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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM          TO                

 

Commission File No: 001-34897

GFI GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-0006224

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

55 Water Street, New York, NY

 

10041

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (212) 968-4100

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES x     NO 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES x     NO 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(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 x

 

The number of shares of registrant’s common stock outstanding on April 30, 2015 was 170,814,812.

 

 

 



Table of Contents

 

Table of Contents

 

Part I—Financial Information

 

 

 

Page
Number

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition as of March 31, 2015 (unaudited) and December 31, 2014

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)

 

7

 

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2015 (unaudited)

 

9

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

62

 

 

 

 

Item 4.

Controls and Procedures

 

62

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

64

 

 

 

 

Part II—Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

65

 

 

 

 

Item 1A.

Risk Factors

 

65

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

 

 

 

 

Item 5.

Other Information

 

65

 

 

 

 

Item 6.

Exhibits

 

66

 

2



Table of Contents

 

Available Information

 

Our Internet website address is www.gfigroup.com. Through our website, we make available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the Securities and Exchange Commission (the “SEC”): our Proxy Statements; Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers; and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

In addition, you may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington D.C. 20549. You also may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains our reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC at http://www.sec.gov.

 

Information relating to the corporate governance of the Company is also available on the Investor Relations page of our website, including information concerning our directors, board committees, including committee charters, our corporate governance guidelines, our code of business conduct and ethics for all employees and for senior financial officers and our compliance procedures for accounting and auditing matters. In addition, the Investor Relations page of our website includes certain supplemental financial information that we make available from time to time.

 

Our website and the information contained therein or connected thereto are not incorporated into this Quarterly Report on Form 10-Q.

 

3



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.              FINANCIAL STATEMENTS

 

GFI GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

March 31,
2015

 

December 31,
2014

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

131,870

 

$

183,432

 

Cash and securities segregated under federal and other regulations

 

157

 

163

 

Accounts receivable, net of allowance for doubtful accounts of $1,806 and $1,900 at March 31, 2015 and December 31, 2014, respectively

 

92,838

 

82,748

 

Receivables from brokers, dealers and clearing organizations

 

1,121,468

 

507,601

 

Property, equipment and leasehold improvements, net of depreciation and amortization of $200,728 and $196,237 at March 31, 2015 and December 31, 2014, respectively

 

53,743

 

55,897

 

Goodwill

 

134,358

 

134,542

 

Intangible assets, net

 

28,842

 

30,905

 

Receivables from related parties

 

60,256

 

232

 

Other assets

 

193,859

 

172,721

 

Assets held for sale

 

23,254

 

193,701

 

TOTAL ASSETS

 

$

1,840,645

 

$

1,361,942

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accrued compensation

 

$

89,274

 

$

88,590

 

Accounts payable and accrued expenses

 

37,736

 

31,791

 

Payables to brokers, dealers and clearing organizations

 

1,061,872

 

463,243

 

Short-term borrowings

 

60,000

 

10,000

 

Long-term debt

 

240,000

 

240,000

 

Other liabilities

 

82,859

 

70,270

 

Liabilities held for sale

 

18,153

 

161,914

 

Total Liabilities

 

$

1,589,894

 

$

 1,065,808

 

Commitments and contingencies (Note 12)

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at March 31, 2015 and December 31, 2014

 

 

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 144,480,612 and 144,290,612 shares issued at March 31, 2015 and December 31, 2014, respectively

 

1,444

 

1,442

 

Additional paid in capital

 

379,710

 

399,774

 

Retained deficit

 

(50,973

)

(31,050

)

Treasury stock, 16,695,060 and 16,724,843 shares of common stock at cost, at March 31, 2015 and December 31, 2014, respectively

 

(73,368

)

(73,445

)

Accumulated other comprehensive loss

 

(8,286

)

(2,493

)

Total Stockholders’ Equity

 

248,527

 

294,228

 

Non-controlling interests

 

2,224

 

1,906

 

Total Equity

 

250,751

 

296,134

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,840,645

 

$

1,361,942

 

 

See notes to condensed consolidated financial statements

 

4



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Revenues

 

 

 

 

 

Agency commissions

 

$

117,991

 

$

121,415

 

Principal transactions

 

47,010

 

51,689

 

Total brokerage revenues

 

165,001

 

173,104

 

Clearing services revenues

 

21,338

 

34,164

 

Interest income from clearing services

 

297

 

528

 

Equity in net earnings of unconsolidated businesses

 

1,564

 

2,554

 

Software, analytics and market data

 

25,756

 

25,765

 

Other income, net

 

17,566

 

4,624

 

Total revenues

 

231,522

 

240,739

 

Interest and transaction-based expenses

 

 

 

 

 

Transaction fees on clearing services

 

20,495

 

32,640

 

Transaction fees on brokerage services

 

5,283

 

5,503

 

Interest expense from clearing services

 

128

 

169

 

Total interest and transaction-based expenses

 

25,906

 

38,312

 

Revenues, net of interest and transaction-based expenses

 

205,616

 

202,427

 

Expenses

 

 

 

 

 

Compensation and employee benefits

 

147,217

 

137,697

 

Communications and market data

 

12,042

 

13,347

 

Travel and promotion

 

6,383

 

7,779

 

Rent and occupancy

 

6,927

 

8,086

 

Depreciation and amortization

 

7,321

 

8,596

 

Professional fees

 

18,436

 

6,171

 

Interest on borrowings

 

7,868

 

7,784

 

Merger termination fees

 

24,728

 

 

Other expenses

 

6,233

 

7,464

 

Total other expenses

 

237,155

 

196,924

 

(Loss) income before (benefit from) provision for income taxes

 

(31,539

)

5,503

 

(Benefit from) provision for income taxes

 

(12,392

)

1,094

 

Net (loss) income before attribution to non-controlling stockholders

 

(19,147

)

4,409

 

Less: Net income attributable to non-controlling interests

 

776

 

406

 

GFI’s net (loss) income

 

$

(19,923

)

$

4,003

 

 

 

 

 

 

 

Earnings per share available to common stockholders

 

 

 

 

 

Basic

 

$

(0.16

)

$

0.03

 

Diluted

 

$

(0.16

)

$

0.03

 

Weighted average shares outstanding

 

 

 

 

 

Basic

 

127,339,178

 

122,362,839

 

Diluted

 

127,339,178

 

131,430,701

 

Dividends declared per share of common stock

 

$

0.00

 

$

0.05

 

 

 

 

See notes to condensed consolidated financial statements

 

5



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(In thousands)

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Net (loss) income before attribution to non-controlling stockholders

 

$

(19,147

)

$

4,409

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

Foreign currency translation adjustment

 

(6,250

)

2,241

 

Unrealized loss on available-for-sale securities, net of tax(1)

 

 

(1,069)

 

Total other comprehensive (loss) income

 

(6,250

)

1,172

 

 

 

 

 

 

 

Comprehensive (loss) income including non-controlling stockholders

 

(25,397

)

5,581

 

Comprehensive income attributable to non-controlling stockholders

 

319

 

412

 

GFI’s comprehensive (loss) income

 

$

(25,716

)

$

5,169

 

 


(1)         Amounts are net of benefit from income taxes of $0 and $341 for the three months ended March 31, 2015 and 2014, respectively.

 

 

See notes to condensed consolidated financial statements

 

6



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income before attribution to non-controlling stockholders

 

$

(19,147

)

$

4,409

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,321

 

8,596

 

Deferred compensation

 

15,223

 

7,357

 

Tax expense related to share-based compensation

 

(8

)

812

 

Amortization of prepaid bonuses and forgivable loans

 

4,831

 

6,720

 

Benefit from deferred taxes

 

(16,664

)

(3,936

)

Gains on foreign exchange derivative contracts, net

 

(3,601

)

(202

)

Earnings from equity method investments, net

 

(66

)

(663

)

Amortization of deferred financing fees

 

472

 

454

 

Mark-to-market of contingent consideration liabilities

 

115

 

28

 

Impairment charges

 

 

611

 

Other non-cash charges, net

 

360

 

(392

)

(Increase) decrease in operating assets:

 

 

 

 

 

Cash and securities segregated under federal and other regulations

 

9,479

 

(205

)

Accounts receivable

 

(11,939

)

(21,562

)

Receivables from brokers, dealers and clearing organizations

 

(637,547

)

(556,054

)

Other assets

 

(9,405

)

(6,268

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accrued compensation

 

(34,258

)

(11,894

)

Accounts payable and accrued expenses

 

8,976

 

7,812

 

Payables to brokers, dealers and clearing organizations

 

598,629

 

513,521

 

Payables to clearing services customers

 

10,244

 

22,451

 

Other liabilities

 

11,523

 

7,420

 

Cash used in operating activities

 

(65,462

)

(20,985

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from disposition of consolidated subsidiary, net

 

1,982

 

 

Proceeds from disposition of interests in unconsolidated businesses

 

 

6,044

 

Return of capital from unconsolidated businesses

 

 

413

 

Proceeds from disposition of available-for-sale securities

 

 

5,882

 

Purchases of interests in unconsolidated businesses

 

 

(92

)

Purchases of property, equipment and leasehold improvements

 

(992

)

(2,628

)

Cash used for loans to related parties

 

(60,000

)

 

Capitalization of internally developed software

 

(1,907

)

(2,752

)

Proceeds on foreign exchange derivative contracts

 

3,277

 

271

 

Payments on foreign exchange derivative contracts

 

(335

)

(338

)

Other, net

 

(5

)

257

 

Cash (used in) provided by investing activities

 

(57,980

)

7,057

 

 

 

See notes to condensed consolidated financial statements

 

7



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from short-term borrowings

 

75,000

 

$

47,000

 

Repayment of short-term borrowings

 

(25,000

)

(47,000

)

Cash dividends paid to common stockholders

 

 

(6,188

)

Shares withheld for taxes on vested restricted stock units

 

(495

)

(5,174

)

Tax benefit (expense) related to share-based compensation

 

8

 

(812

)

Other, net

 

 

(176

)

 

456

 

Cash provided by (used in) financing activities

 

 

49,337

 

 

(11,718

)

Effects of exchange rate changes on cash and cash equivalents

 

(3,348

)

84

 

Decrease in Cash and cash equivalents classified as Held for sale

 

25,891

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(51,562

)

(25,562

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

183,432

 

 

174,606

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

131,870

 

$

149,044

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE:

 

 

 

 

 

Cash paid for interest

 

$

13,608

 

$

13,635

 

Cash paid for income taxes

 

$

3,651

 

$

2,718

 

Cash received from income tax refunds

 

$

138

 

$

675

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

Purchase of property and equipment through seller financing arrangement

 

$

894

 

$

 

 

 

 

See notes to condensed consolidated financial statements

 

8



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)

 

 

 

 

Common
Stock

 

Additional
Paid In
Capital

 

Treasury
Stock

 

Retained
Deficit

 

Accumulated
Other
Comprehensive
Loss

 

Total
Stockholders’
Equity

 

Non-
Controlling
Interests

 

Total
Equity

 

Balance, January 1, 2015

 

$

1,442

 

$  399,774

 

$

(73,445

)

$

(31,050

)

$           (2,493

)

$

294,228

 

$

1,906

 

$  296,134

 

Issuance of treasury stock

 

 

(77

)

77

 

 

 

 

 

 

Issuance of common stock for exercise of stock options and vesting of restricted stock units

 

2

 

(441

)

 

 

 

(439

)

 

(439

)

Withholding of restricted stock units in satisfaction of tax requirements

 

 

(572

)

 

 

 

(572

)

 

(572

)

Tax expense associated with share-based awards

 

 

8

 

 

 

 

8

 

 

8

 

Foreign currency translation adjustment

 

 

 

 

 

(5,793

)

(5,793

)

(457

)

(6,250

)

Share-based compensation

 

 

3,276

 

 

 

 

3,276

 

 

3,276

 

Conversion of restricted stock units to deferred cash awards

 

 

(22,244

)

 

 

 

(22,244

)

 

(22,244

)

Other capital adjustments

 

 

(14

)

 

 

 

(14

)

(1

)

(15

)

Net (loss) income

 

 

 

 

(19,923

)

 

(19,923

)

776

 

(19,147

)

Balance, March 31, 2015

 

$

1,444

 

$  379,710

 

$

(73,368

)

$

(50,973

)

$           (8,286

)

$

248,527

 

$

2,224

 

$  250,751

 

 

 

See notes to condensed consolidated financial statements

 

9



Table of Contents

 

1.     ORGANIZATION AND BUSINESS

 

The Condensed Consolidated Financial Statements include the accounts of GFI Group Inc. and its subsidiaries (collectively, “GFI” or the “Company”). The Company, through its subsidiaries, provides wholesale brokerage and trade execution services, clearing services and trading system software products to institutional clients in markets for a range of fixed income, financial, equity and commodity instruments. The Company complements its brokerage and trade execution capabilities with value-added services, such as market data and analytical software products for trader and back-office support, which it licenses primarily to companies in the financial services industry.  The Company is majority-owned by, and operates as a division of BGC Partners, Inc. (together with its affiliates, “BGC”), which owned approximately 56% of the Company’s outstanding shares of common stock as of March 31, 2015. See Note 2 for further information on the acquisition by BGC. In addition, as of March 31, 2015, Jersey Partners, Inc. (“JPI”) owned approximately 36% of the Company’s outstanding shares of common stock. The Company’s executive chairman, Michael Gooch, is the controlling shareholder of JPI.

 

2.      ACQUISITION BY BGC PARTNERS, INC. AND TERMINATION OF THE CME MERGER

 

On February 19, 2015, the Company, BGC and BGC Partners, L.P. entered into a Tender Offer Agreement pursuant to which BGC and BGC Partners, L.P. agreed to amend their previously commenced tender offer to purchase all of the outstanding shares of common stock of the Company for $6.10 per share.  On February 26, 2015, BGC successfully completed the BGC Tender and on March 4, 2015 BGC Partners, L.P. paid for the 54,274,212 shares of Common Stock tendered pursuant to the BGC Tender for an aggregate purchase price of $331,073. The tendered shares, together with the 17,120,464 shares already owned by BGC, represented approximately 56% of the outstanding shares of the Company’s common stock as of March 31, 2015.   See Note 20 on Subsequent events for further information.

 

As a result of the transaction, GFI is a controlled company of BGC and operates as a division of BGC. Going forward, BGC and GFI are expected to remain separately branded divisions.

 

Prior to the completion of the tender offer, the Company was a party to a series of agreements, including an Agreement and Plan of Merger (the “CME Merger Agreement”) and a Purchase Agreement (the “IDB Purchase Agreement”), each dated as of July 30, 2014, as amended, with CME Group Inc. (“CME”) and certain of its affiliates, whereby the Company had agreed to merge with and into a wholly owned subsidiary of CME (the “CME Merger”) and, immediately following such merger, a private consortium of current GFI management would acquire the Company’s wholesale brokerage and clearing businesses from CME (such transactions collectively, the “CME Transaction”). In addition, CME, JPI and certain other stockholders of GFI, who collectively control approximately 38% of the outstanding shares of our common stock, entered into an agreement, dated as of July 30, 2014 (the “Support Agreement”), that provided for such stockholders to vote for the CME Transaction and vote against any alternative transaction and that prevented such stockholders from transferring their shares, including by tendering into the tender offer. The CME Merger Agreement and the CME Transaction were terminated on January 30, 2015. The restrictions in the Support Agreement continue until on or about January 30, 2016.

 

Pursuant to the terms of the CME Merger Agreement, the Company was required to reimburse CME for its expenses up to $7,065and such reimbursement was paid in February 2015. Additionally, the Company was required to pay CME a termination fee equal to $17,663(which is the total termination fee of $24,728 less the expense reimbursement that has already been paid to CME) and such transaction fee was paid in March 2015. The termination fee was payable if within 12 months of such termination the Company consummated, or entered into a definitive agreement to consummate, a transaction in which the Company or 20% or more of the fair value of the assets or of any class of equity or voting securities of the Company and its subsidiaries, the subsidiaries that were to be retained by CME in the CME Merger Agreement, or Trayport or Fenics was sold.

 

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation— The Company’s Condensed Consolidated Financial Statements (Unaudited) are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingencies in the Condensed Consolidated Financial Statements. Certain estimates and assumptions relate to the accounting for acquired goodwill and intangible assets, fair value measurements, compensation accruals, tax liabilities and the potential outcome of litigation matters. Management believes that the estimates utilized in the preparation of the Condensed Consolidated Financial Statements are reasonable and prudent. Actual results could differ materially from these estimates.

 

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Certain amounts in the Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation.

