UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

Commission file number: 014140

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(212) 273-7100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the shares of common stock of the Registrant held by non-affiliates based upon the closing price of Registrant’s shares as reported on The NASDAQ Global Market on June 30, 2009, which was $5.58, was $223,245,577. Common stock held by each officer and director and by each person known to the Company who owned 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of February 28, 2010, 128,170,616 shares of common stock, par value $0.01 per share, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for the 2010 annual meeting of shareholders to be filed with the Securities and Exchange Commission are incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

 

This Report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical information contained herein are forward-looking statements and may contain projections relating to revenues, earnings, operations, other financial measures, economic conditions, trends and known uncertainties, and may include statements of our future performance, strategies and objectives. These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed in this Report. You should review the “Risk Factors” section of this Report for a discussion of the important factors that could cause actual results to differ materially from those described in or implied by the forward-looking statements contained in this Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

 

As used herein, the terms “Company,” “Broadpoint Gleacher,” “we,” “us,” or “our” refer to Broadpoint Gleacher Securities Group, Inc., and its subsidiaries.

 

 

Broadpoint Gleacher Securities Group, Inc. (together with its subsidiaries, the “Company”) is an independent investment bank that provides corporations and institutional investors with strategic, research-based investment opportunities, capital raising, and financial advisory services, including merger and acquisition, restructuring, recapitalization and strategic alternative analysis services, as well as securities brokerage for institutional customers primarily in the United States. The Company offers a diverse range of products through the Broadpoint Descap, Debt Capital Markets, and Investment Banking divisions of Broadpoint Capital, Inc. (“Broadpoint Capital”), including its new Investment Banking financial advisory subsidiary, Gleacher Partners LLC (“Gleacher Partners”), its Equity Capital Markets subsidiary, Broadpoint AmTech and its venture capital subsidiary, FA Technology Ventures Inc. (“FATV”). At February 15, 2010, the Company had 342 employees. The Company is a New York corporation, incorporated in 1985, and is traded on The NASDAQ Global Market (“NASDAQ”) under the symbol “BPSG.”

 

The Company estimates based upon certain assumptions and outside sources, that the market for the Company’s services in 2009 was over $145 billion, consisting of approximately $55 billion of investment banking fees for equities and capital markets transactions, debt capital markets and advisory services and approximately $90 billion of cash commissions on annual secondary trading volume in the markets in which the Company participates. The market and competition for these fees and commissions has and continues to endure dramatic structural and fundamental changes. The credit crisis of 2008 created an unprecedented opportunity for a new class of investment banks to fill the need for these services to corporations and institutional investors. Nonetheless, boutique firms that lack scale, diversification, strong balance sheets and profitable business models face significant challenges in remaining viable participants in these markets.

 

We operate through five business segments, which are described below.

 

Broadpoint Descap

 

The Broadpoint Descap segment provides sales and trading on a wide range of mortgage and asset-backed securities, U.S. Treasury and government securities, structured products such as collateralized loan obligations (or CLOs) and collateralized debt obligations (or CDOs), whole loans, swaps, and other securities. The team generates revenues from spreads and fees on trades executed on behalf of clients and from principal transactions executed to facilitate trades for clients. Revenues are also generated from interest income on securities held primarily for the purpose of facilitating customer trading. The team consists of sales professionals who have developed strong relationships with more than 700 institutional investors including mutual funds, pension funds, insurance companies, hedge funds, investment managers and investment advisors by providing value-added investment ideas and access to execution services and inventory capital on an as-needed basis. Sales professionals deliver investment ideas with support of desk analysts that monitor and

analyze applicable securities where clients have demonstrated interest. The Broadpoint Descap team also provides execution services for institutional investor customer trades where it seeks to match buy side demand with sell side supply to achieve best execution and liquidity for participating parties.

 

Debt Capital Markets

 

The Company’s Debt Capital Markets segment provides sales and trading on corporate debt securities including bank debt, investment grade and high-yield debt, convertibles, distressed debt, and preferred stock. The team generates revenues from spreads and fees on trades executed and on intraday principal and riskless principal transactions on behalf of clients. The team consists of sales professionals who have developed strong relationships with more than 1,150 institutional investors, including mutual funds, pension funds, insurance companies, hedge funds, investment managers and investment advisors, by providing value-added investment ideas and access to execution services. Sales professionals deliver investment ideas with the support of desk analysts that monitor and analyze debt securities in a variety of industry verticals where clients have demonstrated interest. The Debt Capital Markets team also provides execution services for institutional investor customer trades and corporate debt repurchase activities where it seeks to match buy side demand with sell side supply to achieve best execution and liquidity for participating parties.

 

Investment Banking

 

The Company’s Investment Banking segment consists of 50 client-facing professionals committed to offering a broad range of financial advisory services in regards to mergers and acquisitions, restructurings and corporate finance-related matters. In addition, it raises capital for corporate clients through underwritings and private placements of debt and equity securities.

 

Gleacher Partners

 

On June 5, 2009, the Company acquired Gleacher Partners, Inc., a leading corporate advisory firm that provides strategic financial advice to corporations globally. Gleacher Partners has advised on more than $250 billion of mergers, acquisitions, divestitures and restructurings.

 

Equities

 

The Company’s Equities segment provides sales and trading on equity securities and generates revenues through cash commissions on customer trades and hard-dollar fees for research and other services. In connection with the reorganization of its legacy equities business in October 2008, the results of such business are included within this segment as well.

 

Broadpoint AmTech

 

On October 2, 2008, the Company acquired American Technology Research, a broker-dealer specializing in institutional research, sales and trading in the technology, aerospace and defense and clean tech areas. Rebranded as Broadpoint AmTech, this group provides sales, trading and research on equity securities and generates revenues through cash commissions on customer trades and hard-dollar fees for services and cash commissions on corporate repurchase activities. The team consists of 19 research professionals that seek to provide quantitative, value-added, differentiated insight on equity securities they cover. Research analysts develop relationships with corporate management teams of issuers they cover, maintain networks of industry and competitor contacts to gain proprietary data points to support investment theses and provide access to their views via published research, in-person and through hosted meetings and events for investors on behalf of the companies whose stocks they cover. As of February 15, 2010, Broadpoint AmTech research covered approximately 126 stocks primarily in the technology, aerospace and defense and clean tech sectors and seeks to cover securities where clients express strong interest or the team feels significant value can be delivered via proprietary and differentiated views. Institutional sales professionals deliver investment ideas generated by our research to approximately 300 institutional investor clients including mutual funds, hedge funds, investment managers and investment advisors.

Other

 

The Company’s Other segment includes the results from the Company’s venture capital business and costs related to corporate overhead and support including various fees associated with legal and settlement expenses. The Company’s venture capital business generates revenue through the management and investment of venture capital funds.

 

FA Technology Ventures

 

FA Technology Ventures provides early-stage growth capital to companies. The team generates revenues from fees for assets under management and a carried interest in returns on investments.

 

 

We seek growth through (i) market share gains in our existing product and service offerings, (ii) expansion into new products and services to better serve our corporate and investor clients and (iii) acquisitions of businesses and assets that add scale to our existing businesses, are complementary, or diversify our revenue base. The Company emphasizes a variable compensation model and a low-cost non-compensation expense structure along with a culture of employee ownership.

 

The Company’s broker-dealer subsidiaries, Broadpoint Capital, Broadpoint AmTech, and Gleacher Partners are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and various exchanges. Broadpoint Capital is also a member of the National Futures Association (“NFA”). The Company’s subsidiaries mentioned above are registered as broker-dealers with the Securities and Exchange Commission (“SEC”).

 

The Company’s headquarters are located at 12 East 49th Street, 31st Floor, New York, NY 10017. The telephone number is (212) 273-7100 and our internet address is www.bpsg.com.

 

Discontinued Operations

 

During the past several years, the Company has restructured nearly all of its operations. In September 2007, the Company completed the sale of its Municipal Capital Markets Group to DEPFA BANK plc (“DEPFA”). In June 2007, the Company closed its Fixed Income Middle Markets Group. In June 2006, the Company ceased operations in its Taxable Fixed Income division. In April 2006, the Company closed its Convertible Arbitrage Advisory Group. In February 2005, the Company sold its asset management operations in Albany, New York and in December 2004, the Company closed its asset management operations in Sarasota, Florida.

 

The operating results of the groups and divisions referred above are reported as discontinued operations (see Note 22 of the consolidated financial statements). We replaced these discontinued operations with the more streamlined and profitable operations described above.

 

Available Information

 

The Company files with the SEC current, annual and quarterly reports, proxy statements and other information as required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at www.sec.gov from which interested persons can electronically access the Company’s SEC filings.

 

The Company will make available free of charge, through its internet site www.bpsg.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information. These filings and information will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

 

The Company also makes available, on the Corporate Governance page of its website, its (i) Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics, (iii) the charters of the Audit, Executive

Compensation, and Directors and Corporate Governance Committees of our Board of Directors, and (iv) the Procedures for Reporting Violations of Compliance Standards. These documents will also be available in print without charge to any person who requests them by writing or telephoning: Broadpoint Gleacher Securities Group, Inc., Attn: Investor Relations, 12 East 49th Street, 31st Floor, New York, NY 10017, U.S.A., telephone number (212) 273-7100.

 

Sources of Revenues

 

A breakdown of the amount and percentage of net revenues from each principal source for the periods indicated follows (excluding discontinued operations):

 

 

For information regarding the Company’s reportable segment, refer to Note 20 of the consolidated financial statements.

 

Principal Transactions

 

The Company’s Broadpoint Descap and, to a lesser extent, Debt Capital Markets segments maintain inventories of debt issued by U.S. government and federal agency obligations, commercial mortgage-backed debt, residential mortgage-backed debt, other debt obligations, CDOs, corporate debt, equity securities, preferred stock, derivatives, and state and municipal bonds in order to facilitate its customer trading activities. These segments combined comprised approximately 79%, 82%, and 38% of the Company’s net revenues for the years ending December 31, 2009, 2008, and 2007, respectively.

 

The Company’s trading activities may require the commitment of capital. As a result, the Company exposes its own capital to the risk of fluctuations in market value. All inventory positions are marked-to-market; i.e. their fair value price on a daily basis. The following table sets forth the highest, lowest, and average month-end inventories (the net of securities owned and securities sold, but not yet purchased, less securities

not readily marketable) for the year ended December 31, 2009, by securities category, where the Company acted in a principal capacity.

 

 

Commissions

 

A portion of the Company’s revenue is derived from customer commissions on brokerage transactions for the Company’s institutional clients, such as investment advisors, mutual funds, hedge funds, and pension and profit sharing plans, for which the Company is not acting as a market maker.

 

Investment Banking

 

Investment banking fees are generated from strategic merger, acquisition, restructuring and recapitalization advisory services, liability management and capital raising transactions of equity and debt securities for a diverse group of corporate and institutional clients.

 

Capital Raising

 

The Company seeks to raise capital for its clients by underwriting and privately placing a broad range of securities, including common and preferred stock, convertible and exchangeable securities, investment-grade debt, high-yield debt, bank debt and mortgage and asset-backed securities. The Company seeks to provide these services for a wide range of corporate clients primarily through initial public offerings, follow-on public equity offerings, secondary equity offerings and registered direct placements of equity securities, private placements of public and private equity and public and private placements of investment grade-debt, high-yield debt, bank debt and convertible debt, among others. The Company utilizes its team of Investment Banking professionals to structure transactions and its team of equity and debt distribution professionals within its Debt Capital Markets, Broadpoint AmTech and Broadpoint Descap segments to place underwritten and agented securities with its investor clients on behalf of its corporate clients and to provide aftermarket services on those securities including research, sales and trading.

 

Advisory Services

 

The Company offers a broad range of advisory services for a variety of corporate and institutional investor constituents. For corporations, the Company provides corporate strategic reviews, mergers and acquisitions advisory services, takeover defense analyses, fairness opinions and restructuring and recapitalization advisory services. Corporate strategic advisory services are offered to a variety of constituents including corporate management teams and committees of corporate boards of directors. The Company seeks to provide advice in each of these areas to help its clients succeed and achieve their near and long-term goals. For institutional investors, the Company also offers a range of advisory services, including restructuring and recapitalization advisory services and structured products valuation advisory services. Restructuring and recapitalization advisory services are offered to a variety of constituents including corporations, creditors, labor-related parties, government agencies, litigation claimants, plan sponsors and stalking horse bidders or other potential acquirers. The restructuring and strategic advisory teams often generate financing opportunities

from their clients. The Company also has a team of professionals which provides investment ideas to certain of the Company’s applicable sales and trading desks and valuation services on complex and difficult to value structured products to clients.

 

For the periods indicated, the table below provides a breakdown of the Company’s investment banking revenues by area.

 

 

Investment gains (losses)

 

The Company’s investment portfolio includes interests in privately held companies and its interest in FA Tech Ventures L.P managed by FATV. Investment gains (losses) are comprised of both unrealized and realized gains and losses from the Company’s investment portfolio (see Note 7 of the consolidated financial statements).

 

Interest Income

 

Interest income is recognized primarily on the Company’s trading portfolio of fixed income securities which is held in order to facilitate its customer trading activities. The Company incurs interest expense primarily as a result of funding its trading portfolio through its clearing broker and through the repurchase markets. Net interest has increased year over year primarily due to the Company’s higher inventory levels.

 

Fees and Other

 

Fees and other relate primarily to equity research fees and investment management fees earned by FATV.

 

Other Business Information

 

Operations

 

The Company’s broker-dealer subsidiaries clear customers’ securities transactions through third parties under clearing agreements. Under these agreements, the clearing agents execute and settle customer securities transactions, collect margin receivables related to these transactions, monitor the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, require the customer to deposit additional collateral with them or to reduce positions, if necessary.

