securities borrowed                                                                            |       | 2,631,989             |       | 3,128,304                  |       |
| Receivables from  broker-dealers and clearing organizations                                                      |       | 10,770,348            |       | 1,996,331                  |       |
| Receivables from  customers, net of $62,107 and $61,190 in reserves, respectively                                |       | 1,807,446             |       | 2,081,968                  |       |
| Securities  owned, at market or fair value                                                                       |       | 6,774,039             |       | 5,594,797                  |       |
| Memberships in  exchanges (market value: May 31, 2005: $58,984, February 28,  2005: $60,566) |       | 36,159                |       | 36,638                     |       |
| Goodwill                                                                                                         |       | 744,110               |       | 716,566                    |       |
| Identifiable  intangible assets                                                                                  |       | 595,931               |       | 578,702                    |       |
| Other assets                                                                                                     |       | 363,888               |       | 275,209                    |       |
| Total assets                                                                                                     |       | $                     | 74,319,691 |                       | $          | 48,767,849 |   |
|                                                                                                             |       |                  |       |                       |       |
| Liabilities                                                                                                      |       |                  |       |                       |       |
| Short-term  borrowings, including current portion of long-term borrowings                                        |       | $                     | 144,913    |                       | $          | 32,628 |   |
| Securities sold  under agreements to repurchase                                                                  |       | 43,333,241            |       | 28,625,903                 |       |
| Payable from  securities loaned                                                                                  |       | 2,458,147             |       | 3,028,933                  |       |
| Payable to  broker-dealers and clearing organizations                                                            |       | 8,444,520             |       | 741,122                    |       |
| Payable to  customers                                                                                            |       | 7,622,809             |       | 6,847,558                  |       |
| Securities sold,  not yet purchased, at market or fair value                                                     |       | 10,590,379            |       | 7,833,022                  |       |
| Accounts  payable, accrued expenses and other liabilities                                                        |       | 278,149               |       | 252,582                    |       |
| Long-term  borrowings                                                                                            |       | 1,236,000             |       | 1,238,000                  |       |
| Total  liabilities                                                                                               |       | 74,108,158            |       | 48,599,748                 |       |
| Commitments and  contingent liabilities                                                                          |       |                  |       |                       |       |
| Membership  interests issued by subsidiary and minority interest                                                 |       | 23,606                |       | 15,351                     |       |
| Member’s equity                                                                                             |       | 187,927               |       | 152,750                    |       |
| Total  liabilities and member’s equity                                                                      |       | $                     | 74,319,691 |                       | $          | 48,767,849 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

1

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**REFCO GROUP LTD., LLC ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                                                                                                                | ** ** | **Successor**                             | ** ** | ** ** | **Predecessor**                           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **Three Months Ended  May 31, 2005** | ** ** | ** ** | **Three Months Ended  May 31, 2004** | ** ** |
| ** **                                                                                                                                                                | ** ** | **(unaudited)**                           | ** ** |
| ** **                                                                                                                                                                | ** ** | **(in thousands)**                        | ** ** |
| Revenues                                                                                                                                                                  |       |                                      |       |       |                                      |       |
| Commissions and  brokerage                                                                                                                                                |       | $                                         | 244,213    |       |                                      | $          | 215,795 |   |
| Interest                                                                                                                                                                  |       | 939,471                                   |       |       | 377,560                                   |       |
| Principal  transactions, net                                                                                                                                              |       | 114,764                                   |       |       | 61,200                                    |       |
| Asset management  and advisory fees                                                                                                                                       |       | 5,559                                     |       |       | 1,891                                     |       |
| Other                                                                                                                                                                     |       | 8,029                                     |       |       | 978                                       |       |
| Total revenues                                                                                                                                                            |       | 1,312,036                                 |       |       | 657,424                                   |       |
| Expenses                                                                                                                                                                  |       |                                      |       |       |                                      |       |
| Commissions and  order execution costs                                                                                                                                    |       | 207,920                                   |       |       | 142,706                                   |       |
| Interest                                                                                                                                                                  |       | 923,830                                   |       |       | 344,254                                   |       |
| Employee  compensation and benefits                                                                                                                                       |       | 74,245                                    |       |       | 64,570                                    |       |
| General,  administrative and other                                                                                                                                        |       | 62,263                                    |       |       | 47,521                                    |       |
| Total expenses                                                                                                                                                            |       | 1,268,258                                 |       |       | 599,051                                   |       |
| Income before  provision for income taxes, income from equity investees, members’ interest  in earnings of subsidiary, minority interest and discontinued operations |       | 43,778                                    |       |       | 58,373                                    |       |
| Provision for  income taxes                                                                                                                                               |       | 4,990                                     |       |       | 6,330                                     |       |
| Income before  income from equity investees, members’ interest in earnings of subsidiary,  minority interest and discontinued operations                             |       | 38,788                                    |       |       | 52,043                                    |       |
| Income from  equity investees                                                                                                                                             |       | 14,182                                    |       |       | 6,597                                     |       |
| Members’  interest in earnings of subsidiary and minority interest                                                                                                   |       | 10,383                                    |       |       | 926                                       |       |
| Income from  continuing operations                                                                                                                                        |       | 42,587                                    |       |       | 57,714                                    |       |
| Discontinued  operations:                                                                                                                                                 |       |                                      |       |       |                                      |       |
| Income from  discontinued operations                                                                                                                                      |       | —                                    |       |       | 3,437                                     |       |
| Applicable  income tax expense                                                                                                                                            |       | —                                    |       |       | 1,881                                     |       |
| Net income                                                                                                                                                                |       | $                                         | 42,587     |       |                                      | $          | 59,270 |   |

 

The accompanying notesare an integral part of these financial statements.

 

2

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**REFCO GROUP LTD., LLC ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’EQUITY**

 
| ** **                                     | ** ** | **Members’ equity** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **Common  capital**      | ** ** | **Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | ** **               | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **               | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Balance, February 29,  2004 (predecessor) |       | $                        | 595,398    |   | $ | 20,686 |   | $ | 616,084 |   |
| Net income                                     |       | 59,270                   |       | — |   | 59,270 |   |
| Currency  translation adjustment               |       | —                   |       | (4,254 | ) | (4,254 | ) |
| Balance, May 31,  2004 (predecessor)      |       | $                        | 654,668    |   | $ | 16,432 |   | $ | 671,100 |   |
|                                           |       |                     |       |   |   |   |   |
|                                           |       |                     |       |   |   |   |   |
| Balance, February 28,  2005 (successor)   |       | 143,404                  |       | 9,346 |   | 152,750 |   |
| Net income                                     |       | 42,587                   |       | — |   | 42,587 |   |
| Issuance of  Class B units to employees   |       | 559                      |       | — |   | 559 |   |
| Currency  translation adjustment               |       | —                   |       | (7,969 | ) | (7,969 | ) |
| Balance, May 31,  2005 (successor)        |       | $                        | 186,550    |   | $ | 1,377 |   | $ | 187,927 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**REFCO GROUP LTD., LLC ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                | ** ** | **Successor**         | ** ** | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **May 31, 2005** | ** ** | ** ** | **May 31, 2004** | ** ** |
| ** **                                                                | ** ** | **(unaudited)**       | ** ** |
| ** **                                                                | ** ** | **(in thousands)**    | ** ** |
| Cash flows from  operating activities                                     |       |                  |       |       |                  |       |
| Net income                                                                |       | $                     | 42,587     |       |                  | $          | 59,270 |   |
| Income from  discontinued operations                                      |       | —                |       |       | 1,556                 |       |
| Net income from  continuing operations                                    |       | 42,587                |       |       | 57,714                |       |
| Noncash items  included in net income                                     |       |                  |       |       |                  |       |
| Depreciation and  amortization                                            |       | 9,662                 |       |       | 6,361                 |       |
| Stock  compensation expense                                               |       | 559                   |       |       | —                |       |
| Members’  interest in earnings of subsidiary and minority interest   |       | 10,383                |       |       | 926                   |       |
| (Increase)  decrease in operating assets                                  |       |                  |       |       |                  |       |
| Cash and  securities segregated under federal and other regulations:      |       |                  |       |       |                  |       |
| Cash and cash  equivalents                                                |       | 49,321                |       |       | (60,234               | )          |
| Securities  purchased under agreements to resell                          |       | (8,363                | )          |       | 13,230                |       |
| Restricted cash                                                           |       | —                |       |       | (500,000              | )          |
| Securities  purchased under agreements to resell                          |       | (16,315,503           | )          |       | (15,980,574           | )          |
| Deposits with  clearing organizations and others                          |       | (79,494               | )          |       | (87,606               | )          |
| Receivables from  securities borrowed                                     |       | 496,315               |       |       | (1,037,181            | )          |
| Receivables from  broker-dealers and clearing organizations               |       | (8,774,017            | )          |       | (3,006,915            | )          |
| Receivables from  customers                                               |       | 274,522               |       |       | (443,286              | )          |
| Receivables from  equity members                                          |       | —                |       |       | (13,777               | )          |
| Securities  owned, at market or fair value                                |       | (1,179,242            | )          |       | (865,349              | )          |
| Memberships in  exchanges                                                 |       | 479                   |       |       | (75                   | )          |
| Other assets                                                              |       | (126,013              | )          |       | 12,713                |       |
| Increase  (decrease) in operating liabilities                             |       |                  |       |       |                  |       |
| Short-term  borrowings, including current portion of long-term borrowings |       | 112,285               |       |       | (20,890               | )          |
| Securities sold  under agreements to repurchase                           |       | 14,707,338            |       |       | 17,857,323            |       |
| Payable from  securities loaned                                           |       | (570,786              | )          |       | 809,225               |       |
| Payable to  broker-dealers and clearing organizations                     |       | 7,703,398             |       |       | 1,797,426             |       |
| Payable to  customers                                                     |       | 775,251               |       |       | 612,510               |       |
| Securities sold,  not yet purchased, at market or fair value              |       | 2,757,357             |       |       | 569,003               |       |
| Accounts  payable, accrued expenses and other liabilities                 |       | 17,598                |       |       | 14,264                |       |
| Net cash used in  operating activities                                    |       | (96,363               | )          |       | (265,192              | )          |
| Cash flows from  investing activities                                     |       |                  |       |       |                  |       |
| Acquisition of  businesses, net of cash acquired                          |       | (17,101               | )          |       | —                |       |
| Net cash used in  investing activities                                    |       | (17,101               | )          |       | —                |       |
| Cash flows from  financing activities                                     |       |                  |       |       |                  |       |
| Repayment of  long-term borrowings                                        |       | (2,000                | )          |       | —                |       |
| Net withdrawals  to membership interests issued by subsidiary             |       | (2,128                | )          |       | (4,876                | )          |
| Net cash used in  financing activities                                    |       | (4,128                | )          |       | (4,876                | )          |
| Net cash provided  by discontinued operations                             |       | —                |       |       | 151,315               |       |
| Net decrease in  cash and cash equivalents                                |       | (117,592              | )          |       | (118,753              | )          |
| Cash and cash  equivalents, beginning of period                           |       | 522,621               |       |       | 316,213               |       |
| Cash and cash  equivalents, end of period                                 |       | $                     | 405,029    |       |                  | $          | 197,460 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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**REFCO GROUP LTD., LLC AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTEA—ORGANIZATION**

 

Refco Group Ltd., LLC (the “Company”)is a limited liability company under the laws of the State of Delaware. RefcoFinance Inc. is a Delaware corporation and a wholly owned subsidiary of the Company.The consolidated financial statements include the accounts of the Company andits subsidiaries (collectively, the “Group”), including Refco Finance Inc. TheGroup is a diversified financial services organization and is among the leadingfirms in the futures and options brokerage business. In addition to its futuresand options activities, the Group provides fund management and administrativeservices and is also a substantial broker of cash market products, includinggovernment securities, foreign exchange and foreign exchange options,international equities and emerging markets debt. The Group’s worldwideheadquarters in New York are complemented by a network of U.S. andinternational offices.

 

The Group’s principaloperating subsidiaries comprise Refco Securities, LLC, a registered broker-dealer,Refco, LLC, a registered Futures Commission Merchant and Refco Capital Markets,Ltd., an offshore securities and foreign exchange broker.

 

Prior to the closing date ofthe Transactions on August 5, 2004, the Group was 90% owned by Refco GroupHoldings, Inc. (“RGHI”), a Delaware corporation. The remaining 10% wasowned by BAWAG Overseas, Inc., a third party financial institution.

 

*TheTransactions*

 

On June 8, 2004, THLRefco Acquisition Partners entered into an equity purchase and merger agreementwith the Company, RGHI and certain other parties, which was amended on July 9,2004 (the “Purchase Agreement”). The Purchase Agreement provided for a seriesof transactions that resulted in New Refco Group Ltd., LLC (“New Refco”)becoming the Group’s parent and THL Refco Acquisition Partners and its affiliatesand co-investors acquiring a 56.7% interest in New Refco, based on avaluation of New Refco of $2.3 billion, following the closing of theTransactions on August 5, 2004. THL Refco Acquisition Partners and itsaffiliates are affiliates of Thomas H. Lee Partners, L.P. Thomas H. LeePartners, L.P. is a leading private equity firm focused on identifying andacquiring substantial ownership stakes in mid-to large-cap growthcompanies.

 

Concurrently with theconsummation of the Transactions, the Group distributed $550.0 million in cashand other capital distributions and all the equity interests of Forstmann-LeffInternational Associates, LLC, which upon consummation of the Transactionsowned substantially all the assets of the Company’s Asset Management business(the “Asset Management Distribution”), to RGHI, an entity wholly owned byPhillip Bennett upon consummation of the Transactions. This distribution didnot include the retained assets from the Group’s Asset Management Business,Refco Alternative Investments, which have been retained and became part of theGroup’s Derivatives Brokerage & Clearing business.

 

The following unaudited proforma consolidated summary of operations presents information of the Company asif the Transactions had occurred on March 1, 2004.

 

| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **May 31, 2004**  | ** ** |
| ** **    | ** ** | **(unaudited)**        | ** ** |
| ** **    | ** ** | **(in thousands)**     | ** ** |
| Total revenue |       | $                      | 657,424    |   |
| Net income    |       | 37,762                 |       |
|               |            |                        |            |  |

 

These pro forma results arefor illustrative purposes. They do not purport to be indicative of the resultsof operations that actually would have resulted had the Transactions occurredas of March 1, 2004, or the future results of operations of the Company.

 

For purposes ofidentification and description, Refco Group Ltd., LLC and its subsidiaries arereferred to as the “Predecessor” for the period prior to the Transactions, the “Successor”for the period subsequent to the Transactions and the “Group” for both periods.

 

 

5

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**NOTEB—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofpreparation**

 

The consolidated financialstatements include the accounts of the Company and each of its subsidiaries, mostof which are wholly owned. Refco Securities, LLC, a subsidiary of the Company,issues non-voting membership interests in the normal course of business.All material intercompany transactions and balances have been eliminated inconsolidation.

 

20% to 50% owned companiesare accounted for using the equity method and included in “Other Assets.”

 

The Group consolidatesentities deemed to be variable interest entities (“VIEs”) when the Group isdetermined to be the primary beneficiary under Financial Accounting StandardsBoard (“FASB”) Interpretation No. 46 Revised (December 2003), *Consolidation of Variable Entities* (“Interpretation 46 R”).

 

The preparation ofconsolidated financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

These unaudited consolidatedfinancial statements reflect all adjustments that are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiod presented. These adjustments are of a normal, recurring nature. Interimperiod operating results may not be indicative of the operating results for afull year. These consolidated financial statements should be read in conjunctionwith the Group’s fiscal year-end consolidated financial statements.

 

**Recentlyissued accounting pronouncement**

 

In May 2005, the FASBissued SFAS No. 154, *Accounting Changesand Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3*. SFAS No. 154 replaces Accounting**Principles Board Opinion No. 20, *Accounting Changes*, and SFAS No. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and changes the requirements for the accounting for andreporting of a**change inaccounting principle. This statement applies to all voluntary changes inaccounting principle**and alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the**pronouncementdoes not include specific transition provisions. The statement is effective foraccounting**changes andcorrections of errors made in fiscal years beginning after December 15,2005. The**Company will adopt theprovisions of SFAS No. 154 beginning in fiscal year 2007. Management**believes that the adoption of theprovisions of SFAS No. 154 will not have a material impact on the**Company’s current consolidated financialstatements.

 

**NOTE C—NETCAPITAL REQUIREMENT**

 

The Company’s subsidiaryRefco Securities, LLC is subject to the uniform net capital requirements of theSecurities and Exchange Commission (“SEC”) under Rule 15c3-1 (the “Rule”),which requires the maintenance of minimum net capital. Refco Securities, LLCcomputes its net capital requirements under the alternative method provided forin the Rule, which requires that Refco Securities, LLC maintain net capitalequal to the greater of $250,000 or 2% of aggregate customer related debititems, as defined in SEC Rule 15c3-3. The net capital rule alsoprovides that equity capital may not be withdrawn or cash dividends paid ifresulting net capital would be less than 5% of aggregate debits. As of May 31,2005, Refco Securities, LLC had net capital of $62.2 million, which was 11.1%of aggregate debit balances and $49.6 million in excess of required netcapital.

 

6

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The Company’s subsidiaryRefco, LLC is subject to the Commodity Futures Trading Commission’s (“CFTC”)minimum financial requirements, which require that the subsidiary maintain netcapital, as defined. The requirement is equal to the greater of 4% of customerfunds required to be segregated/secured pursuant to the Commodity Exchange Actless the market value of certain commodity options, all as defined, or the sumof 8% of the customer risk maintenance margin requirement plus 4% of the non-customerrisk maintenance margin requirement. The net capital rule also provides thatRefco, LLC must maintain adjusted net capital in excess of an early warninglevel equal to 110% of its net capital requirement. Additionally, thesubsidiary is subject to certain restrictions in reductions in capital, as defined.As of May 31, 2005, Refco, LLC had net capital of $354.5 million, whichwas $167.7 million in excess of required net capital.