 

These Condensed Consolidated Financial Statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). The condensed consolidated financial information as of December 31, 2014 presented in this Form 10-Q has been derived from audited Consolidated Financial Statements not included herein.

 

These unaudited Condensed Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.

 

Consolidation Policies

 

General— The Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and subsidiaries that are treated as such and other entities in which the Company has a controlling financial interest. For consolidated subsidiaries that are less than wholly-owned, equity interests that are not owned by the Company are referred to as non-controlling interests. The portion of net income attributable to non-controlling interests for such subsidiaries is presented as Net income attributable to non-controlling interests on the Condensed Consolidated Statements of Operations, and the portion of the stockholders’ equity of such subsidiaries is presented as Non-controlling interests in the Condensed Consolidated Statements of Financial Condition and Condensed Consolidated Statement of Changes in Stockholders’ Equity. All intercompany transactions and balances have been eliminated.

 

Variable Interest Entities—The Company determines whether it holds any interests in entities deemed to be a variable interest entity (“VIE”). A VIE is an entity that lacks one or more of the following characteristics (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The Company has a controlling financial interest and will consolidate a VIE if it is the primary beneficiary.

 

The primary beneficiary is the party that has both (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. As of March 31, 2015, the Company holds interests in certain VIEs. One of these VIEs is consolidated because it was determined that the Company is the primary beneficiary of this VIE because (1) the Company provided the majority of the VIE’s start-up capital and (2) the Company has consent rights regarding those activities that the Company believes would most significantly impact the economic performance of the entity. The remaining VIEs are not consolidated as it was determined that the Company is not the primary beneficiary due to the level of equity ownership and voting power.  The Company reassesses its evaluation of whether an entity is a VIE when certain events occur, such as changes in economic ownership and voting power.  The Company reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.  See Note 16 for disclosures on Variable Interest Entities.

 

Cash and Cash Equivalents— Cash and cash equivalents consist of cash and highly liquid investments purchased with an original maturity of three months or less. Cash and cash equivalents are categorized within Level 1 of the fair value hierarchy.

 

Cash and Securities Segregated Under Federal and Other Regulations—The Company holds cash and securities representing funds received in connection with customer trading activities. The Company’s subsidiaries are required to satisfy regulations mandated by their primary regulators to segregate or set aside cash or equivalent securities to satisfy regulations, promulgated to protect customer assets.

 

Accounts Receivable —Accounts receivable largely represents commissions due from brokers, dealers, banks and other financial and nonfinancial institutions for the execution of securities, commodities, foreign exchange and other derivative brokerage transactions. Also, included within Accounts receivable are the billed portion of existing contracts from customers related to the licensing, support and maintenance of software, analytics and market data, as well as any unbilled but earned portion of any services provided to such customers. In estimating the allowance for doubtful accounts, management considers the length of time receivables are past due and historical experience. In addition, if the Company is aware of a client’s inability to meet its financial obligations, a specific provision for doubtful accounts is recorded in the amount of the estimated losses that will result from the inability of that client to meet its financial obligation.

 

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Receivables from and Payables to Brokers, Dealers and Clearing Organizations—Receivables from and payables to brokers, dealers and clearing organizations primarily represent: (i) principal transactions for which the stated settlement dates have not yet been reached, (ii) principal transactions which have not settled as of their stated settlement dates, (iii) cash, including deposits, held at clearing organizations and exchanges in support of the Company’s clearing business and to facilitate settlement and clearance of matched principal transactions and (iv) the spread on matched principal transactions that have not yet been remitted from/to clearing organizations and exchanges.

 

Property, Equipment and Leasehold Improvements—Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method, generally over three to seven years. Property and equipment are depreciated over their estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the respective lease to which they relate or the remaining useful life of the leasehold improvement. Internal and external costs incurred in developing or obtaining computer software for internal use are capitalized in accordance with Accounting Standards Codification (“ASC”) 350 Intangibles—Goodwill and Other (“ASC 350”), and are amortized on a straight-line basis over the estimated useful life of the software, generally three years. General and administrative costs related to developing or obtaining such software are expensed as incurred.

 

Goodwill and Intangible Assets—Goodwill represents the excess of the purchase price allocation over the fair value of tangible and identifiable intangible net assets acquired. The goodwill associated with each business combination is allocated to the related reporting units, which are determined based on how the Company’s businesses are managed and how they are reviewed by the Company’s chief operating decision maker. Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions. Substantially all of the firm’s identifiable intangible assets are considered to have definite lives and are amortized on a straight-line basis over their estimated useful lives.

 

In accordance with ASC 350, goodwill is not amortized, but instead is periodically tested for impairment. The Company reviews goodwill for impairment on an annual basis as of November 1 of each fiscal year or whenever an event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. See Note 6 for further information.

 

Prepaid Bonuses and Forgivable Employee Loans—Prepaid bonuses and forgivable loans to employees are stated at historical value net of amortization when the agreement between the Company and the employee provides for the return of proportionate amounts of the bonus or loan outstanding if employment is terminated in certain circumstances prior to the end of the term of the agreement. Amortization is calculated using the straight-line method over the term of the contract, which is generally two to four years, and is recorded in Compensation and employee benefits. The Company generally expects to recover the unamortized portion of prepaid bonuses and forgivable loans when employees voluntarily terminate their employment or if their employment is terminated for cause prior to the end of the term of the agreement. The prepaid bonuses and forgivable loans are included in Other assets in the Condensed Consolidated Statements of Financial Condition. At March 31, 2015 and December 31, 2014, the Company had prepaid bonuses of $15,905 and $16,523, respectively. At March 31, 2015 and December 31, 2014, the Company had forgivable employee loans and advances to employees of $15,022 and $15,072, respectively. Amortization of prepaid bonuses and forgivable employee loans for the three months ended March 31, 2015 and 2014 was $4,831 and $6,720, respectively and is included within Compensation and employee benefits.

 

Investments—When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for under the equity method of accounting in accordance with ASC 323-10, Investments—Equity Method and Joint Ventures (“ASC 323-10”). Significant influence generally exists when the Company owns 20% to 50% of the entity’s common stock or in-substance common stock. The Company initially records the investment at cost and adjusts the carrying amount each period to recognize its share of the earnings and losses of the investee based on the percentage of ownership. At March 31, 2015 and December 31, 2014, the Company had equity method investments with a carrying value of $12,842 and $13,184, respectively, included within Other assets. The Company also provides clearing and other administrative services to certain of these equity method investees.

 

Investments for which the Company does not have the ability to exert significant influence over operating and financial policies are generally accounted for using the cost method of accounting in accordance with ASC 325-10, Investments—Other (“ASC 325-10”). At March 31, 2015 and December 31, 2014, the Company had cost method investments of $1,533 and $1,688, respectively, included within Other assets.  The fair value of the Company’s cost method investments are not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value. The Company monitors its equity and cost method investments for indicators of impairment each reporting period.

 

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The Company accounts for its marketable equity securities and its debt securities in accordance with ASC 320-10, Investments—Debt and Equity Securities (“ASC 320-10”). Investments that are owned by the Company’s broker-dealer subsidiaries are recorded at fair value with realized and unrealized gains and losses reported in net (loss) income. Investments designated as available-for-sale that are owned by the Company’s non broker-dealer subsidiaries are recorded at fair value with unrealized gains or losses reported as a separate component of other comprehensive (loss) income, net of tax.  The fair value of the Company’s available-for-sale securities was $98 and $0 as of March 31, 2015 and December 31, 2014, respectively, and is included within Other assets.

 

Fair Value of Financial Instruments—In accordance with ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), the Company estimates fair values of financial instruments using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment in interpreting market data and, accordingly, changes in assumptions or in market conditions could adversely affect the estimates. The Company also discloses the fair value of its financial instruments in accordance with the fair value hierarchy as set forth by ASC 820-10. See Note 14 for further information.

 

Derivative Financial Instruments—The Company enters into derivative transactions for a variety of reasons, including managing its exposure to risk arising from changes in foreign currency, facilitating customer trading activities and, in certain instances, to engage in principal trading for the Company’s own account. Derivative assets and liabilities are carried on the Condensed Consolidated Statements of Financial Condition at fair value, with changes in the fair value recognized in the Condensed Consolidated Statements of Operations. Contracts entered into to manage risk arising from changes in foreign currency are recognized in Other income, net and contracts entered into to facilitate customer transactions and principal trading are recognized in Principal transactions. Derivatives are reported on a net-by-counterparty basis when management believes that a legal and enforceable right of offset exists under these agreements. See Note 15 for further information.

 

Payables to Clearing Services Customers—Payables to clearing services customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers.

 

Revenue Recognition

 

Brokerage Transactions—The Company provides brokerage services to its clients in the form of either agency or principal transactions. In agency transactions, the Company charges commissions for executing transactions between buyers and sellers. Agency commission revenues and related expenses are recognized on a trade date basis. These revenues are presented in “Agency Commissions”.  Principal transactions revenue is primarily derived from matched principal and principal trading transactions. Principal transactions revenues and related expenses are recognized on a trade date basis. The Company earns revenue from principal transactions on the spread between the buy and sell price of the security that is brokered. In matched principal transactions, the Company simultaneously agrees to buy instruments from one customer and sell them to another customer. These revenues are presented in “Principal Transactions”.  In the normal course of its matched principal and principal trading businesses, the Company may hold security positions overnight. These positions are marked to market on a daily basis.

 

Clearing Services Revenues—The Company charges fees to customers for clearing services provided for cash and derivative transactions. Clearing services revenues are recorded on a trade date basis as customer transactions occur and are presented net of any customer negotiated rebates.

 

Software, Analytics and Market Data Revenue Recognition— Software revenue consists primarily of fees charged for Trayport electronic trading software, which are typically billed on a subscription basis and are recognized ratably over the term of the subscription period, which ranges from one to five years. Analytics revenue consists primarily of software license fees for Fenics pricing tools which are typically billed on a subscription basis, and is recognized ratably over the term of the subscription period, which is generally three years. Market data revenue primarily consists of subscription fees and fees from customized one-time sales. Market data subscription fees are recognized on a straight-line basis over the term of the subscription period, which ranges from one to two years. Market data revenue from customized one-time sales is recognized upon delivery of the data. The Company markets its software, analytics and market data products through its direct sales force and, in some cases, indirectly through resellers. In general, the Company’s license agreements for such products do not provide for a right of return.

 

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Other Income, net—Included within Other income, net on the Company’s Condensed Consolidated Statements of Operations are revaluations of foreign currency derivative contracts, realized and unrealized transaction gains and losses on certain foreign currency denominated items, and gains and losses on certain investments, and interest income earned on short-term investments.

 

Compensation and Employee Benefits—The Company’s compensation and employee benefits have both a fixed and variable component. Base salaries and benefit costs are primarily fixed for all employees while bonuses constitute the variable portion of compensation and employee benefits. The Company has historically paid certain performance bonuses in restricted stock units (“RSUs”).  All RSUs which were outstanding immediately prior to the completion of BGC’s tender offer were converted into the right to receive cash, subject to the terms of each award’s pre-existing vesting schedule.  During the three months ended March 31, 2015, the Company paid certain performance bonuses in deferred cash awards. The Company also may grant sign-on and retention bonuses for certain newly-hired or existing employees who agree to long-term employment agreements.

 

Share-Based Compensation—The Company’s share-based compensation had consisted of RSUs. The Company accounts for share-based compensation in accordance with ASC 718 Compensation— Stock Compensation (“ASC 718”). This accounting guidance requires measurement of compensation expense for equity-based awards at fair value and recognition of compensation expense over the service period, net of estimated forfeitures. In all periods presented, the only share-based compensation expense recognized by the Company has been RSUs. The Company determines the fair value of RSUs based on the number of units granted and the grant date fair value of the Company’s common stock, measured as of the closing price on the date of grant. As discussed in further detail in Note 11, during the first quarter of 2015, the Company converted all RSUs which were outstanding immediately prior to the completion of BGC’s tender offer into the right to receive cash, subject to the terms of each award’s pre-existing vesting schedule.

 

Deferred Cash Compensation—The Company accounts for deferred cash compensation in accordance with ASC 710 Compensation— General (“ASC 710”). This accounting guidance requires measurement of deferred compensation expense for non-equity-based awards based upon future amounts expected to be paid, and provides for recognition of compensation expense over the expected service period, net of estimated forfeitures. See Note 11 for further information.

 

Income Taxes— In accordance with ASC 740, Income Taxes (“ASC 740”), the Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carryforwards that result from events that have been recognized either in the financial statements or the income tax returns, but not both. The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Management applies the more likely than not criteria prior to recognizing a financial statement benefit for a tax position taken (or expected to be taken) in a tax return. The Company recognizes interest and/or penalties related to income tax matters in interest expense and other expense, respectively.

 

The Company recorded a benefit from income taxes of $12,392 for the three months ended March 31, 2015, as compared to a provision for income taxes of $1,094 for the three months ended March 31, 2014.  The change from provision for income taxes to benefit from income taxes was primarily due to an allowable U.S. income tax deduction as a result of the merger termination fee paid to CME following the termination of the CME Merger Agreement in January 2015. The effective tax rates for both periods were impacted by a geographical mix of pre-tax profits and losses.

 

Treasury Stock—The Company accounts for Treasury stock using the cost method. Treasury stock held by the Company may be reissued with respect to vested RSUs in qualified jurisdictions. The Company’s policy is to account for these shares as a reduction of Treasury stock on a first-in, first-out basis.

 

Foreign Currency Translation Adjustments and Transactions— Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at the period end rates of exchange, and revenue and expenses are translated at the average rates of exchange for the period. Gains or losses resulting from translating foreign currency financial statements are reflected in foreign currency translation adjustments and are reported as a separate component of comprehensive (loss) income and included in accumulated other comprehensive income in the Condensed Consolidated Statement of Changes in Stockholders’ Equity. The revaluation of asset and liability balances that are denominated in currencies other than the functional currency of the business unit involved in such transactions is reflected in Other Income, net in the Condensed Consolidated Statements of Operations. Net losses resulting from remeasurement of foreign currency transactions and balances were $1,038 and $92 for the three months ended March 31, 2015 and 2014, respectively.

 

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Recent Accounting Pronouncements— In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the criteria for disposals to qualify as discontinued operations and requires new disclosures about disposals of both discontinued operations and certain other disposals that do not meet the new definition. The guidance was effective for the Company’s fiscal year beginning January 1, 2015. The adoption of ASU 2014-08 has not had a material impact on the Company’s Consolidated Financial Statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The guidance is effective beginning in the first quarter of fiscal 2017. The Company is currently evaluating the impact of the new guidance on the Company’s Consolidated Financial Statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the Company’s ability to continue as a going concern, and if so, to provide related footnote disclosures. The guidance is effective for the Company’s 2016 annual financial statements. The Company is currently evaluating the impact of the new guidance on the Company’s Consolidated Financial Statements.

 

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations  (Topic 805) - Pushdown Accounting (“ASU 2014-17”). ASU 2014-17 provides an acquired entity the option of applying pushdown accounting in its stand-alone financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company adopted this guidance on November 18, 2014, the effective date of ASU 2014-17.  In conjunction with the Company’s February 2015 acquisition by BGC, the Company has elected not to apply pushdown accounting on the Condensed Consolidated Financial Statements for the three months ended March 31, 2015, the reporting period in which the change-in-control event occurred.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the consolidation analysis performed on certain types of legal entities. The guidance is effective beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its Condensed Consolidated Financial Statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be reported on the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective for the Company retrospectively beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its Condensed Consolidated Financial Statements.

 

4. DISPOSALS AND ASSETS AND LIABILITIES HELD FOR SALE

 

On January 24, 2015, the Company entered into an agreement to sell 100% equity ownership of The Kyte Group Limited (“KGL”), which primarily included the Company’s clearing business.  The Company determined that as of December 31, 2014, KGL met the criteria for classification as held for sale and, accordingly, its assets and liabilities were included in Assets held for sale and Liabilities held for sale on the Condensed Consolidated Statements of Financial Condition as of December 31, 2014, net of $4.1 million of asset impairment, resulting from a write-down to the carrying value of its long-lived assets. The transaction was completed in March 2015. KGL’s operations prior to the completion of the transaction are included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 and within the Clearing and Backed Trading reportable segment.