 

Employees

 

As of February 15, 2010, the Company’s operations had approximately 342 full-time employees, of which there are 64 professionals in the Investment Banking segment of which 50 are client-facing, 94 professionals in the Debt Capital Markets segment of which 79 are client-facing, 76 professionals in the Broadpoint Descap segment of which 63 are client-facing, 53 professionals in the Equities segment of which 44 are client-facing. The remaining 55 employees are in various support and administrative roles within the Other segment. The Company considers its employee relations to be good and believes that its compensation and employee benefits are competitive with those offered by other securities firms. None of the Company’s employees are covered by a collective bargaining agreement.

Competition

 

As an investment bank, all aspects of the Company’s business are intensely competitive. The Company competes with other investment banks, commercial banks or bank holding companies, brokerage firms, merchant banks and financial advisory firms. The Company competes with firms nationally as well as on a regional, product or business line basis. Many of the Company’s competitors have substantially greater capital and resources than it does and offer a broader range of financial products. To the extent we expand into new business areas and new geographic regions, we will face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market. The Company believes that the principal factors affecting competition in its business include client relationships, reputation, quality and price of our products and services, market focus and the ability of our professionals. Competition is intense for the recruitment and retention of qualified professionals. The Company’s ability to continue to compete effectively in its business will depend upon its continued ability to retain and motivate its existing professionals and attract new professionals. In recent years, there has been substantial consolidation and convergence among companies in the financial services industry. In particular, a number of large commercial banks have established or acquired broker-dealers or have merged with other financial institutions. Many of these firms have the ability to offer a wider range of products than the Company offers, including loans, deposit taking and insurance. Many of these firms also have more extensive investment banking teams and services, which may enhance their competitive position relative to the Company’s. They also have the ability to support investment banking and securities products with commercial banking and other financial services revenue in an effort to gain market share, which could result in pricing pressure in the Company’s business. This trend toward consolidation and convergence has significantly increased the capital base and geographic reach of the Company’s competitors.

 

Regulation

 

The securities industry in the United States is subject to extensive regulation under federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the direct oversight of broker-dealers, however, has been delegated to self-regulatory organizations, principally FINRA and the U.S. securities exchanges. These self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the securities industry and conduct periodic examinations of member broker-dealers. Securities firms are also subject to substantial regulation by state securities authorities in the U.S. jurisdictions in which they are registered. The Company’s subsidiaries, Broadpoint Capital, Broadpoint AmTech and Gleacher Partners, are registered as broker-dealers as follows: (1) Broadpoint Capital: all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands; (2) Broadpoint AmTech: 27 states; and (3) Gleacher Partners: all 50 states, the District of Columbia and Puerto Rico.

 

The U.S. regulations to which broker-dealers are subject cover many aspects of the securities business, including sales and trading practices and financial responsibility, including the safekeeping of customers’ funds and securities, as well as the capital structure of securities firms, books and record keeping, and the conduct of their associated persons. Salespeople, traders, investment bankers and others are required to pass examinations administered by FINRA and all principal exchanges as well as state securities authorities in order to both obtain and maintain their securities license registrations. Certain employees of our broker-dealer subsidiaries are required to be registered with FINRA and also required to participate annually in the firm’s continuing education program.

 

In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Proposals for legislation that could substantially intensify the regulation of the financial services industry are expected to be introduced in Congress, in state legislatures and around the world. Additional legislation, both federal and state, changes in rules promulgated by the SEC and by self-regulatory organizations as well as changes by state securities authorities, and/or changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC, self-regulatory organizations, and state securities regulators have broad authority to conduct examinations and inspections, and initiate administrative proceedings which can result in censure, fine, suspension, or expulsion of a broker-dealer, its officers, or

employees. The principal purpose of U.S. broker-dealer regulation is the protection of customers and the securities markets rather than protection of shareholders of broker-dealers.

 

Net Capital Requirements

 

The Company’s broker-dealer subsidiaries, Broadpoint Capital, Broadpoint AmTech, and Gleacher Partners, are subject to the net capital requirements of Rule 15c3-1 of the Exchange Act. Broadpoint Capital is also subject to the net capital requirements of the Commodity Futures Trading Commissions (Regulation 1.16). These net capital rules are designed to measure the general financial condition and liquidity of a broker-dealer, and they impose a required minimum amount of net capital deemed necessary to meet a broker-dealer’s continuing commitments to its customers.

 

Compliance with these net capital rules may limit those operations that require the use of capital, such as trading in securities, underwriting securities, and financing customer margin account balances. Net capital changes from day to day, based in part on the Company’s inventory positions and the portion of the inventory value the net capital rules require the firm to exclude from its capital (see Note 18 of the consolidated financial statements).

 

At December 31, 2009, net capital and excess net capital of the Company’s broker-dealer subsidiaries were as follows:

 

 

 

Our business and operations face a variety of serious risks and uncertainties. You should carefully consider the risk factors described below and in our other public reports. If any of the following risks actually occur, or if our underlying assumptions prove to be incorrect, our actual results may vary from what we projected and our financial condition or results of operations could be materially and adversely affected. These risk factors are intended to highlight factors that may affect our business, financial condition and results of operations and are not meant to be an exhaustive discussion. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect us.

 

Company Risks

 

Difficult market conditions have adversely affected and may continue to adversely affect our business in many ways.  Our businesses, by their nature, do not produce predictable earnings and are materially affected by conditions in the financial markets and economic conditions generally, both in the U.S. and around the world. Difficult market and economic conditions and geopolitical uncertainties have in the past adversely affected and may in the future adversely affect our business and profitability in many ways. The credit crisis of 2008 has resulted in various programs, initiatives and actions being implemented in the U.S. and other markets in order to stabilize the markets, increase liquidity and restore investor confidence.

 

We have experienced increased volumes due to the return of liquidity to the markets as a result of these programs and initiatives. However, it is unclear whether such initiatives will in fact be positive or negative for the financial markets over either the short or long-term. In addition, unfavorable economic or market conditions, such as those experienced in 2008 and 2007, may significantly reduce the volume and size of capital-raising transactions and advisory engagements for acquisitions and dispositions, thereby reducing the demand for our investment banking services and increasing price competition among financial services companies seeking such engagements. If the economic recovery is unsustainable, our investment banking revenue could be negatively impacted by a reduction of completed transactions, the backlog of transactions, the decreased size of transactions, and our diminished role in these transactions, resulting in reduced

underwriting placement and advisory fees. In the event of extreme market events, such as a recurrence of the global credit crisis, we could incur substantial risk of loss on the value of our securities due to market volatility.

 

Our business is also significantly affected by interest rates, which can change suddenly and unexpectedly. For example, a significant increase in interest rates would decrease the level of customer activity, increase our cost of funding, likely decrease new issues in the debt capital markets, decrease the value of securities owned and create a business environment in which M&A activity decreases. Any of these results would increase our costs or decrease our revenues.

 

The financial services industry and the markets in which we operate are subject to systemic risk that could adversely affect our business and results.  Participants in the financial services industry and markets increasely are closely interrelated as a result of credit, trading, clearing, technology and other relationships. A significant adverse development with one participant (such as a bankruptcy or default) may spread to others and lead to significant concentrated or market-wide problems (such as defaults, liquidity problems or losses) for other participants as was evident during 2008 following the demise of Bear Stearns and Lehman Brothers. The resulting events had a negative impact on many other industry participants. Systemic risk is inherently difficult to assess and quantify, and its form and magnitude can remain unknown for significant periods of time and could have a negative impact on us.

 

The volume of anticipated investment banking transactions may differ from actual results.  Our investment banking revenue is typically earned upon the successful completion of a transaction. In most cases, we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. Furthermore, the completion of anticipated investment banking transactions in our pipeline is uncertain and beyond our control. For example, a client’s transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the client’s or counterparty’s business. If parties fail to complete a transaction on which we are advising or an offering in which we are participating, we earn little or no revenue from the transaction and may incur significant expenses (for example, travel and legal expenses) associated with the transaction. Accordingly, our business is highly dependent on market conditions as well as the decisions and actions of our clients and interested third parties, and the number of engagements we have at any given time (and any characterization or description of deal pipelines) is subject to change and may not necessarily result in future revenues.

 

Financing and advisory services engagements are singular in nature and do not generally provide for subsequent engagements.  Even though we work to represent our clients at every stage of their lifecycle, we are typically retained on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements and generate fees from the successful completion of those transactions, our business and results of operations will likely be adversely affected.

 

We have incurred losses in recent periods and may incur losses in the future.  We have incurred losses in recent periods. We recorded a net loss of $17.4 million for the year ended December 31, 2008, a net loss of $19.5 million for the year ended December 31, 2007 and a net loss of $44.0 million for the year ended December 31, 2006. We may incur losses and further declines in revenue in future periods. While we recorded net income for the year ending December 31, 2009, we may not be able to maintain profitability. If we incur additional losses and are unable to raise funds to finance those losses, our liquidity and ability to operate would be adversely affected.

 

Our recent improvements in financial results may not be representative of future results.  We have engaged in a restructuring of our business, which was substantially completed in 2008. In the past year, we have experienced significant improvements in our operating results. These improvements, we believe, have resulted from a combination of our restructuring efforts and market conditions favorable to our realigned business operations, including returning liquidity, a continuing low interest rate environment and increased

investor risk tolerance. We may not be able to maintain these profitable results, either because we fail to adequately capitalize on market conditions or because market conditions become adverse to our business model.

 

We may be unable to fully capture the expected value from acquisitions and investments and personnel.   To the extent we make acquisitions or enter into combinations, we face numerous risks and uncertainties combining or integrating the relevant businesses and systems, including the need to combine accounting and data processing systems and management controls and to integrate relationships with clients and business partners. In addition, acquisitions may involve the issuance of additional shares of our common stock, which may dilute our shareholders’ ownership of our firm, or the use of cash or borrowing capacity, which may impact our funding and liquidity following the acquisition. Furthermore, acquisitions could entail a number of risks, including problems with the effective integration of operations, inability to maintain key pre-acquisition business relationships, increased operating costs, exposure to unanticipated liabilities and difficulties in realizing projected efficiencies, synergies and cost savings. For instance, in June 2009, we closed our acquisition of Gleacher Partners, Inc. Gleacher Partners has only been a part of our organization for a short period of time and we may not obtain the benefits and growth opportunities anticipated from this acquisition. We may also not be able to integrate successfully with any businesses we acquire in the future. If we are not able to integrate successfully our past and future acquisitions, there is a risk that our results of operations may be materially and adversely affected. Also, expansions or acquisitions divert our management’s attention from our other operations.

 

In connection with acquisitions, we have recorded a significant amount of goodwill and intangible assets. At December 31, 2009, intangibles and goodwill represented approximately $125.0 million. If the acquired businesses do not perform as expected, we may need to record impairment charges against these intangible assets, which would reduce net income, possibly materially.

 

Our ability to hire and retain our senior professionals is critical to the success of our business.  In order to operate our business successfully, we rely heavily on our senior professionals. Their personal reputation, judgment, business generation capabilities and project execution skills are a critical element in obtaining and executing client engagements. In particular, Eric J. Gleacher, our Chief Executive Officer and Chairman of the Board of Directors, and Peter J. McNierney, our President and Chief Operating Officer, make important contributions to our business, both as to management and business-generation. Also, like others in this industry, we have key professionals responsible for a disproportionate portion of our clients and business. Any loss of professionals, particularly key senior professionals or groups of related professionals, could impair our ability to secure or successfully complete engagements, result in loss of sales and trading business, materially and adversely affect our revenues and make it more difficult to operate profitably. We encounter intense competition for qualified employees from other companies in the investment banking industry as well as from businesses outside the investment banking industry, such as hedge funds, private equity funds and venture capital funds. In the past, we have lost investment banking, brokerage, research, and senior professionals and executives. For example, in February 2010, we announced the resignation of Lee Fensterstock, our then Chief Executive Officer, the loss of whom could result in at least a temporary disruption of our business operations. We could lose more personnel in the future. In the future, we may need to hire additional personnel. At that time, there could be a shortage of qualified personnel whom we could hire. This could hinder our ability to expand or cause a backlog in our ability to conduct our business, including the handling of investment banking transactions and the processing of brokerage orders. These personnel challenges could harm our business, financial condition and operating results.

 

Limitations on our access to capital could impair our liquidity and our ability to conduct our businesses.  Liquidity, or ready access to funds, is essential to financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity, such as that experienced globally in recent years. Liquidity is of particular importance to our trading business, and perceived liquidity issues may affect our clients’ and counterparties’ willingness to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption, negative views about the financial services industry generally or an operational problem that affects

our trading clients, third parties or us. We currently do not have committed sources of borrowing through bank financing arrangements. We rely on cash and assets that have historically been readily convertible into cash, such as our securities held in inventory, to finance our operations generally and to maintain our margin requirements, particularly with our principal clearing firm, Pershing LLC. Our ability to continue to access these and other forms of capital could be impaired due to circumstances beyond our control, such as a change in the value of our collateral, the willingness or ability of lenders to provide credit, and market disruptions or dislocations. Any such events could have a material adverse effect on our ability to fund our operations and operate our business.

 

In order to obtain funding to grow our business or fund operations in the event of future losses, we may seek to raise capital through the issuance and sale of our common stock or the incurrence of debt. The sale of equity, or securities convertible into equity, would result in dilution to our shareholders. The incurrence of debt may subject us to covenants restricting our business activities. Additional funding may not be available to us on acceptable terms, or at all.

 

We have made substantial principal investments in our private equity funds and may make additional investments in future funds. These investments are typically made in securities that are not publicly traded and therefore are subject to an inherent liquidity risk. At December 31, 2009, $19.3 million of our total assets consisted of relatively illiquid private equity investments (see Note 7 of the consolidated financial statements). There is a risk that we may be unable to realize our investment objectives by sale or other disposition at attractive prices or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from changes in the financial condition or prospects of the portfolio companies in which investments are made, changes in national or international economic conditions or changes in laws, regulations, fiscal policies or political conditions of countries in which investments are made. It takes a substantial period of time to identify attractive investment opportunities and then to realize the cash value of our investments through resale. Even if a private equity investment proves to be profitable, it may be several years or longer before any profits can be realized in cash.