 

**NOTE D – PRINCIPAL TRANSACTIONS,NET**

 

The Group, as a broker ofderivatives products, enters into contractual commitments, as principal, involvingforward settlement. The Group generally enters into offsetting contracts toachieve economic hedges, which result in a profit spread for the Group. Boththe contractual commitment and the offsetting contract are recorded at fairvalue. The Group does not apply hedge accounting as defined in SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, and all offsetting contracts are marked to market andincluded in the Consolidated Statements of Income. Both realized and unrealizedgains and losses are recognized and recorded in the consolidated statements ofincome under “Principal transactions, net” as follows:

 
| ** **                 | ** ** | **Three Months Ended  May 31, 2005** | ** ** | ** **                      | **Three Months Ended  May 31, 2004** | ** **                |
|----------------------------|------------|-------------------------------------------|------------|---------------------------------|-------------------------------------------|---------------------------|
| ** **                 | ** ** | **Net**                                   | ** ** | ** **                      | **Net**                                   | ** **                |
| ** **                 | ** ** | **Realized  Gains  (Losses)**             | ** ** | **Unrealized  Gains  (Losses)** | ** **                                | **Total Gains  (Losses)** | ** ** | ** ** | **Realized  Gains  (Losses)** | ** ** | **Unrealized  Gains  (Losses)** | ** ** | **Total Gains  (Losses)** | ** ** |
| ** **                 | ** ** | **(unaudited)**                           | ** ** |
| ** **                 | ** ** | **(in thousands)**                        | ** ** |
| Foreign currency  forwards |       | $                                         | 24,615     |                            | $                                         | 17,240                    |   | $ | 41,855 |   |   | $ | 2,643 |   | $ | 3,399 |   | $ | 6,042 |   |
| Futures                    |       | (12,349                                   | )          | 29,640                          |                                      | 17,291                    |   |   | 16,145 |   | 19,230 |   | 35,375 |   |
| Options                    |       | 7,312                                     |       | (4,044                          | )                                         | 3,268                     |   |   | 4,107 |   | 2,591 |   | 6,698 |   |
| Treasury notes             |       | 72,585                                    |       | (20,130                         | )                                         | 52,455                    |   |   | 19,023 |   | (5,903 | ) | 13,120 |   |
| Bonds                      |       | 4,484                                     |       | (10,210                         | )                                         | (5,726                    | ) |   | 1,932 |   | (2,398 | ) | (466 | ) |
| Other                      |       | (29                                       | )          | 5,650                           |                                      | 5,621                     |   |   | 745 |   | (314 | ) | 431 |   |
| Total                      |       | $                                         | 96,618     |                            | $                                         | 18,146                    |   | $ | 114,764 |   |   | $ | 44,595 |   | $ | 16,605 |   | $ | 61,200 |   |

 

The following table showsthe gross notional or contractual amounts of derivatives held by the Group.

 
| ** **                        | ** ** | **As of May 31, 2005** | ** **  | **As of February 28, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------|-------------|----------------------------------|------------|
| ** **                        | ** ** | **Notional**                | ** **  | **Fair Value**                   | ** ** | **Notional** | ** ** | **Fair Value** | ** ** |
| ** **                        | ** ** | **(unaudited)**             | ** **  | ** **                       | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **(in thousands)**          | ** **  |
| Forward currency  contracts       |       | $                           | 110,108,090 |                             | $          | 6,999 |   | $ | 79,683,493 |   | $ | (5,382 | ) |
| Swap contracts                    |       | 45,258                      |        | (705                             | )          | 30,056 |   | (3,199 | ) |
| Option contracts  sold or written |       | 13,406,921                  |        | (273,016                         | )          | 19,125,420 |   | (352,428 | ) |
| Option contracts  purchased       |       | 10,743,001                  |        | 278,363                          |       | 14,478,439 |   | 370,410 |   |
| Exchange-traded  futures          |       | 15,541,937                  |        | 22,473                           |       | 14,246,658 |   | (1,873 | ) |
| Total                             |       | $                           | 149,845,207 |                             | $          | 34,114 |   | $ | 127,564,066 |   | $ | 7,528 |   |

 

7

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**NOTE E – COMMITMENTS ANDCONTINGENCIES**

 

**Commitments**

 

The Group occupies officesin various locations under operating leases expiring through 2014. Futureminimum rental payments required under significant leases for premises,excluding any escalation adjustments, are as follows (in thousands):

 
| **Fiscal period**  | ** ** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|------------|
| Nine months  ended 2006 |       | $          | 8,793      |       |
| 2007                    |       | 11,631     |       |
| 2008                    |       | 12,073     |       |
| 2009                    |       | 8,051      |       |
| 2010                    |       | 7,578      |       |
| Thereafter              |       | 19,674     |       |
|                    |       | $          | 67,800     |       |
|                         |            |            |            |            |  |  |

 

The Group’s rent expense forthe three months ended May 31, 2005 and 2004 was $3.3 million and $2.5million, respectively.

 

The Company has commitments to enter into certainforward and reverse-forward repurchase agreements of $51.3 billion and $49.0billion as of May 31, 2005 and February 28, 2005, respectively.

 

**PurchaseCommitments**

 

On June 10, 2003, theGroup acquired 50% of the shares of the Friedberg Mercantile Group (“FMG”), aregistered broker/investment dealer. The Group has a commitment to purchase theremaining 50% of FMG’s shares at June 10, 2008 for a maximum price of $17.5million.

 

**Lines ofCredit**

 

The Company’s subsidiaryRefco Capital, LLC has a $20.0 million credit facility, pursuant to which RefcoCapital, LLC provides financing to fund the margin requirements of certaincommercial customers who maintain futures trading accounts with us. Advancesunder this facility are secured by Refco Capital, LLC’s security interest inthe customer’s rights to payments arising from these accounts. As of May 31,2005, the Company has no outstanding debt under this facility.

 

Refco Securities, LLC hastwo lines of credit with Euroclear Bank S.A./N.V. in the aggregate amount of$550.0 million for the purpose of settling intra-day transactions and, ifnecessary, financing positions overnight. As of May 31, 2005, no amountswere outstanding under these facilities.

 

The Company’s subsidiariesRefco Singapore Pte. Ltd. and Refco Investment Services Pte Ltd. (Singapore)have facilities to assist with working capital requirements. The aggregateamount available under these facilities is approximately $29.0 million. TheCompany has guaranteed its subsidiaries’ obligations under these facilities. Asof May 31, 2005, the Company had no outstanding debt under thesefacilities.

 

Inaddition, several of the Company’s subsidiaries have facilities with variousfinancial institutions to, among other things, provide credit support to someof the Company’s customers, satisfy minimum exchange and clearing housecollateral requirements and provide stock financing in exchange-approvedwarehouses. The total availability under these facilities is approximately $496.2million. The Company has guaranteed all of its subsidiaries’ obligations underthese facilities, with the exception of one $10.0 million facility. As of May 31,2005, letters of credit in the aggregate amount of approximately $1.1 million wereoutstanding under these facilities.

 

8

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**Contingencies**

 

In the ordinary course ofbusiness, the Group has been named as a party to both litigation and administrativeproceedings, certain of which are described below.

 

On March 1, 2005,Trading Technologies International, Inc. (“Trading Technologies”) filed anaction against the Company, Refco, LLC and Refco EasySolutions, LLC(collectively, the “Refco parties”) in the U.S. District Court for the NorthernDistrict of Illinois, Eastern Division, alleging that the Refco partiesinfringed upon certain patents owned by Trading Technologies relating to electronictrading software. In its complaint, Trading Technologies demanded a preliminaryand permanent injunction against the Refco parties, as well as unspecifieddamages and costs. The Refco parties filed certain counterclaims for breach ofcontract and attempted monopolization and an affirmative defense of patentmisuse. On May 20, 2005, Trading Technologies filed a motion to dismiss thesecounterclaims and affirmative defense. Trading Technologies has also announcedthat it has postponed its planned termination of certain licensing agreementswith the Refco parties until at least July 15, 2005.

 

Certain of the Group’ssubsidiaries have been named in a legal proceeding in which the plaintiffs, twohedge funds and their investment managers, alleged that the subsidiariesbreached a customer agreement governing the plaintiffs’ margin account whenthey required the plaintiffs to increase the value of collateral securing amargin loan from 60% to 100% in September 1998.

 

On September 15, 2003,the Supreme Court of the State of New York granted the Group’s motion forsummary judgment on six of the seven claims and dismissed those claims withprejudice. By Order dated March 16, 2004, the appellate court (AppellateDivision, First Department) affirmed the trial court’s decision. On May 11,2004, the trial court granted the Group’s motion to bifurcate the trial of liabilityfrom any trial on damages. The remaining claim of liability was tried before ajury in June 2004.

 

On June 17, 2004, thejury returned a verdict in favor of the plaintiffs’ claim as to the Group’s liability.The Group moved the trial court (a) for judgment in favor of the Group asa matter of law, (b) to set aside the verdict and (c)(i) to directentry of judgment for the Group as a matter of law, or (ii) in thealternative, to order a new trial on plaintiffs’ second cause of action. Bymemorandum decision and order dated March 3, 2005, the trial court grantedthe Group’s post-trial motion to set aside the jury verdict as againstthe weight of the evidence and ordered a new trial. Tradewinds has filed anotice of appeal of the order and the Group has filed a notice of cross appeal.The court scheduled a pre-trial conference for August 12, 2005. Ifthe parties’ appeals have not been perfected by that date, the court will set adate for a new trial.

 

After consultation withlegal counsel, management believes that it is not probable that a material losswill result from the final verdict. The Group raised its margin requirements to100% and/or terminated plaintiffs’ financing on specific bonds and issuedresulting margin calls to plaintiffs, who defaulted. The Appellate Division,First Department previously ruled that the Group had the contractual right toterminate margin loans to plaintiffs and thus did not breach any expressprovision of the customer agreements. The Group believes the sole issueremaining for the jury to determine was whether the Group breached the impliedcovenant of good faith and fair dealing when it exercised its contractualrights. The Group does not believe it breached the implied covenant when itexercised its contractual rights. Upon retrial, the Group believes theplaintiff will not be able to sustain its burden. Accordingly, the Group hasnot recorded an accrual for any losses that might arise from the final verdict.

 

9

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In 2001, the Division ofEnforcement of the SEC commenced an informal investigation into short sales ofthe stock of Sedona Corporation (“Sedona”). The SEC requested that the Groupproduce documents relating to any of its accounts that traded in the stock ofSedona. In June 2001, the SEC issued a formal order of investigation intoshort sales of Sedona stock, as well as other transactions. In 2002 and 2003,the Group received subpoenas from the SEC and a request for a writtenstatement. Generally, the subpoenas and the request required the production ofdocuments, tapes and information regarding two of the Group’s former brokerswho handled the account of Amro International, S.A. (“Amro”), one of the Group’sformer customers that engaged through its account with the Group in short salesof Sedona stock and whose financial advisor settled SEC charges with respect tosuch short sales in February 2003; the Group’s relationship with Amro andits two principals; other securities traded by Amro; and the Group’s recordkeeping, supervisory and short sale policies and restrictions.

 

On May 16, 2005, the Group announced that its subsidiary, RefcoSecurities, LLC (“Refco Securities”), had received a “Wells Notice” from theSEC arising out of the investigation. The Wells Notice stated that the SEC staff intends to recommend that acivil enforcement action be brought against Refco Securities, allegingviolations of Section 17(a) of the Securities Act of 1933, as amended, Sections10(b) and 17(a) of the Exchange Act of 1934, as amended, and Rules 10b-5,17a-3 and 17a-4 thereunder, Section 220.8 of Regulation T, ConductRule 3370 of the National Association of Securities Dealers, Inc., aiding andabetting violations of Section 15(a) of the Exchange Act of 1934, as amended,and failure to comply with a prior SEC cease and desist order and the Section21(a) order from the SEC.  The Group isin active discussions with the SEC to resolve the matters raised in theinvestigation and believes that it is near a resolution on all materialissues.  This settlement likely willinvolve an injunction against future violations of certain provisions,including anti-fraud provisions, of the federal securities laws, an orderto comply with the prior cease and desist order and the Section 21(a) order, anadministrative censure, payment of a substantial civil penalty and retention ofan independent consultant to review and make recommendations with respect tovarious business practices and procedures. The Group has recorded a reserve of $5 million for this potentialsettlement.

 

Santo C. Maggio, the President and Chief Executive Officer of RefcoSecurities, also has been in negotiations with the SEC staff, and likewise isnear a resolution of certain supervisory matters raised in theinvestigation.  Mr. Maggio, as part ofsuch resolution, is prepared to accept the entry of an administrative ordersuspending him for a year from any supervisory duties.  While complying with the restrictions of suchsupervisory suspension, Mr. Maggio would continue to work for the Group andRefco Securities in his current capacities.

 

Although the Group is working to finalize the terms of thesesettlements in a formal offer of settlement, the Group believes that thesettlements as described above are highly likely and that the SEC staff wouldrecommend such settlements to the SEC Commissioners, whose approval is required.There is no assurance that the Group will reach such settlements on these termsor, even if it does, that the SEC Commissioners will approve suchsettlements.  The terms of any finalsettlements approved by the SEC Commissioners, or any resolution of thesematters if the Group or Mr. Maggio is unable to reach a settlement withthe SEC, may be materially less favorable than the settlements described above.

 

In July 2005, the Company responded to statements byFrench lawyer Frederik-Karel Conoy on behalf of his client, Gerard Sillam, thatthe Company has not received any documents to corroborate the claim that Mr.Sillam has filed a criminal complaint in Paris against the Company, Thomas H.Lee Partners, L.P. and individuals. Since 2002, Mr. Sillam has institutednumerous commercial and criminal actions against Refco entities under theFrench legal system, which permits private individuals to initiate criminalproceedings.  The Company has cooperatedwith the criminal inquiries, none of which has resulted in any action againstany Refco entity or individual.  The Companyis vigorously defending these actions and believes that Mr. Sillam’s claim iswithout merit.  In 2004, Mr. Sillam fileda commercial claim in New York State Supreme Court but then requested and wasgranted dismissal of the case after the Company removed it to federal court.  To the Company’s knowledge, no action by Mr.Sillam against any Refco entity is pending in the United States.

 

In the opinion of managementand where appropriate, in consultation with outside counsel, the resolution ofthese and other matters will not have a material adverse effect on theconsolidated financial condition and results of operations of the Group infuture periods.

 

**NOTE F—SHORT-TERMBORROWINGS AND LONG-TERM BORROWINGS**

 

**Short-termborrowings**

 

The Group obtains short-termborrowings through bank loans. Short-term borrowings also include theportion of long-term borrowings maturing within one year and certain long-termborrowings that may be payable within one year at the option of the holder. Thecarrying value of these short-term obligations approximates fair valuedue to their short-term nature.

 

Bank loans are generallyfrom major money center banks and are primarily payable on demand. Interest ispaid at prevailing short-term market rates. The Group enters into loan agreementswith banks, which may be collateralized by letters of credit or other forms ofcollateral. Generally, the amounts pledged represent the underlying collateralfor the Group’s receivables from customers.

 

Short-term borrowingsat May 31, 2005 and February 28, 2005 are set forth below:

 
| ** **                               | ** ** | **May 31, 2005** | ** ** | **February 28, 2005** | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **(unaudited)**       | ** ** | ** **                 | ** ** |
| ** **                               | ** ** | **(in thousands)**    | ** ** |
| Bank loans                               |       | $                     | 136,913    |                       | $          | 24,628 |   |
| Current portion  of long-term borrowings |       | 8,000                 |       | 8,000                      |       |
| Total                                    |       | $                     | 144,913    |                       | $          | 32,628 |   |

 

10

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The weighted averageinterest rate on outstanding bank loans, which includes short-termfunding and overdrafts, was 4.55% and 3.78% at May 31, 2005 and February 28,2005, respectively.

 

Interest rates paid on short-termborrowings, excluding the current portion of long-term borrowings, rangedfrom 1.55% to 25.15% and 1.89% to 7.4% for the three months period ended May 31, 2005 and for the yearended February 28, 2005, respectively.

 

**Long-termborrowings**

 

Long-term borrowingsof $1,244.0 million and $1,246.0 million at May 31, 2005 and February 28,2005, respectively, consist of the following loans:

 
| ** **                                             | ** ** | **May 31,  2005** | ** ** | **February 28,  2005** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
|                                                   |       |                   |       |                        |       |
| New Senior  Credit Facility:                           |       |                   |       |                        |       |
| Secured Term  Loan                                     |       | $                      | 644,000    |                        | $          | 646,000 |   |
| Secured  Revolving Loan                                |       | —                 |       | —                      |       |
| 9% Senior  Subordinated Notes, due August 1, 2012 |       | 600,000                |       | 600,000                     |       |
|                                                   |       | 1,244,000              |       | 1,246,000                   |       |
| Less: Portion  included within short-term borrowings   |       | 8,000                  |       | 8,000                       |       |
| Total Long-term  borrowings                            |       | $                      | 1,236,000  |                        | $          | 1,238,000 |   |

 

In connection with theTransactions on August 5, 2004, the Company entered into a new SeniorCredit Facility (the “New Senior Credit Facility”) and issued 9% SeniorSubordinated Notes, a portion the proceeds from which was used to repay theoutstanding amounts under the old senior notes and the old subordinated loanfrom a member.