 

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The major classes of the total consolidated assets and liabilities of KGL that were classified as held for sale at December 31, 2014 were as follows:

 

 

 

December 31,

 

 

 

2014

 

Assets

 

 

 

Cash and cash equivalents

 

$

24,957

 

Cash and securities segregated under federal and other regulations

 

52,160

 

Accounts receivable, net

 

1,348

 

Receivables from brokers, dealers and clearing organizations

 

90,634

 

Property, equipment and leasehold improvements, net

 

1,944

 

Intangible assets, net

 

4,302

 

Other assets (1) 

 

680

 

Asset impairment

 

(4,061

)

Total assets held for sale

 

$

171,964

 

 

 

 

 

Liabilities

 

 

 

Accrued compensation

 

1,545

 

Accounts payable and accrued expenses

 

849

 

Payables to clearing services customers (2) 

 

142,108

 

Other liabilities

 

1,397

 

Total liabilities held for sale

 

$

145,899

 

 


(1)         Excludes $570 of receivables from consolidated affiliates that has been eliminated for the purposes of presentation on the Consolidated Statement of Financial Condition.

(2)         Excludes $12,499 of payables to consolidated affiliates that has been eliminated for the purposes of presentation on the Consolidated Statement of Financial Condition.

 

On February 3, 2015, the Company entered into an agreement to sell 100% equity ownership of Kyte Broking Limited (“KBL”). The Company determined that KBL met the criteria for classification as held for sale and, as a result, its assets and liabilities have been included in Assets held for sale and Liabilities held for sale on the Condensed Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014.  The Company believes that no impairment exists as the fair value of the net assets related to KBL less the costs to sell the business will exceed the related carrying value. The transaction is expected to close in the second quarter of 2015.

 

The major classes of the total consolidated assets and liabilities of KBL that were classified as held for sale at March 31, 2015 and December 31, 2014 were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

 $

12,238

 

 $

13,172

 

Accounts receivable, net

 

8,664

 

7,398

 

Receivables from brokers, dealers and clearing organizations

 

2,040

 

659

 

Property, equipment and leasehold improvements, net

 

157

 

178

 

Other assets

 

155

 

330

 

Total assets held for sale

 

 $

23,254

 

 $

21,737

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable and accrued expenses

 

18,012

 

15,990

 

Other liabilities

 

141

 

25

 

Total liabilities held for sale

 

 $

18,153

 

 $

16,015

 

 

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5.     RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

 

Amounts receivable from and payable to brokers, dealers and clearing organizations consisted of the following:

 

 

 

March 31,
2015

 

December 31,
2014

 

Receivables from brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to deliver

 

$

1,061,593

 

$

458,718

 

Receivables from and deposits with clearing organizations and financial institutions (1) 

 

59,875

 

48,630

 

Net pending trades

 

 

253

 

Total

 

$

1,121,468

 

$

507,601

 

Payables to brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to receive

 

$

1,045,537

 

$

462,747

 

Payables to clearing organizations and financial institutions

 

13,380

 

496

 

Net pending trades

 

2,955

 

 

Total

 

$

1,061,872

 

$

463,243

 

 


(1)         Excluded from the March 31, 2015 balance is $2,040 of Receivables from and deposits with clearing organizations and financial institutions related to KBL. Excluded from the December 31, 2014 balance is $91,293 of Receivables from and deposits with clearing organizations and financial institutions related to KGL and KBL. As discussed in Note 4, such amounts are included in Assets held for sale.

 

Substantially all fail to deliver and fail to receive balances at March 31, 2015 and December 31, 2014 have subsequently settled at the contracted amounts.

 

In addition to the balances above, the Company had Payables to clearing services customers of $142,108 at December 31, 2014 associated with the KGL clearing business, which was included in Liabilities held for sale.  These amounts represented cash which had been payable to the Company’s clearing customers that was held with the Company’s third-party general clearing members and were included within Cash and cash equivalents, Cash and securities segregated under federal and other regulations or Receivables from brokers, dealers and clearing organizations as follows:

 

 

 

December 31,
2014

 

Cash and cash equivalents

 

11,162

 

Cash segregated under federal and other regulations

 

52,160

 

Receivables from brokers, dealers, and clearing organizations

 

78,786

 

Total

 

$

142,108

 

 

As the transaction to sell KGL was completed in March 2015 the Company had no Payables to clearing service customers as of March 31, 2015.  See Note 4 for further information on the sale of KGL.

 

6.     GOODWILL AND INTANGIBLE ASSETS

 

GoodwillChanges in the carrying amount of the Company’s goodwill for the three months ended March 31, 2015 were as follows:

 

 

 

December 31,
2014

 

Goodwill
acquired

 

Impairment
charges

 

Adjustments

 

Foreign currency
translation

 

March 31,
2015

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

All other

 

134,542

 

 

 

 

(184

)

134,358

 

 

 

$

134,542

 

$

 

$

 

$

 

$

(184

)

$

134,358

 

 

Goodwill is required to be tested for impairment at least annually and more frequently when indicators of impairment exist. All of the Company’s goodwill is allocated to its reporting units and the goodwill impairment tests are performed at the reporting unit level. The Company determined its reporting units to be Americas Brokerage; Europe, Middle East and Africa (“EMEA”) Brokerage; Asia Brokerage; Clearing and Backed Trading; Trayport; and Fenics.

 

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No events or changes in circumstances which would indicate goodwill impairment occurred at the Trayport and Fenics reporting units, the Company’s reporting units with remaining goodwill balances, in the three months ended March 31, 2015.

 

Intangible AssetsIntangible assets consisted of the following:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Gross
amount

 

Accumulated
amortization
and foreign
currency
translation

 

Net
carrying
value

 

Gross
amount

 

Accumulated
amortization
and foreign
currency
translation

 

Net
carrying
value 
(1)

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

62,334

 

$

40,604

 

$

21,730

 

$

62,334

 

$

39,203

 

$

23,131

 

Trade names

 

7,904

 

6,851

 

1,053

 

7,904

 

6,750

 

1,154

 

Core technology

 

8,697

 

4,508

 

4,189

 

8,697

 

4,105

 

4,592

 

Non-compete agreements

 

3,756

 

3,434

 

322

 

3,756

 

3,429

 

327

 

Patents

 

3,131

 

1,844

 

1,287

 

3,131

 

1,719

 

1,412

 

Other

 

647

 

386

 

261

 

647

 

358

 

289

 

Total

 

$

86,469

 

$

57,627

 

$

28,842

 

$

86,469

 

$

55,564

 

$

30,905

 

 


(1)         Excluded from net carrying value as of December 31, 2014 is $3,715 of customer relationships,  $576 of trade names and $11 of non-compete agreements with indefinite useful lives related to KGL that were  held for sale. As discussed in Note 4, such amounts were included in Assets held for sale as of December 31, 2014 prior to the disposal of KGL during the first quarter of 2015.

 

Intangible amortization expense for the three months ended March 31, 2015 and 2014 was $1,657 and $2,469, respectively.

 

At March 31, 2015, expected amortization expense for the definite lived intangible assets is as follows:

 

2015

 

$

4,842

 

2016

 

5,941

 

2017

 

4,117

 

2018

 

3,298

 

2019

 

3,081

 

Thereafter

 

7,563

 

Total

 

$

28,842

 

 

7.     OTHER ASSETS AND OTHER LIABILITIES

 

Other assets consisted of the following:

 

 

 

March 31,
2015

 

December 31,
2014

 

Deferred tax assets

 

$

108,561

 

$

91,935

 

Prepaid bonuses

 

15,905

 

16,523

 

Forgivable employee loans and advances to employees

 

15,022

 

15,072

 

Investments accounted for under the cost method and equity method

 

14,375

 

14,872

 

Financial instruments owned

 

5,302

 

3,865

 

Deferred financing fees

 

4,566

 

5,038

 

Software inventory, net

 

3,414

 

3,435

 

Other

 

26,714

 

21,981

 

Total Other assets

 

$

193,859

 

$

172,721

 

 

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Other liabilities consisted of the following:

 

 

 

March 31,
2015

 

December 31,
2014

 

Payroll related liabilities

 

  $

29,105

 

  $

12,522

 

Deferred revenues

 

9,252

 

7,993

 

Deferred rent liabilities

 

8,494

 

8,657

 

Unrecognized tax benefits

 

7,983

 

8,396

 

Income taxes payable

 

6,353

 

5,384

 

Interest payable

 

6,317

 

12,457

 

Deferred tax liabilities

 

4,591

 

4,726

 

Financial instruments sold, not yet purchased

 

2,166

 

1,387

 

Other

 

8,598

 

8,748

 

Total Other liabilities

 

  $

82,859

 

  $

70,270

 

 

8.     SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

The Company’s outstanding debt obligations consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

8.375% Senior Notes due 2018

  

240,000

 

  $

240,000

 

Loans pursuant to Credit Agreement

 

60,000

 

10,000

 

Total

  

300,000

 

  $

250,000

 

 

The Company’s debt obligations are carried at historical amounts. The fair value of the Company’s Long-term debt obligations, categorized within Level 2 of the fair value hierarchy, is measured primarily using pricing service data from external providers.  The carrying amounts and estimated fair values of the Company’s Long-term debt obligations are as follows:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

8.375% Senior Notes

240,000

264,528

240,000

272,568

 

 

8.375% Senior Notes

 

In July 2011, the Company issued $250,000 in aggregate principal amount of 8.375% Senior Notes (the “8.375% Senior Notes”) due 2018 in a private offering (the “Offering”) to qualified institutional buyers pursuant to Rule 144A and to certain persons in offshore transactions pursuant to Regulation S, each under the Securities Act of 1933, as amended (the “Securities Act”).  The notes were priced to investors at 100% of their principal amount, and mature in July 2018. Interest on these notes is payable, semi-annually in arrears on the 19th of January and July. Transaction costs of approximately $9,100 related to the 8.375% Senior Notes were deferred and are being amortized over the term of the notes.  On December 21, 2011, the Company completed an exchange offer for the 8.375% Senior Notes whereby it exchanged $250,000 in aggregate principal amount of the 8.375% Senior Notes for 8.375% Senior Notes that are registered under the Securities Act.

 

In March 2013, the Company repurchased $10,000 principal amount of its 8.375% Senior Notes on the open market for an aggregate purchase price of $9,602, including accrued interest and sales commissions. The Company funded the repurchase of these notes with borrowings under its Credit Agreement.

 

On January 18, 2013, Moody’s Investor Services lowered its credit rating on the Company’s 8.375% Senior Notes two notches to B1, which increased the Company’s applicable per annum interest, effective January 19, 2013, by an additional 50 basis points. On April 19, 2013, Fitch Ratings, Inc. (“Fitch”) further lowered its credit rating on the Company’s 8.375% Senior Notes two notches to BB and revised its outlook from Stable to Negative. This credit rating downgrade by Fitch increased our applicable per annum interest by an additional 50 basis points, effective July 19, 2013. On June 26, 2013, Standard & Poor’s (“S&P”) further lowered its credit rating on the Company’s 8.375% Senior Notes one notch to B+ and revised its outlook from Negative to Stable. This credit rating downgrade by S&P increased the Company’s applicable per annum interest by an additional 25 basis points, effective July 19, 2013.

 

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Pursuant to the terms of the 8.375% Senior Notes, the cumulative effect of downgrades to the Company’s credit rating by rating agencies subsequent to the issuance of our 8.375% Senior Notes resulted in 200 basis points penalty interest, which is the maximum increase permitted under the indenture. The additional 200 basis points of interest equates to $4,800 in additional interest expense per annum, based on the aggregate amount of outstanding principal as of March 31, 2015.

 

At March 31, 2015 and December 31, 2014, unamortized deferred financing fees related to the 8.375% Senior Notes of $4,108 and $4,420, respectively, were recorded within Other assets and the Company was in compliance with all applicable covenants.

 

Credit Agreement

 

In March 2013, the Company entered into an amendment to its second amended and restated credit agreement (as amended, the “Credit Agreement”) with Bank of America, N.A. and certain other lenders. The Credit Agreement provided for maximum revolving loans of up to $75,000 until December 2013, at which time $18,750 of the lender commitments were due to mature and the remaining $56,250 of lender commitments were due to mature in December 2015.

 

In December, 2013, the various lenders under the Credit Agreement executed an assignment and assumption agreement pursuant to which the extending lenders under the Credit Agreement assumed the lender commitments of the non-extending lender and the Company has consented to the assignment.  As a result, the borrowing capacity will remain at $75,000 until the Credit Agreement matures in December 2015. The Credit Agreement provides for up to $50,000 for letters of credit.

 

In February 2015, in connection with the transactions contemplated by the Tender Offer Agreement, the Company entered into a third amendment to the Credit Agreement to permit the transactions contemplated by the Tender Offer Agreement, including by amending the definition of “Change of Control” to permit BGC to acquire shares of the equity of the Company in excess of 35% without triggering a “Change of Control” under the Credit Agreement.

 

The Credit Agreement contains certain financial and other covenants. The financial covenants contained in our Credit Agreement require that we maintain minimum consolidated capital, as defined, of no less than $375,000 at any time.  The amendment to the Credit Agreement executed in July 2014 reduced the required minimum amount of consolidated capital by any goodwill or asset impairment charge in an aggregate amount not to exceed $160,000 contained in our financial statements in any of the fiscal quarters ending June 30, 2014, September 30, 2014 or December 31, 2014.  In April 2015, GFI entered into a fourth amendment to the Credit Agreement, whereby the minimum consolidated capital the Company is required to maintain was adjusted to $215,000. The Company was in compliance with all applicable covenants at March 31, 2015 and December 31, 2014.

 

Revolving loans may be either base rate loans or Eurocurrency rate loans. Eurocurrency rate loans bear interest at the annualized rate of one-month LIBOR plus the application margin and base rate loans bear interest at a rate per annum equal to a prime rate plus the applicable margin. Letter of credit fees per annum are equal to the applicable margin times the outstanding amount drawn under such letter of credit. As long as no default has occurred under the Credit Agreement, the applicable margin for base rate and Eurocurrency rate loans and letters of credit is based on a matrix that varies with a ratio of outstanding debt to EBITDA, as defined in the Credit Agreement.

 

The interest rate of the outstanding loan under the Credit Agreement was 5.50% at March 31, 2015. At March 31, 2015 and December 31, 2014, unamortized deferred financing fees related to the Credit Agreement of $458 and $618, respectively, were recorded within Other assets.

 

9.     STOCKHOLDERS’ EQUITY

 

On March 30, 2015, the Company filed a Form 25 with the Securities Exchange Commission (SEC”) to voluntarily delist GFI’s common stock on the New York Stock Exchange (“NYSE”) and to terminate the registration of the common stock under the Exchange Act. The Company’s common stock was delisted on April 10, 2015 and the Company expects to file a Form 15 with the SEC to effect the deregistration of the common stock. The Company expects the deregistration of the common stock to become effective 90 days after filing the Form 15 with the SEC.

 

In April 2015, the Company’s Board of Directors authorized the Company to repurchase up to $50,000 of the Company’s common stock and 8.375% Senior Notes. During the three months ended March 31, 2015, and March 31, 2014 the Company did not repurchase any shares of its common stock.

 

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The payment of quarterly dividends was suspended by the Company’s Board during the third quarter of 2014, in conjunction with the then-pending Amended CME Merger Agreement.  Following the Company’s acquisition by BGC the payment of quarterly dividends continues to be suspended. Therefore, the Company did not pay a cash dividend during the first quarter of 2015. On March 28, 2014 the Company paid a cash dividend of $0.05 per share, which, based on the number of shares outstanding on the record date for such dividends, totaled $6,188.

 

10.     (LOSS) EARNINGS PER SHARE

 

Basic (loss) earnings per share for common stock is calculated by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is calculated by dividing net (loss) income by the sum of: (i) the weighted average number of shares outstanding, (ii) outstanding stock options and RSUs (using the “treasury stock” method when the impact of such options and RSUs would be dilutive), and (iii) any contingently issuable shares when dilutive.

 

Basic and diluted (loss) earnings per share for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Basic (loss) earnings per share

 

 

 

 

 

GFI’s net (loss) income

 

$

(19,923

)

$

4,003

 

Weighted average common shares outstanding

 

127,339,178

 

122,362,839

 

Basic (loss) earnings per share

 

$

(0.16

)

$

0.03

 

Diluted (loss) earnings per share

 

 

 

 

 

GFI’s net (loss) income

 

$

(19,923

)

$

4,003

 

Weighted average common shares outstanding

 

127,339,178

 

122,362,839

 

Effect of dilutive options, RSUs, and other contingently issuable shares

 

 

9,067,862

 

Weighted average shares outstanding and common stock equivalents

 

127,339,178

 

131,430,701

 

Diluted (loss) earnings per share

 

$

(0.16

)

$

0.03

 

 

As discussed in Note 11 in further detail, all RSUs which were outstanding immediately prior to the completion of BGC’s tender offer were converted into the right to receive cash, subject to the terms of each award’s pre-existing vesting schedule, and therefore, were not subject to the computation of basic or diluted earnings per share for the three months ended March 31, 2015.