 

Regulatory capital requirements may impede our ability to conduct our business.  Broadpoint Capital, Broadpoint AmTech and Gleacher Partners, our broker-dealer subsidiaries, are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain. Any failure to comply with these net capital requirements could impair our ability to conduct our core business as a brokerage firm.

 

Pricing pressures may impair the revenues and profitability of our brokerage business.  In recent years, we have experienced significant pricing pressures on trading margins and commissions in debt and equity trading. In the fixed income markets, regulatory requirements have resulted in greater price transparency, leading to increased price competition and decreased trading margins. In the equity markets, we have experienced increased pricing pressure from institutional clients to reduce commissions, and this pressure has been augmented by the increased use of electronic, algorithmic and direct market access trading, as well as changes in soft dollar practice which has created additional downward pressure on trading margins. We believe that pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay, including reducing the number of brokerage firms they use, and some of our competitors seek to obtain market share by reducing fees, commissions or margins. Additionally, in 2008 several prominent financial institutions consolidated, merged or received substantial government assistance. Such events could result in our competitors gaining greater capital and other resources, or seeking to obtain market share by reducing fees, commissions or margins.

 

Certain of our businesses focus principally on specific sectors of the economy, and deterioration in the business environment in these sectors generally or decline in the market for securities of companies within these sectors could materially and adversely affect our business.  The majority of our securities owned are related to our Descap business and are comprised of debt securities issued by U.S. government and federal agency obligations. Our holdings in federal agency obligations are subject to prepayment risk which may result in losses or lower returns than originally anticipated. The low interest rate environment and government

initiatives to help underwater homeowners refinance their mortgages subject us to prepayment risk. In addition, any future industry developments such as the announcement in February 2010 in which the Government Sponsored Entities (“GSEs”) stated their intention to buy back from its pools at par, substantially all loans 120 days or more delinquent, could have an impact on our trading revenues. Our equities business focuses principally on the technology, aerospace and defense and clean tech sectors. Volatility in the business environment in these sectors, or in the market for securities of companies within these sectors, could substantially affect our financial results and the market value of our common stock. The market for securities in each of our target sectors may also be subject to industry-specific risks. Underwriting transactions, strategic advisory engagements and trading activities in our target sectors represent a significant portion of our business. This concentration exposes us to the risk of substantial declines in revenues in the event of downturns in these sectors of the economy. Any future downturns in our target sectors could materially and adversely affect our business and results of operations.

 

We are a holding company and depend on payments from our subsidiaries.  We depend on dividends, distributions and other payments from our subsidiaries to fund our obligations. Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular, our broker-dealer subsidiaries are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to the parent holding company, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may hinder our ability to access funds that we may need to make payments on our obligations. In addition, because our interests in the Company’s subsidiaries consist of equity interests, our rights may be subordinated to the claims of the creditors of these subsidiaries.

 

Markets have and may continue to experience periods of high volatility.  Financial markets are susceptible to unanticipated, severe and rapid depreciation in asset values accompanied by a reduction in asset liquidity, such as the asset price deterioration in the subprime residential mortgage market. Volatile interest rates, falling property prices, and a significant increase in the number of subprime mortgages originated in prior years, contributed to dramatic increases in recent mortgage delinquencies and defaults and led to delinquencies among higher-risk, or subprime, borrowers in the United States. The widespread dispersion of credit risk related to mortgage delinquencies and defaults, through the securitization of mortgage-backed securities, sales of CDOs and the creation of structured investment vehicles, and the broad range of unregulated derivative products, caused banks to reduce their loans to each other or make them at higher interest rates. The economic impact of these problems spread and led to the most significant disruption of the financial markets since the Great Depression and what ultimately amounted to a complete shutdown of the credit markets. While markets have since begun to recover, global market and economic conditions have been, and continue to be both volatile and challenging. It is impossible to predict the long-term impact of this financial disruption, or whether it will persist or recur, or to predict the extent to which our markets, products and businesses will be adversely affected. As a result, these conditions could adversely affect our financial condition and results of operations.

 

Increase in capital commitments in our trading, underwriting and other businesses increases the potential for significant losses.  Until the onset of the recent financial disruption, the trend in capital markets had been toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to win business, investment banks increasingly committed to purchase large blocks of stock of publicly-traded issuers, instead of employing the more traditional marketed underwriting process, in which marketing was typically completed before an investment bank committed to purchase securities for resale. We believe that the wide-spread capital impairment of investment banks resulting from the financial dislocations experienced recently could reverse this trend. However, we cannot predict with certainty how the industry will evolve or the extent to which investment banks will continue to use their own capital as a competitive tool in winning business. As a result, we may be forced to commit greater amounts of capital to facilitate primarily client-driven business.

 

Our underwriting activities may place our capital at risk.  We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased as an underwriter at the anticipated price levels. As an underwriter, we also are subject to heightened standards

regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite.

 

Our principal trading and investments expose us to risk of loss.  To facilitate client-trading activities, we maintain securities trading positions in our Descap business. For example, if one of our clients is seeking to acquire a significant position in a particular security, we may accumulate a position in that security prior to selling it to the client. Conversely, we may purchase a block of securities from a client before we have located purchasers for the entire block. We seek to minimize market risk associated with these positions by trading out of them as quickly as possible and/or through hedging strategies. Certain positions, however, may be held by us for longer periods of time while we are seeking buyers for those positions, thereby exposing us to greater risk of loss.

 

We may incur significant losses from these positions due to market fluctuations and volatility. For example, to the extent that we own securities, a downturn in the value of those securities would result in losses from a decline in value. Conversely, to the extent that we have sold securities we do not own, an upturn in value could expose us to potentially unlimited losses as we attempt to acquire the securities in a rising market. In addition, we may engage in hedging transactions and strategies that may not adequately mitigate losses in our principal positions. If the transactions and strategies are not successful, we could suffer significant losses. Moreover, taking such positions in times of significant volatility can lead to significant unrealized losses, which further impact our ability to borrow to finance such activities. The unprecedented volatility of the markets recently for both fixed income and equity securities, in combination with the credit crisis, caused several well established investment banks to fail or come close to failing. If these conditions continue, our business, financial condition and results of operations could be adversely affected.

 

Our financial results may fluctuate substantially from period to period, which may impact our stock price.  We have experienced, and expect to experience in the future, significant periodic variations in our revenues and results of operations. The very significant variations over the past few years are attributable to our restructuring and the very significant changes in our business operations that resulted. On a “normalized” basis, these variations are attributed in part to trading activity and the fact that our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond our control. Our business is highly dependent on market conditions and the interest in the market for the products and services we trade and offer, as well as the decisions and actions of our clients and interested third parties. This risk may be intensified by focusing on companies in specific industries or sectors. For example, our Broadpoint AmTech broker-dealer focuses on companies in the Technology, Aerospace and Defense, and Clean Tech sectors. Concentrating in a specific sector or industry exposes us to volatility in that area that may not affect the broader markets. In addition, our results of operations experience some seasonality, with the third quarter typically being less robust than other quarters, most likely because of a general business activity slow-down in July and August of each year.

 

Increased competition, including from larger firms, may adversely affect our revenues and profitability.  The brokerage and investment banking industries are intensely competitive, and we expect them to remain so. We compete directly with other investment firms, brokers and dealers, and commercial banks. In addition to competition from firms currently in the securities business, there has been increased competition from others offering financial services, including automated trading and other services based on technological innovations. Recent changes, such as financial institution consolidations and the government’s involvement with financial institutions through the Emergency Economic Stabilization Act of 2008 and other transactions, may provide a competitive advantage for some of our competitors.

 

We compete on the basis of a number of factors, including client relationships, reputation, the abilities of our professionals, market focus and the relative quality and price of our services and products. We have experienced intense price competition in some of our businesses, particularly discounts in large block trades and trading commissions and spreads. In addition, pricing and other competitive pressures in investment banking, including the trends toward multiple bookrunners, co-managers and multiple financial advisors handling transactions, have continued and could adversely affect our revenues. We believe we may experience

competitive pressures in these and other areas in the future, as some of our competitors seek to obtain market share by competing on the basis of price.

 

Many of our competitors in the brokerage and investment banking industries have a broader range of products and services, greater financial and marketing resources, larger client bases, greater name recognition, more professionals to serve their clients’ needs, greater global reach and more established relationships with clients than we have. These larger and better-capitalized competitors may be better able to respond to changes in the brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. They also have the ability to support investment banking with commercial banking, insurance and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in our businesses. For example, many of our larger competitors have in the past provided “bridge” lending and equity participation and otherwise committed their own capital to facilitate transactions. The ability to provide financing had become, prior to the financial crisis, an important advantage for some of our larger competitors, and if this trend continues, it would adversely affect us competitively because we do not provide such financing. Additionally, these broader, more robust investment banking and financial services platforms may be more appealing to investment banking professionals than our business, making it more difficult for us to attract new employees and retain those we have.

 

If we are unable to compete effectively in our markets, our business, financial condition and results of operations will be adversely affected.

 

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated financial risk.  Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

 

Our risk hedging strategies also expose us to the risk that counterparties that owe us money, securities or other assets will not perform on their obligations. These counterparties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, breach of contract or other reasons. In 2008, an unprecedented number of counterparties defaulted on obligations in the financial services community, although we were not directly affected by these defaults. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.

 

Our operations and infrastructure may malfunction or fail.  Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions we process have become increasingly complex and involve many different types of securities with a wide variety of terms. Our financial, accounting or other data processing systems may fail to operate properly or become disabled as a result of events such as consolidation of our office space or events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. If any of these systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage.

 

We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to execute transactions and to manage our exposure to risk.

In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties, including our customers, with which we conduct business, whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of our employees in our primary locations, including New York City, NY, Greenwich, CT, and Roseland, NJ, work in close proximity to each other. If a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer and we may not be able to implement successfully contingency plans that depend on communication or travel.

 

Our operations also rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this could potentially jeopardize our, our clients’ or our counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

 

To be successful, we must profitably expand our business operations. We face numerous risks and uncertainties as we seek to expand.  We seek growth in our business primarily from internal expansion and through acquisitions. If we are successful in expanding our business, there can be no assurance that our financial controls, the level and knowledge of our personnel, our operational abilities, our legal and compliance controls, our risk management procedures and our other corporate support systems will be adequate to manage our business and our growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects.

 

Financial services firms have been subject to increased scrutiny and enforcement activity over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.  The financial services industry has experienced increased scrutiny and enforcement activity from a variety of regulators, including the SEC, FINRA, the NYSE, NFA, NASDAQ, the state securities commission and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the U.S. Congress, the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. Among other things, we could be fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on our business activities. We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The Company’s broker-dealer subsidiaries are subject to routine audits by FINRA. If, in the course of these audits, any adverse findings are noted by FINRA, we may incur fines or other censure. Periodically, the Company and its subsidiaries also receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory organizations. The Company does not always know the purpose behind these communications or the status or target of any related investigation. The responses to these communications have in the past resulted in the Company and/or its subsidiaries being cited for regulatory deficiencies, although to date these communications have not had a material adverse effect on the Company’s business. Substantial legal liability or significant regulatory action against us could have

material adverse financial effects or cause significant reputational harm to us, which could seriously harm our business prospects.

 

Events since early 2008 affecting the financial services industry and, more generally, the financial markets and the economy as a whole, have led to various proposals for changes in the regulation of the financial services industry in the U.S. and other markets. In 2009, President Obama released draft legislation providing for a comprehensive restructuring of the regulation of financial services firms. Legislators have introduced other draft legislation that will affect the securities industry, including Senators Charles Schumer and Maria Cantwell’s Shareholders’ Bill of Rights Act of 2009. The House of Representatives recently passed the Wall Street Reform and Consumer Protection Act of 2009, which, among other things, calls for the establishment of a Consumer Financial Protection Agency having broad authority to regulate providers of credit, savings, payment and other consumer financial products and services; creates a new structure for resolving troubled or failed financial institutions; requires certain over-the-counter derivative transactions to be cleared in a central clearinghouse and/or effected on the exchange; revises the assessment base for the calculation of the Federal Deposit Insurance Corporation assessments; and creates a structure to regulate systemically important financial companies, including providing regulators with the power to require such companies to sell or transfer assets and terminate activities if they determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States. Other proposals have been made both domestically and internationally, including additional capital and liquidity requirements and limitations on size or types of activity in which banks may engage. It is not clear at this time which of these proposals will be finally enacted into law, what form they will take or what new proposals may be made, as the debate over financial reform continues in 2010. Any such proposals, to the extent they are adopted, could substantially change the way in which we operate, perhaps materially adversely.

 

In addition, financial services firms are subject to numerous conflicts or perceived conflicts of interests. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts and regularly seek to review and update our policies, controls and procedures. However, appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. Our policies and procedures to address conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation.

 

Extensive regulation of public companies in the U.S. could reduce our revenue and otherwise adversely affect our business.  Highly-publicized financial scandals in past years have led to investor concerns over the integrity of the U.S. financial markets, and have prompted Congress, the SEC, FINRA, the NYSE, NFA and NASDAQ to significantly expand corporate governance, internal control over financial reporting and public disclosure requirements. The financial crisis of 2008 is likely to lead to more regulation of both public companies and the financial services industry. To the extent that private companies, in order to avoid becoming subject to these requirements, decide to forgo initial public offerings, or list their securities instead on non-U.S. securities exchanges, our equity underwriting business may be adversely affected. In addition, any new corporate governance rules may divert a company’s attention away from capital market transactions, including securities offerings and acquisition and disposition transactions. These factors, in addition to adopted or proposed accounting and disclosure changes, may have an adverse effect on our business. In addition, we could be directly impacted, as a public company, by such changes or developments.