 

The New Senior CreditFacility provides for a $75.0 million revolving credit facility in revolvingcredit loans and letters of credit. The revolving credit facility matures on August 5,2010. The New Senior Credit Facility also provides for an $800.0 millionsecured term loan facility, which was fully drawn immediately after the closingof the Transactions. The secured term loan facility matures on August 5,2011. In January 2005, the Company voluntarily prepaid $150.0 million of borrowingsunder the secured term loan facility, and available borrowings thereunder werereduced to $648.0 million. On March 15, 2005, the Company refinanced andreplaced the secured term loan facility with a new secured term loan facilityproviding for borrowings of up to an aggregate principal amount of $648.0million. 

 

None of the revolving creditfacility has been drawn as of May 31, 2005. This facility will meet theGroup’s future needs for working capital and general corporate purposes.

 

The New Senior CreditFacility bears interest, at the Group’s option, at either the Eurodollar Rateor the Base Rate (both as defined), plus an applicable interest rate margin.The applicable margin under the revolving credit facility is determined basedupon the Leverage Ratio (as defined), as set forth in the following table:

 
| **Pricing** | ** ** | ** **                | ** ** | **Applicable Rate**  | ** ** |
|-------------|------------|---------------------------|------------|----------------------|------------|
| **Level**   | ** ** | **Leverage Ratio**        | ** ** | **Euro Dollar Rate** | ** ** | **Base Rate** | ** ** |
|        |       |                      |       |                 |       |   |   |
| 1           |       | >5.00:1                |       | 2.75                 | %          | 1.75 | % |
| 2           |       | >4.50:1 but <5.00:1 |       | 2.50                 | %          | 1.50 | % |
| 3           |       | >4.00:1 but <4.50:1 |       | 2.00                 | %          | 1.00 | % |
| 4           |       | <4.00:1                |       | 1.75                 | %          | 0.75 | % |

 

11

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The applicable margin forthe Eurodollar Rate loans and Base Rate loans under the term loan facility isdetermined based upon the Debt Rating (as defined), as set forth in thefollowing table:

 
| **Pricing** | ** ** | ** **                                                                       | ** ** | **Applicable Rate**  | ** ** |
|-------------|------------|----------------------------------------------------------------------------------|------------|----------------------|------------|
| **Level**   | ** ** | **Criteria**                                                                     | ** ** | **Euro Dollar Rate** | ** ** | **Base Rate** | ** ** |
|        |       |                                                                             |       |                 |       |   |   |
| 1           |       | rated at least BB- by S&P and Ba3 by Moody’s                            |       | 1.75                 | %          | 0.75 | % |
| 2           |       | rated at lease  BB- by S&P and B1 by Moody’s and Level 1 does not apply |       | 2.00                 | %          | 1.00 | % |
| 3           |       | if neither Level 1 nor Level 2 applies                                           |       | 2.25                 | %          | 1.25 | % |

 

The weighted averageinterest rates per annum in effect as of May 31, 2005 for the secured termloan facility was 5.03%. The interest rate payable under the New Senior CreditFacility will increase by 2.00% per annum during the continuance of any paymentor bankruptcy event of default.

 

The New Senior CreditFacility is also secured by, among other things:

 

•                  a first priority security interest insubstantially all of the assets of New Refco and the Company’s non-regulatedrestricted domestic subsidiaries (other than Refco Finance Inc.), includingwithout limitation, all receivables, contracts, contract rights, equipment,intellectual property, inventory and all other tangible and intangible assets,subject to certain customary exceptions;

 

•                  a pledge of (i) all of present andfuture capital stock of each of the Company and New Refco, each guarantor’sdirect domestic subsidiaries, including regulated domestic subsidiaries helddirectly by the Company or any guarantor and (ii) 65% of the voting stockof each of the Company and each guarantor’s direct foreign subsidiaries; and

 

•                  all proceeds and products of the property andassets described above.

 

In addition, the New SeniorCredit Facility is guaranteed by New Refco and the Company’s non-regulatedrestricted domestic subsidiaries.

 

On August 5, 2004, theCompany completed a financing, which consisted of the sale of $600.0 million of9% Senior Subordinated Notes due 2012 (the “New Notes”) pursuant to a privateoffering. The New Notes bear interest at the rate of 9% per annum, which ispayable semi-annually in cash in arrears on February 1 and August 1.The New Notes mature on August 1, 2012. The payment of the principal of,premium, if any, and interest on the New Notes and the payment of anySubsidiary Guaranty will be subordinate in right of payment to the priorpayment in full of all Senior Indebtedness of the Issuers or the relevantSubsidiary Guarantor, as the case may be. The Company has issued 9% SeniorSubordinated Notes due 2012 (the “Notes”) in exchange for all New Notes,pursuant to an exchange offer whereby holders of the New Notes received Notesthat have been registered under the Securities Act of 1933, as amended, havingterms substantially identical in all material aspects to the New Notes, exceptthat the Notes do not contain terms with respect to transfer restrictions.

 

12

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At any time prior to August 1,2007, the Company may redeem up to 35% of the aggregate principal amount of theNotes at a price of 109.000% in connection with a Designated Offering, asdefined. With the exception of a Designated Offering, the Notes are redeemableat the option of the Company beginning August 1, 2008 at prices decreasingfrom 104.500% of the principal amount thereof to par on August 1, 2010 andthereafter. Prior to August 1, 2008, the Company has the option to redeemall, but not less than all, of the Notes at a redemption price equal to 100% ofthe principal amount of the Notes, plus an Applicable Premium, as defined, plusaccrued and unpaid interest to the redemption date. The Company is not requiredto make mandatory redemption or sinking fund payments with respect to theNotes.

 

The indenture for the Notesrequires the Company and its subsidiaries to comply with certain restrictivecovenants, including a restriction on dividends; and limitations on theincurrence of indebtedness, certain payments and distributions and sales of theCompany’s assets and stock. The Company was in compliance with all contractualdebt commitments as of May 31, 2005 and February 28, 2005,respectively.

 

The Notes are fully andunconditionally guaranteed on an unsecured, senior subordinated basis by all ofthe Company’s active domestic non-regulated subsidiaries. The CondensedConsolidating Financial Information in Note K provides additional guarantor/non-guarantorinformation.

 

The table below sets out thematurities of the Group’s long-term borrowings (in thousands):

 

| **Fiscal year ended:** | ** ** | **2005**  | ** ** |
|------------------------|------------|-----------|------------|
|                   |       |      |       |
| 2006                   |       | $         | 6,000      |   |
| 2007                   |       | 8,000     |       |
| 2008                   |       | 8,000     |       |
| 2009                   |       | 8,000     |       |
| 2010                   |       | 8,000     |       |
| 2011 and  thereafter   |       | 1,206,000 |       |
|                   |       | $         | 1,244,000  |   |

 

The Group’s interest expensefrom long-term borrowings for each of the three months ended May 31,2005 and 2004 was $21.7 million and $7.0 million, respectively.

 

**NOTE G – VARIABLE INTERESTENTITIES**

 

An entity is subject toInterpretation 46 R and is called a VIE if it has (1) equity that isinsufficient to permit the entity to finance its activities without additionalsubordinated financial support from other parties, or (2) equity investorsthat cannot make significant decisions about the entity’s operations, or thatdo not absorb the expected losses or receive the expected returns of theentity. All other entities are evaluated for consolidation under SFAS No. 94,*Consolidation of All Majority-OwnedSubsidiaries*. A VIE is consolidated by its primary beneficiary,which is the party involved with the VIE that has a majority of the expectedlosses or a majority of the expected residual returns or both. In addition tothe VIEs that are consolidated in accordance with Interpretation 46 R, theGroup has significant variable interests in certain other VIEs that are notconsolidated because the Company is not the primary beneficiary. As of May 31,2005, the Group held variable interests in certain VIEs with respect to whichthe Group is deemed not to be the primary beneficiary. Those VIEs includeseveral managed futures funds with aggregate net asset value of approximately $511.6million managed by several of the Company’s subsidiaries since April 1,2003. Several of the Company’s subsidiaries earn fixed investment managementfees and, in certain cases, incentive fees and other fees from these managedfunds. As of May 31, 2005, the Group’s maximum exposure to loss from thefunds managed by these subsidiaries is not material.

 

13

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**NOTE H – ACQUISITIONS**

 

In April 2005, theGroup acquired the customer accounts and related business operations of TheLeague Corp. for approximately $11.2 million with an additional contingentpayment based on performance to be made after the one year period ended January 31,2006. This acquisition was accounted for as a purchase in conformity with SFAS No. 141,*Business Combinations*. The Company hasassigned $6.7 million to customer relationships and $1.1 million to non-competeagreements based on a preliminary valuation analysis by an independentvaluation firm. The customer relationships are amortized on an acceleratedbasis over a weighted-average economic useful life of nine years, and thenon-compete agreements are amortized on a straight line basis over fiveyears.

 

In May 2005, RefcoTrading Services (UK) Ltd., a wholly owned subsidiary of the Company, purchased86.2% of the outstanding ordinary share capital of EasyScreen plc (“EasyScreen”)for £15.525 per share, or £12.8 million, which valued the entire share capitalof EasyScreen at £14.8 million.  EasyScreenis a software development company that designs and markets innovative softwarefor trading on electronic markets.  As ofMay 31, 2005, the Company owned 95.3% of EasyScreen. This acquisition wasaccounted for as a purchase in conformity with SFAS No. 141. Based on aninitial estimate to be followed by a valuation from an independent firm, theCompany has assigned $15.0 million to technology, which is being amortized on astraight-line basis over an economic useful life of seven years.

 

**NOTE I – SEGMENT REPORTING**

 

Operating segments aredefined as components of an enterprise for which separate financial informationis regularly available and evaluated by the chief operating decision maker, ordecision making group, in deciding how to allocate resources and in assessingperformance.

 

The Group has reported theresults of operations related to Forstmann-Leff International Associates,LLC as discontinued operations. Forstmann-Leff International Associates,LLC was previously disclosed within the Asset Management segment. The Group’sremaining operations include two operating segments: (1) DerivativesBrokerage & Clearing; and (2) Prime Brokerage/Capital Markets.The Derivatives Brokerage & Clearing business operations consist ofexecution and clearing services for global exchange-traded derivatives inelectronic and open outcry markets. Prime Brokerage/Capital Markets is focusedon offering a variety of securities products consisting of fixed income,equities, foreign exchange and prime brokerage. The retained assets from theAsset Management segment, Refco Alternative Investments, have become part ofour Derivatives Brokerage & Clearing segment. Segment data has beenreclassified to reflect the current segment structure.

 

For financial reportingpurposes, and to reconcile to the amounts reported in the consolidatedfinancial statements, we have established a Corporate & Other non-operatingsegment. Corporate administration costs are not allocated to the respectivesegments and are included in Corporate & Other. Eliminations consistof intersegment interest income and interest expense derived in the Group’snormal course of business from intercompany funding.

 

14

----

 
| ** **                                                                                                                                                                | ** ** | **Derivatives  Brokerage &  Clearing** | ** ** | **Prime  Brokerage /  Capital Markets** | ** ** | **Corporate &  Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                                                                                                                | ** ** | **(in  thousands)**                             | ** ** |
| **Three  Months Ended May 31, 2005 (unaudited)**                                                                                                                     |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| Interest revenue                                                                                                                                                          |       | $                                               | 76,383     |                                    | $          | 1,002,355                       |       | $                | 3,771      |      | $          | (143,038 | ) | $ | 939,471 |   |
| Total revenues                                                                                                                                                            |       | 336,566                                         |       | 1,123,811                               |       | 5,506                           |       | (153,847         | )          | 1,312,036 |       |
| Interest expense                                                                                                                                                          |       | 50,464                                          |       | 973,328                                 |       | 43,076                          |       | (143,038         | )          | 923,830   |       |
| Depreciation and  amortization                                                                                                                                            |       | 3,096                                           |       | 3,782                                   |       | 2,784                           |       | —           |       | 9,662     |       |
| Income before  provision for income taxes, income from equity investees, member’s interest  in earnings of subsidiary and minority interest                          |       | 35,539                                          |       | 50,080                                  |       | (41,841                         | )          | —           |       | 43,778    |       |
|                                                                                                                                                                      |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| **As of May 31,  2005 (unaudited)**                                                                                                                                  |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| Total assets                                                                                                                                                              |       | 9,866,659                                       |       | 79,581,861                              |       | 774,774                         |       | (15,903,603      | )          |      | 74,319,691 |   |
|                                                                                                                                                                      |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| **Three  Months Ended May 31, 2004 (unaudited)**                                                                                                                     |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| Interest revenue                                                                                                                                                          |       | $                                               | 37,438     |                                    | $          | 381,034                         |       | $                | 6,624      |      | $          | (47,536 | ) | $ | 377,560 |   |
| Total revenues                                                                                                                                                            |       | 263,839                                         |       | 440,653                                 |       | 7,032                           |       | (54,100          | )          | 657,424   |       |
| Interest expense                                                                                                                                                          |       | 20,135                                          |       | 356,872                                 |       | 15,510                          |       | (48,263          | )          | 344,254   |       |
| Depreciation and  amortization                                                                                                                                            |       | 3,182                                           |       | 558                                     |       | 2,621                           |       | —           |       | 6,361     |       |
| Income before  provision for income taxes, income from equity investees, members’ interest  in earnings of subsidiary, minority interest and discontinued operations |       | 40,865                                          |       | 31,568                                  |       | (14,060                         | )          | —           |       | 58,373    |       |
|                                                                                                                                                                      |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| **As of February 28,  2005**                                                                                                                                         |       |                                            |       |                                    |       |                            |       |             |       |      |       |
| Total assets                                                                                                                                                              |       | 9,303,522                                       |       | 50,629,868                              |       | 719,168                         |       | (11,884,709      | )          |      | 48,767,849 |   |

 

15

----

 

*GeographicInformation*

 

The Group conducts businessin three countries that individually comprise greater than 10% of revenues andlong-lived assets within the last three years. The following informationprovides a reasonable representation of each region’s contribution to theconsolidated amounts:

 

| ** **      | ** ** | **Three Months  Ended  May 31, 2005** | ** ** | ** ** | **Three Months  Ended  May 31, 2004** | ** ** |
|-----------------|------------|--------------------------------------------|------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **(unaudited)**                            | ** ** |
| ** **      | ** ** | **(in thousands)**                         | ** ** |
| Total revenues: |       |                                       |       |       |                                       |       |
| United States   |       | $                                          | 1,056,306  |       |                                       | $          | 502,952 |   |
| Bermuda         |       | 115,112                                    |       |       | 52,262                                     |       |
| United Kingdom  |       | 79,386                                     |       |       | 66,361                                     |       |
| Other           |       | 61,232                                     |       |       | 35,849                                     |       |
| Total           |       | $                                          | 1,312,036  |       |                                       | $          | 657,424 |   |

 

| ** **          | ** ** | **As of  May 31, 2005** | ** ** | **As of  February 28, 2005** | ** ** |
|---------------------|------------|------------------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **(unaudited)**              | ** ** | ** **                        | ** ** |
| ** **          | ** ** | **(in thousands)**           | ** ** |
| Long-lived  assets: |       |                         |       |                              |       |
| United States       |       | $                            | 32,041     |                              | $          | 32,417 |   |
| Bermuda             |       | 1,302                        |       | 1,318                             |       |
| United Kingdom      |       | 5,965                        |       | 4,979                             |       |
| Other               |       | 8,957                        |       | 5,157                             |       |
| Total               |       | $                            | 48,265     |                              | $          | 43,871 |   |

 

**NOTE J – SUBSEQUENT EVENTS**

 

In April 2005, theBoard of Directors of Refco Inc., a newly-formed Delaware corporation,approved the filing with the SEC of a registration statement on Form S-1in connection with the proposed initial public offering (the “Offering”) of itscommon stock. Immediately prior to consummation of the Offering, the New Refco’sexisting members will contribute all of their Class A and Class Bunits in New Refco to Refco Inc. in exchange for shares of common stock ofRefco Inc. As a result, Refco Inc. will own all of the outstanding membershipinterests in New Refco. There can be no assurance that the Offering will beconsummated.

 

Refco Inc. is a Delaware “C”corporation, and as such is subject to federal and state income taxes. Deferredtax assets and liabilities will be recognized for the tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax basis. Deferred taxassets and liabilities will be measured using enacted tax rates applied totaxable income in the years in which those temporary differences are expectedto be recovered or settled. A deferred tax asset valuation allowance will berecorded if it is more likely than not that all or a portion of the recordeddeferred tax assets will not be realized.

 

In June 2005, the Groupentered into a definitive agreement to acquire the global brokerage operationsof Cargill Investor Services for $208.0 million in cash and a future contingentcash payment of between $67.0 million and $192.0 million, based on the performanceof the acquired operations.

 

16

----

 

**NOTE K –****CONDENSED CONSOLIDATINGFINANCIAL INFORMATION**

 

The following informationsets forth the Group condensed financial statements as of May 31, 2005 andFebruary 28, 2005 and for each of the three months ended May 31, 2005and 2004 on a consolidated basis and with respect to the Company (which werefer to below as “Parent”) the Subsidiary Guarantors under the indenture governingthe New Notes and the non-Guarantor Subsidiaries.