 

Excluded from the computation of diluted earnings per share for the three months ended March 31, 2014 because their effect would be anti-dilutive were the following:

 

 

 

Three Months Ended
March 31,

 

 

 

2014

 

Stock Options

 

$

16,844

 

RSUs

 

286,014

 

 

Included in the computation of diluted earnings per share, but not in the computation of basic earnings per share as the conditions for issuance were not satisfied as of the respective reporting period were 1,171,879 contingently issuable shares for the three months ended March 31, 2014.

 

11.     DEFERRED COMPENSATION

 

Restricted Stock Units

 

Prior to the completion of BGC’s tender offer (as discussed in Note 2), the Company awarded bonuses in the form of equity awards pursuant to the  Amended and Restated GFI Group Inc. 2008 Equity Incentive Plan, (“2008 Equity Incentive Plan”) which permitted the grant of non-qualified stock options, incentive stock options, stock appreciation rights, shares of restricted stock, restricted stock units and performance units to employees, non-employee directors or consultants. The Company issued

 

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shares from authorized but unissued shares and authorized and issued shares reacquired and held as treasury shares, which were reserved for issuance upon the vesting of RSUs granted pursuant to the 2008 Equity Incentive Plan.  Following the acquisition by BGC, the Company filed post-effective amendments to its registration statements on Form S-8 de-registering any and all securities registered under the registration statements that remain unissued pursuant to its equity incentive and stock option plans and does not plan to issue any additional RSUs. Pursuant to the Tender Offer Agreement, each RSU of the Company outstanding immediately prior to the completion of BGC’s tender offer was converted into the right to receive an amount in cash equal to $6.10 per unit, the offer price with respect to each share underlying such award, with such cash payable on and subject to the terms and conditions of the original vesting schedule of each RSU.

 

The Company accounted for the conversion of RSUs into the right to receive cash as the modification of an equity award to a liability in accordance with the applicable provisions of ASC 718. Accordingly, the Company recorded incremental compensation cost on the previously recognized portion of any outstanding RSUs based upon the excess, if any, of the $6.10 per unit fair value of the modified award over the value of the original award immediately before its terms were modified.   The total unrecognized compensation cost associated with those RSUs which were outstanding when the modification was effective, will be recognized based on each award’s pre-existing vesting schedule based upon the $6.10 per unit fair value of the modified award, net of estimated forfeitures.

 

The following is a summary of RSU transactions under the 2008 Equity Incentive Plan:

 

 

 

RSUs

 

Weighted-
Average
Grant Date
Fair Value

 

Outstanding December 31, 2014

 

14,282,789

 

$

4.02

 

Granted

 

 

 

Vested

 

(393,554

)

3.71

 

Cancelled

 

(64,724

)

3.81

 

Converted to deferred cash awards

 

(13,824,511

)

4.03

 

Outstanding March 31, 2015

 

 

 

 

There were no RSUs granted during the three months ended March 31, 2015.The weighted average grant-date fair value of RSUs granted for the three months ended March 31, 2014 was $3.56 per unit. Total compensation expense and related income tax benefits recognized in relation to RSUs are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015 (1)

 

2014

 

Compensation expense

 

$

17,917

 

$

7,356

 

Income tax benefits

 

$

5,116

 

$

2,099

 

 


(1)         Compensation expense for the three months ended March 31, 2015 includes $11,545 of incremental compensation costs on unvested RSUs related to the modification of the RSUs.

 

At March 31, 2015, total unrecognized compensation cost related to the RSUs (which are to be settled in cash based on pre-existing vesting schedules) prior to the consideration of expected forfeitures was approximately $41,829 and is expected to be recognized over a weighted-average period of 1.38 years. The total fair value of RSUs vested during the three months ended March 31, 2015 and 2014 was $1,459 and $16,057, respectively.

 

Deferred Cash Compensation

 

Separate from the modification of RSUs discussed above under “Restricted Stock Units”, the Company’s Deferred Cash Award Program, which was adopted on February 12, 2013, provides for the grant of deferred cash incentive compensation to eligible employees.

 

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The Company may pay certain bonuses in the form of deferred cash compensation awards, which generally vest over a future service period. Total compensation expense recognized in relation to deferred cash compensation awards, not including the expense related to RSUs converted to deferred cash awards as described above, is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Compensation expense

 

$

325

 

$

11

 

 

At March 31, 2015, total unrecognized compensation cost related to deferred cash compensation prior to the consideration of expected forfeitures, not including the unrecognized portion of the RSUs converted to deferred cash awards as described above, was approximately $13,324 and is expected to be recognized over a weighted-average period of 2.81 years.

 

12.     COMMITMENTS AND CONTINGENCIES

 

Purchase Obligations—The Company has various unconditional purchase obligations. These obligations are for the purchase of market data from a number of information service providers during the normal course of business. As of March 31, 2015, the Company had total purchase commitments for market data of approximately $18,898, with $15,792 due within the next twelve months, $2,839 due between one to three years and $267 due between three and five years. Additionally, the Company had $4,574 of other purchase commitments including $4,023 for hosting and software license agreements , and $551 primarily related to network upgrades. Of these other purchase commitments, approximately $2,920 is due within the next twelve months.

 

Contingencies—In the normal course of business, the Company and certain of its subsidiaries included in the Condensed Consolidated Financial Statements are, and have been in the past, involved in various lawsuits and legal proceedings and are, and have been in the past, involved in certain regulatory examinations. The Company’s unresolved legal proceedings and regulatory examinations are at varying stages of adjudication, arbitration or investigation and involve a variety of claims. In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties, if any, relating to each matter may be.

 

The Company is subject to the possibility of losses from these various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. In accordance with applicable accounting guidelines, an accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.  Where a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

 

The Company is subject to regular examinations by various tax authorities in jurisdictions in which the Company has significant business operations. The Company regularly assesses the likelihood of additional tax assessments that may result from these examinations in each of the tax jurisdictions. A tax accrual has been established, which the Company believes to be adequate in relation to the potential for additional tax assessments. Once established, the accrual may be adjusted based on new information or events. The imposition of additional tax assessments, penalties or fines by a tax authority could have a material impact on the Company’s effective tax rate.

 

Additionally, the Company has recorded reserves for certain contingencies to which it may have exposure, such as contingencies related to the employer portion of National Insurance Contributions in the U.K.

 

Following the announcement of the CME Merger, nine putative class action complaints challenging the CME Merger were filed on behalf of purported stockholders of GFI (one of which also purported to be brought derivatively on behalf of GFI), two in the Supreme Court of the State of New York, County of New York, six in the Court of Chancery of the State of Delaware, and one in the United States District Court for the Southern District of New York. The complaints were captioned Coyne v. GFI Group Inc., et al., Index No. 652704/2014 (N.Y. Sup. Ct., filed September 4, 2014), Suprina v. GFI Group, Inc., et al., Index No. 652668/2014 (N.Y. Sup. Ct., filed August 29, 2014), Brown v. GFI Group Inc., et al., Civil Action No. 10082-VCL (Del. Ch., filed September 3, 2014), Hughes v. CME Group, Inc., et al., Civil Action No. 10103-VCL (Del. Ch., filed September 8, 2014), Al Ammary v. Gooch, et al., Civil Action No. 10125-VCL (Del. Ch., filed September 11, 2014), Giardalas v. GFI Group, Inc., Civil Action No. 10132-VCL (Del. Ch., filed September 15, 2014), City of Lakeland Employees’ Pension Plan v. Gooch, et al., Civil Action No. 10136-VCL (Del. Ch., filed September 16, 2014), Michocki v. Gooch., et al., Civil Action No. 10166-VCL (Del. Ch., filed September 25, 2014) and Szarek v. GFI Group Inc., et al., Case No. 14-CV-8228 (S.D.N.Y., filed October 14, 2014). On September 26, 2014,

 

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the Court of Chancery granted voluntary dismissal of the Giardalas action. On October 6, 2014, a consolidation order was entered by Vice Chancellor Laster, consolidating the Delaware cases into the Consolidated Delaware Action.  The consolidation order designated the complaint filed in City of Lakeland Employees’ Pension Plan v. Gooch, et al., Civil Action No. 10136-VCL (Del. Ch.) as the operative complaint in the Consolidated Delaware Action.

 

The complaints named as Defendants various combinations of the Company, GFI Holdco Ltd. (“IDB Buyer”), the members of the Company’s board of directors, GFI managing director Nick Brown, CME, Commodore Acquisition Corp., Commodore Acquisition LLC, Cheetah Acquisition Corp., Cheetah Acquisition LLC, JPI and New JPI Inc. (“New JPI”). The complaints generally allege, among other things, that the members of the Company’s board of directors breached their fiduciary duties to the Company’s stockholders during merger negotiations by entering into the CME Merger Agreement and approving the CME Merger, and that the Company, CME, Commodore Acquisition Corp., Commodore Acquisition LLC, IDB Buyer, Cheetah Acquisition Corp., Cheetah Acquisition LLC, JPI, and New JPI aided and abetted such breaches of fiduciary duties.  The complaints further allege, among other things, (i) that the merger consideration provided for in the CME Merger Agreement undervalued the Company, (ii) that the sales process leading up to the CME Merger was flawed due to the members of the Company’s board of directors’ and Jefferies’ conflicts of interest, and (iii) that certain provisions of the CME Merger Agreement inappropriately favored CME and precluded or impeded third parties from submitting potentially superior proposals.

 

In addition, the Hughes complaint asserted a derivative claim on behalf of the Company against the members of the Company’s board of directors for breaching their fiduciary duties of loyalty and care to the Company by negotiating and agreeing to the CME Merger and against Defendants Gooch and Heffron for usurping a corporate opportunity. The Michocki complaint alleged that the CME Merger is not a solitary transaction but a series of related transactions and further alleged that the IDB Transaction must be approved by an affirmative two-thirds vote of the Shares pursuant to the terms of the Charter.

 

The complaints seek, among other relief: (i) certification of the class, (ii) injunctive relief enjoining the CME Merger, (iii) a declaration that the members of the Company’s board of directors breached their fiduciary duties and that certain provisions of the CME Merger Agreement are unlawful, (iv) a directive to the members of the Company’s board of directors to execute their fiduciary duties to obtain a transaction in the best interest of the Company’s stockholders, (v) rescission of the CME Merger to the extent already implemented, (vi) granting of rescissory damages and an accounting of all of the damages suffered as a result of the alleged wrongdoing, (vii) and reimbursement of fees and costs. The Coyne and Suprina Plaintiffs also demanded a jury trial.

 

Certain Defendants moved to dismiss or, in the alternative, stay the Coyne and Suprina actions in favor of the Consolidated Delaware Action. A hearing was held on December 15, 2014 on (i) the Defendants’ motions to dismiss or stay the Coyne and Suprina actions; (ii) the Plaintiffs’ motion by order to show cause for consolidation and appointment of a leadership structure; and (iii) Plaintiff Suprina’s motion by order to show cause to compel and expedite discovery. In an order filed on January 30, 2015, the Court ordered the Suprina and Coyne cases consolidated as In re GFI Group Inc. Shareholder Litigation, Index No. 652668/2014. In another order filed that same day, the Court denied Plaintiff Suprina’s motion to compel and expedite discovery.  On March 26, 2015, the Court issued a decision and order granting the Defendants’ motions to dismiss the Coyne and Suprina actions on forum non conveniens grounds and in favor of the Consolidated Delaware Action.  The decision and order were entered in the office of the Clerk of the County of New York on March 27, 2015.  The Court’s judgment dismissing the Coyne and Suprina complaints was entered in the office of the Clerk of the County of New York on April 29, 2015.

 

On November 18, 2014, the Delaware court entered a Revised Order Setting Expedited Discovery Schedule in the Consolidated Delaware Action. On December 19, 2014, the court entered a Further Revised Scheduling Order scheduling a preliminary injunction hearing for January 16, 2015.  On December 29, 2014, Plaintiffs in the Consolidated Delaware Action filed a Motion for a Preliminary Injunction, and a brief in support thereof, seeking to enjoin enforcement of Article V of the Support Agreement and preliminarily enjoin the stockholder vote on the CME Merger until (i) certain additional disclosures were made and (ii) the Company’s stockholders were provided the opportunity to vote on the CME Merger, the JPI Merger and the IDB Transaction. On January 8, 2015, the parties agreed to move the preliminary injunction hearing from January 16, 2015 to January 20, 2015. On January 15, 2015, the preliminary injunction hearing (scheduled for January 20) was taken off the court’s calendar.

 

On January 15, 2015, Plaintiffs in the Consolidated Delaware Action filed a Supplement to the Verified Class Action Complaint. On January 30, 2015, Plaintiffs filed a Second Supplement to the Verified Class Action Complaint. On February 4, 2015, Plaintiffs filed a Motion for Expedited Proceedings and a brief in support thereof. On February 6, 2015, the Court scheduled a merits hearing for February 17 and 18, 2015. On February 7, 2015, Plaintiffs filed a Third Supplement to the Verified Class Action Complaint, seeking certain additional injunctive and declaratory relief. On February 11, 2015, the Court,

 

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with the consent of the parties, moved the merits hearing (scheduled for February 17 and 18, 2015) to the first available dates on the Court’s schedule after March 4, 2015. On February 20, 2015, Plaintiffs informed the Court that an expedited merits hearing was no longer necessary.  On February 26, 2015, March 17, 2015, and March 18, 2015, the Court granted stipulations and orders extending the time for certain Defendants to answer, move, or otherwise respond to the operative complaint.  On April 16, 2015, the Court granted a stipulation and order pursuant to which certain of the Defendants need not respond to the operative complaint or the supplements thereto and will have thirty days from the filing of an amended complaint to answer, move, or otherwise respond to it.  To date, an amended complaint has not been filed.

 

In the New York Szarek action, the Court scheduled an initial pretrial conference for December 16, 2014, which the Court adjourned upon application of the parties until March 12, 2015 and adjourned again upon application of Plaintiff until May 21, 2015.

 

In addition to the foregoing litigation, on November 26, 2014, a putative class action complaint alleging violations of the federal securities laws, captioned Gross v. GFI Group, Inc., et al., was filed in the United States District Court for the Southern District of New York. The complaint names the Company, Colin Heffron, Michael Gooch and Nick Brown as Defendants.. The complaint seeks, among other relief: (i) certification of the class, (ii) compensatory damages for Defendants purported wrongdoing and (iii) reimbursement of costs and expenses.

 

On February 20, 2015, the Court in Gross v. GFI Group, Inc. granted Plaintiff’s unopposed motion for appointment as lead plaintiff and approved his selection of co-lead counsel on behalf of the putative class. The Court also extended Defendants’ time to respond to the complaint from February 23, 2015 to March 25, 2015; granted Plaintiff leave to file an amended complaint by March 16, 2015; and rescheduled the initial pre-trial conference to March 27, 2015.  On March 10, 2015, Plaintiff requested additional time to file his amended complaint.  On March 13, 2015, the Court extended Plaintiff’s deadline to file an amended complaint from March 16, 2015 to May 15, 2015; set a June 5, 2015 deadline for Defendants to respond to the amended complaint; and rescheduled the initial pre-trial conference for June 19, 2015.

 

Defendants believe that the claims asserted against them are without merit and intend to defend the litigation vigorously.

 

Based on currently available information, the outcome of the Company’s outstanding legal proceedings are not expected to have a material adverse impact on the Company’s financial position. However, the outcome of any such matters may be material to the Company’s results of operations or cash flows in a given period. It is not presently possible to determine the Company’s ultimate exposure to these matters and there is no assurance that the resolution of the Company’s outstanding matters will not significantly exceed any reserves accrued by the Company.

 

For a limited number of legal matters for which, a loss (whether in excess of a related accrued liability or where there is no accrued liability) is not probable but is reasonably possible in future periods, the Company is sometimes able to estimate a range of possible loss.  In determining whether it is able to estimate a range of possible loss, the Company reviews and evaluates its material litigation and regulatory and other matters on an ongoing basis.  In cases in which the Company is able to estimate a range of possible loss, the aggregate total of such estimated possible losses is disclosed below.  There may be other matters for which a loss is probable or reasonably possible but for which a range of possible loss may not be estimable.  For those matters for which a range of possible loss is estimable, management currently estimates the aggregate range of possible loss as $0 to approximately $10.0 million in excess of the accrued liability (if any) related to those matters.  The estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and uncertainties.  The matters underlying the estimated range will vary from time to time, and actual results may vary significantly from the current estimate.  Management is generally unable to estimate a range of reasonably possible loss for matters other than those included in the estimate above, including where (i) actual or potential plaintiffs have not claimed an amount of monetary damages (unless management can otherwise determine an amount), (ii) the matters are in early stages, (iii) there is uncertainty as to the outcome of pending appeals or motions, (iv) there are significant factual issues to be resolved, (v) there are novel legal issues presented, among other reasons.  Those matters for which an estimate is not possible are excluded from the estimated range above, therefore, the estimated range above does not represent the Company’s maximum loss exposure.