 

Our business is subject to significant credit risk, and the financial difficulty of another prominent financial institution could adversely affect financial markets.  In the normal course of our businesses, we are involved in the execution and settlement of various customer transactions and financing of various principal securities transactions. These activities are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance. Although transactions are generally collateralized by the underlying security or other securities, we still face the risks associated with changes in the market value of securities that we may be obligated to purchase or have purchased in principal or riskless principal trades where a counterparty or customer fails to perform. During the recent unprecedented volatility of the financial markets, this risk greatly increased. We may also incur credit risk in our derivative

transactions to the extent such transactions result in uncollateralized credit exposure to our counterparties. We seek to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily.

 

In addition, the creditworthiness and financial well-being of many financial institutions may be interdependent because of credit, trading, clearing or other relationships between the institutions. The financial difficulty of one company, therefore, could result in further market illiquidity or financial difficulties with other institutions and may adversely affect the clearing agencies, clearing houses, banks, exchanges and other intermediaries with which we conduct business. Such events, therefore, could adversely impact our business.

 

Our business and results of operations could be adversely affected by governmental fiscal and monetary policies.  Our cost of funds for lending, investment activities and capital raising are affected by the fiscal and monetary policies of the U.S. and foreign governmental and banking authorities, changes to which are not wholly predictable or within our control. Such changes may also affect the value of the securities we hold.

 

Our exposure to legal liability is significant, and damages that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses.  Due to the nature of the Company’s business, the Company and its subsidiaries are exposed to risks associated with a variety of legal proceedings. These include litigations, arbitrations and other proceedings initiated by private parties and arising from underwriting, financial advisory or other transactional activities, client account activities and employment matters. Third parties who assert claims may do so for monetary damages that are substantial, particularly relative to the Company’s financial position. We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. We have in the past, and are currently subject to a variety of litigation arising from our business, most of which we consider to be routine. Risks in our business include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, potential liability for “fairness opinions” and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of trading arrangements. We are also subject to claims by employees alleging discrimination or harassment, among other things, as well as claims arising from disputes with employees. These risks often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time.

 

As a brokerage and investment banking firm, we depend to a large extent on our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses. Moreover, our role as underwriter to our clients on important underwritings or as advisor for mergers and acquisitions and other transactions involves complex analysis and the exercise of professional judgment, including rendering “fairness opinions” in connection with mergers and other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including shareholders of our clients who could bring securities class action lawsuits against us. Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be enforceable in all cases. As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action against us could have a material adverse effect on our results of operations or cause significant reputational harm to us, which could seriously harm our business and prospects.

 

See also “Item 3 — Legal Proceedings.”

 

Employee misconduct could harm us and is difficult to detect and deter.  There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years and we are also subject to risk from potential employee misconduct. For example, misconduct by employees could involve the improper use or disclosure of confidential information, or inappropriate sales techniques, which could result in regulatory sanctions and serious reputational or financial harm. It is not

always possible to deter employee misconduct and the precautions we take to detect and prevent this activity may not be effective in all cases.

 

Our businesses could be adversely affected by market uncertainty or lack of confidence among customers and investors due to difficult geopolitical or market conditions.  Our investment banking business has been and may continue to be adversely affected by market conditions. Unfavorable economic or geopolitical conditions have and may continue to adversely affect customer and investor confidence, resulting in a substantial industry-wide decline in underwritings and financial advisory transactions. Additionally, market uncertainty and unfavorable economic conditions may result in fewer institutional clients with lesser amounts of assets to trade. In each case, this could have an adverse effect on our revenues and profits. Additionally, unfavorable returns on investment, whether due to general adverse market conditions or otherwise, could adversely affect our ability to retain clients and attract new clients.

 

The impact of the current market and regulatory environment on trading customers may adversely affect our sales and trading commission revenues.  A large number of our institutional investor sales and trading customers are also financial institutions, including hedge funds, banks, insurance companies and institutional money managers. The majority of transactions conducted with us relate to financial services companies. The current market environment may cause some of these companies to curtail their investment activities or even cease to do business, which may reduce our commissions. For example, a number of hedge funds have recently been experiencing significant investor requests to withdraw funds in addition to having to curtail certain investing activities as a result of regulatory limitations on short selling. Several hedge fund customers have announced their intention to close.

 

Risks Related to Ownership of Our Common Stock

 

Provisions of our Certificate of Incorporation and Bylaws, agreements to which we are a party, regulations to which we are subject and provisions of our equity incentive plans could delay or prevent a change in control of our company and entrench current management.  Our Board of Directors may, if it deems it advisable, take actions that have the effect of deterring a takeover or other offer for our securities.

 

Any such actions, together with provisions of our Certificate of Incorporation and Bylaws, as well as New York law, could make more difficult efforts by shareholders to change our Board of Directors or management.

 

Our Certificate of Incorporation and Bylaws provide:

 

 

In addition, our brokerage businesses are heavily regulated, and some of our regulators require that they approve transactions which could result in a change of control, as defined by the then-applicable rules of our regulators. The requirement that this approval be obtained may prevent or delay transactions that would result in a change of control.

 

Our stock price may fluctuate as a result of several factors, including but not limited to, changes in revenues and operating results.  We have experienced, and expect to experience in the future, fluctuations in the market price of our common stock due to factors that relate to the nature of our business, including but not limited to changes in our revenues and operating results. Our business, by its nature, does not produce steady and predictable earnings on a quarterly basis, which causes fluctuations in our stock price that may be significant. Other factors that have affected, and may further affect, our stock price include changes in news related to economic or market events or conditions, changes in market conditions in the financial services industry, including developments in regulation affecting our business, failure to meet the expectations of market analysts, changes in recommendations or outlook by market analysts, and aggressive short selling similar to that experienced in the financial industry in 2008.

 

Future sales or anticipated future sales of our common stock in the public market, by us, by MatlinPatterson, by management, or by others, could cause our stock price to decline.  We may in the future issue additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could be substantially dilutive to holders of our common stock. Holders of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series, and therefore, such sales or offerings could result in increased dilution to our shareholders. The market price of our common stock could decline as a result of sales of, or an expectation of sales of, shares of our common stock or securities convertible into or exchangeable for common stock.

 

In addition, the sale or anticipated future sale of a significant number of shares of our common stock in the open market by MatlinPatterson or others, whether pursuant to a resale prospectus or pursuant to Rule 144, promulgated under the Securities Act, may also have a material adverse effect on the market price of our common stock. Any such decline in our stock price could impair our ability to raise capital in the future through the sale of additional equity securities at a price we deem appropriate.

 

We have granted to several of our significant shareholders and certain others rights with respect to registration under the Securities Act of the offer and sale of our common stock. These rights include both “demand” rights, which require us to file a registration statement if asked by such holders, as well as incidental, or “piggyback,” rights granting the right to such holders to be included in a registration statement filed by us. As of February 28, 2010, there were approximately 52.5 million shares of our common stock to which these rights pertain. These sales might impact the liquidity of our common stock making it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

We do not expect to pay any dividends for the foreseeable future.  We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. We expect to retain all future earnings, if any, for investment in our business.

 

Because MatlinPatterson FA Acquisition LLC, a Delaware limited liability company (“MatlinPatterson”) and Eric J. Gleacher, the Chief Executive Officer of the Company and the Chairman of our Board of Directors, each controls a significant percentage of the voting power of our common stock, they can exert significant influence over the Company.  As of February 28, 2010, MatlinPatterson controlled approximately 28 percent of the voting power of our common stock and Eric J. Gleacher controlled approximately 11 percent of the voting power of our common stock. Either MatlinPatterson or Mr. Gleacher, acting alone, can exert significant influence over corporate actions requiring shareholder approval. As a result, it may be difficult for other investors to affect the outcome of any shareholder vote.

In addition, if any of our shareholders, including MatlinPatterson and Mr. Gleacher, that in the aggregate own a majority of our common stock choose to act together, they will be able to direct the election of all of the members of our Board of Directors and determine the outcome of most matters submitted to a vote of our shareholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. Furthermore, they would have the power to prevent or cause a change in control, and could take other actions that might be favorable to them but not to our other shareholders.

 

We are no longer a “controlled company” within the meaning of the NASDAQ Marketplace Rules. As a result, we are subject to all of the NASDAQ corporate governance requirements and we may be delisted if we fail to comply.  From our recapitalization in 2007 until June 2009, we operated as a “controlled company,” which allowed us to elect to not comply with certain NASDAQ corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended by a majority of the independent directors or by a nominating committee composed solely of independent directors. Following the consummation of the Gleacher transaction on June 5, 2009, MatlinPatterson owned less than 50% of the voting power of our common stock, and therefore we ceased to be a “controlled company” within the meaning of the rules. In order to comply with the NASDAQ corporate governance rules, we have appointed additional independent directors to our committees. Currently, our Audit Committee and Committee Directors and Corporate Governance are composed entirely of independent directors, and our Executive Compensation Committee is composed of a majority of independent directors. Our Executive Compensation Committee is composed of three independent directors and one director whom we consider not to be independent. Although NASDAQ rules generally require a compensation committee to be wholly independent, there is an exception, that may be claimed for up to two years, that we believe we fall under. Consequently, we believe we are fully compliant with the NASDAQ requirement related to the composition of our Executive Compensation Committee.

 

We are actively working to be in compliance with the NASDAQ corporate governance requirement that a majority of our board of directors consists of independent directors by the required phase-in date, but have not yet achieved that status. If we violate the NASDAQ requirements, we may be delisted.

 

 

None.

 

 

The Company currently leases all of its office space. The Company’s lease for its current headquarters in New York, New York (approximately 16,000 square foot space) expires on December 31, 2018. On September 30, 2009, the Company entered into a lease agreement pursuant to which it has leased for a 15-year term (subject to extension) approximately 75,000 rentable square feet of space at 1290 Avenue of the Americas, New York, New York and expects to occupy these facilities by May 2010, assuming the necessary build-out construction is completed by then. The Company has not yet made a final determination with respect to any continued use of the space associated with its current headquarters.

A list of office locations as of December 31, 2009 by segment is as follows:

 

 

 

Based on currently available information, the Company does not believe that any current litigation, proceeding or other matter to which it is a party or otherwise involved will have a material adverse effect on its financial position, results of operations and cash flows, although an adverse development, or an increase in associated legal fees, could be material in a particular period, depending in part on the Company’s operating results in that period.

 

 

[Reserved]

 

 

The Company’s common stock trades on The NASDAQ Global Market under the symbol “BPSG.” As of February 28, 2010 there were approximately 3,874 holders of record of the Company’s common stock. No dividends have been declared or paid on our common stock since February 2005. We do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future. The terms of our outstanding shares of preferred stock prohibit our paying cash dividends on our common stock without the preferred stock holder’s prior written consent.

 

The following table sets forth the high and low sales prices for the common stock during each quarter for the fiscal years ended.

 

 

Information relating to compensation plans under which our common stock is authorized for issuance will be set forth in our definitive proxy statement for our annual meeting of shareholders to be held on May 27, 2010 and is incorporated herein by reference.

 

ISSUANCE OF UNREGISTERED EQUITY SECURITIES

 

There were no undisclosed issuances of unregistered equity securities during 2009. Any such issuances have been previously disclosed in a previously filed Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

We did not repurchase any shares of our common stock in the fourth quarter of 2009.

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

 

Set forth below are line graphs comparing the yearly change in cumulative total shareholder return on our common stock against cumulative total return of the Standard & Poors 500 and Standard & Poors 500 Financials Indices, assuming an investment of $100 on December 31, 2004.

 

The following table has been included for the period of five fiscal years, commencing December 31, 2004 and ending December 31, 2009:

 

Shareholder Returns (5 years)

 

 

The table below has been included to show our cumulative returns since our recapitalization in September 21, 2007:

 

Shareholder Return (since recapitalization)

 

 

The following selected financial data has been derived from the consolidated financial statements of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this report.

 

 

 

Reclassification

 

Certain amounts in operating results for 2005 through 2008 have been reclassified to conform to the 2009 presentation.

 

Discontinued Operations and Business Combinations

 

During the past several years, the Company has restructured nearly all of its operations. In September 2007, the Company completed the sale of its Municipal Capital Markets Group to DEPFA. In June 2007, the Company closed its Fixed Income Middle Markets Group. In June 2006, the Company ceased operations in its Taxable Fixed Income division. In April 2006, the Company closed its Convertible Arbitrage Advisory Group. In February 2005 sold its asset management operations in Albany, New York and in December 2004, the Company closed its asset management operations in Sarasota, Florida.

 

During the years ending December 31, 2009 and 2008, the Company completed certain acquisitions. In June 2009, the Company acquired Gleacher Partners Inc., an internationally recognized financial advisory boutique, which has expanded the Company’s investment banking capabilities. In October 2008, the Company acquired American Technology Research, Inc., a broker-dealer specializing in institutional research, sales and trading in the information technology, clean tech and defense areas. In early 2008, the Company hired the employees of the Fixed Income Division of BNY Capital Markets, Inc. and acquired certain related assets, which gave the Company a greater distribution capability, particularly in high yield and convertible bonds.

 

As a result of these discontinued operations and business combinations, period-to-period comparisons of the Company’s financial results may not, in any given case, be meaningful.

 

Cumulative Effect of Accounting Change

 

Upon adoption of ASC 718 “Compensation — Stock Compensation” on January 1, 2006, the Company recognized an after-tax gain of approximately $0.4 million as the cumulative effect of a change in accounting principles, primarily attributable to the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred.

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

There are included or incorporated by reference in this document statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are usually preceded by words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” and “continue” or similar words. All statements other than historical information or current facts should be considered forward-looking statements. Forward-looking statements may contain projections or stated targets regarding revenues, earnings, operations, and other financial projections, and may include statements of future performance, strategies and objectives. However, there may be events in the future, which the Company is not able to accurately predict or control which may cause actual results to differ, possibly materially, from the expectations set forth in the Company’s forward-looking statements. All forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors. Such factors include, among others, market risk, credit risk and operating risk. These and other risks are set forth in greater detail throughout this document. The Company does not intend or assume any obligation to update any forward-looking information it makes.