 

**Condensed consolidating balancesheet**

 
| ** **                                                                              | ** ** | **May 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **Parent**            | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation  Totals** | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**       | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**    | ** ** |
| Cash and cash  equivalents                                                              |       | $                     | —     |   | $ | 37,714 |   | $ | 367,315 |   | $ | — |   | $ | 405,029 |   |
| Cash and  securities segregated under federal and other regulations                     |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                              |       | —                |       | — |   | 1,053,218 |   | — |   | 1,053,218 |   |
| Securities  purchased under agreements to resell                                        |       | —                |       | — |   | 67,013 |   | — |   | 67,013 |   |
| Securities  purchased under agreements to resell                                        |       | —                |       | — |   | 53,805,462 |   | (7,254,088 | ) | 46,551,374 |   |
| Deposits with  clearing organizations and others                                        |       | —                |       | 8,380 |   | 3,579,657 |   | (1,068,890 | ) | 2,519,147 |   |
| Receivables from  securities borrowed                                                   |       | —                |       | — |   | 2,844,780 |   | (212,791 | ) | 2,631,989 |   |
| Receivables from  broker-dealers, clearing organizations and customers, net of reserves |       | 171,686               |       | 3,911,509 |   | 14,994,063 |   | (6,499,464 | ) | 12,577,794 |   |
| Securities  owned, at market value or fair value                                        |       | —                |       | 246 |   | 7,285,765 |   | (511,972 | ) | 6,774,039 |   |
| Investment in  and advances to subsidiaries                                             |       | 2,555,130             |       | 954,244 |   | — |   | (3,509,374 | ) | — |   |
| Goodwill,  identifiable intangible assets and other assets                              |       | 95,868                |       | 487,407 |   | 1,404,952 |   | (248,139 | ) | 1,740,088 |   |
| Total assets                                                                            |       | $                     | 2,822,684  |   | $ | 5,399,500 |   | $ | 85,402,225 |   | $ | (19,304,718 | ) | $ | 74,319,691 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Liabilities                                                                             |       |                  |       |   |   |   |   |   |   |   |   |
| Short-term  borrowings, including current portion of long-term borrowings               |       | $                     | 8,000      |   | $ | — |   | $ | 136,913 |   | $ | — |   | $ | 144,913 |   |
| Securities sold  under agreements to repurchase                                         |       | —                |       | — |   | 50,653,338 |   | (7,320,097 | ) | 43,333,241 |   |
| Payable from  securities loaned                                                         |       | —                |       | — |   | 2,534,496 |   | (76,349 | ) | 2,458,147 |   |
| Payable to  broker-dealers and clearing organizations                                   |       | —                |       | 4,806 |   | 8,517,177 |   | (77,463 | ) | 8,444,520 |   |
| Payable to  customers                                                                   |       | 1,322,444             |       | 4,325,821 |   | 9,845,731 |   | (7,871,187 | ) | 7,622,809 |   |
| Securities sold,  not yet purchased, at market value or fair value                      |       | —                |       | 255 |   | 10,590,124 |   | — |   | 10,590,379 |   |
| Accounts  payable, accrued expenses and other liabilities                               |       | 68,313                |       | 92,167 |   | 211,744 |   | (94,075 | ) | 278,149 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term  borrowings                                                                   |       | 1,236,000             |       | — |   | — |   | — |   | 1,236,000 |   |
| Subordinated  debt                                                                      |       | —                |       | — |   | 112,688 |   | (112,688 | ) | — |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Total  liabilities                                                                      |       | 2,634,757             |       | 4,423,049 |   | 82,602,211 |   | (15,551,859 | ) | 74,108,158 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Membership  interests issued by subsidiary and minority interest                        |       | —                |       | 2,609 |   | 20,997 |   | — |   | 23,606 |   |
| Member’s equity                                                                    |       | 187,927               |       | 973,842 |   | 2,779,017 |   | (3,752,859 | ) | 187,927 |   |
| Total  liabilities and member’s equity                                             |       | $                     | 2,822,684  |   | $ | 5,399,500 |   | $ | 85,402,225 |   | $ | (19,304,718 | ) | $ | 74,319,691 |   |

 

17

----

 

**Condensed consolidating balance sheet**

 
| ** **                                                                              | ** ** | **February 28,  2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                              | ** ** | **Parent**                  | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation  Totals** | ** ** |
| ** **                                                                              | ** ** | **(in  thousands)**         | ** ** |
|                                                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                              |       | $                           | —     |   | $ | 29,429 |   | $ | 493,192 |   | $ | — |   | $ | 522,621 |   |
| Cash and  securities segregated under federal and other regulations                     |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                              |       | —                      |       | — |   | 1,102,539 |   | — |   | 1,102,539 |   |
|                                                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Securities  purchased under agreements to resell                                        |       | —                      |       | — |   | 58,650 |   | — |   | 58,650 |   |
| Securities  purchased under agreements to resell                                        |       | —                      |       | — |   | 34,548,479 |   | (4,312,608 | ) | 30,235,871 |   |
| Deposits with  clearing organizations and others                                        |       | —                      |       | 6,348 |   | 3,409,003 |   | (975,698 | ) | 2,439,653 |   |
| Receivables from  securities borrowed                                                   |       | —                      |       | — |   | 3,128,304 |   | — |   | 3,128,304 |   |
| Receivables from  broker-dealers, clearing organizations and customers, net of reserves |       | 125,796                     |       | 3,298,520 |   | 6,508,245 |   | (5,854,262 | ) | 4,078,299 |   |
| Securities owned,  at market value or fair value                                        |       | —                      |       | 341 |   | 5,990,649 |   | (396,193 | ) | 5,594,797 |   |
| Investment in  and advances to subsidiaries                                             |       | 2,472,182                   |       | 907,702 |   | — |   | (3,379,884 | ) | — |   |
| Goodwill,  identifiable intangible assets and other assets                              |       | 95,352                      |       | 365,745 |   | 1,394,157 |   | (248,139 | ) | 1,607,115 |   |
| Total assets                                                                            |       | $                           | 2,693,330  |   | $ | 4,608,085 |   | $ | 56,633,218 |   | $ | (15,166,784 | ) | $ | 48,767,849 |   |
|                                                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Liabilities                                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Short-term  borrowings, including current portion of long-term borrowings               |       | $                           | 8,000      |   | $ | — |   | $ | 24,628 |   | $ | — |   | $ | 32,628 |   |
|                                                                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Securities sold  under agreements to repurchase                                         |       | —                      |       | — |   | 33,001,115 |   | (4,375,212 | ) | 28,625,903 |   |
| Payable from  securities loaned                                                         |       | —                      |       | — |   | 3,028,933 |   | — |   | 3,028,933 |   |
| Payable to  broker-dealers and clearing organizations                                   |       | —                      |       | 6,093 |   | 1,122,507 |   | (387,478 | ) | 741,122 |   |
| Payable to  customers                                                                   |       | 1,237,776                   |       | 3,601,764 |   | 8,603,429 |   | (6,595,411 | ) | 6,847,558 |   |
| Securities sold,  not yet purchased, at market value or fair value                      |       | —                      |       | 351 |   | 7,832,671 |   | — |   | 7,833,022 |   |
| Accounts payable,  accrued expenses and other liabilities                               |       | 56,804                      |       | 71,693 |   | 195,976 |   | (71,891 | ) | 252,582 |   |
| Long-term  borrowings                                                                   |       | 1,238,000                   |       | — |   | — |   | — |   | 1,238,000 |   |
| Subordinated  debt                                                                      |       | —                      |       | — |   | 113,264 |   | (113,264 | ) | — |   |
| Total  liabilities                                                                      |       | 2,540,580                   |       | 3,679,901 |   | 53,922,523 |   | (11,543,256 | ) | 48,599,748 |   |
| Membership  interests issued by subsidiary and minority interest                        |       | —                      |       | — |   | 15,351 |   | — |   | 15,351 |   |
| Member’s equity                                                                    |       | 152,750                     |       | 928,184 |   | 2,695,344 |   | (3,623,528 | ) | 152,750 |   |
| Total  liabilities and member’s equity                                             |       | $                           | 2,693,330  |   | $ | 4,608,085 |   | $ | 56,633,218 |   | $ | (15,166,784 | ) | $ | 48,767,849 |   |

 

18

----

 

**Condensed consolidating statementof income**

 
| ** **                                                                                                                                       | ** ** | **Three Months Ended May 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **Parent**                               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation  Totals** | ** ** |
| ** **                                                                                                                                       | ** ** | **(unaudited)**                          | ** ** |
| ** **                                                                                                                                       | ** ** | **(in thousands)**                       | ** ** |
| Revenues                                                                                                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Commissions and  brokerage                                                                                                                       |       | $                                        | —     |   | $ | 1,112 |   | $ | 252,109 |   | $ | (9,008 | ) | $ | 244,213 |   |
| Interest                                                                                                                                         |       | 1,962                                    |       | 49,582 |   | 1,030,965 |   | (143,038 | ) | 939,471 |   |
| Principal  transactions, net                                                                                                                     |       | —                                   |       | 30,100 |   | 84,664 |   | — |   | 114,764 |   |
| Asset management  and advisory fees                                                                                                              |       | —                                   |       | — |   | 5,559 |   | — |   | 5,559 |   |
| Other                                                                                                                                            |       | 1,725                                    |       | 2,706 |   | 5,399 |   | (1,801 | ) | 8,029 |   |
| Total revenues                                                                                                                                   |       | 3,687                                    |       | 83,500 |   | 1,378,696 |   | (153,847 | ) | 1,312,036 |   |
|                                                                                                                                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Expenses                                                                                                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Commissions and  order execution costs                                                                                                           |       | —                                   |       | 21,941 |   | 194,987 |   | (9,008 | ) | 207,920 |   |
| Interest                                                                                                                                         |       | 36,821                                   |       | 53,342 |   | 976,705 |   | (143,038 | ) | 923,830 |   |
| Employee  compensation and benefits                                                                                                              |       | 2,516                                    |       | 5,557 |   | 66,172 |   | — |   | 74,245 |   |
| General,  administrative and other                                                                                                               |       | 1,699                                    |       | 1,660 |   | 60,705 |   | (1,801 | ) | 62,263 |   |
| Total expenses                                                                                                                                   |       | 41,036                                   |       | 82,500 |   | 1,298,569 |   | (153,847 | ) | 1,268,258 |   |
| Equity in net  income of subsidiaries                                                                                                            |       | 80,541                                   |       | 43,373 |   | — |   | (123,914 | ) | — |   |
|                                                                                                                                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Income before  provision for income taxes, income from equity investees, member’s interest  in earnings of subsidiary and minority interest |       | 43,192                                   |       | 44,373 |   | 80,127 |   | (123,914 | ) | 43,778 |   |
| Provision for  income taxes                                                                                                                      |       | 605                                      |       | — |   | 4,385 |   | — |   | 4,990 |   |
| Income before  income from equity investees, member’s interest in earnings of subsidiary and  minority interest                             |       | 42,587                                   |       | 44,373 |   | 75,742 |   | (123,914 | ) | 38,788 |   |
| Income from  equity investees                                                                                                                    |       | —                                   |       | 13,442 |   | 740 |   | — |   | 14,182 |   |
| Member’s  interest in earnings of subsidiary and minority interest                                                                          |       | —                                   |       | — |   | 10,383 |   | — |   | 10,383 |   |
| Net income                                                                                                                                       |       | $                                        | 42,587     |   | $ | 57,815 |   | $ | 66,099 |   | $ | (123,914 | ) | $ | 42,587 |   |

 

19

----

 

**Condensed consolidating statementof income**

 
| ** **                                                                                                                                                                | ** ** | **Three Months Ended May 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **Parent**                               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation  Totals** | ** ** |
| ** **                                                                                                                                                                | ** ** | **(unaudited)**                          | ** ** |
| ** **                                                                                                                                                                | ** ** | **(in thousands)**                       | ** ** |
| Revenues                                                                                                                                                                  |       |                                     |       |   |   |   |   |   |   |   |   |
| Commissions and  brokerage                                                                                                                                                |       | $                                        | —     |   | $ | 1,893 |   | $ | 219,732 |   | $ | (5,830 | ) | $ | 215,795 |   |
| Interest                                                                                                                                                                  |       | 5,919                                    |       | 22,932 |   | 396,245 |   | (47,536 | ) | 377,560 |   |
| Principal  transactions, net                                                                                                                                              |       | —                                   |       | 12,970 |   | 48,230 |   | — |   | 61,200 |   |
| Asset management  and advisory fees                                                                                                                                       |       | —                                   |       | 1,702 |   | 189 |   | — |   | 1,891 |   |
| Other                                                                                                                                                                     |       | 369                                      |       | 1,334 |   | 9 |   | (734 | ) | 978 |   |
| Total revenues                                                                                                                                                            |       | 6,288                                    |       | 40,831 |   | 664,405 |   | (54,100 | ) | 657,424 |   |
| Expenses                                                                                                                                                                  |       |                                     |       |   |   |   |   |   |   |   |   |
| Commissions and  order execution costs                                                                                                                                    |       | —                                   |       | 4,978 |   | 142,831 |   | (5,103 | ) | 142,706 |   |
| Interest                                                                                                                                                                  |       | 12,273                                   |       | 28,924 |   | 351,320 |   | (48,263 | ) | 344,254 |   |
| Employee  compensation and benefits                                                                                                                                       |       | 1,025                                    |       | 4,925 |   | 58,620 |   | — |   | 64,570 |   |
| General,  administrative and other                                                                                                                                        |       | 4,536                                    |       | 7,456 |   | 36,263 |   | (734 | ) | 47,521 |   |
| Total expenses                                                                                                                                                            |       | 17,834                                   |       | 46,283 |   | 589,034 |   | (54,100 | ) | 599,051 |   |
| Equity in net  income of subsidiaries                                                                                                                                     |       | 70,816                                   |       | 70,146 |   | — |   | (140,962 | ) | — |   |
| Income before  provision for income taxes, income from equity investees, members’ interest  in earnings of subsidiary, minority interest and discontinued operations |       | 59,270                                   |       | 64,694 |   | 75,371 |   | (140,962 | ) | 58,373 |   |
| Provision for  income taxes                                                                                                                                               |       | —                                   |       | — |   | 6,330 |   | — |   | 6,330 |   |
| Income before  income from equity investees, members’ interest in earnings of subsidiary,  minority interest and discontinued operations                             |       | 59,270                                   |       | 64,694 |   | 69,041 |   | (140,962 | ) | 52,043 |   |
| Income from  equity investees                                                                                                                                             |       | —                                   |       | 6,209 |   | 388 |   | — |   | 6,597 |   |
| Members’  interest in earnings of subsidiary and minority interest                                                                                                   |       | —                                   |       | — |   | 926 |   | — |   | 926 |   |
| Income from  continuing operations                                                                                                                                        |       | 59,270                                   |       | 70,903 |   | 68,503 |   | (140,962 | ) | 57,714 |   |
| Discontinued  operations:                                                                                                                                                 |       |                                     |       |   |   |   |   |   |   |   |   |
| Income from  discontinued operations                                                                                                                                      |       | —                                   |       | — |   | 3,437 |   | — |   | 3,437 |   |
| Applicable income  tax expense                                                                                                                                            |       | —                                   |       | — |   | 1,881 |   | — |   | 1,881 |   |
| Net income                                                                                                                                                                |       | $                                        | 59,270     |   | $ | 70,903 |   | $ | 70,059 |   | $ | (140,962 | ) | $ | 59,270 |   |

 

20

----

 

**Condensed consolidating statementof cash flows**

 
| ** **                                                                            | ** ** | **Three Months Ended May 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **Parent**                               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation Totals** | ** ** |
| ** **                                                                            | ** ** | **(unaudited)**                          | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**                       | ** ** |
| Net cash  generated from (used in) operating activities                               |       | $                                        | 2,000      |   | $ | 8,285 |   | $ | (106,648 | ) | $ | — |   | $ | (96,363 | ) |
| Cash flows from  investing activities Acquisition of businesses, net of cash acquired |       | —                                   |       | — |   | (17,101 | ) | — |   | (17,101 | ) |
| Net cash used in  investing activities                                                |       | —                                   |       | — |   | (17,101 | ) | — |   | (17,101 | ) |
| Cash flows from  financing activities Repayment of long-term borrowings               |       | (2,000                                   | )          | — |   | — |   | — |   | (2,000 | ) |
| Withdrawals of  interests by members of subsidiary                                    |       | —                                   |       | — |   | (2,128 | ) | — |   | (2,128 | ) |
| Net cash used in  financing activities                                                |       | (2,000                                   | )          | — |   | (2,128 | ) | — |   | (4,128 | ) |
| Net increase (decrease)  in cash and cash equivalents                                 |       | —                                   |       | 8,285 |   | (125,877 | ) | — |   | (117,592 | ) |
| Cash and cash  equivalents, beginning of period                                       |       | —                                   |       | 29,429 |   | 493,192 |   | — |   | 522,621 |   |
| Cash and cash  equivalents, end of period                                             |       | $                                        | —     |   | $ | 37,714 |   | $ | 367,315 |   | $ | — |   | $ | 405,029 |   |

 
| ** **                                                                              | ** ** | **Three Months Ended May 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                              | ** ** | **Parent**                               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Consolidation Totals** | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**                          | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**                       | ** ** |
| Net cash  generated from (used in) operating activities                                 |       | $                                        | —     |   | $ | 14,715 |   | $ | (279,907 | ) | $ | — |   | $ | (265,192 | ) |
| Cash flows from  financing activities Withdrawals of interests by members of subsidiary |       | —                                   |       | — |   | (4,876 | ) | — |   | (4,876 | ) |
| Net cash used in  financing activities                                                  |       | —                                   |       | — |   | (4,876 | ) | — |   | (4,876 | ) |
| Net cash  generated from discontinued operations                                        |       | —                                   |       | — |   | 151,315 |   | — |   | 151,315 |   |
| Net increase (decrease)  in cash and cash equivalents                                   |       | —                                   |       | 14,715 |   | (133,468 | ) | — |   | (118,753 | ) |
| Cash and cash  equivalents, beginning of period                                         |       | —                                   |       | 4,477 |   | 311,736 |   | — |   | 316,213 |   |
| Cash and cash  equivalents, end of period                                               |       | $                                        | —     |   | $ | 19,192 |   | $ | 178,268 |   | $ | — |   | $ | 197,460 |   |
|                                                                                         |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 2****.****                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

* *

*Youshould read the following discussion in conjunction with our auditedconsolidated financial statements and the related notes thereto as of February 28,2005 and the Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our 2005 Annual Report on Form 10-K,and our unaudited consolidated interim financial statements and related notesthereto included elsewhere in this Form 10-Q.  Further, the following discussion includesinformation related to our Asset Management business, substantially all of theassets of which were distributed to Refco Group Holdings, Inc. on August 5,2004.*

** **

**General**

 

We provide execution andclearing services for exchange-traded derivatives and provide primebrokerage services in the fixed income and foreign exchange markets. We serveover 200,000 customer accounts from our 23 locations in 14 countries. Ourinternational operations generated $173.7 million, or 42.2%, of our netrevenues for the quarter ended May 31, 2005. Our customers includecorporations, government agencies, hedge funds, managed futures funds, pensionfunds, financial institutions, retail clients and professional traders.