 

Risks and Uncertainties— The Company primarily generates its revenues by executing and facilitating transactions for counterparties. Revenues for these services are transaction based. As a result, the Company’s revenues will likely vary based upon the trading volumes of the various securities, commodities, foreign exchange and other cash and derivative markets in which the Company provides its services.

 

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Table of Contents

 

Guarantees— The Company, through its subsidiaries, is a member of certain exchanges and clearing houses. Under the membership agreements, members are generally required to guarantee certain obligations. To mitigate the performance risks of its members, the exchanges and clearing houses may, from time to time, require members to post collateral, as well as meet certain minimum financial standards. The Company’s maximum potential liability under these arrangements cannot be quantified. However, management believes that the potential for the Company to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Statements of Financial Condition for these arrangements.

 

13.     MARKET AND CREDIT RISKS

 

Disclosure regarding the Company’s financial instruments with market and credit risks are described in “Note 16—Market and Credit Risks” of the Notes to the Consolidated Financial Statements contained in the Company’s 2014 Form 10-K.  There have been no material changes to these risks during the three months ended March 31, 2015.

 

14.     FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Certain of the Company’s financial assets and liabilities are carried at fair value, and are measured at fair value on a recurring basis. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value, and included in Other assets and Other liabilities, respectively. Contingent consideration, if any, is also recorded at fair value, and included in Other liabilities. The Company’s investments that are accounted for under the cost and equity methods are investments in companies that are not publicly traded and for which no established market for their securities exists. The fair value of these investments is only estimated if there are identified events or changes in circumstances that may have a significant adverse effect on the carrying value of the investment.

 

The Company’s financial assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC 820-10. In accordance with ASC 820-10, the Company has categorized its financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below.

 

Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices for identifiable assets or liabilities in an active market that the company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).

 

Level 2—Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

 

·                  Quoted prices for identifiable or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently); and

 

·                  Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps).

 

Level 3—Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

 

Valuation Techniques

 

A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis are as follows:

 

U.S. Treasury Securities - U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied.

 

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Table of Contents

 

Accordingly, U.S. Treasury securities are generally categorized in Level 1 of the fair value hierarchy.

 

Equity Securities - Equity securities include mostly exchange-traded securities and are valued based on quoted market prices. Accordingly, exchange-traded equity securities are generally categorized in Level 1 of the fair value hierarchy.  Non-exchange traded equity securities are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. Non-exchange traded equity securities are generally categorized within Level 2 of the fair value hierarchy.

 

Corporate Bonds — Corporate bonds are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

 

Foreign government bonds — Foreign government bonds are mostly valued using quoted market prices. Accordingly, foreign government bonds are generally categorized in Level 1 or Level 2 of the fair value hierarchy.

 

Derivative Contracts — Derivative contracts include instruments such as foreign exchange, commodity, fixed income and equity derivative contracts.

 

Listed Derivative Contracts - Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.

 

OTC Derivative Contracts — Over-the-counter (“OTC”) derivative contracts include forwards, swaps, and options contracts related to foreign currencies. Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks, including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof.  Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. OTC derivative products valued by the Company using pricing models generally fall into this category and are categorized in Level 2 of the fair value hierarchy.

 

Equity warrants -  Non-exchange traded equity warrants are classified within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

 

Contingent Consideration — The category consists primarily of contingent consideration related to one of the Company’s acquisitions.

 

On November 14, 2013, the Company completed the acquisition of Contigo Limited, a provider of trading, portfolio risk management and logistics software for the energy industry. This contingent liability, which was settled in cash during March 2015, had been remeasured at fair value principally based on the acquired business’ future financial performance, including revenues and operating margins, from May 1, 2014 through the settlement date.

 

The inputs used in estimating the fair value of these contingent considerations were both unobservable and significant to the overall fair value measurement of this liability, therefore the liability was categorized in Level 3 of the fair value hierarchy.

 

In the three months ended March 31, 2015 and 2014, the Company did not have any material transfers among Level 1, Level 2, and Level 3.

 

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Table of Contents

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of March 31, 2015 are as follows:

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
March 31,
2015

 

Assets

 

 

 

 

 

 

 

 

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

247

 

$

94

 

$

 

$

341

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

342

 

$

3,620

 

$

 

$

3,962

 

Commodities derivative contracts

 

1,650

 

 

 

1,650

 

Netting (1) 

 

(651

)

 

 

(651

)

Total derivative contracts

 

$

1,341

 

$

3,620

 

$

 

$

4,961

 

Total financial instruments owned

 

$

1,588

 

$

3,714

 

$

 

$

5,302

 

Total

 

$

1,588

 

$

3,714

 

$

 

$

5,302

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

57

 

$

2,166

 

$

 

$

2,223

 

Commodities derivative contracts

 

594

 

 

 

594

 

Netting (1) 

 

(651

)

$

 

$

 

$

(651

)

Total derivative contracts

 

$

 

$

2,166

 

$

 

$

2,166

 

Total financial instruments sold, not yet purchased

 

$

 

$

2,166

 

$

 

$

2,166

 

Total

 

$

 

$

2,166

 

$

 

$

2,166

 

 


(1)                                 Represents the impact of netting on a net-by-counterparty basis.

 

Excluded from the table above is variation margin on long derivative contracts related to exchange traded futures in the amount of $335 included within Payables to brokers, dealers and clearing organizations.

 

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Table of Contents

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of December 31, 2014 are as follows:

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
December 31,
2014

 

Assets

 

 

 

 

 

 

 

 

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

 $

 

 $

232

 

 $

 

 $

232

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

 $

592

 

 $

2,181

 

 $

 

 $

2,773

 

Commodities derivative contracts

 

1,198

 

 

 

1,198

 

Netting (1) 

 

(338

)

 

 

 

 

(338

)

Total derivative contracts

 

 $

1,452

 

 $

2,181

 

 $

 

 $

3,633

 

Total financial instruments owned

 

 $

1,452

 

 $

2,413

 

 $

 

 $

3,865

 

Total

 

 $

1,452

 

 $

2,413

 

 $

 

 $

3,865

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

 $

 

 $

1,387

 

 $

 

 $

1,387

 

Commodities derivative contracts

 

 $

338

 

 $

 

 $

 

 $

338

 

Netting (1) 

 

(338

)

 

 

(338

)

Total derivative contracts

 

 $

 

1,387

 

 

1,387

 

Total financial instruments sold, not yet purchased

 

 $

 

 $

1,387

 

 $

 

 $

1,387

 

Other liabilities: Contingent consideration

 

 $

 

 $

 

 $

348

 

 $

348

 

Total

 

 $

 

 $

1,387

 

 $

348

 

 $

1,735

 

 


(1)                                 Represents the impact of netting on a net-by-counterparty basis.

 

Excluded from the table above is variation margin on long derivative contracts related to exchange traded futures in the amount of $256 included within Payables to brokers, dealers and clearing organizations.

 

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Table of Contents

 

Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015 are as follows:

 

 

 

Opening
Balance

 

Total realized
and unrealized
losses
included in
Net loss 
(1)

 

Unrealized gains (losses)
included
in Other
comprehensive
loss 

 

Purchases

 

Issues

 

Sales

 

Settlements

 

Closing
Balance at
March 31,
2015

 

Unrealized
gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
March 31,
2015

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration:

 

$

348

 

$

115

 

$

 

$

 

$

 

$

 

$

(463)

 

$

 

$

 


(1)                                 Realized and unrealized gains (losses) are reported in Other income, net in the Condensed Consolidated Statements of Operations.

 

 

Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the three months ended March 31, 2014 are as follows:

 

 

 

Opening
Balance

 

Total realized
and unrealized
losses
included in
Net loss 
(1)

 

Unrealized
losses included
in Other
comprehensive
income

 

Purchases

 

Issuances

 

Sales

 

Settlements

 

Closing
Balance at
March 31, 2014

 

Unrealized gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
March 31,
2014

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

14

 

$

(14

)

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

4,317

 

$

28

 

$

27

 

$

 

$

 

$

 

$

 

$

4,372

 

$

28

 


(1)                                 Realized and unrealized gains (losses) are reported in Other income, net in the Condensed Consolidated Statements of Operations.

 

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Table of Contents

 

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 Assets and Liabilities measured at fair value on a recurring basis, as of December 31, 2014:

 

 

 

Fair Value as of
December 31,
2014

 

Valuation
Technique(s)

 

Unobservable
Input(s)

 

Range (Weighted
Average) (a)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

348

 

Present value of expected payments

 

Discount rate

 

 

17

%

 

 

 

 

 

 

 

Forecasted financial information

 

 

                    (b)

 


(a)         As December 31, 2014, contingent consideration consisted of one liability.

 

(b)         The Company’s estimate of contingent consideration as of December 31, 2014was principally based on the acquired business’ projected future financial performance, including revenues and operating margins from May 1, 2014 through April 30, 2015.

 

Valuation ProcessesLevel 3 Measurements—Depending on the instrument, the Company utilizes a valuation technique, including discounted cash flow methods, option pricing methods and present value methods, as indicated above. Valuations are generally conducted by the Company, with consultation of a third-party valuation expert to develop the valuation model when the asset or liability is initially recorded. Each reporting period, the Company updates unobservable inputs utilizing relevant published information, where applicable. The Company has a formal process to review changes in fair value for satisfactory explanation.

 

Sensitivity AnalysisLevel 3 Measurements

 

Contingent consideration – The significant unobservable inputs used in the fair value in the Company’s contingent consideration are the discount rate and forecasted financial information.  Significant increases (decreases) in the discount rate would have resulted in a lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a higher (lower) fair value measurement.

 

For all significant unobservable inputs used in the fair value measurement of all Level 3 assets and liabilities, a change in one of the inputs would not necessarily result in a directionally similar change in the other.

 

15. DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company uses foreign exchange derivative contracts, including forward contracts and foreign currency swaps, to reduce the effects of fluctuations in certain assets and liabilities denominated in foreign currencies. The Company also hedges a portion of its foreign currency exposures on anticipated foreign currency denominated revenues and expenses by entering into forward foreign exchange contracts. As of March 31, 2015 and December 31, 2014, none of these contracts were designated as foreign currency cash flow hedges under ASC 815-10, Derivatives and Hedging (“ASC 815-10”).

 

The Company provides brokerage services to its customers for exchange-traded and OTC derivative products, which include futures, forwards and options contracts. The Company may enter into principal transactions for exchange-traded and OTC derivative products to facilitate customer trading activities or to engage in principal trading for the Company’s own account.

 

The Company monitors market risk exposure from its matched principal business and principal trading business by regularly monitoring both (i) its concentration of market risk to financial instruments, countries or counterparties and (ii) trades that have not settled within prescribed settlement periods or volume thresholds. Additionally, market risks are monitored and mitigated by the use of the Company’s proprietary, electronic risk monitoring system, which provides daily credit reports in each of the Company’s geographic regions that analyze credit concentration and facilitates the regular monitoring of transactions against key risk indicators.

 

For certain derivative contracts, the Company has entered into agreements with counterparties that allow for the netting of positions. The Company reports these derivative contracts on a net-by-counterparty basis when management believes that a legal and enforceable right of offset exists under these agreements.

 

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Table of Contents

 

Fair values of derivative contracts on a gross and net basis as of March 31, 2015 and December 31, 2014 are as follows:

 

 

 

March 31, 2015

 

December 31, 2014

 

Derivatives not designated as hedging
instruments under ASC 815-10 (1)

 

Derivative
    Assets
(2)

 

Derivative
   Liabilities
(3)

 

Derivative
   Assets
(2)

 

Derivative
Liabilities(3)

 

Foreign exchange derivative contracts

 

$

3,962

 

$

2,223

 

$

2,773

 

$

1,387

 

Commodity derivative contracts

 

1,650

 

594

 

1,198

 

338

 

Total fair value of derivative contracts

 

$

5,612

 

$

2,817

 

$

3,971

 

$

1,725

 

Counterparty netting

 

(651

)

(651

)

(338

)

(338

)

Total fair value

 

$

4,961

 

$

2,166

 

$

3,633

 

$

1,387

 

 


(1)                     Excluded from the above table is variation margin on open long and short futures contracts which is included in Receivables from brokers, dealers and clearing organizations and Payables to brokers, dealers and clearing organizations,  on the Condensed Consolidated Statements of Financial Condition. See Note 14 for further details about variation margin balances on open long and short futures contracts as of March 31, 2015 and December 31, 2014.  Gross notional amounts on these futures contracts are included in the table below which details outstanding long and short notional amounts of derivative financial instruments.

(2)                     Reflects options and forwards contracts within Other assets.

(3)                     Reflects options and forwards contracts within Other liabilities.

 

As of March 31, 2015 and December 31, 2014, the Company had outstanding forward foreign exchange hedge contracts with a combined notional value of $56,022 and $69,692, respectively. Approximately $16,110 and $20,568 of these forward foreign exchange contracts represent a hedge of Euro and British pound-denominated balance sheet positions at March 31, 2015 and December 31, 2014, respectively. The remaining outstanding forward foreign exchange contracts are hedges of anticipated future cash flows.

 

In addition to the Company’s outstanding forward foreign exchange hedge contracts, the following table includes the outstanding long and short notional amounts on a gross basis of derivative financial instruments as of March 31, 2015 and December 31, 2014:

 

 

 

March 31, 2015 (1)

 

December 31, 2014 (2)

 

 

 

Long

 

Short

 

Long

 

Short

 

Foreign exchange derivative contracts

 

 $

14,368

 

 $

124,313

 

 $

3,185

 

 $

415,756

 

Commodity derivative contracts

 

582,250

 

580,670

 

675,686

 

692,855

 

Fixed income derivative contracts

 

5,101,596

 

5,564,179

 

7,124,375

 

7,911,965

 

Equity derivative contracts

 

2,411

 

2,408

 

2,758

 

2,871

 

Total derivative notional amounts

 

 $

5,700,625

 

 $

6,271,570

 

 $

7,806,004

 

 $

9,023,447

 


(1)                     Notional amounts include gross notionals on open long and short futures contracts of $5,699,521 and $6,270,828 respectively, as of March 31, 2015. These gross notional amounts primarily relate to positions held by a consolidated VIE for which the Company’s exposure to economic loss is approximately $5,633 as of March 31, 2015. See Note 16 for further information.

(2)                     Notional amounts include gross notionals on open long and short futures contracts of $7,804,981 and $9,023,087, respectively, as of December 31, 2014.  These gross notional amounts primarily relate to positions held by a consolidated VIE for which the Company’s exposure to economic loss is approximately $5,298 as of December 31, 2014. See Note 16 for further information.

 

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Table of Contents

 

The following is a summary of the effect of derivative contracts on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014:

 

 

Location of Gain (Loss)

Amount of Gain (Loss) Recognized in Income on
Derivatives

 

Derivatives not designated as hedging
instruments under ASC 815-10

Recognized in Income on
Derivatives

For the Three Months

Ended March 31, 2015

 

For the Three Months
Ended March 31, 2014

 

Foreign exchange derivative contracts

(1)

$

4,675

 

$

295

 

Commodity derivative contracts

Principal transactions

2,881

 

1,753

 

Fixed income derivative contracts

Principal transactions

1,587

 

3,130

 

Equity derivative contracts

(2)

164

 

7

 


(1)         For the three months ended March 31, 2015, approximately $3,601 of gains on foreign exchange derivative contracts were included within Other income, net and approximately $1,074 of gains on foreign currency options were included within Principal transactions.  For the three months ended March 31, 2014, approximately $202 of gains on foreign exchange derivative contracts were included within Other income, net and approximately $93 of gains on foreign currency options were included within Principal transactions.

(2)         For the three months ended March 31, 2015, approximately $164 of gains on equity derivative contracts were included within Principal transactions. For the three months ended March 31, 2014, approximately $14 of losses on equity derivative contracts were included within, Other income, net and approximately $21 of gains on equity derivative contracts were included within Principal transactions.