 

Any forward-looking statement should be read and interpreted together with these documents, including the following:

 

 

Any forward-looking statement speaks only as of the date on which that statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

 

Business Overview

 

The Company is an independent, full-service investment bank that provides corporate and institutional clients with strategic, research-based investment opportunities, capital raising, and financial advisory services, including merger and acquisition, restructuring, recapitalization and strategic alternative analysis services, as well as securities brokerage for institutional customers primarily in the United States. We are focused on growth and have taken advantage of the recent dislocation of the markets by making strategic acquisitions and hiring professionals that will contribute to our intellectual capital. Our financial acquisitions generally include some form of contingent consideration or “earnout” which provides the opportunity for employees to participate in a share of the profits of their individual business unit. This model aligns those employees with both the short and long-term strategy of the Company. Our strategy also includes continued diversification of

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

our earnings stream and balanced growth in investment banking in order to capitalize on the recent return of liquidity to the markets.

 

The implementation of our growth strategy began in September 2007 with the closing of a $45.8 million capital infusion from MatlinPatterson Global Opportunities Partners II (“MatlinPatterson”). This re-capitalization was the first step in our efforts to build a premier investment bank for mid-sized and emerging growth companies and their investors. Following this re-capitalization, the Company implemented a restructuring plan to properly size the Company’s infrastructure, including a reduction in headcount within IT and operations, the outsourcing of our clearing operations and the elimination of excess office space.

 

In early 2008, the Company hired the employees of the Fixed Income Division of BNY Capital Markets, Inc. and acquired certain related assets, which now comprises our Debt Capital Markets segment. In connection with this acquisition, the Company raised an additional $19.7 million of capital in order to grow the business. This acquisition was strategically additive in that it gave the Company a distribution capability, particularly in high yield and convertible bonds, which enabled the Company to expand its investment banking practice and better serve our corporate clients.

 

The Company then completed its acquisition of American Technology Research (“Broadpoint AmTech”) on October 2, 2008, which now comprises our Equities segment. Broadpoint AmTech is a broker-dealer specializing in institutional research, sales and trading in the technology, aerospace and defense and clean tech areas. This acquisition provided the Company with critical mass to more effectively serve the equity research, sales and trading support needs of our institutional investor client base and provided the Company with a full-service platform on which to build a significant middle-market focused investment bank.

 

For the year ending December 31, 2008, the Company reported a net loss of $17.4 million. The Company completed the restructuring plan in the third quarter of 2008 and as a part of the Company’s restructuring activities, the Company incurred restructuring costs of approximately $4.3 million during the year ending December 31, 2008. This restructuring brought our non-compensation expenses to more efficient levels. We reported our first quarterly profit in the fourth quarter of 2008 since our re-capitalization. As a result of the Company’s restructuring, acquisitions and related activities, period-to-period comparisons of the Company’s results of operations may not be meaningful. Furthermore, there can be no assurance that the Company will remain profitable.

 

In 2009, we continued the implementation of our growth strategy and in June 2009 acquired Gleacher Partners, Inc. (“Gleacher Partners”). Gleacher is a financial advisory boutique best known for advising major companies in mergers and acquisitions. This acquisition provided us with a significant advisory business that expanded our investment banking capabilities and provided us with the ability to offer a full suite of advisory and financing products to our corporate client base.

 

In the third quarter of 2009, the Company completed a public offering with 16 million shares sold by the Company, generating net proceeds to the Company of $93.3 million. This additional capital was raised for working capital, general corporate purposes, potential acquisitions and expansion of our business generally.

 

The transformation of our business resulted in positive contributions to our operating results in 2009. We are focused on building our investment banking business, including leveraging pre-existing Gleacher relationships, growing fixed income through increased market share and new product areas, expanding our equity business and continuing to pursue complementary, high return on equity opportunities.

 

Unfavorable or uncertain economic and market conditions impact our results and can be caused by a number of factors, including declines in economic growth, business activity or investor confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation, interest rates, outbreaks of hostilities or other geopolitical instability, corporate, political or other scandals that reduce investor

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

confidence in the capital markets, or a combination of these or other factors. Such factors influence levels of equity security issuance and merger and acquisition activity, which affects our investment banking business. The same factors also affect trading volumes and valuations in secondary financial markets, which affect our brokerage business. Commission rates, market volatility and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period.

 

Our revenues recently have been derived primarily from our fixed income business, which was a significant driver of our profitability in 2009. In 2008, our business suffered as a result of a lack of liquidity resulting in a widening of “spreads” which provided opportunities for higher margins per trade, but also resulted in reduced revenues due to lower trading volumes. We have experienced increased volumes due to the return of liquidity, which has been a major contributor to our strong operating results. However, this return of liquidity could be adversely impacted to the extent there is a rise in short-term interest rates. A rate increase could cause a reduction of trading volumes, the impact of which may be partially offset by an increase in spreads and would result in increased funding costs. We manage our interest rate risk on our fixed income positions by shorting to be announced securities (“TBAs”), forward mortgage-backed securities whose collateral remain “to be announced” until just prior to the trade settlement, and government securities and look toward alternative sources of funding in the repo markets to manage funding costs associated with our clearing broker. We believe our fixed income business is currently well positioned and continue to allocate capital to this operation.

 

We are focused on diversifying our product mix, recognizing that our business is principally fixed income. Continued improvement will also depend on growth in our equities segment, which we believe will benefit from the return of liquidity and overall improved confidence in the equities market. We also continue to look for opportunities to grow through acquisitions to the extent such acquisitions contribute to our talent, relationships and ideas.

 

The economic turmoil of 2008 significantly impacted mergers & acquisitions activity (“M&A”). Our clients engaging in M&A often rely on access to the credit markets to finance their transactions. Deal volume plunged in 2008 as a result of the liquidity crisis in the credit markets, which resulted in limited access to capital. While this environment continued during 2009, we believe the recent stabilization of the markets should result in new opportunities to capitalize on our combined Broadpoint Gleacher platform by leveraging the expertise and corporate relationships of our combined operations. However, there can be no assurances that these conditions will improve in the near term.

 

Our business model is based upon low risk and highly liquid investments. Although we do not engage in any significant proprietary trading for our own account, our inventory of securities held to facilitate customer trades and our market making activities are sensitive to market movements. We do not have any significant direct exposure to the sub-prime markets, but are subject to market fluctuations resulting from news and corporate events in such markets, associated write-downs by other financial services firms and interest rate and prepayment speed fluctuations.

 

The Company maintains an investment portfolio which includes interests in publicly and privately held companies. This was a strategic investment made by the Company in 2001, which provides returns consistent with risks of investing in venture capital. Our open commitments to fund this portfolio were $1.0 and $1.4 at December 31, 2009 and 2008, respectively. The fair value of this portfolio at December 31, 2009 and 2008 was approximately $18.3 and $14.3 million, respectively with gains/(losses) of $5.8 million and $1.1 million, respectively.

 

Our business is a human capital business and our performance is dependent on our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality service and guidance to our clients. Employee compensation is variable and includes share based compensation

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

to create employee equity ownership in order to align our employees’ interests with the interests of the Company.

 

Currently, we operate through the following five business segments:

 

 

Our Company has moved from an employee mix of a nearly equal number of client-facing and support to a ratio of nearly 2-to-1, which has brought improved scalability to our business.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

We continue to evaluate market opportunities resulting from the recent credit crisis and return of liquidity and we believe there is significant opportunity to expand our revenue base due to the recent troubles at some of the major primary dealers. This includes continued growth through acquisition and/or hiring of sales and trading professionals with extensive client relationships from many of the larger firms that were impacted by the turbulent markets.

 

Business Environment in 2009

 

The financial markets recovered significantly in 2009 from the challenging economic environment stemming from the credit crisis in 2008. Various government actions to inject liquidity and shore up the credit markets resulted in improved investor confidence. Interest rates remain at historically low levels, the government implemented a $1.25 trillion mortgage-backed securities buyback program which was intended to create liquidity and keep mortgage rates low and results of stress tests of the nation’s largest banks were generally positive and certain financial institutions were able to shore-up their capital bases and repay the government TARP funds.

 

In many cases, investors have shifted away from U.S. treasuries and into higher yielding assets in the equity and credit markets, producing returns of approximately 20% in the Dow Jones, S&P and corporate bond indices, with high yield assets returning over 50%. This resulted in long-term U.S. treasuries performing approximately 13% lower than the prior year. The U.S. and global economics remains weak, and the M&A markets continue to lag. These conditions present us with both opportunities and challenges.

 

While U.S. and foreign governments took extraordinary actions to address the financial crisis, it is expected that the government will be seeking ways to unwind its various economic stimulus programs. In order to protect the economy against inflation, the government may raise interest rates and remove the excess liquidity that was originally injected into the markets to stimulate the economic recovery. The overall impact this will have on the markets is unknown and may lead to continued volatility.

 

The results of our operations for 2009 have benefitted as a result of the recovery experienced in the financial markets. As these results are highly dependent on the environment in which our businesses operate, our current year results may not be indicative of what may be recognized in the future.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

RESULTS OF OPERATIONS

 

 

2009 Financial Overview

 

For the year ended December 31, 2009, net revenues from continuing operations were $341.8 million, compared to $134.3 million for the year ended December 31, 2008. The 155 percent increase in net revenues was due to strength in all the Company’s business segments as revenues increased in each of the revenue categories. Overall increase in net revenues was largely attributable to higher volumes resulting from an improvement in investor sentiment when compared to the prior year which was significantly impacted by the credit crisis, as well as higher overall inventories in order to facilitate our customers’ trading activities. Net income per diluted share from continuing operations for the year ended December 31, 2009 was $0.53 compared to a loss per diluted share of $0.25 for the year ended December 31, 2008. The Company reported a

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

consolidated net profit of $54.9 million for the year ended December 31, 2009, compared to a consolidated net loss of $17.4 million for the year ended December 31, 2008.

 

Net Revenues

 

For the year ended December 31, 2009, net revenues from continuing operations were $341.8 million compared to $134.3 million for the year ended December 31, 2008. Commissions and principal transactions revenue increased $146.2 million, or 141 percent, to $249.8 million from $103.6 million due to an increase of $76.4 million in Broadpoint Descap and $59.3 million in the Debt Capital Markets segment, which commenced operations in March 2008. The Equities segment revenue increased $10.6 million and Investment Banking revenues increased $29.5 million, or 176 percent, to $46.2 million due to an increase in advisory services revenue of $21.3 million and an increase in capital raising related revenue of $8.1 million. Investment gains were $5.7 million compared to investment losses of $1.1 million in the prior year due to an increase in the value of the Company’s investment in the FATV Partnership. Net interest income of $33.9 million increased $22.6 million, or 201 percent, compared to the prior year, primarily due to coupon interest generated on higher inventory levels at Broadpoint Descap and partially offset by higher funding costs at our clearing broker due to these higher inventory levels. Fees and other revenues of $6.4 million increased $2.4 million, or 62 percent, primarily due to an increase in payments received for equity research in our Equity segment.

 

Non-Interest Expense

 

Non-interest expenses for the year ended December 31, 2009 of $279.9 million increased $130.8 million, or 88 percent, compared to $149.1 million for the year ended December 31, 2008. The increase in non-interest expense is due to a combination of increased headcount and overall compensation as a result of higher net revenues in all of our business segments and an increase in activity in the Company’s Equities, Investment Banking, Debt Capital Markets and Broadpoint Descap segments.

 

Compensation and benefits expense increased $124.1 million, or 111 percent, to $235.8 million in the year ended December 31, 2009 due to an increase in net revenues of 155 percent and an increase in headcount to 346 employees from 241 at the end of the prior year. As is standard in the industry, the Company compensates many of its professional personnel with a percentage of, or otherwise based on, the net revenues generated by that professional or his or her business unit. Consequently, as net revenue increases, associated compensation expense increases. The increase in compensation and benefits expense was also due to an increase in support personnel that are necessary to manage the Company’s growth.

 

Clearing, settlement and brokerage costs of $4.6 million increased $1.8 million, or 66 percent, compared to the prior year. The year-over-year increase was due to increased volume in Equities, Debt Capital Markets and Broadpoint Descap segments.

 

Communications and data processing expense of $10.5 million increased $1.3 million, or 14%, compared to the prior year. The year-over-year increase was due to increased headcount throughout the Company and increased activity in Equities, Investment Banking, Debt Capital Markets and Broadpoint Descap segments.

 

Occupancy and depreciation expense increased $2.1 million, or 34 percent, to $8.4 million due to the leasing of additional office space related to our Investment Banking segment and the impact of a full year’s expense for Broadpoint Amtech’s Greenwich office.

 

Amortization of intangible assets increased $3.5 million over the prior year to $3.9 million due to amortization of a full year of intangible assets acquired as a result of the Broadpoint AmTech acquisition and seven months worth of amortization of intangible assets associated with the Gleacher Partners acquisition.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Selling expense increased $2.4 million, or 77 percent, over the prior year to $5.5 million, primarily due to a Company-wide increase in sales activity.

 

The Company’s restructuring was completed at the end of the third quarter of 2008 and as a result, no restructuring charges were incurred during 2009, compared to the $4.3 million in restructuring charges incurred in 2008.

 

Other expenses were flat compared to the prior year and include costs associated with the Gleacher acquisition and the implementation of a new SIPC assessment fee in 2009, which were partially offset by a decrease in legal expenses.