 

We were historicallyorganized into three operating business segments for financial reportingpurposes: (i) Derivatives Brokerage & Clearing; (ii) PrimeBrokerage/Capital Markets; and (iii) Asset Management. We also havehistorically had a Corporate & Other non-operating business segment.Following the distribution of substantially all the assets of our AssetManagement business in connection with the THL Transactions described below, weare now organized into two operating business segments for financial reportingpurposes, Derivatives Brokerage & Clearing and Prime Brokerage/CapitalMarkets, and we have one non-operating business segment, Corporate &Other. We report the retained assets from our Asset Management business, RefcoAlternative Investments, as part of our Derivatives Brokerage & Clearingbusiness.

** **

**The THLTransactions and the Reincorporation**

 

On August 5, 2004, THL RefcoAcquisition Partners, an affiliate of Thomas H. Lee Partners, L.P., and itsaffiliates and co-investors acquired approximately 57% of the equityinterests in Refco Group, which they hold through New Refco Group Ltd., LLC,for approximately $507.0 million in cash. In connection with the transaction,Phillip Bennett, our President and Chief Executive Officer, exchanged hisexisting equity investment of approximately $382.5 million in Refco Group foran approximate 43% interest in New Refco, and other members of our managementmade an investment in New Refco aggregating approximately $4.5 million in cash.Concurrently with the closing of the acquisition, Refco Group entered intosenior credit facilities providing for a fully drawn $800.0 million term loanand an undrawn $75.0 million revolving loan facility, and, together with RefcoFinance, issued $600.0 million in aggregate principal amount of seniorsubordinated notes. Also concurrently with the consummation of the transactionsdescribed above, Refco Group distributed $550.0 million in cash as well as allof the equity interests of Forstmann-Leff International Associates, LLC,which at that time owned substantially all the assets of Refco Group’s AssetManagement business, to Refco Group Holdings, Inc., an entity that was owned byTone Grant and Phillip Bennett and that is now wholly owned by Phillip Bennett.We refer to the foregoing transactions collectively as the “THL Transactions.”

 

We presently conduct ourbusiness through Refco Group and its direct and indirect subsidiaries. Weintend to effect an initial public offering of common stock through Refco Inc.,a newly formed Delaware corporation that will act as a holding company for ourbusiness. Immediately prior to the initial public offering, Refco Inc. willenter into a series of transactions as a result of which, Refco Inc. willbecome the parent of New Refco and its wholly-owned and majority-ownedsubsidiaries and will have no other assets or operations. We refer to thesetransactions as the “Reincorporation” and Refco Inc.’s initial public offeringas the “initial public offering.”

 

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** **

**FactorsAffecting Our Results**

 

Our results of operationshave been, and we expect will continue to be, affected principally bytransaction volumes, interest rates, the level of global market activity,market volatility and expense management. Our results of operations have alsobeen affected by acquisitions.

 

Our revenues are primarilycomprised of: (i) transaction fees earned from executing and clearing customerorders, which we record as commissions and brokerage or principal transactions,net depending on the nature of the transaction, and (ii) interest income earnedon cash balances in our customers’ accounts and from providing securedfinancing through repurchase transactions. From fiscal year 2000 through fiscalyear 2005, our Derivatives Brokerage & Clearing net revenues increased at acompound annual growth rate of 24.3%, due primarily to annual increases incontract volumes executed or cleared and in part attributable to acquisitionsand annual increases in customer deposits. During the same period, our PrimeBrokerage/Capital Markets net revenues increased at a compound annual growthrate of 26.0%, due primarily to increases in both the number of customers andmarkets we serve as well as new product introductions and acquisitions.

 

***Transaction Volumes***

 

Since 2001, DerivativesBrokerage & Clearing transaction volumes, measured in numbers of contracts,have increased, reflecting the broad growth trend in contract trading volumescurrently being experienced in the derivatives industry. The continuedconvergence of derivatives and cash markets and the expanded use of derivativesfor hedging and investment purposes have been the primary drivers of thisindustry trend. This industry trend has been global in nature, with a rapidintroduction of new products in a variety of international markets. PrimeBrokerage/Capital Markets transaction volumes, specifically foreign exchangedollar volumes and our customer securities financing and clearing volumes,increased reflecting expanded U.S. government borrowing activity and thecontinued long-term growth of foreign exchange markets. Recently, thisincrease in volume has been accelerated by market volatility caused bypolitical uncertainty in the Middle East and its impact on energy supplies andthe uncertain outlook concerning economic growth, interest rates and, inparticular, the changing value of the U.S. dollar. We have been able to takeadvantage of the increase in derivatives transaction volume because of ourdiverse customer base, product offering and market coverage and have benefitedfrom the increase in prime brokerage volumes as a result of new productinitiatives, including online foreign exchange and emerging market debtbrokerage.

 

***Interest Rates***

 

Due to the fact that aportion of our revenues is derived from interest earned from the investment offunds deposited with us primarily by customers of our Derivatives Brokerage& Clearing business and the level of secured customer financing transactionsin our Prime Brokerage/Capital Markets business, the level of prevailinginterest rates affects our revenues. We generally benefit from rising interestrates. Rising interest rates increase the amount of net interest income earnedfrom these customer deposits and the potential financing spread available onsecured customer financing transactions. However, our interest expense alsoincreases as a result of rising interest rates because borrowings under our newsenior credit facilities accrue interest at variable rates. Declining interestrates decrease the amount of net interest income earned on customer depositsand the spread available on secured customer financing transactions. This isonly partially offset by a decrease in interest rates on borrowings under oursenior credit facilities.

 

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***Global Market Activity***

 

Each of our primary businesssegments is global in nature, and the general expansion of the global economyand continued globalization of financial markets have had a positive impact onour results of operations. The introduction of derivatives productsinternationally has accelerated in recent years, with emerging markets in Asiaand Latin America supplementing traditional centers in North America andEurope. This growth has been prompted by economic expansion in these regions,deregulation and globalization. Similar trends have emerged in our PrimeBrokerage/Capital Markets business as the capital markets in emerging economieshave become more sophisticated. We believe this has presented us with growthopportunities in non-dollar fixed income, emerging market debt andforeign exchange brokerage.

 

***Expense Management***

 

We have been able toleverage our operating capabilities to benefit from increased scale in ourtransaction volumes. By adding incremental volume to a pre-existingplatform, our marginal cost of growth in transaction processing has beenminimal. We believe we will benefit from the scalable nature of our transactionprocessing capabilities as more markets automate and move to electronicplatforms. A high proportion of our marginal expense is variable in nature,which provides us an opportunity to improve our cost to income ratio. Webelieve this characteristic will have a continuing positive impact on ourresults of operations.

 

***Acquisitions***

 

We have completed 16acquisitions since 1999. It has been our practice to integrate and rationalizeacquired companies as rapidly as possible, transferring operations to ourexisting platform. During the fiscal year ended February 28, 2002, weacquired the professional floor trader business of First Options, MST CanadaCo. and Main Street Trading, all derivatives brokerage businesses. We acquiredtwo other derivatives brokerage businesses during the fiscal year ended February 28,2003: a division of Spear, Leeds & Kellogg and CFG Financial Group Inc.During the fiscal year ended February 29, 2004, we acquired three assetmanagement businesses, Edinburgh Fund Managers Ltd., Societe Generale InvestmentManagers and Cardales UK Ltd., and five derivatives brokerage businesses,MacFutures Ltd., Carlton Brokerage Ltd., Friedberg Mercantile Group, RB&Hand Trafalgar Commodities Ltd. In September 2004, we acquired the customeraccounts and related assets of Pioneer Futures, a division of Pioneer Futures,Inc. In April 2005, we acquired the customer accounts and related businessoperations of The League Corp. In May 2005, we purchased 86.2% of theoutstanding ordinary share capital of EasyScreen plc, and as of May 31,2005, we owned 95.3% of its outstanding ordinary share capital. In addition, weentered into a purchase and sale agreement to acquire the global brokerageoperations of Cargill Investor Services in June 2005.

 

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**Results ofOperations**

 

***Revenues***

 

*TotalRevenues.*Thecomponents of our total revenues are commissions and brokerage, interest,principal transactions, net, asset management and advisory fees and otherincome.

 

Commissions and brokerage revenue.Commissions and brokerage revenues represent transaction fees earned onexecuted or cleared contracts in our Derivatives Brokerage & Clearingbusiness and transaction fees on trades in our Prime Brokerage/Capital Marketsbusiness. The transaction fees we charge are based on the type of customer, thetype of transaction, the method of trading and the volume of trading activitythat a particular customer conducts with us. The aggregate amount ofcommissions and brokerage revenues is a function of the number of transactionswe process and the amount of gross commissions charged to customers in respectof those transactions.

 

Interest revenue. Interestrevenue represents both interest earned from the investment of customer fundsdeposited with us as margin for their trading activities in our DerivativesBrokerage & Clearing business and interest earned from providing securedcustomer financing through repurchase agreements as part of our PrimeBrokerage/Capital Markets business. The latter involves taking a customer’ssecurity and refinancing it with a qualified financial counterparty. We earninterest revenue on these transactions by charging our customer a pre-determinedspread above our cost of refinancing. Overall, interest revenue is driven bythe level of customer deposits placed with our brokerage operations, the levelof secured financing transactions we provide to our customers and the level ofprevailing interest rates. Typically, the net interest that we earn is lower ina low interest rate environment and higher in a higher interest rateenvironment.

 

Principal transactions, net.Principal transactions, net revenue is generated mainly by our PrimeBrokerage/Capital Markets business and is derived from broking transactions innon-exchange traded derivatives and foreign exchange products. To executea customer’s order in non-exchange traded derivatives and foreignexchange products we enter into a transaction with our customer and asimultaneous and offsetting transaction in the market. We generally price thecustomer transaction such that we earn a small positive spread on theoffsetting transaction, which we record on our income statement as principaltransactions, net. This revenue represents our compensation for executing ourcustomers’ orders, and therefore is analogous to the commissions we earn whenexecuting our clearing contracts for exchange traded derivative contracts.

 

Although the absence of acentral clearing counterparty requires us to broker such transactions asprincipal, the risks associated with such transactions are not materiallygreater than those associated with the brokerage of exchange-tradedderivatives. Our customers bear the risk of the economic results of suchtransactions, and we confine ourselves to earning the positive spread on thetransaction. Nonetheless, because of our principal role, we are required torecord certain other aspects of the transactions, including a record ofrealized and unrealized gains and losses relating to such customertransactions. These transaction gains are for the benefit of our customers andany losses are for the account of our customers who secure the payment to us ofany such losses by depositing margin funds as collateral. Analyses of therealized and unrealized gains and losses as recognized and recorded underprincipal transactions, net for each of the three months ended May 31,2005 and May 31, 2004 are included in our unaudited consolidated financialstatements and the related notes thereto included elsewhere in this Form 10-Q.See Note D to our unaudited consolidated financial statements.

 

Asset management andadvisory fees revenues. Asset management and advisory fees revenues primarilyrepresent fees we charge for managing funds. The amount of these revenues hastraditionally fluctuated with the level of funds under management and theinvestment performance of these funds.

 

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*NetRevenues.*Although wereport total revenues on a gross basis in our consolidated financial statementsfor purposes of segment reporting and analyzing our revenues, we believe thatnet revenues provide a more meaningful indication of our operating results. Netrevenues represent total revenues less interest expense. Interest expenseincludes interest paid to Derivatives Brokerage & Clearing customers on thefunds they maintain with us and interest paid to finance counterparties in ourPrime Brokerage/Capital Markets business for the financing of customersecurities. For purposes of calculating net revenues, interest expense excludesinterest paid on long-term debt. We net interest expense against revenuesbecause a substantial portion of our interest expense pertains to customertransactions from which we derive interest income but in which we have arelated charge for interest expense.

 

***Expenses***

 

*Commissionsand Order Execution Costs.*Commissions and order execution costs include variable expenses relateddirectly to transactions conducted in our brokerage operations. These costsinclude exchange and clearing house fees, fees paid to third parties forexecution of customer orders and sales commissions paid in those cases wherecustomers are introduced and their orders are handled by non-salariedsales personnel.

 

*EmployeeCompensation and Benefits Expenses.*Employee compensation and benefits expenses include the cost of ourglobal salaried employees. These expenses include base compensation, bonuscompensation (whether discretionary or performance related) and the cost ofmedical insurance and other related employee benefits.

 

*General,Administrative and Other Expenses.*General, administrative and other expenses include all other operatingexpenses, including primarily lease expenses, communications and quotationsystems expenses, travel and entertainment expenses, depreciation andamortization, professional fees and other miscellaneous expenses.

 

***Income from Equity Investees***

 

We own minority interests invarious businesses. We record income earned by these businesses based on ourproportionate ownership. This income is recorded on our income statement asincome from equity investees. These companies are engaged in both derivativesbrokerage and prime brokerage operations in key product segments (such asretail foreign exchange brokerage) and important geographical markets (such asthe Taiwan derivatives markets). Because we consider these activities integralto our global operations and material to our results of operations, wehistorically included earnings from these activities in operating profit forcomparative purposes.

 

***Operating Profit***

 

Operating profit representsincome before provision for income taxes, dividends on preferred securitiesissued by subsidiaries, income from equity investees, members’ interest inearnings of subsidiary, minority interest and discontinued operations.

 

***Income Taxes***

 

We will be treated as apartnership for federal income tax purposes. Under applicable regulations,members of a limited liability company treated as a partnership are responsiblefor their individual income tax liabilities related to the limited liabilitycompany’s results of operations. Because we generated taxable income, weincluded in distributions to our members amounts sufficient to facilitate thepayment of tax liabilities arising from the limited liability company’s income.Accordingly, we have not provided for federal income taxes related to ourresults of operations. The provision for income taxes included in ourconsolidated financial statements relates to income taxes of foreignsubsidiaries.

 

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***Periodic Results***

The following tablessummarize our results of operations for the periods indicated and include ourconsolidated net revenues and net revenues and income before taxes and certainother items by segment. The consolidated financial data for the three monthsended May 31, 2004 and 2005 have been derived from our unauditedconsolidated financial statements.

Theinformation contained in the following tables should be read in conjunctionwith our unaudited consolidated financial statements and the related notesthereto included elsewhere in this Form 10-Q.

 
| ** **                                  | ** ** | **Three Months Ended May 31,** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2004**                            | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(unaudited)**                     | ** ** | **(unaudited)** | ** ** |
| ** **                                  | ** ** | **(in millions)**                   | ** ** |
| Commissions and  brokerage                  |       | $                                   | 215.8      |   | $ | 244.2 |   |
| Interest                                    |       | 377.6                               |       | 939.5 |   |
| Principal  transactions, net                |       | 61.2                                |       | 114.8 |   |
| Asset management  and advisory fees         |       | 1.9                                 |       | 5.6 |   |
| Other                                       |       | 1.0                                 |       | 8.0 |   |
| Total revenues                              |       | 657.4                               |       | 1,312.0 |   |
| Interest expense                            |       | (344.3                              | )          | (923.8 | ) |
| Interest expense  from long-term borrowings |       | 7.0                                 |       | 23.4 |   |
| Net revenues                                |       | $                                   | 320.2      |   | $ | 411.6 |   |

 
| ** **                                                                                                                                                                 | ** ** | **Three  Months Ended May 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2004**                             | ** ** | **2005** |   |
| ** **                                                                                                                                                                 | ** ** | **(unaudited)**                      | ** ** | **(unaudited)** |   |
| ** **                                                                                                                                                                 | ** ** | **(in  millions)**                   | ** ** |
| Net revenues:                                                                                                                                                              |       |                                 |       |   |   |
| Derivatives  Brokerage & Clearing                                                                                                                                      |       | $                                    | 243.7      |   | $ | 286.1 |   |
| Prime  Brokerage/Capital Markets                                                                                                                                           |       | 83.8                                 |       | 150.5 |   |
| Corporate &  Other(1)                                                                                                                                                  |       | (1.5                                 | )          | (14.1 | ) |
| Eliminations(1)                                                                                                                                                            |       | (5.8                                 | )          | (10.8 | ) |
| Total net  revenues                                                                                                                                                        |       | $                                    | 320.2      |   | $ | 411.6 |   |
|                                                                                                                                                                       |       |                                 |       |   |   |
| Expenses:                                                                                                                                                                  |       |                                 |       |   |   |
| Commissions and  order execution costs                                                                                                                                     |       | $                                    | 142.7      |   | $ | 207.9 |   |
| Employee  compensation and benefits                                                                                                                                        |       | 64.6                                 |       | 74.2 |   |
| General, administrative  and other                                                                                                                                         |       | 47.5                                 |       | 62.3 |   |
| Total                                                                                                                                                                      |       | $                                    | 254.8      |   | $ | 344.4 |   |
|                                                                                                                                                                       |       |                                 |       |   |   |
| Income before  provision for income taxes, income from equity investees, members’ interest  in earnings of subsidiary, minority interest and discontinued operations: |       |                                 |       |   |   |
| Derivatives  Brokerage & Clearing                                                                                                                                      |       | $                                    | 40.9       |   | $ | 35.5 |   |
| Prime  Brokerage/Capital Markets                                                                                                                                           |       | 31.6                                 |       | 50.1 |   |
| Corporate &  Other                                                                                                                                                     |       | (14.1                                | )          | (41.8 | ) |
| Total                                                                                                                                                                      |       | $                                    | 58.4       |   | $ | 43.8 |   |

 

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(1) These lineitems are included to reconcile these summarized financial tables to ourconsolidated financial statements. Corporate & Other net revenues andexpenses primarily include interest income and interest expense incurred at theparent company level as well as non-material fees and other expenses.Eliminations arise upon the consolidation of group operating performance andrelate to intercompany balances and transactions.