 

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Table of Contents

 

The following is a summary of derivative contracts, by counterparty, including the gross amounts offset in the Condensed Consolidated Statements of Financial Position as of March 31, 2015:

 

 

 

 

 

Gross Amount
Offset in the

 

Net Amounts of
Assets Offset in the

 

Gross Amounts Not Offset in the
Condensed Consolidated Statements
of Financial Condition

 

 

 

Counterparties (1)

 

Gross
Amounts of
Recognized
Assets

 

Condensed
Consolidated
Statements of
Financial Position

 

Condensed
Consolidated
Statements of
Financial Position
(2)

 

Derivatives (3)

 

Cash Collateral
Received/
(Pledged)

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

 $

2,599

 

 $

 

 $

2,599

 

 $

 

 $

 

 $

2,599

 

Counterparty B

 

1,756

 

(414

)

1,342

 

 

 

1,342

 

Counterparty C

 

1,021

 

 

1,021

 

 

 

1,021

 

Counterparty D

 

237

 

(237

)

 

 

 

 

Total

 

 $

5,613

 

 $

(651

)

 $

4,962

 

 $

 

 $

 

 $

4,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

 $

747

 

 $

 

 $

747

 

 $

 

 $

 

 $

747

 

Counterparty B

 

414

 

(414

)

 

 

 

 

Counterparty C

 

1,420

 

 

1,420

 

 

 

1,420

 

Counterparty D

 

237

 

(237

)

 

 

 

 

Total

 

 $

2,818

 

 $

(651

)

 $

2,167

 

 $

 

 $

 

 $

2,167

 

 

 


(1)         Excluded from the above table is variation margin on open long and short futures contracts which is included in Receivables from brokers, dealers and clearing organizations  and Payables to brokers, dealers and clearing organizations,  on the Condensed Consolidated Statements of Financial Condition. See Note 14 for further details about variation margin balances on open long and short futures contracts as of March 31, 2015.

(2)         Derivative assets and derivative liabilities are reflected within Other assets and Other Liabilities, respectively.

(3)         As of March 31, 2015, the Company does not have any derivative positions under a master netting agreement that are not netted.

 

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The following is a summary of derivative contracts, by counterparty, including the gross amounts offset in the Consolidated Statements of Financial Position as of December 31, 2014:

 

 

 

 

 

 

Gross Amounts
Offset in the

 

Net Amounts of
Assets Offset in the

 

Gross Amounts Not Offset in the
Condensed Consolidated Statements
of Financial Condition

 

 

 

Counterparties (1)

 

Gross
Amounts of
Recognized
Assets

 

Condensed
Consolidated
Statements of
Financial Position

 

Condensed
Consolidated
Statements of
Financial Position
(2)

 

Derivatives (3)

 

Cash Collateral
Received/
(Pledged)

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

 $

1,630

 

 $

 

 $

1,630

 

 $

 

 $

 

 $

1,630

 

Counterparty B

 

1,789

 

(338

)

1,451

 

 

 

1,451

 

Counterparty C

 

552

 

 

552

 

 

 

552

 

Total

 

 $

3,971

 

 $

(338

)

 $

3,633

 

 $

 

 $

 

 $

3,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

 $

394

 

 $

 

 $

394

 

 $

 

 $

 

 $

394

 

Counterparty B

 

 $

338

 

 $

(338

)

 $

 

 $

 

 $

 

 $

 

Counterparty C

 

993

 

 

993

 

 

 

993

 

Total

 

 $

1,725

 

 $

(338

)

 $

1,387

 

 $

 

 $

 

 $

1,387

 

 

 


(1)         Excluded from the above table is variation margin on open long and short futures contracts which is included in Receivables from brokers, dealers and clearing organizations and Payables to brokers, dealers and clearing organizations,  on the Condensed Consolidated Statements of Financial Condition. See Note 14 for further details about variation margin balances on open long and short futures contracts as of December 31, 2014.

(2)         Derivative assets and derivative liabilities are reflected within Other assets and Other Liabilities, respectively.

(3)         As of December 31, 2014, the Company does not have any derivative positions under a master netting agreement that are not netted.

 

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16. VARIABLE INTEREST ENTITIES

 

Non-consolidated VIEs

 

The Company holds interests in certain VIEs that it does not consolidate. The Company has determined that it is not the primary beneficiary, mostly due to a lack of significant economic interest, voting power and/or power to direct the activities that would most significantly impact the economic performance of the VIE.

 

As of March 31, 2015 and December 31, 2014, the Company had certain variable interests in non-consolidated VIEs in the form of direct equity interests, a convertible note and a non-recourse loan. The carrying amount of these VIEs was $2,802 as of March 31, 2015 and $3,144 as of December 31, 2014, and was recorded within Other assets. These VIEs include a technology provider with a proprietary financial application, trading entities in which the Company has provided initial capital to fund trading activities, investment fund managers and a commodity pool operator. The Company also provides clearing and other administrative services to certain of these non-consolidated VIEs. The maximum exposure to loss on these VIEs was $2,850 as of March 31, 2015 and $3,144 as of December 31, 2014, respectively.

 

The Company previously had certain variable interests in non-consolidated VIEs in the form of trading margin accounts in which the Company had an economic interest in profits and losses and has provided initial capital to fund trading activities. All such interests had been terminated as of March 31, 2015.

 

The Company has not recorded any liabilities with respect to non-consolidated VIEs.

 

Consolidated VIEs

 

In December 2010, Kyte invested in a limited company that is focused on developing a proprietary trading business. The limited company is a VIE and it was determined that the Company is the primary beneficiary of this VIE because the Company, through Kyte, was the provider of the majority of this VIE’s start-up capital and has the power to direct the activities of this VIE that most significantly impact its economic performance, primarily through its voting percentage and consent rights on the activities that would most significantly influence the entity. The consolidated VIE had total assets of $10,804 at March 31, 2015 and $9,956 as of December 31, 2014, which primarily consisted of clearing margin. There were no material restrictions on the consolidated VIE’s assets. The consolidated VIE had total liabilities of $2,955 at March 31, 2015 and $2,761 at December 31, 2014. The Company’s exposure to economic loss on this VIE is approximately $5,633 and $5,298 as of March 31, 2015 and December 31, 2014, respectively.

 

17.    REGULATORY REQUIREMENTS

 

Many of the Company’s material operating subsidiaries are subject to regulatory restrictions and minimum capital requirements, which may restrict the Company’s ability to withdraw capital from its subsidiaries.

 

Certain domestic subsidiaries of the Company are registered as a broker-dealer, swap execution facility (“SEF”) or introducing broker and therefore are subject to the applicable rules and regulations of the SEC and the Commodity Futures Trading Commission (“CFTC”). Certain foreign subsidiaries are also registered as introducing brokers with the CFTC. These rules contain uniform minimum net capital requirements, as defined, and also require a significant part of the registrants’ assets be kept in relatively liquid form. As of March 31, 2015, each of the Company’s subsidiaries that are subject to these regulations had net capital in excess of their minimum capital requirements.

 

Certain of the Company’s European subsidiaries are regulated by the Financial Conduct Authority (“FCA”) and must maintain financial resources (as defined by the FCA) in excess of FCA’s total financial resources requirement. As of March 31, 2015, each of these European subsidiaries had financial resources in excess of their requirements.

 

Certain other subsidiaries of the Company are subject to similar regulatory and other requirements in the jurisdictions in which they operate and, as of March 31, 2015, each of these subsidiaries was in compliance with its regulatory capital requirements.

 

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The regulatory requirements referred to above may restrict the Company’s ability to withdraw capital from its regulated subsidiaries. As of March 31, 2015, the Company had the following aggregate regulatory capital, in individually regulated entities, in each of its operating regions:

 

 

 

Americas

 

EMEA

 

Asia

 

Regulatory capital

 

$

24,422

 

$

122,996

 

$

31,824

 

Minimum regulatory capital required

 

7,150

 

98,895

 

8,608

 

Excess regulatory capital

 

$

17,272

 

$

24,101

 

$

23,216

 

 

The regulatory requirements set forth in the table above include aggregated amounts held in individually regulated entities in each of the Company’s operating regions, calculated by entity, to comply with the requirements of various regulators for capital requirements in each of those entities. In situations where the Company is subject to the requirements of multiple regulators, the Company has included the more onerous capital requirement in the table above.

 

18.    SEGMENT AND GEOGRAPHIC INFORMATION

 

In accordance with ASC 280-10, Segment Reporting (“ASC 280-10”) and based on the nature of the Company’s operations, products and services in each geographic region, the Company determined that it has four reportable segments: (i) Americas Brokerage, (ii)  EMEA Brokerage, (iii) Asia Brokerage and (iv) Clearing and Backed Trading. The Company’s brokerage operations provide brokerage services in four broad product categories: fixed income, financial, equity and commodity. The Clearing and Backed Trading segment encompasses the Company’s clearing, risk management, settlement and other back-office services, as well as the capital we provide to start-up trading groups, small hedge funds, market-makers and individual traders. Information about other business activities is disclosed in an “All Other” category. All Other includes the results of the Company’s software, analytics and market data operations. All Other also includes revenues and expenses that are not directly assignable to one of the Company’s reportable segments, primarily consisting of indirect costs related to the Company’s brokerage segments as well as all of the Company’s corporate business activities.

 

The accounting policies of the segments are the same as those described above in Note 3—Summary of Significant Accounting Policies. The Company evaluates performance of the operating segments based on income (loss) before income taxes, which it defines as revenues less direct expenses.

 

Revenues within each brokerage segment include revenues that are directly related to providing brokerage services along with interest and other income (loss) directly attributable to the operating segment. Revenues within the Clearing and Backed Trading segment primarily include revenues that are directly related to providing clearing services along with the Company’s share of profit (loss) on trading activity from capital investments. The Company’s Clearing and Backed Trading segment incurs exchange fees on behalf of its clients, which are reflected within Interest and transaction-based expenses. The reimbursement of these fees from the Company’s clients is reflected within Total Revenues. Therefore, the Company evaluates the top-line performance of its Clearing and Backed Trading segment using Revenues, net of interest and transaction-based expenses.

 

Direct expenses of the operating segments are those expenses that are directly related to providing the brokerage or clearing services and trading activities of the operating segments and include compensation expense related to the segment management and staff, communication and market data, travel and promotion, and certain professional fees and other expenses that are directly incurred by the operating segments. However, the Company does not allocate to its brokerage operating segments certain expenses that it manages separately at the corporate level. The unallocated costs include rent and occupancy, depreciation and amortization, professional fees, interest on borrowings and other expenses and are included in the All Other operating segment. Management generally does not consider the unallocated costs in its performance measurement of its reportable segments.

 

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Selected financial information for the Company’s reportable segments is presented below for periods indicated:

 

 

 

Three Months Ended March 31, 2015

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

57,552

 

 $

84,500

 

 $

20,757

 

 $

28,253

 

 $

40,460

 

$

231,522

 

Revenues, net of interest and
transaction-based expenses

 

54,926

 

81,654

 

20,663

 

7,217

 

41,156

 

205,616

 

Income (loss) before income taxes

 

16,480

 

27,622

 

7,659

 

1,301

 

(84,601

)

(31,539

)

 

 

 

Three Months Ended March 31, 2014

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

61,698

 

 $

89,300

 

 $

19,223

 

 $

44,293

 

 $

26,225

 

$

240,739

 

Revenues, net of interest and
transaction-based expenses

 

58,752

 

86,427

 

19,103

 

11,140

 

27,005

 

202,427

 

Income (loss) before income taxes

 

14,342

 

28,704

 

5,632

 

931

 

(44,106

)

5,503

 

 

In addition, with the exception for goodwill, the Company does not identify or allocate assets by operating segment, nor does its chief operating decision maker evaluate operating segments using discrete asset information. See Note 6 for goodwill by reportable segment.

 

For the three months ended March 31, 2015 and 2014, the U.K. is the only individual foreign country that accounts for 10% or more of the Company’s total revenues and total long-lived assets. Information regarding revenue for the three ended March 31, 2015 and 2014, and information regarding long-lived assets (defined as property, equipment, leasehold improvements and software inventory) in geographic areas as of March 31, 2015 and December 31, 2014, are as follows:

 

 

 

Three Months Ended
 March 31,

 

 

 

2015

 

2014

 

Revenues:  

 

 

 

 

 

United States

 

$

68,766

 

$

63,213

 

United Kingdom

 

107,351

 

124,305

 

Other

 

55,405

 

53,221

 

Total

 

 $

231,522

 

 $

240,739

 

 

 

 

 

 

 

 

 

Three Months Ended
 March 31,

 

 

 

2015

 

2014

 

Revenues, net of interest and transaction-based expenses:  

 

 

 

 

 

United States

 

$

67,937

 

$

62,096

 

United Kingdom

 

83,942

 

89,819

 

Other

 

53,737

 

50,512

 

Total

 

 $

205,616

 

 $

202,427

 

 

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March 31,
2015

 

December 31,
2014

 

Long-lived Assets, as defined:

 

 

 

 

 

United States

 

$

47,262

 

$

48,506

 

United Kingdom

 

6,935

 

6,976

 

Other

 

2,960

 

3,850

 

Total (1) 

 

$

57,157

 

$

59,332

 

 


(1)         Excluded from the March 31, 2015 balance is $157 of Property, equipment, leasehold improvements, net related to KBL. Excluded from the December 31, 2014 balance is $2,122 of Property, equipment, leasehold improvements, net related to KGL and KBL.  As discussed in Note 4, such amounts are included in Assets held for sale.

 

Revenues are attributed to geographic areas based on the location of the particular subsidiary of the Company which generated the revenues.

 

19.    RELATED PARTIES

 

As of March 31, 2015, entities affiliated with BGC were the beneficial owners of approximately 56 % of the Company’s common stock.  Therefore, GFI is a controlled company of BGC and operates as a division of BGC.  See Note 2 for further information on BGC’s acquisition of the Company.

 

As of March 31, 2015, the Company had $60,256 of receivables from BGC, which primarily consisted of $60,000 of receivables for loans which were issued by the Company on March 27, 2015, comprised of a $40,000 loan, bearing interest at 3.75% per annum and due June 30, 2015 and a $20,000 loan, bearing interest at 3.75% per annum and payable on demand.  In addition, certain of the Company’s subsidiaries transact with BGC and its affiliated entities. The Company had approximately $12,898 included in payables to brokers, dealers and clearing organizations related to matched principal transactions in which BGC and its affiliates were the counterparty. For the three months ended March 31, 2015 and 2014, the Company earned both software and brokerage revenues related to transactions with BGC and its affiliated entities. The revenues earned from BGC and its affiliated entities did not have a material impact on any of the periods presented in the Company’s Condensed Consolidated Financial Statements.

 

20.    SUBSEQUENT EVENTS

 

Delisting and Deregistration of GFI common stock

 

The Company’s common stock was delisted on the NYSE on April 10, 2015 and the Company expects to file a Form 15 with the SEC to effect the deregistration of the common stock. The Company expects the deregistration of the common stock to become effective 90 days after filing the Form 15 with the SEC.

 

Related party transactions

 

In April 2015, the Company provided a loan to BGC in the amount of $9,250, which bears interest of 3.75% per annum and is payable on demand.

 

Under rules adopted by the U.S. CFTC, all foreign introducing brokers engaging in transactions with U.S. persons are required to register with the National Futures Association and either meet financial reporting and net capital requirements on an individual basis or obtain a guarantee agreement from a registered Futures Commission Merchant. The Company’s European-based brokers engage from time to time in interest rate swap transactions with U.S.-based counterparties, and therefore the Company is subject to these CFTC requirements. In April 2015, Cantor Fitzgerald & Co. (“CF&Co”), an affiliate of BGC, the Company’s controlling stockholder, has entered into guarantees on the Company’s and the Company is required to indemnify CF&Co for the amounts, if any, paid by CF&Co pursuant to this arrangement.

 

On April 28 2015, the Company issued 43,029,260 shares (the “New Shares”) of its common stock to BGC at that dates closing price of $5.81 per share, for an aggregate purchase price of $250,000.  The purchase price was paid to the Company in the form of a Note due on June 19, 2018 which bears an interest rate of LIBOR plus 200 basis points. The Company expects that any funds received in payment of the principal of the note would be earmarked for repayment of the Company’s 8.375% Senior Notes or potentially be the basis of collateral with respect to the 8.375% Senior Notes. Following the issuance of the New Shares, BGC owns approximately 67% of the Company’s outstanding common stock.

 

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Other subsequent events

 

The Company and BGC announced that they have retained CF&Co to assist in the potential sale of our Trayport subsidiary.