 

Income Tax Expense (Benefit)

 

The effective income tax rates for the years ended December 31, 2009 and 2008 were 11.5% and (16.4)%, respectively. Our effective income tax rate differed from the federal statutory rate of 35% in 2009 primarily as a result of the release of the deferred tax asset valuation allowance of (39.8)%, partially offset by state and local income taxes, net of federal income taxes of 7.5%, preferred stock dividends of 2.2%, change in estimated state tax rates of 2.3%, provision to return adjustments of 1.9% and non-deductible compensation of 1.3%. Our effective income tax rate differed from the federal statutory rate of 35% for 2008 primarily as a result of the change in federal and foreign valuation allowance of (34.9)%, a reserve for uncertain tax positions of (16.3)%, partially offset by state and local income taxes, net of federal income taxes and state valuation allowance of 8.1%.

 

The Company estimates that its effective income tax rate for 2010 will range from 45%-47% which differs from the 2009 effective income tax rate of 11.5% primarily due to the impact of the valuation allowance release in 2009 which will not impact the effective income tax rate for 2010.

 

2008 Financial Overview

 

For the year ended December 31, 2008, net revenues from continuing operations were $134.3 million, compared to $40.1 million for the year ended December 31, 2007. The 235 percent increase in net revenues was driven by increased commissions and principal transactions revenue in Broadpoint’s Descap segment and the addition of the Debt Capital Markets segment, which commenced operations in March 2008. Investment Banking revenue and net interest income also improved in 2008 compared to the prior year. The Company reported a loss from continuing operations of $17.2 million for the year ended December 31, 2008 compared to the Company’s loss from continuing operations of $26.9 million for the year ended December 31, 2007. Loss per diluted share from continuing operations for the year ended December 31, 2008 was $0.25 compared to a loss per diluted share of $0.98 for the year ended December 31, 2007. The Company reported a consolidated net loss of $17.4 million for the year ended December 31, 2008, compared to a consolidated net loss of $19.5 million for the year ended December 31, 2007. Consolidated diluted loss per share for the year ended December 31, 2008 was $0.25 compared to a consolidated loss per diluted share of $0.71 for the year ended December 31, 2007.

 

Net Revenues

 

For the year ended December 31, 2008, net revenues from continuing operations were $134.3 million, compared to $40.1 million for the year ended December 31, 2007. Commissions and principal transactions increased $77.7 million to $103.6 million from $25.9 million due to an increase at Broadpoint Descap of $25.9 million and $54.3 million generated by the Debt Capital Markets segment, which commenced operations in March 2008, partially offset by a decrease in Equities of $3.3 million. Investment Banking revenues increased 105 percent or $8.6 million to $16.7 million in 2008. The Investment Banking segment generated

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

$12.9 million in revenues of which $10.2 million were due to its Restructuring and Recapitalization group, which commenced operations in February 2008. In addition, the Debt Capital Markets segment generated $3.3 million in placement fees and the Equities segment generated $0.4 million in investment banking fees for the year. Investment losses primarily associated with the Company’s venture capital subsidiary were $1.1 million compared to investment gains of $2.6 million for 2007. Net interest increased $9.6 million or 597 percent to $11.2 million due to higher inventory levels at Broadpoint Descap and lower financing costs. Fees and other revenues of $3.9 million increased by $2.1 million primarily due to an increase in payments received related to equity research agreements.

 

Non-Interest Expense

 

Non-interest expense increased $77.4 million, or 108 percent, to $149.1 million in the year ended December 31, 2008.

 

Compensation and benefits expense increased 170 percent, or $70.4 million, to $111.7 million in the year ended December 31, 2008 due to an increase in net revenues of 235 percent.

 

Clearing, settlement, and brokerage costs were $2.8 million, representing a decrease of 11 percent in the year ended December 31, 2008 compared to the prior year. The year-over-year decline was primarily due to a decrease in equity trading volume that was partially offset by volume in the Debt Capital Markets segment and increased volume in the Broadpoint Descap segment.

 

Communications and data processing costs increased $1.4 million or 18 percent in the year ended December 31, 2008 due to the addition of the Debt Capital Markets segment and increased head count at the Broadpoint Descap segment, which offset cost savings initiatives implemented during the year. In addition, a $0.6 million reserve related to services previously utilized by the legacy equities business was established in the third quarter of 2008.

 

Occupancy and depreciation expense decreased $0.3 million or 5 percent in the year ended December 31, 2008.

 

Amortization of intangible assets increased $0.3 million to $0.4 million in the year ended December 31, 2008 primarily due to amortization of intangible assets associated with the Company’s acquisition of Broadpoint AmTech, which closed in the fourth quarter of 2008.

 

Selling expense remained relatively unchanged in the year ended December 31, 2008.

 

Other expense increased $4.0 million, or 55 percent, for the year ended December 31, 2008. The increase was driven primarily by an increase in legal and settlement expenses.

 

Income Tax Expense (Benefit)

 

The effective income tax rate for the year ended December 31, 2008 was (16.4)%, compared to 14.8% for the year ended December 31, 2007. Our effective income tax rate differed from the federal statutory rate of 35% for 2008 primarily as a result of by the change in the valuation allowance on deferred tax assets of (34.9)%, a reserve for uncertain tax positions of (16.3)%, partially offset by state and local income taxes, net of federal income taxes and state valuation allowance of 8.1%. Our effective income tax rate differed from the federal statutory rate of 35% for 2007 primarily as a result of the change in federal and foreign valuation allowance of (18.2)%, other compensation of (2.7)%, partially offset by state and local income taxes, net of federal income taxes and state valuation allowance of 2.4%.

 

The Company maintained a valuation allowance at December 31, 2008 and 2007 as a result of uncertainties related to the realization of its net deferred tax assets. The valuation allowance was established

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

after weighing all positive and negative evidence, including the Company’s history of cumulative losses over the past three years and the difficulty of forecasting future taxable income. The valuation allowance reflected the conclusion of management that it was more likely than not that the benefits of the deferred tax assets will not be realized.

 

Segment Highlights

 

For presentation purposes, net revenue within each of the businesses is classified into commissions and principal transactions, investment banking, investment gains/(losses), net interest, and other. Commissions and principal transactions include commissions on agency trades and gains and losses from sales and trading activities. Investment banking includes revenue generated from capital raising through underwritings and private placements of equity and debt securities, and financial advisory service fees in regards to mergers and acquisitions, restructuring and corporate finance related matters. Investment gains/(losses) reflect gains and losses on the Company’s investment portfolio. Other revenue reflects management fees received from the partnerships the Company manages and research fees. Net interest includes interest income net of interest expense and reflects the effect of funding rates on the Company’s inventory levels. Net revenue presented within each category may differ from that presented in the financial statements as a result of differences in categorizing revenue within each of the revenue line items listed below for purposes of reviewing key business performance.

 

Broadpoint Descap

 

 

2009 vs. 2008

 

Broadpoint Descap net revenues increased 185 percent to $145.2 million in 2009. Commissions and principal transactions revenue increased $76.4 million, or 186 percent, compared to the prior year due to increased trading volumes as the number of sales professionals doubled compared to the prior year as well as improved market conditions. Net interest income increased $17.0 million due to coupon interest received on increased inventory levels, partially offset by higher funding costs as a result of these increased inventory levels. Pre-tax contribution increased $35.6 million, or 169 percent, as a result of the increase in revenues, partially offset by higher compensation costs resulting from higher revenues as well as increases in headcount.

 

2008 vs. 2007

 

Broadpoint Descap net revenue increased 234 percent to $50.9 million in 2008. Commissions and principal transactions revenue increased $25.9 million or 171 percent compared to the prior year due to increased trading volumes and an overall widening of spreads in their markets. Net interest increased by $10.4 million due to decreased funding rates and the allocation of additional capital that was utilized to increase net inventory levels leading to higher interest income. Pre-tax contribution increased $18.3 million, or

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

664 percent, due to the increase in net revenues which is partly attributable to increased headcount. In addition, the fixed nature of non-compensation costs in relation to these higher net revenues also contributed to the increase in pre-tax contribution.

 

Debt Capital Markets

 

 

2009 vs. 2008

 

Debt Capital Markets net revenue increased $65.4 million or 110 percent to $124.7 million in 2009. Commissions and principal transactions revenue increased $59.3 million, or 109 percent, primarily due to an increase in volumes. While the operations of the Debt Capital Markets segment commenced in March of 2008, the increase in volumes can be attributed to increased level of activity over the comparable prior year period, as well as the benefit of having a full year of activity. In 2008 investment banking revenues were primarily generated due to placement fees. During 2009, the Company hired a group of investment banking professionals that expanded the services offering to include debt liability management, which was the primary reason for the $7.0 million increase in investment banking revenues. Pre-tax contribution increased $12.7 million, or 110 percent, as a result of the increase in revenues, partially offset by higher compensation costs resulting from higher revenues as well as increases in headcount.

 

2008 vs. 2007

 

The Debt Capital Markets segment commenced operations in March of 2008.

 

Investment Banking

 

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

2009 vs. 2008

 

Investment Banking net revenue increased $20.9 million or 162 percent to $33.8 million. The Company’s Restructuring and Recapitalization group averaged over $1 million a month in monthly retainer fees and benefited from an increase in the number of deals that led to a significant increase in transaction fees. In June of 2009, the Company acquired Gleacher Partners, expanding the Company’s investment banking services offering to include mergers and acquisitions expertise. Pre-tax contribution was flat in 2008 as the net revenues of the segment fully absorbed the expenses incurred. In 2009, higher net revenues more than offset such operating expenses.

 

2008 vs. 2007

 

Investment Banking net revenue increased $6.6 million or 104 percent to $12.9 million in 2008. The revenues generated in 2008 primarily resulted from the activities of the Restructuring and Recapitalization group which commenced operations in February of 2008. The Restructuring and Recapitalization group completed one significant transaction with MatlinPatterson, which accounted for 58 percent of 2008 revenues.

 

Equities

 

 

2009 vs. 2008

 

Net revenues in Equities increased $12.5 million, or 114 percent, to $23.5 million in 2009 due to the benefit of a full year of operations from Broadpoint AmTech, which was acquired in the fourth quarter of 2008. Commissions and principal transactions revenue increased $10.5 million and other revenue increased $2.1 million. Pre-tax contribution for 2009 was $1.7 million compared to a loss of $9.0 million in 2008. The $9.0 million pre-tax loss in 2008 reflects the inability of the legacy Equities business to operate profitably in addition to the shut-down costs associated with the transition to the Broadpoint AmTech platform.

 

2008 vs. 2007

 

Net revenues in Equities decreased $2.1 million or 16 percent to $11.0 million in 2008. In 2008, equities represented 8 percent of consolidated net revenue compared to 33 percent in 2007. Commissions and principal transactions revenue declined due, in part, to a decrease in trading activity and a reduction in Equity trading and sales personnel in anticipation of the Company’s acquisition of Broadpoint AmTech in October. Approximately 54 percent of commissions and principal transactions revenue for the full year was contributed by Broadpoint AmTech, which was acquired in the fourth quarter. Equity Investment Banking revenues decreased 58 percent compared to 2007. In the third quarter of 2008, the Company incurred $4.4 million in costs associated with transitioning the legacy Equity sales and trading operations to the Broadpoint AmTech platform. Closedown costs of approximately $1.8 million related to reserves established for clearing,

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

settlement, and brokerage costs and communications and data processing services the Company had contracts for, and other costs related to compensation and benefits. In addition, the legacy Equities business reported an operating loss of $2.6 million.

 

Other

 

 

2009 vs. 2008

 

Other net revenues of $14.7 million in 2009 increased $14.5 million compared to $0.2 million in 2008. Investment gains in 2009 were $5.7 million compared to a loss of $1.1 million in 2008. The increase of $6.8 million is due to an increase in the Company’s investment in the FA Technology Ventures L.P. (the “Partnership”). Net interest income was $6.4 million compared to net interest expense of $0.1 million in 2008. The change in net interest was due to an increase in inter-company financing of the activities of other business segments, primarily Broadpoint Descap. Pre-tax contribution increased $11.5 million, or 35 percent as a result of primarily resulting from higher net revenues and no restructuring costs being incurred in 2009, compared to approximately $4.0 million in 2008, partially offset by higher amortization of intangible assets of $3.5 million related to the Broadpoint AmTech and Gleacher Partners acquisitions.

 

2008 vs. 2007

 

Other net revenue decreased $5.3 million compared to 2007. Other net revenue was negatively impacted by losses incurred on the valuation of the Company’s investments in Broadpoint’s venture capital subsidiary. For the year ended 2008, net interest expense was $0.1 million compared to net interest income of $2.3 million for 2007 due to an increase in interest expense for the mandatorily redeemable preferred stock cash dividend that was partially offset by the FATV management fee for managing the Partnership. Pre-tax contribution was negatively impacted by costs associated with the restructuring plan and legal costs.

 

FINANCIAL CONDITION

 

The Company’s securities owned and investments comprised approximately 82% and 89% of total assets at December 31, 2009 and 2008, respectively. The Company primarily maintains these positions in order to facilitate its customer trading activities. The majority of these assets are financed by the Company’s clearing agents and periodically, through repurchase agreements, although no such agreements were open at year-end. Payables to brokers, dealers and clearing agencies comprised approximately 78% and 86% of the Company’s total liabilities at December 31, 2009 and 2008, respectively.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Securities owned (including investments) and sold, but not yet purchased consisted of the following at December 31:

 

 

Refer to Notes 1 and 5 of the consolidated financial statements for further information regarding the Company’s accounting policy over valuation of these financial instruments and classification of such financial instruments in accordance with Accounting Standards Codification 820 “Fair Value Measurements and Disclosures” (“ASC 820”).

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s liquidity results primarily from assets that are readily convertible into cash, as well as capital raising activities such as our underwritten public offering of our common stock (described further below) conducted in the third quarter of 2009.

 

At December 31, 2009, the Company had Cash and cash equivalents of $25.1 million, compared to $7.8 million at December 31, 2008. In August 2009, the Company received proceeds in the amount of $93.3 million, after payment of certain expenses, related to the public offering described below, the majority of which has been deployed to operations.