***Results for the Three Months Ended May 31, 2005 Compared to theThree Months Ended May 31, 2004***

*Net Revenues.*Net revenues on a consolidated basis for the three months ended May 31,2005 increased $91.4 million, or 28.5%, to $411.6 million from $320.2 millionfor the three months ended May 31, 2004. The increase in net revenues forthe three months ended May 31, 2005 was primarily due to the growth intransaction volumes that reflects broad secular trends across all major marketsegments that we serve. Commissions and brokerage revenue for the three monthsended May 31, 2005 increased $28.4 million, or 13.2%, to $244.2 millionfrom $215.8 million for the three months ended May 31, 2004. The increasewas primarily due to an increase of 30.2% in derivative transaction volumesfrom 159 million contracts cleared for the three months ended May 31, 2004to 207 million contracts cleared for the three months ended May 31, 2005.Net interest revenue, excluding interest from long-term borrowings, forthe three months ended May 31, 2005 decreased $1.2 million, or 3.0%, to$39.1 million from $40.3 million for the three months ended May 31, 2004.The decline in net interest revenues was the result of lower interest marginsprimarily related to the timing and duration at which investments mature. Thisdecline also reflects the reduced investment income available to our parentcompany, New Refco, following the distribution by us of $550.0 million inliquid working capital in connection with the THL Transactions. Principaltransactions, net revenue for the three months ended May 31, 2005increased $53.6 million, or 87.6%, to $114.8 million from $61.2 million for thethree months ended May 31, 2004. This increase was primarily due to a126.7% increase in foreign exchange dollar volumes to $409.8 billion for thethree months ended May 31, 2005.

*Commissions and Order Execution Costs.*Commissions and order execution costs on aconsolidated basis for the three months ended May 31, 2005 increased $65.2million, or 45.7%, to $207.9 million from $142.7 million for the three monthsended May 31, 2004. The increase in commissions and order execution costsfor the three months ended May 31, 2005 was primarily due to the increasein transaction volume in all of our business segments and the addition of newbusiness operations.

 

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*EmployeeCompensation and Benefits Expenses.*Employee compensation and benefits expenses on a consolidated basis forthe three months ended May 31, 2005 increased $9.6 million, or 14.9%, to$74.2 million from $64.6 million for the three months ended May 31, 2004.The increase in employee compensation and benefits expenses was due in part tothe addition of several new operating groups acquired during the year ended February 28,2005. These groups include Trafalgar Commodities and the Wexford Fixed IncomeGroup in New York as well as the further expansion of the MacFutures Group,particularly the commencement of its U.S. operations where the start-upexpenses have exceeded anticipated revenues. In addition, bonus accrualsincreased as a function of increased profitability in certain business segmentsin the geographical markets that we serve, including Asia and Europe, wherelocal currency appreciation also had the effect of increasing equivalent U.S.dollar compensation levels.

 

*General,Administrative and Other Expenses.*General, administrative and other expenses on a consolidated basis forthe three months ended May 31, 2005 increased $14.8 million, or 31.2%, to$62.3 million from $47.5 million for the three months ended May 31, 2004.Our results for the three months ended May 31, 2005 reflect the financialimpact of the THL Transactions. There was an increase in depreciation andamortization expense associated with the amortization of customer relationshipsdetermined as a result of the THL Transactions. The increase in amortization ofthe customer relationships determined as a result of the THL Transactions forthe three months ended May 31, 2005 was $3.8 million compared to the threemonths ended May 31, 2004. Total depreciation and amortization expense was$9.7 million and $6.4 million for the three months ended May 31, 2005 and May 31,2004, respectively.

 

*OperatingProfit.*Operatingprofit for the three months ended May 31, 2005 decreased $14.6 million, or25.0%, to $43.8 million from $58.4 million for the three months ended May 31,2004. Operating profit for the three months ended May 31, 2005 includessignificant incremental expenses associated with the THL Transactions. Inaddition to the increased cost of depreciation and amortization of customerrelationships, interest expense on long-term borrowings increasedcompared to the three months ended May 31, 2004. For the three monthsended May 31, 2005, all of these expenses related to the THL Transactionstotaled $5.1 million and $23.4 million, respectively, compared with pre-THLTransactions expenses of $1.2 million and $7.0 million, respectively, for thethree months ended May 31, 2004. The THL Transactions resulted in a totalincrease in expenses of $20.2 million for the three months ended May 31,2005. Further, our working capital was reduced by $113.0 million (which was netreduction of working capital that resulted from the $550.0 cash distribution aspart of the THL Transactions), which decreased interest revenue by an estimated$1.4 million. The increase in interest expense from long-term borrowingsand amortization of customer relationships combined with reduction in workingcapital decreased our operating profit by $21.6 million, or 37.0%.

 

In addition, we recordoperating profit exclusive of the income we derive from investments in non-consolidatedequity investees. Income from investments in non-consolidated equityinvestees is recorded in income from equity investees and included in incomefrom continuing operations. These companies are engaged in both derivativesbrokerage and prime brokerage operations in key product segments (such asretail foreign exchange brokerage) and important geographical markets (such asthe Taiwan derivatives markets). Because we consider these activities integralto our global operations and material to our results of operations, wehistorically included earnings from these activities in operating profit.Operating profit excluding the earnings from equity investees for the threemonths ended May 31, 2005 decreased $14.6 million, or 25.0%, to $43.8million from $58.4 million for the three months ended May 31, 2004. Thedecrease in operating profit reflected a shift in product mix within ouroperations to products offered by equity investees, particularly retail foreignexchange brokerage. Income from our share of our equity investees’ operationstotaled $14.2 million for the three months ended May 31, 2005 comparedwith $6.6 million for the three months ended May 31, 2004. The increase inincome from equity investees of $7.6 million increased operating profit by13.0% for the three months ended May 31, 2005.

 

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**SegmentInformation**

 

***Derivatives Brokerage & Clearing***

 

*                NetRevenues.*DerivativesBrokerage & Clearing net revenues for the three months ended May 31,2005 increased $42.4 million, or 17.4%, to $286.1 million from $243.7 millionfor the three months ended May 31, 2004. The increase in DerivativesBrokerage & Clearing net revenues for the three months ended May 31,2005 was primarily due to increased transaction volume in virtually all marketsand geographic sectors that we serve, particularly electronic markets utilizedby our professional trading customers, which are reflected in commissions andbrokerage revenues and principal transactions, net. Global demand for commoditymaterials, in particular oil and petroleum products, resulted in increasedactivity in physical commodity markets, while interest rate uncertaintiesincreased the level of interest rate derivative volumes. In Europe, localforeign exchange operations (reported in Derivatives Brokerage & Clearing)also increased. Derivatives Brokerage & Clearing contract volume for thethree months ended May 31, 2005 increased by 48 million contracts, or30.2%, to 207 million contracts cleared from 159 million contracts cleared forthe three months ended May 31, 2004. Commissions and brokerage incomeincreased by 13.4% as a result of increased transaction volume and changingcustomer mix. This increase includes European foreign exchange revenues.Substantially all of the assets of our Asset Management business weredistributed to Refco Group Holdings, Inc. as part of the THL Transactions. Wereport the retained assets from the Asset Management business, RefcoAlternative Investments, as part of our Derivatives Brokerage & Clearingbusiness. Refco Alternative Investments’ net revenues for the three monthsended May 31, 2005 increased approximately $2.6 million, or 154.1%, to$4.2 million from $1.7 million for the three months ended May 31, 2004.

 

*OperatingProfit.*DerivativesBrokerage & Clearing operating profit for the three months ended May 31,2005 decreased $5.4 million, or 13.2%, to $35.5 million from $40.9 million forthe three months ended May 31, 2004. The decrease in Derivatives Brokerage& Clearing operating profit for the three months ended May 31, 2005was primarily due to increased general and administrative and employeecompensation expense in London; a modest reduction in commission and brokeragerevenues reflecting a temporary slowing of Asia-Pacific market growth inSingapore; increased general and administrative expenses at Refco Trading Services,which also had a small decline in average commission income; and costs associatedwith transitioning to full electronic platforms in foreign markets. Theincrease in income from equity investees increased operating profit by $0.6million, or 1.5%, for the three months ended May 31, 2005. Operatingprofit includes expenses associated with the THL Transactions, most notably theincrease in the amortization of customer relationships determined as a resultof the THL Transactions. The increased amortization of $0.7 million for theDerivatives Brokerage & Clearing customer relationships determined as aresult of the THL Transactions for the three months ended May 31, 2005decreased operating profit by 1.7% for the three months ended May 31,2005.

 

***Prime Brokerage/Capital Markets***

 

*NetRevenues.*PrimeBrokerage/Capital Markets net revenues for the three months ended May 31,2005 increased $66.7 million, or 79.6%, to $150.5 million from $83.8 millionfor the three months ended May 31, 2004. The increase in PrimeBrokerage/Capital Markets net revenues for the three months ended May 31,2005 was primarily due to the increase of 43.5% in the average net customersecurities financing portfolio to $49.5 billion from $34.5 billion for thethree months ended May 31, 2004 and a 126.7% increase in foreign exchangedollar volumes, which totaled $409.8 billion for the three months ended May 31,2005, up from $180.8 billion for the three months ended May 31, 2004.These increases were offset in part by decreased volume in the U.S. Treasurymarket.

 

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*Operating Profit.*Prime Brokerage/Capital Markets operatingprofit for the three months ended May 31, 2005 increased $18.5 million, or58.5%, to $50.1 million from $31.6 million for the three months ended May 31,2004. Prime Brokerage/Capital Markets operating profit excludes income fromequity investees, which totaled $13.1 million for the three months ended May 31,2005. The increase in income from equity investees increased operating profitby $7.0 million, or 22.2%, for the three months ended May 31, 2005.Operating profit includes expenses associated with the THL Transactions, mostnotably the increase in the amortization of customer relationships determinedas a result of the THL Transactions. The increased amortization of $3.1 millionfor the Prime Brokerage/Capital Markets customer relationships determined as aresult of the THL Transactions for the three months ended May 31, 2005decreased operating profit by 9.8% for the three months ended May 31,2005. The underlying increase in Prime Brokerage/Capital Markets operatingprofit for the three months ended May 31, 2005 was primarily due to thecontinued growth in Prime Brokerage/Capital Markets net revenues, particularlythe 126.7% increase in foreign exchange dollar volumes to a total of $409.8billion for the three months ended May 31, 2005.

 

**Seasonality**

 

Our business has experiencedseasonal fluctuations. Financial markets often experience reduced tradingactivity during summer months and in the last fiscal quarter as a result ofholidays. Traditional commodity derivatives, such as energy contracts, willreflect changing supply/demand factors related to heating/cooling seasons. As aresult of these factors, we may experience relatively high trading volume andrevenue during our first and third fiscal quarters and lower trading volume inour second fiscal quarter. However, this trend is not evident in every year andin recent years has been moderated by globalization and an expanded range ofproducts that tend to counteract traditional seasonality trends. For thesereasons, seasonality was not a major factor in the last fiscal quarter.

** **

**Liquidityand Capital Resources**

 

We expect our primary usesof cash over the next twelve months to be for working capital and debt service.Also, consistent with past practice and policy, we may from time to timeevaluate acquisition opportunities in our core businesses. If we were to consummatean acquisition, we may utilize cash for that purpose.

 

***Cash Flows***

 

As a financial institution,our cash flows are complex and interrelated and highly dependent upon ouroperating performance, levels of customer activity and secured financingactivities. We had cash flow used in operating activities of $96.4 million forthe three months ended May 31, 2005. This compared to cash flow used in operatingactivities of $265.2 million for the three months ended May 31, 2004. Forthe three months ended May 31, 2005, we used cash and cash equivalents of$17.1 million due to our acquisitions of League Corp. and EasyScreen plc.During the three months ended May 31, 2004, total cash and cashequivalents decreased by $118.8 million as cash flows from investing activitiesand discontinued operations of $0 and $151.3 million, respectively, were offsetby cash used in operating activities and financing activities of $265.2 millionand $4.9 million, respectively.

 

***Working Capital***

 

Our primary requirement forworking capital relates to funds we are required to maintain at exchanges orclearing organizations to support our customers’ trading activities. We requirethat our customers deposit funds with us in support of their tradingactivities, which we in turn deposit with exchanges or clearing organizationsto satisfy our obligations. These required deposits account for the majority ofour working capital requirements and thus our primary use of working capital isfunded directly or indirectly by our customers. Our working capital needs areotherwise primarily limited to regulatory capital requirements which we havesatisfied in the past from internally generated cash flow and available funds.

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Notwithstanding the self-fundingnature of our operations, we may sometimes be required to fund timingdifferences arising from the delayed receipt of customer funds or timingdifferences associated with the settlement of customer transactions insecurities markets. Historically, these timing differences have been fundedeither with internally generated cash flow or, if needed, with funds drawnunder short-term borrowing facilities, including committed lines ofcredit. We have $75.0 million of available borrowings under a revolving creditfacility for working capital purposes. Separately, our finance subsidiary,Refco Capital, LLC, utilizes secured bank facilities to refinance specializedfinancing arrangements entered into with select customers from time to time. Asof May 31, 2005, there were no borrowings outstanding under thesefacilities.

 

Our two primary U.S.regulated subsidiaries are Refco, LLC and Refco Securities, LLC. Refco, LLC issubject to the Commodity Futures Trading Commission (“CFTC”) minimum financialrequirements, which requires it to maintain net capital equal to the sum of 8%of the total risk margin requirements for all positions carried in customeraccounts and 4% of the total risk margin requirements for all positions carriedin non-customer accounts. As of May 31, 2005, Refco, LLC had netcapital of $354.5 million, which was $167.7 million in excess of required netcapital. Refco Securities, LLC is subject to the uniform net capitalrequirements of the SEC, which require the maintenance of minimum net capital.Refco Securities, LLC computes its net capital requirements under thealternative method provided for by the SEC’s rules, which require that RefcoSecurities, LLC maintain net capital equal to the greater of $250,000 or 2% ofaggregate customer related debit items as defined in the SEC’s rules. The netcapital rule also provides that equity capital may not be withdrawn or cashdividends paid if resulting net capital would be less than 5% of aggregatecustomer-related debit items. As of May 31, 2005, Refco Securities,LLC had net capital of $62.2 million which was 11.1% of aggregate customer-relateddebit items and $49.6 million in excess of required net capital.

 

As a matter of policy, wemaintain excess regulatory capital to provide liquidity during periods of unusualmarket volatility, and this has been sufficient in the past to absorb volatilemarket events. Similarly, for our brokerage activities in the OTC markets,despite these transactions being brokered as principal and not as agent, wehave adopted a futures-style margin methodology to protect us againstprice movements, and this also reduces the amount of capital needed to conductbusiness because even if we are required to post funds with clearingorganizations in order to facilitate customer-initiated transactions, weare able to use customer deposits for this purpose rather than our own funds.As a result, we are able to execute a substantial volume of transactionswithout the need for large amounts of working capital.

 

Funding for purposes otherthan working capital requirements, including the financing of acquisitions, hasbeen provided either through internally generated cash flow or through specificlong-term financing arrangements described below. Substantially all theassets of our Asset Management business, which accounted for 1.3% of revenueand an operating income of $7.4 million in fiscal year 2005, were distributedto Refco Group Holdings, Inc. in connection with the THL Transactions. OurAsset Management business generated nominal cash flow for fiscal year 2005.

 

***Long-Term Debt***

 

It has been our policy tomatch the varied nature of our liquidity requirements with appropriatelystructured funding sources. Prior to the THL Transactions, our long-termdebt consisted principally of long-term notes, which we had traditionallyused to finance acquisitions. We repaid all these notes in connection with theTHL Transactions. However, in connection with the THL Transactions we incurreda substantial amount of new long-term debt. As of May 31, 2005, wehad $1,244.0 million of long-term debt outstanding, including the currentportion of long-term debt. We intend to continue to fund long-termrequirements, including acquisitions, with long-term debt. Our long-termdebt currently consists of our senior credit facilities and the notes.

 

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In connection with the THLTransactions, we entered into senior credit facilities consisting of a $75.0million revolving credit facility and an $800.0 million term loan facility. InJanuary 2005, we voluntarily prepaid $150.0 million of borrowings under theterm loan facility, and available borrowings thereunder were reduced to $648.0million. On March 15, 2005, we refinanced and replaced the term loan facilitywith a new term loan facility providing for borrowings of up to an aggregateprincipal amount of $648.0 million. As of May 31, 2005, $644.0 millionremained outstanding under the term loan facility. Refco Group and RefcoFinance also issued $600.0 million aggregate principal amount of seniorsubordinated notes in connection with the THL Transactions. The proceeds fromthe term loans, along with the proceeds from the issuance of the seniorsubordinated notes, were used to fund the cash payments made to our existingstockholders, repay existing indebtedness and pay related transaction fees andexpenses.