 

In April 2015, GFI entered into a fourth amendment to the Credit Agreement, whereby the minimum consolidated capital the Company is required to maintain was adjusted to $215,000.  See Note 8 for further information.

 

In April 2015, the Company’s Board of Directors authorized the Company to repurchase up to $50,000 of the Company’s common stock and 8.375% Senior Notes.

 

On April 29, 2015, S&P raised its credit rating on the Company’s 8.375% Senior Notes four notches to BB+, following the announcement that BGC gained the two-thirds ownership necessary to effect the full merger of GFI. See Note 20 under “Related party transactions” for further information on GFI’s issuance of shares to BGC. S&P indicated its rating on the Company’s 8.375% Senior Notes remained on CreditWatch with positive implications. On May 6, 2015, Fitch increased its credit rating on the Company’s 8.375% Senior Notes four notches to BB+ and has also removed the Company’s 8.375% Senior Notes rating  the from Rating Watch Positive and assigned a Positive Rating Outlook, following the purchase of additional GFI shares by BGC. The recent upgrades from S&P and Fitch will lower the Company’s interest rate by 100 basis points. Any upgrade from Moody’s could also lower the Company’s rate on the Senior Notes up to a maximum of 50 basis points.

 

Subsequent events have been evaluated for recording and disclosure in the notes to the Consolidated Financial Statements through the filing date of this Form 10-Q.

 

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Table of Contents

 

ITEM 2.

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

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning. These forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:

 

·                   the risks and other factors described under the heading “Risk Factors” and elsewhere in this Form 10-Q and in our 2014 Form 10-K;

 

·                   economic, political and market factors affecting trading volumes, securities prices, or demand for our brokerage services, including recent conditions in the world economy and financial markets in which we provide our services;

 

·                   the extensive regulation of the Company’s business, changes in laws and regulations governing our business and operations or permissible activities and our ability to comply with such laws and regulations;

 

·                   our ability to obtain and maintain regulatory approval to conduct our business in light of certain proposed and recently adopted changes in laws and regulations in the U.S. and Europe and increased operational costs related to compliance with such changes in laws and regulations, including the laws and regulations governing the operation of swap execution facilities (“SEF”);

 

·                   the risks associated with the transition of cleared swaps to future contracts and our ability to continue to provide value-added brokerage and execution services to our customers pursuant to rules and regulations applicable to futures markets;

 

·                   our ability to attract and retain key personnel, including highly qualified brokerage personnel;

 

·                   our ability to keep up with rapid technological change and to continue to develop and support software, analytics and market data products, including hybrid brokerage and matching systems, that are desired and utilized by our customers;

 

·                   our entrance into new brokerage markets, including investments in establishing new brokerage desks;

 

·                   competition from current and new competitors;

 

·                   risks associated with our matched principal and principal trading businesses, including risks arising from specific brokerage transactions, or series of brokerage transactions, such as credit risk, market risk or the risk of fraud or unauthorized trading;

 

·                   financial difficulties experienced by our customers or key participants in the markets in which we focus our brokerage services;

 

·                   our ability to assess and integrate acquisitions of businesses or technologies;

 

·                   the maturing of key markets and any resulting contraction in commissions;

 

·                   risks associated with the expansion and growth of our operations generally or of specific products or services, including, in particular, our ability to manage our international operations;

 

·                   uncertainties associated with currency fluctuations;

 

·                   our failure to protect or enforce our intellectual property rights;

 

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·                   uncertainties relating to litigation;

 

·                   liquidity and clearing capital requirements and the impact of the conditions in the world economy and the financial markets in which we provide our services on the availability and terms of additional or future capital;

 

·                   our ability to identify and remediate any material weakness in our internal controls that could affect our ability to prepare financial statements and reports in a timely manner;

 

·                   the effectiveness of our risk management policies and procedures and the impact of unexpected market moves and similar events; future results of operations and financial condition; and

 

·                   the success of our business strategies.

 

The foregoing risks and uncertainties, as well as those risks discussed under the headings “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 3—Quantitative and Qualitative Disclosures About Market Risk” and “Part II, Item 1A Risk Factors” and elsewhere in this Form 10-Q, may cause actual results to differ materially from the forward-looking statements. The information included herein is given as of the filing date of this Form 10-Q with the Securities Exchange Commission (the “SEC”) and future events or circumstances could differ significantly from these forward-looking statements. The Company does not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Acquisition by BGC Partners, Inc. and Termination of the CME Merger

 

        On February 26, 2015, BGC Partners Inc. (together with its affiliates, “BGC”) successfully completed its tender offer to acquire shares of our common stock for $6.10 per share in cash. On March 4, 2015, BGC Partners, L.P. paid for the 54.3 million shares of common stock of the Company tendered pursuant to the tender offer. The tendered shares, together with the 17.1 million shares already owned by BGC, represent approximately 56% of the outstanding shares of our common stock.  As a result of the transaction, we are a controlled company of BGC and will operate as a division of BGC, reporting to Shaun Lynn, BGC’s President. Going forward, BGC and GFI are expected to remain separately branded divisions.

 

On February 19, 2015, we entered into a Tender Offer Agreement with BGC and BGC Partners, L.P. (the “Tender Offer Agreement”). Pursuant to the Tender Offer Agreement, our board of directors unanimously agreed to support the tender offer and to expand our board and to appoint BGC’s designees. The Tender Offer Agreement also contained an offer extension and a reduction to the minimum tender condition of the tender offer. On February 26, 2015, our board of directors was increased from five to eight members and, following the appointment of three of the individuals designated by BGC, Marisa Cassoni, Frank Fanzilli, Jr. and Richard Magee resigned as members of the board of directors and any and all committees thereof. BGC designated six directors to the expanded eight-member board of directors, including Howard Lutnick, BGC’s Chairman and Chief Executive Officer, Shaun Lynn, BGC’s President, Stephen Merkel, BGC’s Executive Vice President, General Counsel and Secretary, William J. Moran, a former Executive Vice President of JPMorgan Chase & Co. and a current director of BGC, Peter J. Powers, President and Chief Executive Officer of Powers Global Strategies LLC and a current director of BGC, and Michael Snow, Managing Member and Chief Investment Officer of Snow Fund One, LLC. Messrs. Moran, Powers and Snow are independent directors. The other conditions of the Tender Offer Agreement were met.

 

        Our Executive Chairman, Michael Gooch, and Chief Executive Officer, Colin Heffron, have remained as executives and directors of GFI and have continued as Chairman and Chief Executive Officer, respectively, of the GFI division. Mr. Gooch also holds the title of Vice Chairman of BGC Partners, L.P. Mr. Heffron has entered into an amended and restated employment agreement which continues to provide him with certain annual cash and equity compensation and severance arrangements. Mr. Gooch has entered into a fixed term employment agreement which provides him with certain cash and equity compensation. Pursuant to the Tender Offer Agreement, BGC has agreed to promptly establish a Distributable Earnings Bonus Pool program (the “Pool”) in an amount equal to one times the average annual distributable earnings, as defined, of our inter-dealer brokerage business for the three successive 12-month periods beginning on July 1, 2015. The Pool will be in the form of an award of restricted equity units and preferred restricted equity units of BGC Holdings, L.P and will be allocated 35% to Mr. Gooch, 35% to Mr. Heffron and 30% to other GFI employees as mutually agreed by Messrs. Gooch and Heffron and BGC. As a condition to participation in the Pool, each participant (including Messrs. Gooch and Heffron) is required to enter into a non-competition and award agreement containing the terms and conditions of his or her participation, which terms include the participant’s continued employment through July 1, 2018 and certain conditions, obligations and covenants (including non-competition, non-solicitation, non-hire non-disclosure provisions).

 

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        Prior to the entry into the Tender Offer Agreement, we were a party to a series of agreements, including an Agreement and Plan of Merger (the “CME Merger Agreement”) and a Purchase Agreement (the “IDB Purchase Agreement”), each dated as of July 30, 2014, as amended, with CME Group Inc. (“CME”) and certain of its affiliates, whereby we had agreed to merge with and into a wholly owned subsidiary of CME (the “CME Merger”) and, immediately following such merger, a private consortium of current GFI management would acquire our wholesale brokerage and clearing businesses from CME (such transactions collectively, the “CME Transaction”). In addition, CME, Jersey Partners, Inc. (“JPI”) and certain other stockholders of GFI, who collectively control approximately 38% of the outstanding shares of our common stock, entered into an agreement, dated as of July 30, 2014 (the “Support Agreement”), that provided for such stockholders to vote for the CME Transaction and vote against any alternative transaction and that prevented such stockholders from transferring their shares, including by tendering into the tender offer. The CME Merger Agreement and the CME Transaction were terminated on January 30, 2015. The restrictions in the Support Agreement continue until on or about January 30, 2016.

 

        Under the Tender Offer Agreement, JPI has the right to require, within the period of 21 days following the earlier of (x) the expiration or termination of the Support Agreement or (y) February 19, 2016, that BGC complete back-end mergers in which each remaining share of our common stock would be converted into $6.10, with holders of shares (other than JPI) receiving cash, and holders of JPI common stock receiving a mix of cash and shares of BGC’s Class A common stock (“BGC Stock”) valued at the closing price of BGC Stock on the date prior to the date of the Tender Offer Agreement in respect of each share indirectly owned by such holder through JPI. The amount of consideration to be received by Messrs. Gooch and Heffron, as holders of JPI common stock, in the back-end mergers is subject to reduction in certain circumstances, and our obligation to pay consideration to such holders in the back-end mergers is also subject to certain conditions, each as described in the Tender Offer Agreement.

 

        Pursuant to the Tender Offer Agreement, we will execute certain ancillary agreements, including amendments to BGC’s existing administrative services agreements. Our employees holding restricted stock units will receive $6.10 per unit in cash based on their pre-existing vesting schedules. We and BGC have also agreed that we will establish a retention bonus pool for our employees, which may be payable in the forms of forgivable loans and equity or partnership awards of us or our affiliates.

 

Delisting and Deregistration of GFI common stock

 

On March 30, 2015, we filed a Form 25 with the SEC to voluntarily delist our common stock and notes on the New York Stock Exchange and to terminate the registration of the common stock under the Exchange Act. The common stock was delisted on April 10, 2015 and we expect to file a Form 15 with the SEC to effect the deregistration of the common stock.  Upon the filing of the Form 15, the Company’s obligations to file certain reports with the SEC, including reports on Forms 10-K, 10-Q and 8-K, will immediately be suspended. However, the Company intends to make voluntary SEC filings with respect to its 8.375% Senior Notes due July 2018 in compliance with its obligations under the related indenture. The Company expects the deregistration of the common stock to become effective ninety (90) days after filing the Form 15 with the SEC.

 

Disposition of interests in Kyte

 

       During the first quarter of 2015, the Company entered into a number of share purchase agreements to divest certain interests in Kyte (the “Kyte SPAs”). In March 2015, we completed a transaction to sell The Kyte Group Limited (“KGL”), which primarily included our clearing business. Following the closing of that transaction, the Company no longer offers clearing and settlement services. The Company expects the transaction to sell Kyte Broking Limited (“KBL”) in the next few months.

 

 Business Environment

 

As a leading provider of wholesale brokerage services, clearing services and electronic execution and trading support products for global financial markets, our results of operations are impacted by a number of external market factors, including market volatility, transactional volumes and the organic growth or contraction of the derivative and cash markets in which we provide our brokerage services, the particular mix of transactional activity in our various products, the competitive and regulatory environment in the various jurisdictions and markets in which we operate and the commercial activity levels of the dealers, hedge funds, traders and other market participants to whom we provide our services. Outlined below are management’s observations of these external market factors during the most recent fiscal period.

 

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The factors outlined below are not the only factors that impacted our results of operations for the most recent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods.

 

Market Volumes and Volatility

 

                                                Recent Activity in Underlying Markets. We believe that overall market volatility was generally higher in the first quarter of 2015 than that of the same period in 2014, particularly in currencies and interest rate markets, which contributed to increased activity in those product categories.  Many dealer banks reported increases in their fixed income, currencies and commodities revenues for the first quarter of 2015, as compared to the same prior year quarter.

 

                                                The level of organic growth or contraction in the over-the-counter (“OTC”) derivatives markets we serve, as well as our market share within any particular market, has historically been difficult to measure on a timely basis, as there are only a few independent, objective measures of the outstanding notional amount of OTC derivatives, all of which are published retrospectively and do not measure transactional volumes. Therefore, to help gauge growth or contraction in any particular quarter or year, management has looked to the published results of large OTC derivatives dealers and certain futures and derivative exchanges as potential indicators of transactional activity in the related OTC derivative markets. In future periods, as SEFs and swap data repositories report their daily trading volumes on a more consistent basis pursuant to applicable Commodity Futures Trading Commission (“CFTC”) regulations, management expects such data to provide a better indication of overall market size and our relative market share within such derivative markets.

 

OTC market volumes were generally mixed across most asset classes during the first quarter of 2015, as compared to the same period in 2014. OTC markets continued to confront higher capital requirements and a low global short-term interest rate environment. However, the level of the Chicago Board Options Exchange Volatility Index (“VIX”), on average, was approximately 12% higher during the first quarter of 2015 compared with the same period in the prior year. The Bank of America Merrill Lynch (“BAML”) Global Financial Stress Index was also higher during the first quarter of 2015 when compared to the same prior year period. We believe that these indexes provide valuable proxies for the overall volatility across our four brokerage product categories. However, it should be noted that volatility events can affect each of our product categories to varying degrees.

 

Fixed Income Volumes. Our fixed income product category is comprised of revenues related to the brokerage of cash and derivative fixed income products. Fixed income volumes typically correlate with fluctuations in interest rates, market volatility and the level of bond issuances. Interest rates remained low during the first quarter of 2015, however, market volatility in this product category generally increased compared to the same period in 2014. Corporate bond issuances increased for the three months ended March 31, 2015 as compared to the same prior year period, with the Securities Industry and Financial Markets Association (“SIFMA”) reporting a 15% increase in corporate bond issuances, year over year.  In addition, SIFMA reported a 15% increase in average daily volumes (“ADV”) for U.S. corporate debt, but also reported that the average gross notional outstanding for credit default swaps declined, year over year.  Similarly, IntercontinentalExchange Inc. (“ICE”) reported an approximately 18% decline in credit default swap trade execution revenues compared with the same period in 2014. Furthermore, BrokerTec, an electronic trading platform in the fixed income market, reported decreased ADV of 7%, year over year.  In comparison, our fixed income volumes decreased on the majority of our desks in the first quarter of 2015 from the same period in 2014, largely as a result of decreased volumes for many fixed income derivative products. Overall, our margins in this product category generally declined.  Our brokerage revenues from fixed income products declined 19% in the three months ended March 31, 2015, as compared to the same period in the prior year.

 

Interest Rate and Foreign Exchange Volumes. Our financial product category primarily consists of revenues related to the brokerage of foreign exchange and interest rate derivative products. Foreign exchange volumes generally increased in the first quarter of 2015, compared with the same quarter in 2014, predominately driven by increased volatility during the period.  Global foreign exchange volatility, as measured by the Deutsche Bank FX Volatility Index, or CVIX, increased approximately 41% from the year-ago quarter. CME’s foreign exchange derivatives ADVs increased 17% in the first quarter of 2015, while EBS, an electronic trading platform for spot currencies, reported a 31% increase in volumes, year over year.  In addition, reported volumes for interest rate products generally increased in the three months ended March 31, 2015, as compared to the same period in 2014, with CME reporting a 12% increase in interest rate derivatives ADVs for the first quarter of 2015. Similarly, our volumes generally increased in the financial products category in the first quarter of 2015 from the same prior year period, while changes in our margins were relatively evenly mixed amongst desks in this product category.  Overall, our brokerage revenues from financial products increased 7% in the three months ended March 31, 2015, as compared to the same period in the prior year.

 

Equity Volumes. Our equity product category consists of revenues related to the brokerage of cash equity and equity derivative products.

 

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Cash equity and equity derivative volume indicators in Europe and the U.S. were generally mixed in the first quarter of 2015 compared with the same prior year period.  International Securities Exchange’s equity derivative volumes declined 22% in the first quarter of 2015 as compared to the same period in 2014, while Options Clearing Corporation reported a 9% decrease in cleared equity option contract volumes, year over year.  However, Eurex European equity derivative volumes increased 10% over that same period.  In addition, ADVs for NYSE’s U.S. cash products increased 10% during the first quarter of 2015, while ADVs for Euronext’s European cash products (the vast majority of which are cash equity products) increased 20%, year over year.  In comparison, our volumes and margins declined on a majority of our equity desks in the first quarter of 2015 as compared to the same prior year period. Our brokerage revenues from all equity products declined 13% in the first quarter of 2015, as compared to the same period in the prior year.