 

A substantial portion of the Company’s assets are liquid, consisting of cash and assets that have historically been readily convertible into cash, such as securities held in inventory. The majority of these assets are financed by the Company’s clearing agents and periodically through repurchase agreements. The Company currently has no additional committed sources of borrowing. The Company’s securities positions in trading accounts that are readily marketable and actively traded are approximately $906.7 million at December 31, 2009 compared to approximately $603.6 million at December 31, 2008. The level of assets and liabilities will fluctuate as a result of the changes in the level of positions held to facilitate customer transactions and changes in market conditions.

 

On August 3, 2009, the Company completed an underwritten public offering of its common stock, consisting of 16,000,000 shares issued and sold by the Company and 11,025,000 shares sold by certain of the Company’s existing shareholders. The proceeds to the Company from the offering, net of underwriting

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

discounts and commissions, and after deducting payment of expenses related to the underwriting, were approximately $93.3 million. The Company did not receive any of the proceeds from the sale of shares by the selling shareholders.

 

On June 27, 2008, the Company entered into a Preferred Stock Purchase Agreement with Mast Credit Opportunities I Master Fund Limited, a Cayman Islands corporation (“Mast”) for the issuance and sale of (i) 1,000,000 newly-issued unregistered shares of the Company’s Series B Preferred Stock, and (ii) a warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $3.00 per share, for an aggregate cash purchase price of $25 million. The Preferred Stock Purchase Agreement and the Series B Preferred Stock include, among other things, negative covenants and other rights with respect to the operations, actions and financial condition of the Company and its subsidiaries so long as the Series B Preferred Stock remains outstanding. Cash dividends of 10 percent per annum must be paid quarterly on the Series B Preferred Stock, while an additional dividend of 4 percent per annum accrues and is cumulative, if not otherwise paid, together with accrued but unpaid dividends quarterly at the option of the Company. The Series B Preferred Stock must be redeemed on or before June 27, 2012 (see Note 13 of the consolidated financial statements).

 

On March 4, 2008, the Company completed the sale of 11,579,592 shares of the Company’s common stock in a private placement for $19.7 million, or approximately $1.70 per share, pursuant to a stock purchase agreement with MatlinPatterson FA Acquisition LLC (“MatlinPatterson”), Mast, and certain other investors. The stock purchase agreement required the Company to file a registration statement on Form S-3 for the resale on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of the 7.1 million shares purchased by the lead investor, Mast. Such registration statement was filed and thereafter became effective on April 29, 2008.

 

Short-term Bank Loans and Notes Payable

 

At December 31, 2008 and December 31, 2009, respectively, the Company had no outstanding short-term bank loans or notes payable.

 

Regulatory

 

As of December 31, 2009, each of the Company’s three registered broker-dealer subsidiaries, Broadpoint Capital, Broadpoint AmTech, and Gleacher Partners, were in compliance with the net capital requirements of FINRA, and in the case of Broadpoint Capital, NFA as well. The net capital rules restrict the amount of a broker-dealer’s net assets that may be distributed. Also, a significant operating loss or extraordinary charge against net capital could compel the Company to make additional contributions to one or more of these subsidiaries or adversely affect the ability of the Company’s broker-dealer subsidiaries to expand or maintain their present levels of business and the ability to support the obligations or requirements of the Company. As of December 31, 2009, Broadpoint Capital had net capital of $74.20 million, which exceeded minimum net capital requirements by $73.95 million, Broadpoint AmTech had net capital of $3.25 million, which exceeded minimum net capital requirements by $2.81 million, and Gleacher Partners had net capital of $0.45 million, which exceeded net capital requirements by $0.20 million.

 

Derivatives

 

The Company’s subsidiaries enter into derivatives contracts to manage risk exposures arising from customer facilitation of mortgage-backed and U.S. government securities trading. Derivatives entered into by the Company’s subsidiaries include purchase and sale agreements of TBAs and exchange traded treasury futures contracts. At December 31, 2009, they had entered into TBA sale agreements in the notional amount of $280.5 million, had not entered into any TBA purchase agreements and had no outstanding open futures contracts.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Investments and Commitments

 

Investments in privately held companies include an investment of $18.3 million in the Partnership. The Partnership’s primary purpose is to provide investment returns consistent with risks of investing in venture capital. As of December 31, 2009, the Company had a commitment to invest up to an additional $1.0 million in the Partnership. The investment period expired in July 2006; however, the general partner of the Partnership, FATV GP LLC, may continue to make capital calls up through July 2011 for additional investments in portfolio companies and for the payment of management fees. The majority of the limited partners of the Partnership are non-affiliates of the Company. The Company intends to fund these commitments through operating cash flow.

 

On June 5, 2009, the Company completed its acquisition of Gleacher Partners. Pursuant to the related Merger Agreement, the Company paid $10 million in cash and issued 23 million shares of Company common stock as merger consideration for all the outstanding shares of Gleacher Partners. Of these shares, 14,542,035 shares were issued to Eric J. Gleacher, the founder and Chairman of Gleacher Partners. All of the shares issued as merger consideration are subject to resale restrictions. The Company is obligated to pay the shareholders an additional $10 million in cash after five years, subject to acceleration under certain circumstances. This amount is recorded within the Company’s consolidated Statement of Financial Condition.

 

Contingent Consideration

 

On October 2, 2008, the Company acquired 100 percent of the outstanding common shares of Broadpoint AmTech. Per the stock purchase agreement, the sellers are entitled to receive future contingent consideration consisting of approximately 100 percent of the profits earned by Broadpoint AmTech in the fourth quarter of fiscal year 2008 and all of fiscal years 2009, 2010 and 2011, up to an aggregate of $15 million in profits. The sellers are also entitled to receive earn-out payments consisting of 50 percent of such profits in excess of $15 million. All such earn-out payments will be paid 50 percent in cash and, depending on the recipient thereof, either 50 percent in Company common stock, subject to transfer restrictions lapsing ratably over the three years following issuance, or 50 percent in restricted stock from the Incentive Plan, subject to vesting based on continued employment with Broadpoint AmTech.

 

Contingent Liabilities

 

On September 14, 2007, the Company consummated the sale of the Municipal Capital Market Group of its subsidiary, Broadpoint Capital, Inc. to DEPFA. In connection with such sale, the Company recognized a pre-tax gain on sale in the amount of $7.9 million. Pursuant to the asset purchase agreement, the Company was required to deliver an estimate of the accrued bonuses at closing and a final accrued bonus calculation thirty days following closing. The Company accrued the bonus consistent with the asset purchase agreement. All items arising from the sale of the Municipal Capital Markets Group were reflected in the Gain on Sale of Discontinued Operations. This includes the closing bonuses paid to employees and the reversal of restricted stock and deferred cash amortization as a result of the employees’ termination of employment. On October 30, 2007, DEPFA provided the Company notice that it was exercising its option pursuant to the agreement to appoint an independent accounting firm to conduct a special audit of the final accrued bonus amount. On June 26, 2008, DEPFA provided the Company notice that it was withdrawing its dispute of the final accrued bonus amount.

 

Legal Proceedings

 

From time to time, the Company and its subsidiaries are involved in legal proceedings or disputes (See Part I — Item 3 — Legal Proceedings). Based on currently available information, the Company does not believe that any current litigation, proceeding or other matter to which it is a party or otherwise involved will

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

have a material adverse effect on its financial position, results of operations and cash flows, although an adverse development, or an increase in associated legal fees, could be material in a particular period, depending in part on the Company’s operating results in that period.

 

In addition, the securities industry is highly regulated. The Company and its subsidiaries are subject to both routine and unscheduled regulatory examinations of their respective businesses and investigations of securities industry practices by governmental agencies and self-regulatory organizations. In recent years securities firms have been subject to increased scrutiny and regulatory enforcement activity. Regulatory investigations can result in substantial fines being imposed on the Company and/or its subsidiaries. Periodically the Company and its subsidiaries receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory organizations. The Company does not always know the purpose behind these communications or the status or target of any related investigation. The responses to these communications have, in the past, resulted in the Company and/or its subsidiaries being cited for regulatory deficiencies, although to date these communications have not had a material adverse effect on the Company’s business.

 

Tax Valuation Allowance

 

During the year ended December 31, 2009, the Company released the valuation allowance on its net deferred tax assets of approximately $24.7 million because of, among other factors, the continued trend of improved profitability, the success of the Company’s recent secondary offering, the completion of management’s restructuring plan and the successful integration of the Broadpoint AmTech and Gleacher acquisitions. The Company believes that it is more likely than not that its net deferred tax assets will be realized in the future.

 

The Company’s effective tax rate is impacted by a variety of factors, including fluctuations in projected earnings, changes in the statutory tax rates to which the Company’s operations are subject, settlements or changes to uncertain tax positions, changes in the Company’s valuation allowance and other miscellaneous items.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Information concerning the Company’s off balance sheet arrangements are included in the Contractual Obligations section which follows, and as set forth in the “Derivative Financial Instruments” note to the consolidated financial statements.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth the contractual obligations described below by fiscal year:

 

 

 

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

 

CRITICAL ACCOUNTING POLICIES

 

The following is a summary of the Company’s critical accounting policies. For a full description of these and other accounting policies, see Note 1 of the consolidated financial statements. The Company believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates, and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company.

 

Valuation of Securities and Other Assets

 

Substantially all of the financial instruments of the Company are reported on the Consolidated Statements of Financial Condition at market or fair value, or at carrying amounts that approximates fair value, because of their short term nature, with the exception of mandatorily redeemable preferred stock and subordinated debt. Financial instruments recorded at carrying amounts approximating fair value consist largely of receivables from and payables to brokers, dealer and clearing organizations, related parties and others. The fair value of the mandatorily redeemable preferred stock at December 31, 2009 was approximately $26.0 million, based upon an estimate of the Company’s current borrowing rate. Carrying value approximated fair value at December 31, 2008 given the proximity in which the mandatorily redeemable preferred stock was issued in relation to year-end. The fair value of the subordinated debt at December 31, 2009 and 2008 approximated fair value based on current rates available.

 

Proprietary securities transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities transactions entered into for the account and risk of the Company are recorded on a trade date basis. Unrealized gains and losses from valuing investments at market value of fair value as determined by management are included as revenues from investment gains (losses). Commission income and expenses related to customers’ securities transactions are reported on a trade date basis. Equity securities owned and equity securities sold, but not yet purchased are valued at market value based on quoted market prices. Fixed income securities owned and fixed income securities sold but not yet purchased, are valued using a variety of inputs, including observable market inputs when available. The Company utilizes observable market factors in determining fair value. Management also utilizes benchmark yields, reported trades for comparable trade sizes, issuer spreads, benchmark securities, bids and offers. These inputs relate either directly to the financial asset being evaluated or indirectly to a similar security (for example, another bond of the same issuer or a bond of a different issuer in the same industry with similar maturity, terms and conditions). Additionally, for certain mortgage-backed securities management also considers various characteristics such as issuer, underlying collateral, prepayment speeds, cash flows and credit ratings. Management considers these pricing methodologies consistent with the assumptions made by other market participants in valuing similar financial assets. For investments in illiquid and privately held securities that do not have readily determinable fair values, the Company’s estimate of fair value includes subjective assessments about a fair market valuation of the investee, including but not limited to assumptions regarding the expected future financial performance of the investee and our assessment of the future prospects of the investee’s business model. All of our investments in illiquid and privately held securities are evaluated quarterly for changes in fair value. Securities owned and investments include, at December 31, 2009 and 2008,

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

$19.3 million and $15.4 million, respectively, of private equity securities related to the venture capital funds managed by FATV.

 

Goodwill and Intangible Assets

 

The Company amortizes customer related intangible assets over their estimate useful life, which is the period over which the assets are expect to contribute directly or indirectly to the future cash flows of the Company. Goodwill is not amortized; instead, it is reviewed on an annual basis for impairment. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. A reporting unit is defined by the Company as an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. For impairment testing purposes, goodwill has been allocated to each reporting unit based upon the goodwill derived from each specific acquisition. The Company has designated its annual impairment testing dates for its Broadpoint Descap, Broadpoint AmTech, and Investment Banking reporting units to be December 31, October 1, and June 1, respectively. The Company uses income and market approaches to determine fair value of the reporting unit. The income approach applies a discounted cash flow analysis based on management’s projections, while the market approach analyzes and compares the operating performance and financial condition of the reporting unit with those of a group of selected publicly traded companies that can be used for comparison. Goodwill and intangible assets are also tested for impairment at the time of a triggering event requiring a re-evaluation, if one were to occur.

 

Contingencies

 

The Company is subject to contingencies, including judicial, regulatory and arbitration proceedings, tax and other claims. The Company records reserves related to legal and other claims in “accrued expenses.” The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to the amount of the claim; the amount of the loss, if any incurred by the other party, the basis and validity of the claim; the possibility of wrongdoing on the part of the Company; likely insurance coverage; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions of management in determining the estimates of reserves may prove to be incorrect, which could materially affect results in the period the claims are ultimately resolved.

 

Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Investments and Commitments and — Contingent Consideration” for details on the liability for additional consideration related to the acquisition of Gleacher and contingent consideration related to the acquisition of Broadpoint AmTech.

 

Income Taxes

 

Deferred income taxes are determined under the asset and liability method and are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable for future years to differences between the financial statement basis and tax basis of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. The Company provides a valuation allowance against deferred tax assets (“DTAs”) when it is more likely than not that such DTAs will not be realized.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

The Company recognizes tax benefits from uncertain tax positions only when tax positions meet the minimum probability threshold, as defined by ASC 740-10-25, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. The Company’s continuing practice is to recognize interest and penalties related to income tax matters as a component of income tax.