 

Borrowings under the senior credit facilities bearinterest at a floating rate, which can be either the Eurodollar rate plus anapplicable margin or, at the borrower’s option, an alternative base rate(defined as the higher of (x) the Bank of America prime rate and (y) thefederal funds effective rate, plus one half percent (.50%) per annum) plus anapplicable margin.  The applicable marginsfor Eurodollar rate loans and alternative base loans in respect of therevolving credit facility are subject to adjustment based on Leverage Ratio (asdefined), as set forth in the following table:

 

| ** **         | ** ** | ** **                | ** ** | **Applicable  Rate** | ** ** |
|--------------------|------------|---------------------------|------------|----------------------|------------|
| **Pricing  Level** | ** ** | **Leverage  Ratio**       | ** ** | **Eurodollar  Rate** | ** ** | **Base  Rate** | ** ** |
| 1                  |       | >5.00:1                |       | 2.75                 | %          | 1.75 | % |
| 2                  |       | >4.50:1 but <5.00:1 |       | 2.50                 | %          | 1.50 | % |
| 3                  |       | >4.00:1 but <4.50:1 |       | 2.00                 | %          | 1.00 | % |
| 4                  |       | <4.00:1                |       | 1.75                 | %          | 0.75 | % |

 

The applicable margins under the term loan facilityare subject to adjustment based on the debt ratings of the senior creditfacilities by S&P and Moody’s, as set forth in the following table:

 
| ** **         | ** ** | ** **                                                                       | ** ** | **Applicable  Rate** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------|------------|----------------------|------------|
| **Pricing  Level** | ** ** | **Criteria**                                                                     | ** ** | **Eurodollar  Rate** | ** ** | **Base  Rate** | ** ** |
| 1                  |       | rated at least BB-  by S&P and Ba3 by Moody’s                           |       | 1.75                 | %          | 0.75 | % |
|               |       |                                                                             |       |                 |       |   |   |
| 2                  |       | rated at least BB-  by S&P and B1 by Moody’s and Level 1 does not apply |       | 2.00                 | %          | 1.00 | % |
|               |       |                                                                             |       |                 |       |   |   |
| 3                  |       | If neither Level 1 nor  Level 2 applies                                          |       | 2.25                 | %          | 1.25 | % |

 

The weighted averageinterest rates per annum in effect as of May 31, 2005 for the term loanfacility is 5.03%. The interest rate payable under the senior credit facilitieswill increase by 2.00% per annum during the continuance of any payment orbankruptcy event of default.

 

For Eurodollar rate loans,Refco Group may select interest periods of one, two, three or six months and,to the extent available to all lenders, nine or twelve months. Interest will bepayable at the end of the selected interest period, but no less frequently thanevery three months within the selected interest period.

 

The senior credit facilitiesalso require payment of a commitment fee on the difference between committedamounts and amounts actually borrowed under the revolving credit facility.Prior to the maturity date, funds borrowed under the revolving credit facilitymay be borrowed, repaid and reborrowed, without premium or penalty.

 

The term loan facility issubject to amortization in equal quarterly installments of principal as setforth in the table below.

 

| **Year** | ** ** | **Term Loan Facility** | ** **    |
|----------|------------|------------------------|---------------|
| 1        |       | $                      | 8.0 million   |   |
| 2        |       | $                      | 8.0 million   |   |
| 3        |       | $                      | 8.0 million   |   |
| 4        |       | $                      | 8.0 million   |   |
| 5        |       | $                      | 8.0 million   |   |
| 6        |       | $                      | 8.0 million   |   |
| 7        |       | $                      | 600.0 million |   |

 

Voluntary prepayments ofprincipal amounts outstanding under the senior credit facilities are permittedat any time. A 1% prepayment penalty will be assessed to any prepayment ofprincipal made on the term loan facility where (a) such prepayment is made withthe proceeds of, or in connection with, a new tranche of senior secured termloans incurred on or before March 15, 2006, (b) such new term loans have aninterest rate margin that is less than the applicable rate on the term loanfacility, and (c) such new term loans are incurred for the primary purpose ofrefinancing the term loan facility. Further, if a prepayment of principal ismade with respect to a Eurodollar rate loan on a date other than the last dayof the applicable interest period, the lenders will require compensation forany funding losses and expenses incurred as a result of the prepayment.

 

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In addition, mandatoryprepayments are required to prepay amounts outstanding under the senior creditfacilities in an amount equal to:

 

• 100% of net cash proceeds from certain assetdispositions by New Refco, Refco Group or any of Refco Group’s restrictedsubsidiaries, subject to certain exceptions and reinvestment provisions andlimitations on the remittance of funds by our regulated subsidiaries;

 

• 100% of the net cash proceeds from theissuance or incurrence after the closing date of any additional debt by NewRefco, Refco Group or any of Refco Group’s restricted subsidiaries (excludingcertain permitted debt) and subject to limitations on the remittance of fundsby Refco Group’s regulated subsidiaries;

 

• 50% (which percentage will be reduced uponthe achievement of specified performance targets) of the net cash proceeds fromthe issuance or sale after the closing date of additional equity by New Refco,Refco Group or any of Refco Group’s restricted subsidiaries in a publicoffering or in a private placement underwritten, managed, arranged, placed orinitially purchased by an investment bank, excluding proceeds of equityissuances or sales to certain investors, proceeds from the initial publicoffering (including the proceeds used to redeem our senior subordinated notes)and other customary exceptions and subject to limitations on the remittance offunds by Refco Group’s regulated subsidiaries; and

 

• 50% (which percentage will be reduced uponthe achievement of specified performance targets) of excess cash flow, asdefined in the senior credit facilities, subject to certain limitations on theremittance of funds by Refco Group’s regulated subsidiaries.

 

The senior credit facilitiescontain restrictive covenants which, among other things, limit indebtedness,investments, dividends, transactions with affiliates, asset sales,acquisitions, capital expenditures, mergers and consolidations, prepayments ofother indebtedness, liens and encumbrances and other matters customarilyrestricted in such agreements. In addition, the senior credit facilities requirecompliance with a variety of covenants. We were in compliance with thosecovenants as of May 31, 2005. The most restrictive covenants relate toratios of Consolidated EBITDA to Consolidated Interest Charges (interestcoverage ratio), Adjusted Consolidated Funded Indebtedness (net of Cash onHand) to Consolidated EBITDA (total leverage ratio), and maximum capitalexpenditures, all as defined in the senior credit facilities. The minimuminterest coverage and maximum leverage ratios are computed based on our resultsfor the last twelve months ended. More specifically, the senior creditfacilities’ covenants require us to maintain:

 

• a minimum interest coverage ratio of2.15:1.00 from November 30, 2004 through November 30, 2005; 2.25:1.00 from February 28,2006 through November 30, 2006; 2.45:1.00 from February 28, 2007 toNovember 30, 2007; 2.70:1.00 from February 29, 2008 through November 30,2008; and 3:00:1.00 as of February 28, 2009 and through each fiscalquarter ending thereafter through November 30, 2011.

 

• a maximum leverage ratio of 6.25:1.00 as of February 28,2005 and May 31, 2005; 6.00:1.00 as of August 31, 2005 and November 30,2005; 5.50:1.00 as of February 28, 2006 and May 31, 2006; 5.25:1.00as of August 31, 2006 and November 30, 2006; 5.00:1.00 as of February 28,2007 and May 31, 2007; 4.75:1.00 as of August 31, 2007 and November 30,2007; 4.25:1 from February 29, 2008 through November 30, 2008; 3.50:1.00from February 28, 2009 through November 30, 2009; and 3:00:1.00 as of February 28,2010 and each fiscal quarter ending thereafter through November 30, 2011.

 

• a maximum capital expenditure limitation of$40.0 million for fiscal year 2006; $45.0 million for fiscal year 2007; $50.0million for fiscal year 2008, $70.0 million for fiscal year 2009; and $55.0million from fiscal year 2010 through fiscal year 2012 with the ability to rollforward to future years unused amounts from the previous fiscal year.

 

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We expect to maintaincompliance with these covenants for the foreseeable future. ConsolidatedEBITDA, as defined in the senior credit facilities, differs from the term“EBITDA” as it is commonly used in our industry. In addition to adjusting netincome to exclude interest expense, income taxes and depreciation andamortization, Consolidated EBITDA, as defined in the senior credit facilities,also adjusts net income by excluding items or expenses not typically excludedin the calculation of “EBITDA”: letter of credit fees; non-cash expensesresulting from employee benefit and management compensation plans, the grant ofstock and stock options to our employees or the treatment of such options undervariable plan accounting; extraordinary charges; non-cash amortization offinancing costs; cash expenses incurred in connection with the THLTransactions, permitted investments and issuances of equity or debt (in eachcase, whether or not consummated); any losses realized upon the disposition of propertyor assets outside the ordinary course of business; to the extent actuallyreimbursed, expenses incurred to the extent covered by indemnificationprovisions of any agreement on connection with a permitted acquisition; to theextent covered by insurance, expenses with respect to liability or casualty eventsor business interruptions; permitted management fees; non-cash purchaseaccounting adjustments and step-ups with respect to re-valuingassets and liabilities in connection with the THL Transactions or any permittedinvestments; non-cash losses from joint ventures and non-cashminority interest reductions; fees and expenses in connection with permittedexchanges or refinancings; non-cash, non-recurring charges withrespect to employee severance; other non-cash, non-recurringcharges that do not result in a cash charge in a future period; cash chargesthat do not exceed $25.0 million in the aggregate or $15.0 million during anyfiscal year; other expenses reducing Consolidated Net Income that do notrepresent a cash item in such period or any future period; fines, penalties,settlement payments or judgment payments related to the Tradewinds litigationor the SEC and/or U.S. attorneys’ investigation into the sale of stock ofSedona Corporation (to the extent the payments do not exceed $10.0 million inthe aggregate and are made on or prior to August 5, 2005 or Refco Group isindemnified for such payments); and, for purposes of calculating the ratiosdescribed above, the net cash proceeds of certain equity issuances in an amountas is necessary to ensure compliance with the ratios, solely to the extent thatsuch net cash proceeds are (i) received no later than twenty business daysafter the date of delivery of the applicable compliance certificate and (ii)not otherwise required to be applied to prepay borrowings under the seniorcredit facilities or to determine the permissibility of a transaction under thesenior credit facilities; less non-cash income, extraordinary gains andgains realized upon the disposition of property outside the ordinary course ofbusiness; plus/minus unrealized gains/losses in respect of certain hedgingarrangements. We present Consolidated EBITDA because it is a material componentof the covenants contained in our senior credit facilities. Non-compliancewith those covenants could result in the acceleration of all amountsoutstanding under the senior credit facilities, which could have a materialadverse effect on our results of operations, financial position and cash flow.While the determination of “unusual and non-recurring losses” is subjectto interpretation and requires judgment of management, we believe the items andcalculations set forth below are in accordance with the senior creditfacilities. Consolidated EBITDA does not represent net income or cash flow fromoperations as those terms are defined by GAAP and does not necessarily indicatewhether cash flows will be sufficient to fund cash needs.

 

The following is acalculation of our minimum interest coverage and maximum leverage ratios underour senior credit facilities as of May 31, 2005. The terms and relatedcalculations are defined in the senior credit facilities (in thousands, exceptratios).

 
| ** **                                                       | ** ** | **May 31, 2005** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| Calculation of  minimum Interest Coverage Ratio:                 |       |                  |       |
| Twelve months  ended Consolidated EBITDA(1)                      |       | $                     | 296,747    |   |
| Consolidated  Interest Charges(2)                                |       | $                     | 74,686     |   |
| Actual Interest  Coverage Ratio(3)                               |       | 3.97                  | x          |
| Minimum  permitted Interest Coverage Ratio                       |       | 2.15                  | x          |
|                                                             |       |                  |       |
| Calculation of  maximum Leverage Ratio:                          |       |                  |       |
| Adjusted  Consolidated Funded Indebtedness (net of Cash on Hand) |       | $                     | 899,539    |   |
| Twelve months  ended Consolidated EBITDA(1)                      |       | $                     | 296,747    |   |
| Actual Leverage  Ratio(4)                                        |       | 3.03                  | x          |
| Maximum  permitted Leverage Ratio                                |       | 6.25                  | x          |

 

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(1)                                  ConsolidatedEBITDA for the twelve months ended May 31, 2005 adds back to ConsolidatedNet Income; Refco Interest Expense with respect to Consolidated FundedIndebtedness; income, franchise and similar taxes and permitted taxdistributions; depreciation and amortization expense; and non-cashexpenses resulting from employee benefit and management compensation plans, thegrant of stock and stock options to our employees or the treatment of suchoptions under variable plan accounting. In addition, for purposes of our senior credit facilities, ConsolidatedEBITDA for the twelve months ended May 31, 2005 includes $4.0 million ofnet income from discontinued operations. In future periods, net income from discontinued operations will not beincluded.

 

(2)                                  ConsolidatedInterest Charges for the twelve months ended May 31, 2005 follows (inthousands):

 
| Interest expense  on Consolidated Funded Indebtedness |   | $      | 78,992  |   |
|-------------------------------------------------------|--------|--------|---------|--------|
| Interest income  on Cash on Hand                      |   | (4,306 | )  |
| Consolidated  Interest Charges                        |   | $      | 74,686  |   |

 

(3)                                  Representsratio of Consolidated EBITDA to Consolidated Interest Charges.

 

(4)                                  Representsratio of Adjusted Consolidated Funded Indebtedness (net of Cash on Hand) toConsolidated EBITDA.

 

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The senior credit facilitiescontain customary events of default, including without limitation, paymentdefaults, breaches of representations and warranties, covenant defaults, cross-defaultsto other indebtedness in excess of specified amounts, events of bankruptcy andinsolvency specified in the senior credit facilities, judgment defaults inexcess of specified amounts, failure of any material provision of any guarantyor security document supporting the senior credit facilities to be in fullforce and effect, and a change of control.

 

In connection with the THLTransactions, Refco Group, together with Refco Finance as co-issuer,issued $600.0 million aggregate principal amount of 9% senior subordinatednotes. The senior subordinated notes rank equally in right of payment with allof Refco Group’s existing and future senior indebtedness and rank senior inright of payment to all Refco Group’s existing and future subordinated indebtedness.These notes are not secured, and as such, have no underlying assets to securethe payment of principal or interest. The senior subordinated notes areguaranteed on a senior unsecured basis by Refco Group’s non-regulateddomestic subsidiaries. The senior subordinated notes mature on August 1, 2012,with interest at a rate of 9% payable semi-annually in arrears on February 1and August 1, commencing on February 1, 2005.

 

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The senior subordinatednotes may be redeemed at any time, in whole or in part, on or after August 1,2008 at a redemption price equal to 104.5% of the principal amount of thesenior subordinated notes in the first year, declining yearly to par at August1, 2010, plus accrued and unpaid interest, if any, to the date of redemption.In addition, at any time prior to August 1, 2007, Refco Group may redeem thesenior subordinated notes in the aggregate up to 35% of the original principalamount using the net proceeds of certain equity offerings (including theinitial public offering) at a redemption price equal to 109.0% of the principalamount of the senior subordinated notes, plus accrued and unpaid interest, ifany, to the date of redemption. The indenture does not contain any mandatoryprepayment provisions.

 

Upon the occurrence of achange of control, each holder of the senior subordinated notes will have theright to require Refco Group to repurchase that holder’s senior subordinatednotes at a price equal to 101% of their principal amount, plus accrued andunpaid interest, if any, to the date of purchase.

 

The indenture governing thesenior subordinated notes contains covenants that, among other things, limitthe ability of Refco Group and its subsidiaries, subject to certainqualifications and exceptions, to: incur or guarantee additional indebtedness;sell assets; pay dividends and make other equity distributions; purchase orredeem capital stock; make investments; consolidate or merge with or into othercompanies; and engage in transactions with affiliates. The senior subordinatednotes contain certain events of default, including failure to pay principal andinterest on the notes, failure to comply with covenants, subject to a 60-daygrace period in certain instances, and certain bankruptcy, insolvency orreorganization events with respect to Refco Group or its subsidiary guarantors.

 

Our subsidiary RefcoCapital, LLC has a $20.0 million credit facility, pursuant to which RefcoCapital, LLC provides financing to fund the margin requirements of some ofcommercial customers who maintain futures trading accounts with us. Advancesunder this facility are secured by Refco Capital, LLC’s security interest inthe customer’s rights to payments arising from these accounts. We currentlyhave no outstanding debt under this facility.

 

Refco Securities, LLC hastwo lines of credit with Euroclear Bank S.A./N.V. in the aggregate amount of$550.0 million for the purpose of settling intra-day transactions and, ifnecessary, financing positions overnight. As of May 31, 2005, no amountswere outstanding under these facilities.

 

Our subsidiaries RefcoSingapore Pte. Ltd. and Refco Investment Services Pte Ltd. (Singapore) havefacilities to assist with working capital requirements. The aggregate amountavailable under these facilities is approximately $29.0 million. We haveguaranteed our subsidiaries’ obligations under these facilities. There iscurrently no outstanding debt under these facilities.

 

In addition, several of oursubsidiaries have facilities with various financial institutions to, amongother things, provide credit support to some of our customers, satisfy minimumexchange and clearing house collateral requirements and provide stock financingin exchange-approved warehouses. The total availability under thesefacilities is approximately $496.2 million. We have guaranteed all of oursubsidiaries’ obligations under these facilities, with the exception of one$10.0 million facility. As of May 31, 2005, letters of credit in theaggregate amount of approximately $1.1 million were outstanding under thesefacilities.