 

Share-Based Compensation

 

The Company accounts for share-based compensation awards (“Awards”) in accordance with ASC 718 “Compensation — Stock Compensation” (“ASC 718”). The cost of employee services received in exchange for an Award is generally measured based upon the grant-date fair value of the Award. Compensation expense for Awards that contain performance conditions are recognized when it becomes probable that such performance conditions will be met. Awards that do not require future service (e.g. vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Such Awards that require future service are amortized over the relevant service period on a straight-line basis. Expected forfeitures are included in determining share-based employee compensation expense.

 

The Company has elected to apply the short-cut method to calculate the historical pool of windfall tax benefits available as of the date of adoption of ASC 718.

 

NEW ACCOUNTING STANDARDS

 

In June 2009, the FASB issued amendments to accounting principles which change the accounting for transfers of financial assets which were codified as Accounting Standards Update (“ASU”) No. 2009-16, “Transfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets”. ASU No. 2009-16 improves financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrender control over the transferred financial assets. ASU No. 2009-16 modifies the financial-components approach and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset ASU No. 2009-16 also requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. ASU No. 2009-16 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. The Company does not expect the adoption of ASU No. 2009-16 to have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued amendments to accounting principles which change the accounting for Variable Interest Entities (“VIE”), which were codified as ASU 2009-17, which amends ASC 810 “Consolidation”. ASU 2009-17 significantly changes the criteria by which an enterprise determines whether it must consolidate a VIE. A VIE is an entity which has insufficient equity at risk or which is not controlled through voting rights held by equity investors. Currently, a VIE is consolidated by the enterprise that will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. ASU 2009-17 requires that a VIE be consolidated by the enterprise that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. ASU 2009-17 also requires that an enterprise continually reassess, based upon current facts and circumstances, whether it should consolidate the VIEs with which it is involved. ASU 2009-17 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

period, and for interim and annual reporting periods thereafter. However, in January 2010, the FASB deferred ASU 2009-17 for certain investment entities which allows asset managers that have no obligations to fund potentially significant losses of an investment entity to continue to apply the previous accounting guidance to investment entities that have attributes subject to ASC 946 “The Investment Company Guide”. The deferral likely qualifies for many mutual funds, hedge funds, private equity funds, venture capital funds and certain mortgage REITs. The Company is currently evaluating the impact of this deferral and expects it will apply to its relationship as investment advisor to the FA Technology Ventures L.P. and does not expect the adoption of ASU 2009-17, to which the deferral does not apply, to have a material impact on the Company’s consolidated financial statements. Refer to Note 7 for additional information related to FA Technology Ventures L.P.

 

In December 2007, the FASB issued amendments to accounting principles for business combinations now codified in ASC Topic 805 “Business Combinations”, which requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, the Company applied the provisions of this statement to business combinations occurring after January 1, 2009.

 

In December 2007, the FASB issued amendments to accounting principles related to noncontrolling interests in consolidated financial statements now codified within ASC Topic 810 “Consolidation” (“ASC 810”). ASC 810 requires an entity to clearly identify and present ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires that (i) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings; (ii) changes in ownership interest be accounted for similarly, as equity transactions; and (iii) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and shall be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods. The adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued amendments to accounting principles related to assets acquired and liabilities assumed in a business combination that arise from contingencies which amends ASC 805 “Business Combinations” and requires that such items be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing accounting guidance. This new guidance is effective for acquisitions consummated on or after January 1, 2009. This guidance did not impact any acquisitions of the Company closing after the date of adoption.

 

In May 2009, the FASB issued ASC 855 “Subsequent Events” which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending June 15, 2009. The FASB subsequently issued ASU 2010-09 on February 24, 2010 to amend ASC 855 to address certain implementation issues, including elimination of the requirement for SEC filers to disclose the date through which it has evaluated subsequent events. The adoption of this statement did not have a material

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

effect on the Company’s consolidated financial statements and the required disclosure is included within Note 24 of the consolidated financial statements.

 

In March 2008, the FASB issued amendments to disclosures about derivative instruments and hedging activities which is now codified within ASC Topic 815 “Derivatives and Hedging.” This statement expands derivative disclosure requirements to now require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for the fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements”. ASU 2010-06 provides amended disclosure requirements related to fair value measurements including details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, and a gross presentation of activity within the Level 3 rollforward, presenting separately information about purchases, sales, issuances and settlements. ASU 2010-06 is effective for financial statements issued for reporting periods beginning after December 15, 2009 for certain disclosures and for reporting periods after December 15, 2010 for other disclosures. Since these amended principles require only additional disclosures concerning fair value measurements, the adoption of this statement will not affect the Company’s financial condition, results of operations or cash flows.

 

In April 2009, the FASB issued amended accounting principles related to the determination of fair value when the volume and level of activity for the asset or liability have significantly decreased and the identification of transactions that are not orderly now codified within ASC Topic 820 “Fair Value Measurements and Disclosures.” This guidance lists factors which should be evaluated to determine whether a transaction is orderly, clarifies that adjustments to transactions or quoted prices may be necessary when the volume and level of activity for an asset or liability have decreased significantly, and provides guidance for determining the concurrent weighting of the transaction price relative to fair value indications from other valuation techniques when estimating fair value. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In September 2009, the FASB issued ASU 2009-12 “Fair Value Measurements and Disclosures (Topic 820) — Investments in Certain Entities That Calculate Net Asset Value (“NAV”) per Share (or Its Equivalent)”. ASU 2009-12 provides guidance about using NAV to measure the fair value of interests in certain investment funds and requires additional disclosures about interests in investment funds. ASU 2009-12 is effective for the first annual or interim reporting period ending after December 15, 2009. The Company has no investment funds for which fair value is determined using NAV. However, the Company adopted the additional disclosure provisions of this ASU as it relates to its investment in FA Technology Ventures. Refer to Note 7 “Investments” within the consolidated financial statements.

 

In September 2009 the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value,” which supplements and amends the guidance in ASC 820, Fair Value Measurements and Disclosures, that provides additional guidance on how companies should measure liabilities at fair value and confirmed practices that have evolved when measuring fair value such as the use of quoted prices for a liability when traded as an asset. Under the new guidance, the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. A quoted price, if available, in an active market for an identical liability must be used. If such information is not available, an entity may use either the quoted price of the identical liability when traded as an asset; quoted prices for similar liabilities; similar liabilities traded as assets or another technique such as the income approach or a market approach. The effective date of this ASU is the first reporting period after August 26, 2009. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

In June 2008, FASB issued amended accounting principles related to determining whether instruments granted in share-based payment transactions are participating securities, now codified within ASC Topic 260 “Earnings Per Share.” This guidance requires entities to allocate earnings to unvested and contingently issuable share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents when calculating earnings per share and also to present both basic and diluted EPS pursuant to the two-class method. The effective date for this guidance is for fiscal years beginning after December 15, 2008. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

 

In April of 2008, the FASB issued amended accounting principles related to the determination of the useful life of intangible assets, now codified in ASC Topic 350 “Intangibles — Goodwill and Other.” This guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The effective date for this guidance is for fiscal years beginning after December 15, 2008. The adoption of this guidance did not impact the Company’s consolidated financial statements.

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

Given the amount of capital we deploy, the financial products we trade and the large number of counterparties we deal with in our daily transactions, management believes that comprehensive and effective risk management is a key component for our success.

 

Our risk management mission includes: 1) proactively avoiding/minimizing risk events that would have negative impact on the Company’s earnings and value objectives and 2) enabling more efficient allocation of capital and other resources based on performance and risk attribution quantification, which entails properly sizing our risk appetite/limits based upon Company-wide objectives.

 

We seek to achieve the above goals through risk management processes and procedures.

 

Risk Management Process

 

Senior management is directly involved in risk management of the Company and management directly participates in setting risk limits and allocating risk capital and intervenes if significant risk issues arise. Our risk manager understands the products and markets and is independent of the business units, which ensures an unbiased view of our risk exposures.

 

Our risk management process sets risk capital and risk parameters for each business, approves new business and products, monitors daily business activities and inventory exposure and intervenes when risk issues arise. Risk measures for different risk factors and different market sectors are calculated using sophisticated valuation models and risk analytics. Attribution analysis of both financial performance and risk exposure is performed. Daily risk reports are generated and distributed to trading management as well as senior management. Whenever risk issues arise, risk management will initiate discussions with the business units, trading management and/or senior management.

 

Our risk management process measures, monitors and manages various types of risks we encounter in our business activities, including market, credit, liquidity, funding, operational, legal and reputational risks.

 

Market Risk

 

Market risk represents the risk of loss that may result from the potential change in the value of our trading or investment positions as a result of fluctuations in interest rates, credit spreads and equity prices, as well as changes in the implied volatility of interest rates and equity prices. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company’s market risk management procedures cover both non-derivative and derivatives instruments to include all market-risk-sensitive financial instruments. The Company’s exposure to market risk is primarily related to principal transactions executed in order to facilitate customer trading activities.

 

The Company trades debt securities issued by U.S. Government and federal agency obligations, non-agency mortgage-backed securities, corporate debt, preferred stock and equity securities. In connection with these activities, the Company may be required to maintain inventories in order to facilitate customer transactions. In order to mitigate exposure to market risk, the Company enters into derivatives including the purchase and sale of TBAs and exchange traded treasury futures contracts.

 

In prior annual and quarterly reports, the Company has used the tabular presentation for disclosure of market risk information. The tabular presentation looked solely at the market value of our inventory over a future five-year period. During the year ended December 31, 2009, the Company determined that the sensitivity analysis was the improved disclosure alternative to measure risk for the types of financial instruments of which its trading activity is comprised. The sensitivity analysis uses a hypothetical one basis point adverse movement in interest rates to calculate potential loss in future earnings. We believe that the sensitivity analysis disclosure model presents more accurately the risks associated with the products on which

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — (Continued)

 

our trading activity is based and, consequently, our financial position and results of operations. Comparable information under this new disclosure method is also provided for the year ended December 31, 2008.

 

The following table categorizes the Company’s market risk sensitive financial instruments.

 

 

For additional information regarding the Company’s fair valuation policies and methodologies, refer to Notes 1 and 5 within the consolidated financial statements.

 

The following is a discussion of the Company’s primary market risk exposures as of December 31, 2009, including a discussion of how those exposures are currently managed.

 

Interest Rate Risk and Related Prepayment Risk

 

Interest rate risk exposure is a consequence of maintaining inventory positions and trading in interest-rate-sensitive financial instruments. These financial instruments include debt securities issued by U.S. Government and federal agency obligations, non-agency mortgage-backed securities, corporate debt and preferred stock. In connection with trading activities, the Company exposes itself to interest rate risk, arising from changes in the level or volatility of interest rates or the shape and slope of the yield curve.

 

Prepayment risk, which is related to interest rate risk, arises from the possibility that the rate of principal repayment on mortgages will fluctuate, affecting the value of mortgage-backed securities. Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans and turnover in housing ownership. Prepayment rates on mortgage-related securities vary from time to time and may cause changes in the amount of the Company’s net interest income, the valuations of mortgage-backed securities in the inventory and the effectiveness of our interest rate hedging. Prepayments of mortgage loans usually can be expected to increase when mortgage interest rates fall below the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current interest rate on such loans, although such effects are uncertain. Prepayment experience also may be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans underlying mortgage-backed securities. The

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — (Continued)

 

purchase prices of mortgage-backed securities are generally based upon assumptions regarding the expected rates of prepayments.

 

The Company manages its exposure to interest rate and related prepayment risk by shorting mortgage pass-through TBAs, government securities and exchange traded treasury futures contracts. Hedging using government securities and exchange traded treasury futures contracts protects the Company from movements in the yield curve and changes in general levels of interest rates. Hedging using TBAs minimizes the basis risk between the mortgage-backed securities market and government securities market.

 

A large portion of the Company’s inventory consists of specified mortgage-backed securities pass-through pools, whose prices are linked to TBAs, which also, however, display their own idiosyncratic pricing behavior based on their underlying mortgage loan characteristics. The Company believes that TBAs are the best hedging tool for these pools, but not necessarily a perfect hedge.

 

A sensitivity analysis has been prepared to estimate the Company’s exposure to interest rate risk of its net trading inventory positions. The fair market value of these securities included in the Company’s inventory at December 31, 2009 and 2008 was $905.8 million and $602.6 million, respectively. Interest rate risk is measured as the potential loss in fair value resulting from a hypothetical one-half percent increase in interest rates across the yield curve. At December 31, 2009, the potential change in fair value under this stress scenario was ($9.1) million. In 2009, the Company refined its methodology of calculating fair value change under this sensitivity analysis by reflecting the net reduction in interest rate risk associated with the prepayment and amortization of mortgage-backed securities. At December 31, 2008, under this new methodology, the comparable change would have been $6.5 million. The increase of $2.6 million of this risk measure was driven by an increase of inventory levels and related hedges, as a result of increased volume in the Broadpoint Descap segment. Interest rates may increase more than the amount assumed above and consequently, the actual change in fair value may exceed the change computed above.

 

The following table shows a breakdown of our interest rate exposure on December 31, 2009 and December 31, 2008.

 

 

Credit Spread and Credit Rating Risk

 

The Company actively makes markets in various credit markets, including corporate bonds (both high yield and high grade), emerging market debt and structured credits (MBS/ABS/CMBS/CDO/CLO). As a consequence, the Company is exposed to credit spread and credit rating changes in these markets. Credit spread and credit rating risk results from changes in the level or volatility of credit spreads, either as a result of macro market conditions (e.g. risk aversion sentiment) or from idiosyncratic development of certain debt issuers or their sectors.

 

Our best risk management strategy in these markets is high inventory turnover, where we minimize the amount of and time window during which we hold these types of securities, in some cases by arranging the sale before committing to the purchase. Given this strategy, our inventory level in these securities remained rather low despite the rising revenue and trading volume in these areas.

 

BROADPOINT GLEACHER SECURITIES GROUP, INC.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — (Continued)

 

The following tables show a breakdown of our exposure in these markets on December 31, 2009 and December 31, 2008.