 

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We believe that our cashflow is sufficient to meet our term debt service requirements and that our cashand cash equivalents, as well as cash flow from operations, will be sufficientto fund our operations for the foreseeable future.

 

***Liquidity Risk***

 

Ready access to cash isessential to our business. Our liquidity could be impaired by an inability toaccess lines of credit, an inability to access funds from our subsidiaries oran inability to liquidate customer positions or otherwise sell assets. Thissituation may arise due to circumstances that we may be unable to control, suchas a general market disruption or an operational problem that affects thirdparties or us. Further, our ability to liquidate customer positions orotherwise sell assets may be impaired if other market participants are seekingto sell similar assets at the same time. Our credit ratings are important toour liquidity. A reduction in our credit ratings could adversely affect ourliquidity and competitive position, increase our borrowing costs, limit ouraccess to the capital markets or trigger our obligations under bilateral provisionsin some of our trading and collateralized financing contracts. Under suchcontracts, counterparties could terminate contracts with us or require us topost additional collateral. Termination of our trading and collateralizedfinancing contracts could cause us to sustain losses and impair our liquidityby requiring us to find other sources of financing or to make significant cashpayments or securities movements.

 

**Off BalanceSheet Arrangements**

 

In the normal course of ourcustomer brokerage activities in Prime Brokerage/Capital Markets products,where no central clearing counterparty (such as an exchange) exists, we enterinto various contractual commitments as a principal in order to facilitate theexecution of a customer transaction. Such commitments often involve forwardsettlement and include exchange-traded futures, fixed income and equityswaps, foreign currency forwards and option contracts. We use these commitmentsto offset the customer order and generate a positive profit spread for us. Wealso enter into forward repurchase agreements. Such activities involvecustomers and counterparties in and outside the United States.

 

The following table showsthe gross notional or contractual amounts of contracts held or issued by usthat require forward settlement. This table reflects only off-balancesheet contracts. It should be noted that these off-balance sheetcontracts are often offset by on-balance sheet items not shown here.

 
| ** **                        | ** ** | **As of May 31, 2005** | ** **  | **As of February 28, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------|-------------|----------------------------------|------------|
| ** **                        | ** ** | **Notional**                | ** **  | **Fair Value**                   | ** ** | **Notional** | ** ** | **Fair Value** | ** ** |
| ** **                        | ** ** | **(unaudited)**             | ** **  | ** **                       | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **(in thousands)**          | ** **  |
| Forward currency  contracts       |       | $                           | 110,108,090 |                             | $          | 6,999 |   | $ | 79,683,493 |   | $ | (5,382 | ) |
| Swap contracts                    |       | 45,258                      |        | (705                             | )          | 30,056 |   | (3,199 | ) |
| Option contracts  sold or written |       | 13,406,921                  |        | (273,016                         | )          | 19,125,420 |   | (352,428 | ) |
| Option contracts  purchased       |       | 10,743,001                  |        | 278,363                          |       | 14,478,439 |   | 370,410 |   |
| Exchange-traded  futures          |       | 15,541,937                  |        | 22,473                           |       | 14,246,658 |   | (1,873 | ) |
| Total                             |       | $                           | 149,845,207 |                             | $          | 34,114 |   | $ | 127,564,066 |   | $ | 7,528 |   |

 

We record our contractualcommitments at market or fair value. Changes in market or fair value arerecorded currently in income. The level of reported market risk is determinedby a number of factors, including size, composition and diversification ofpositions held, market volatility and changes in interest and foreign exchangerates. However, in our case the level of reported market and financial riskassociated with these contractual commitments is mitigated by our role asprincipal broker and the fact that such transactions are offset ultimately byour obligation to pay the customers profits relating to such transactions andour practice of ensuring that losses, whether realized or unrealized, aresecured with customer deposits. As a practical matter, the actual level of marketrisk on financial instruments entered into on behalf of customers is limited byother financial instruments recorded on and, as in the case of the above table,off balance sheet. This limits overall market risk and the net impact of suchtransactions on our income statement. To ensure this our management activelymonitors those positions to review the effectiveness of the offset or hedgingstrategy.

 

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**Forward-LookingStatements**

 

ThisForm 10-Q contains forward-looking statements that are subject torisks and uncertainties. All statements other than statements of historicalfact included in this prospectus are forward-looking statements. Forward-lookingstatements give our current expectations and projections relating to ourfinancial condition, results of operations, plans, objectives, futureperformance and business. You can identify forward-looking statements bythe fact that they do not relate strictly to historical or current facts. Thesestatements may include words such as “anticipate,” “estimate,” “expect,”“project,” “plan,” “intend,” “believe” and other words and terms of similarmeaning in connection with any discussion of the timing or nature of futureoperating or financial performance or other events.

 

Theseforward-looking statements are based on assumptions that we have made inlight of our industry experience and on our perceptions of historical trends,current conditions, expected future developments and other factors we believeare appropriate under the circumstances. As you read and consider this Form 10-Q,you should understand that these statements are not guarantees of performanceor results. They involve risks, uncertainties (some of which are beyond ourcontrol) and assumptions. Although we believe that these forward-lookingstatements are based on reasonable assumptions, you should be aware that manyfactors could affect our actual financial results and cause them to differmaterially from those anticipated in the forward-looking statements.These factors include, among others:

 

• changes in domestic and international marketconditions;

 

• competition;

 

• our ability to attract and retain customers;

 

• our relationships with introducing brokers;

 

• retention of our management team;

 

• our ability to manage our growth orintegrate future acquisitions;

 

• our exposure to significant credit riskswith respect to our customers;

 

• international operations and expansion;

 

• system failures;

 

• the performance of third-partysuppliers;

 

• changes in regulations or exchangemembership requirements;

 

• the effectiveness of compliance and riskmanagement methods;

 

• potential litigation or investigations;

 

• employee or introducing broker misconduct orerrors;

 

• reputational harm; and

 

• changes in capital requirements.

 

There may be other factorsthat may cause our actual results to differ materially from the forward-lookingstatements.

 

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Because of these factors, wecaution that you should not place undue reliance on any of our forward-lookingstatements. Further, any forward-looking statement speaks only as of thedate on which it is made. New risks and uncertainties arise from time to time,and it is impossible for us to predict those events or how they may affect us.

 

**ITEM 3****.****                 ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our primary market risksrelate to counterparty, interest rate and exchange rate risk.

 

***Customer and Counterparty Risk***

 

We are exposed to the riskthat third parties that owe us money, securities or other assets will notperform their obligations. These parties may default on their obligations to usdue to bankruptcy, lack of liquidity, operational failure or other reasons. Asa clearing broker, we generally bear the risk of the defaults or misconduct ofour customers. In addition, we have experienced, due to competitive factors,pressure to extend credit and to price more aggressively the credit risks wetake. Although we regularly review credit exposures to specific customers andcounterparties and to specific industries, countries and regions that webelieve may present credit concerns, default risk may arise from events orcircumstances that are difficult to detect or foresee. In addition, concernsabout, or a default by, one institution could lead to significant liquidityproblems, losses or defaults by other institutions, which in turn couldadversely affect us.

 

As a matter of policy, wecontinue to upgrade our risk management procedures and systems to improve ourability to monitor actual and projected risk associated with customerpositions. Our Global Risk Management department is responsible for thesystematic review of customer exposure in both regulated and nonregulatedmarkets. Our current system provides the ability to project the impact ofmarket volatility on price movement. Using various stress tests, we quantifypotential adverse price movements in order to determine whether such movementswould adversely affect the customer’s ability to pay margin. We performfrequent stress tests to our customers’ positions, including intra-daytrading analysis, daily equity change analysis, concentration risk analysis,position liquidity analysis and premium seller analysis. Adjustments of marginor collateral requirements are made in anticipation of unusual adverse marketdevelopments.

 

We have a policy thatrequires customers to deposit margin in respect of their trading accountsirrespective of the credit rating of the customer in question. This policy alsoapplies to daily margin calls. As of May 31, 2005, the dollar value ofcustomer margin calls in excess of $500,000 was $24.4 million relating to 20customer accounts in our Derivatives Brokerage & Clearing business andmargin calls in excess of $100,000 totaled $9.6 million relating to sevencustomer accounts in our Prime Brokerage/Capital Markets business. The totalamount of margin calls over $50,000 that had been outstanding for more thanthree days as of May 31, 2005 was $5.9 million in our Derivatives Brokerage& Clearing business and Prime Brokerage/Capital Markets business. We alsohave exposure with respect to certain credit line customers and clearingorganizations associated with the exchanges of which we are a member. As of May 31,2005, our aggregate exposure to margin financing was $23.4 million.

 

***Interest Rate Risk***

 

In the ordinary course ofour operations, we have limited our exposure to interest rate risk. Our balancesheet, which reflects a substantial amount of short-term and highlyliquid assets, consists of equally matched assets and liabilities. We generateinterest income from the positive spread earned on customer deposits or securedcustomer financing transactions, and the basis for the calculation of interestreceived and paid is entirely matched. This is the case in both rising andfalling interest rate environments, although we have the opportunity to createhigher levels of interest income in a rising interest rate environment.

 

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In the future, we expect tohave greater exposure to changes in interest rates. Borrowings under our seniorcredit facilities accrue interest at variable rates. Interest rate changes maytherefore impact the amount of our interest payments and our future earnings andcash flows. Conversely, interest rate changes may affect the fair market valueof our fixed rate debt, such as the senior subordinated notes. Althoughinterest expense related to our variable-rate debt may increase in arising interest rate environment, we expect the impact to be mitigated in partby increased interest income generated from the investment of customerbalances. We invest these balances on a daily basis in a variety of permissibleshort-term instruments.

 

***Exchange Rate Risk***

 

We conduct globaloperations. Our revenues are denominated predominately in U.S. dollars with ourmost significant non-dollar currency flows being denominated in Euros andPounds Sterling. Our expenses are also denominated predominantly in U.S.dollars and to a lesser extent in a variety of local currencies reflecting thelocation of physical operations, including in the United Kingdom, Canada,France and Singapore.

 

Currently, our generalpractice is to invest in assets that match the currency in which we expectrelated liabilities to be paid. Members’ equity held in local business units iskept primarily in local currencies to the extent that members’ equity isrequired to satisfy regulatory and self-imposed capital requirements.This facilitates our efforts to ensure that capital held in local businessunits will be able to support the local business irrespective of currencymovements. However, this may adversely affect our reported combined members’equity when expressed in U.S. dollars. The table below shows the approximateeffect on members’ equity of instantaneous adverse movements in currencyexchange rates of 10% on our major currency exposures at May 31, 2005against the U.S. dollar.

 
| ** **      | ** ** | **Adverse exchange  rate movement  against the U.S. dollar** | ** ** | **Approximate decline  in members’ equity  (in millions)** | ** ** |
|-----------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Euro            |       | 10                                                           | %          | $                                                               | 4.6        |   |
| Pound Sterling  |       | 10                                                           | %          | $                                                               | 5.3        |   |
| Canadian dollar |       | 10                                                           | %          | $                                                               | 0.7        |   |

 

**ITEM 4****.**** ****INTERNAL CONTROLS AND PROCEDURES**

 

Our management evaluated,with the participation of our principal executive and principal financial officer,the effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended (the “*Exchange**Act*”)), as of May 31, 2005. Based ontheir evaluation, our principal executive and principal financial officerconcluded that our disclosure controls and procedures were effective as of May 31,2005.

 

There have been no changesin our internal control over financial reporting (as defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) that occurred during our firstquarter of 2006, that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PARTII** - OTHER INFORMATION

** **

**ITEM 1**.              LEGAL PROCEEDINGS

 

From time to time, we areparty to litigation and administrative proceedings that arise in the ordinarycourse of our business. We do not have any other pending litigation that,separately or in the aggregate, would in the opinion of management have amaterial adverse effect on our results of operations or financial condition. 

 

***SEC Investigation***

 

In 2001, the Division of Enforcement of the SEC commenced an informalinvestigation into short sales of the stock of Sedona Corporation.  The SEC requested that we produce documentsrelating to any of our accounts that traded in the stock of Sedona.  In June 2001, the SEC issued a formal orderof investigation into short sales of Sedona stock, as well as othertransactions.  In 2002 and 2003, wereceived subpoenas from the SEC and a request for a written statement.  Generally, the subpoenas and the requestrequired the production of documents, tapes and information regarding two ofour former brokers who handled the account of Amro International, S.A., one ofour former customers that engaged through its account with us in short sales ofSedona stock and whose financial advisor settled SEC charges with respect tosuch short sales in February 2003; our relationship with Amro and its twoprincipals; other securities traded by Amro; and our record keeping,supervisory and short sale policies and restrictions.

 

On May 16, 2005, we announced that our subsidiary, RefcoSecurities, LLC (“Refco Securities”), had received a “Wells Notice” from theSEC arising out of the investigation. The Wells Notice stated that the SEC staff intends to recommend that acivil enforcement action be brought against Refco Securities, allegingviolations of Section 17(a) of the Securities Act of 1933, as amended, Sections10(b) and 17(a) of the Exchange Act of 1934, as amended, and Rules 10b-5,17a-3 and 17a-4 thereunder, Section 220.8 of Regulation T, ConductRule 3370 of the National Association of Securities Dealers, Inc., aiding andabetting violations of Section 15(a) of the Exchange Act of 1934, as amended,and failure to comply with a prior SEC cease and desist order and the Section21(a) order from the SEC.  We are inactive discussions with the SEC to resolve the matters raised in theinvestigation and believe that we are near a resolution on all materialissues.  This settlement likely willinvolve an injunction against future violations of certain provisions,including anti-fraud provisions, of the federal securities laws, an orderto comply with the prior cease and desist order and the Section 21(a) order, anadministrative censure, payment of a substantial civil penalty and retention ofan independent consultant to review and make recommendations with respect tovarious business practices and procedures. We have recorded a reserve of $5 million for this potential settlement.

 

Santo C. Maggio, the President and Chief Executive Officer of RefcoSecurities, also has been in negotiations with the SEC staff, and likewise isnear a resolution of certain supervisory matters raised in theinvestigation.  Mr. Maggio, as part ofsuch resolution, is prepared to accept the entry of an administrative ordersuspending him for a year from any supervisory duties.  While complying with the restrictions of suchsupervisory suspension, Mr. Maggio would continue to work for us and RefcoSecurities in his current capacities.

 

Although we are working to finalize the terms of these settlements in aformal offer of settlement, we believe that the settlements as described aboveare highly likely and that the SEC staff would recommend such settlements tothe SEC Commissioners, whose approval is required. There is no assurance thatwe will reach such settlements on these terms or, even if we do, that the SECCommissioners, or any resolution of these matters if we or Mr. Maggio areunable to reach a settlement with the SEC, will approve such settlements.  The terms of any final settlements approvedby the SEC Commissioners may be materially less favorable than the settlementsdescribed above.

 

***Other***

 

In July 2005, we respondedto statements by French lawyer Frederik-Karel Conoy on behalf of his client,Gerard Sillam, that we have not received any documents to corroborate the claimthat Mr. Sillam has filed a criminal complaint in Paris against us, ThomasH. Lee Partners, L.P. and individuals. Since 2002, Mr. Sillam hasinstituted numerous commercial and criminal actions against Refco entitiesunder the French legal system, which permits private individuals to initiatecriminal proceedings. We have cooperated with the criminal inquiries, none ofwhich has resulted in any action against any Refco entity or individual. We arevigorously defending these actions and believe that Mr. Sillam’s claim iswithout merit. In 2004, Mr. Sillam filed a commercial claim in New YorkState Supreme Court but then requested and was granted dismissal of the caseafter we removed it to federal court. To our knowledge, no action by Mr. Sillam against any Refcoentity is pending in the United States.

 

**ITEM2.****                                         UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

** **

None.

 

**ITEM3.****                                         DEFAULTS UPON SENIOR SECURITIES**

** **

None.

 

**ITEM4.****                                         SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**ITEM5.****                                         OTHER INFORMATION**

 

None.

 

## **ITEM 6**.                                         EXHIBITS

 

31.1         Certificationof Chief Executive Officer of Refco Group Ltd., LLC and Refco Finance Inc.pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act, as amended.

 

31.2         Certificationof Chief Financial Officer of Refco Group Ltd., LLC and Refco Finance Inc.pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act, as amended.

 

32.1         Certificationof Chief Executive Officer of Refco Group Ltd., LLC and Refco Finance Inc.pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2         Certificationof Chief Financial Officer of Refco Group Ltd., LLC and Refco Finance Inc.pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                 | Refco Group Ltd., LLC  (Registrant)                                                                                   |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                  |
| DATE:  JULY 15,  2005 | By:                                                                                                                   |  /s/ PHILLIP R. BENNETT |   |
|                                 | Phillip R. Bennett,  President and Chief Executive Officer  (Principal Executive Officer)                             |
|                                 |                                                                                                                  |   |
| DATE:  JULY 15,  2005 | By:                                                                                                                   |  /s/ GERALD M. SHERER |   |
|                                 | Gerald M. Sherer,  Executive Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer) |
|                                 |                                                                                                                  |   |
|                                 |                                                                                                                  |   |
|                                 | Refco Finance Inc.  (Registrant)                                                                                      |
|                                 |                                                                                                                  |   |
| DATE:  JULY 15,  2005 | By:                                                                                                                   |  /s/ PHILLIP R. BENNETT |   |
|                                 | Phillip R. Bennett,  President and Chief Executive Officer  (Principal Executive Officer)                             |
|                                 |                                                                                                                  |   |
| DATE:  JULY 15,  2005 | By:                                                                                                                   |  /s/ GERALD M. SHERER |   |
|                                 | Gerald M. Sherer,  Treasurer and Chief Financial Officer  (Principal Financial and Accounting Officer)                |

 

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