 

 Commodity Volumes. Our commodity product category consists of a wide range of energy products, and to a lesser extent, other commodity products. Energy derivatives volumes generally increased in the first quarter of 2015 as compared to the same period in 2014. CME’s Energy derivatives ADVs increased 26% in the three months ended March 31, 2015 compared with the same prior year period, while ICE’s Energy derivatives ADVs increased 13%, year over year. In addition, ICE reported an increase of approximately 5% in the quarterly rate per contract (“RPC”), while CME’s reported RPC declined approximately 8%. In comparison, the fluctuations in volumes and margins amongst our various energy product desks varied when comparing the first quarter of 2015 with the same prior year period. Our brokerage revenues from commodity products increased 5% in the first quarter of 2015, as compared to the same period in the prior year.

 

Competitive and Regulatory Environment

 

        Another major external market factor affecting our business and results of operations is competition, which may take the form of competitive pressure on the commissions we charge for our services or competition for qualified personnel with extensive experience in the specialized markets we serve. We currently compete for the services of skilled brokerage personnel with other wholesale market participants and, more broadly, we compete for the services of highly qualified technology development personnel. We believe that the demand for productive brokers has lessened in recent periods, as the wholesale brokerage industry has been impacted by lower trading volumes and sluggish trading conditions in certain markets we serve and due to the increased importance of technology. However, we believe that there continues to be increased competition to provide brokerage services to a smaller number of market participants in the near term as dealers have exited or reduced their proprietary trading operations.

 

        In addition, we believe that the continued regulatory uncertainty in certain markets has resulted in lower trading volumes and fewer participants in these markets. GFI Swaps Exchange LLC, our SEF platform, was temporarily registered as a SEF by the CFTC in September 2013 and many of the rules governing the operation of a SEF for swaps in the U.S. became effective on October 2, 2013. The requirements for SEF trading are still developing and regulations are still being interpreted and analyzed, including their cross-border application. This continues to create uncertainty and depressed volumes, as market participants work to understand how to structure their global business and trading. Additionally, the SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. However, in the long run, we remain optimistic that the regulatory reform of recent years, including requirements for enhanced regulatory transparency, central clearing and efficient execution, will benefit and enable growth in the global derivatives markets.

 

Technology Development

 

        Over the past few years, we have continued the expansion of our proprietary electronic trade execution capabilities for our SEF and non-SEF businesses, as well as the number of users of our hybrid electronic trading platforms. We continue to believe that our capabilities have provided us with a market leading position to address customer needs and service our markets in light of new regulatory requirements.

 

        The provision of electronic trade execution requires increasingly complex systems and infrastructures and new regulations may require new business models. Our continued success will depend on our ability to enhance and improve our existing platforms and services, develop and/or license new products and technologies that address the increasingly sophisticated needs of the markets and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

 

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Financial Overview

 

Our results of operations are significantly impacted by the amount of our revenues and the amount of compensation and benefits we provide to our employees. The following factors had a significant impact on our revenues and employee costs during the three-month period ended March 31, 2015:

 

Our total revenues decreased 3.8% to $231.5 million for the three months ended March 31, 2015 from $240.7 million for the three months ended March 31, 2014. The main factors contributing to this decrease in our revenues were:

 

·                  Decreased clearing services revenues primarily due to the disposal of our Kyte clearing business during March 2015;

·                  The adverse impact the strengthening of the U.S. Dollar against the Euro and British Pound had on several of our revenue streams;

·                  Lower trading volumes in certain fixed income derivatives markets in which we provide our services; and

 

·                  The reduction in broker personnel headcount.

 

Partially offsetting the above factors were the following positive factors that affected our brokerage and other revenues, including:

 

·                  Higher volatility levels in foreign exchange markets, which contributed to increased brokerage revenues in our financial products category;

·                  An increase in Other revenues as a result of a legal settlement gain during the first quarter of 2015; and

 

·                  Increased brokerage revenues from certain European commodity markets in which we provide our services.

 

 

The most significant component of our cost structure is employee compensation and benefits, which includes salaries, amortization of sign-on and retention bonuses, incentive compensation and related employee benefits and taxes.  Our compensation and employee benefits expense increased 6.9% to $147.2 million for the three months ended March 31, 2015 from $137.7 million for the three months ended March 31, 2014.  The increase was predominantly due to (i) $11.5 million of incremental compensation costs related to the modification of outstanding RSUs (as discussed in Note 11 of the Condensed Consolidated Financial Statements) and (ii) a $9.2 million increase in severance costs mostly as a result of the BGC acquisition.

 

Our compensation and employee benefits for all employees have both a fixed and a variable component. Base salaries and benefit costs are primarily fixed for all employees, while performance bonuses constitute the variable portion of our compensation and employee benefits. Within overall compensation and employee benefits, the employment cost of our brokerage personnel is the key component. Bonuses for brokerage personnel are primarily based on individual performance and/or the operating results of their related brokerage desk. For many of our brokerage employees, bonuses constitute a significant component of their overall compensation. Broker performance bonuses increased to $46.7 million for the three months ended March 31, 2015 from $45.8 million for the three months ended March 31, 2014.

 

Further, we may pay sign-on bonuses to certain newly-hired brokers and retention bonuses to certain of our existing brokers who agree to long-term employment agreements. These bonuses may be paid in the form of cash, deferred cash, long term equity or forgivable loans, or a combination of the foregoing, and are typically expensed over the term of the related employment agreement for cash bonuses and forgivable loans and the related service period for deferred cash and long term equity, which is generally two to four years. These employment agreements typically contain provisions requiring the repayment of all or a portion of the cash payment or forgivable loan and forfeiture provisions for unvested deferred cash or equity should the employee voluntarily terminate his or her employment or if the employee’s employment is terminated for cause during the initial term of the agreement. Sign-on and retention bonuses, when granted, also increase the fixed component of our compensation and employee benefits expense for the remainder of the term over which such bonus is earned by the employee. Compensation expense resulting from the amortization of broker sign-on and retention bonuses was $6.2 million for the three months ended March 31, 2015, as compared to $8.3 million for the three months ended March 31, 2014.

 

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Results of Consolidated Operations

 

The following table sets forth our condensed consolidated results of operations for the periods indicated:

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2015

 

 

 

2014

 

 

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

Agency commissions

 

 

$

117,991

 

 

 

 $

121,415

 

Principal transactions

 

 

47,010

 

 

 

51,689

 

Total brokerage revenues

 

 

165,001

 

 

 

173,104

 

Clearing services revenues

 

 

21,338

 

 

 

34,164

 

Interest income from clearing services

 

 

297

 

 

 

528

 

Equity in net earnings of unconsolidated businesses

 

 

1,564

 

 

 

2,554

 

Software, analytics and market data

 

 

25,756

 

 

 

25,765

 

Other income, net

 

 

17,566

 

 

 

4,624

 

Total revenues

 

 

231,522

 

 

 

240,739

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

 

20,495

 

 

 

32,640

 

Transaction fees on brokerage services

 

 

5,283

 

 

 

5,503

 

Interest expense from clearing services

 

 

128

 

 

 

169

 

Total interest and transaction-based expenses

 

 

25,906

 

 

 

38,312

 

Revenues, net of interest and transaction-based expenses

 

 

205,616

 

 

 

202,427

 

Expenses

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

147,217

 

 

 

137,697

 

Communications and market data

 

 

12,042

 

 

 

13,347

 

Travel and promotion

 

 

6,383

 

 

 

7,779

 

Rent and occupancy

 

 

6,927

 

 

 

8,086

 

Depreciation and amortization

 

 

7,321

 

 

 

8,596

 

Professional fees

 

 

18,436

 

 

 

6,171

 

Interest on borrowings

 

 

7,868

 

 

 

7,784

 

Merger termination fees

 

 

24,728

 

 

 

 

Other expenses

 

 

6,233

 

 

 

7,464

 

Total other expenses

 

 

237,155

 

 

 

196,924

 

(Loss) income before (benefit from) provision for income taxes

 

 

(31,539

)

 

 

5,503

 

(Benefit from) provision for income taxes

 

 

(12,392

)

 

 

1,094

 

Net (loss) income before attribution to non-controlling stockholders

 

 

(19,147

)

 

 

4,409

 

Less: Net income attributable to non-controlling interests

 

 

776

 

 

 

406

 

GFI’s net (loss) income

 

 

$

(19,923

)

 

 

$

4,003

 

 

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The following table sets forth our condensed consolidated results of operations as a percentage of our revenues, net of interest and transaction-based expenses, for the periods indicated:

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2015

 

 

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

Agency commissions

 

 

57.4

%

 

 

 

60.0

%

Principal transactions

 

 

22.9

 

 

 

 

25.5

 

Total brokerage revenues

 

 

80.3

 

 

 

 

85.5

 

Clearing services revenues

 

 

10.4

 

 

 

 

16.9

 

Interest income from clearing services

 

 

0.1

 

 

 

 

0.2

 

Equity in net earnings of unconsolidated businesses

 

 

0.8

 

 

 

 

1.3

 

Software, analytics and market data

 

 

12.5

 

 

 

 

12.7

 

Other income, net

 

 

8.5

 

 

 

 

2.3

 

Total revenues

 

 

112.6

 

 

 

 

118.9

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

 

9.9

 

 

 

 

16.1

 

Transaction fees on brokerage services

 

 

2.6

 

 

 

 

2.7

 

Interest expense from clearing services

 

 

0.1

 

 

 

 

0.1

 

Total interest and transaction-based expenses

 

 

12.6

 

 

 

 

18.9

 

Revenues, net of interest and transaction-based expenses

 

 

100.0

%

 

 

 

100.0

%

Expenses

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

71.6

 

 

 

 

68.0

 

Communications and market data

 

 

5.8

 

 

 

 

6.6

 

Travel and promotion

 

 

3.1

 

 

 

 

3.8

 

Rent and occupancy

 

 

3.4

 

 

 

 

4.0

 

Depreciation and amortization

 

 

3.6

 

 

 

 

4.3

 

Professional fees

 

 

9.0

 

 

 

 

3.1

 

Interest on borrowings

 

 

3.8

 

 

 

 

3.8

 

Merger termination fees

 

 

12.0

 

 

 

 

0.0

 

Other expenses

 

 

3.0

 

 

 

 

3.7

 

Total other expenses

 

 

115.3

%

 

 

 

97.3

%

(Loss) income before (benefit from) provision for income taxes

 

 

(15.3

)

 

 

 

2.7

 

(Benefit from) provision for income taxes

 

 

(6.0

)

 

 

 

0.5

 

Net (loss) income before attribution to non-controlling stockholders

 

 

(9.3

)

 

 

 

2.2

 

Less: Net income attributable to non-controlling interests

 

 

0.4

 

 

 

 

0.2

 

GFI’s net (loss) income

 

 

(9.7

)%

 

 

 

2.0

%

 

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Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

 

Net Loss

 

GFI’s net loss was $19.9 million for the three months ended March 31, 2015 compared to net income of $4.0 million for the same period in 2014. We generated total revenues of $231.5 million for the first quarter of 2015 compared with $240.7 million for the same period in the prior year. The net decrease in total revenues reflected lower clearing services revenues and lower brokerage revenues, partially offset by an increase in other revenues, primarily due to the factors set forth above under heading “Financial Overview.”

 

Total interest and transaction-based expenses decreased by $12.4 million for the three months ended March 31, 2015 from the same quarter in 2014. The decrease was primarily due to a decline in transaction fees on clearing services largely as a result of the disposal of the Kyte clearing business during March 2015.

 

Total expenses, excluding interest and transaction-based expenses, were $237.2 million for the three months ended March 31, 2015 compared with $196.9 million in the same prior year period.  The increase was primarily attributable to the CME Merger termination fee, an increase in compensation and employee benefits expense and merger and acquisition related professional fees.

 

We recorded a benefit from income taxes of $12.4 million for the three months ended March 31, 2015 as compared to a provision of $1.1 million for the three months ended March 31, 2014. The change was primarily due to the factors set forth below under the section “Income Taxes.”

 

Revenues

 

The following table sets forth the changes in revenues for the three months ended March 31, 2015 as compared to the same period in 2014 (dollars in thousands, except percentage data):

 

 

 

For the Three Months Ended March 31,

 

 

 

2015

 

%*

 

 

2014

 

%*

 

 

Increase (Decrease)

 

%**

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

$

41,850

 

20.4

%

 $

51,735

 

25.6

%

 $

(9,885

)

(19.1

)%

Equity

 

26,211

 

12.7

 

 

30,043

 

14.8

 

 

(3,832

)

(12.8

)

Financial

 

55,035

 

26.8

 

 

51,539

 

25.5

 

 

3,496

 

6.8

 

Commodity

 

41,905

 

20.4

 

 

39,787

 

19.6

 

 

2,118

 

5.3

 

Total brokerage revenues

 

165,001

 

80.2

 

 

173,104

 

85.5

 

 

(8,103

)

(4.7

)

Clearing services revenues

 

21,338

 

10.4

 

 

34,164

 

16.9

 

 

(12,826

)

(37.5

)

Other revenues

 

45,183

 

22.0

 

 

33,471

 

16.5

 

 

11,712

 

35.0

 

Total revenues

 

231,522

 

112.6

 

 

240,739

 

118.9

 

 

(9,217

)

(3.8

)

Total interest and transaction-based expenses

 

25,906

 

12.6

 

 

38,312

 

18.9

 

 

(12,406

)

(32.4

)

Revenues, net of interest and
transaction-based expenses

$

205,616

 

100.0

%

 $

202,427

 

100.0

%

 $

3,189

 

1.6

%

 


*                                         Denotes % of revenues, net of interest and transaction-based expenses

**                                  Denotes % change of dollar amount of revenue for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014

 

Brokerage Revenues—We offer our brokerage services in four broad product categories: fixed income, equity, financial, and commodity. Below is a discussion of our brokerage revenues by product category for the three months ended March 31, 2015 as compared to the same period in 2014.

 

·                  Broker productivity (defined as total brokerage revenues during the period divided by average monthly brokerage personnel headcount for the period) across all product categories for the three months ended March 31, 2015 increased approximately 2%, as compared to the same prior year period.

 

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·                  Fixed income product brokerage revenues decreased $9.9 million, or 19.1%, for the three months ended March 31, 2015 compared to the same period in 2014.  Revenues from fixed income derivative and cash products decreased approximately 24.1% and 16.1%, respectively, year over year.  Our fixed income revenues decreased due, in part, to lower fixed income derivative trading volumes amid the continued low global interest rate environment, as well as reduced brokerage personnel headcount in this product category. Our average monthly brokerage personnel headcount for fixed income products decreased by 26 to 262 employees for the three months ended March 31, 2015.

 

·                  Equity product brokerage revenues decreased $3.8 million, or 12.8%, for the three months ended March 31, 2015 compared with the same prior year period.  The decrease in revenues was largely attributable to reduced trading volumes for certain equity derivative products and reduced brokerage personnel headcount in this product category.  Our average monthly brokerage personnel headcount for equity products decreased by 22 to 148 employees for the three months ended March 31, 2015.

 

·                  The increase in financial product brokerage revenues of $3.5 million, or 6.8%, for the three months ended March 31, 2015 compared with the same prior year period, was largely due to higher currency market volatility during 2015.  Our average monthly brokerage personnel headcount for financial products decreased by 23 to 340 employees for the three months ended March 31, 2015.

 

·                  Commodity product brokerage revenues increased $2.1 million, or 5.3%, for the three months ended March 31, 2015 compared to the same prior year quarter.  The increase was primarily attributable to an increase in our commodities brokerage revenues in Europe, including an increase in revenues derived from certain energy derivative products.  Our average monthly brokerage personnel headcount for commodity products increased by 1 to 264 employees for the three months ended March 31, 2015.

 

Clearing Services Revenue

 

·                  Clearing services revenues decreased by $12.8 million, or 37.5%, in the first quarter of 2015 compared to the same prior year period, primarily due to the disposal of the Kyte clearing business during March 2015.

 

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Other Revenues

 

·                  Other revenues were comprised of the following (dollars in thousands):

 

 

For the Three Months Ended March 31,

 

2015

 

2014

 

Increase

(Decrease)

 

%*

 

Software, analytics and market data

$

25,756

 

$

25,765

 

$

(9

)

(0.0

)%

Equity in net earnings of unconsolidated businesses

 

1,564

 

 

2,554

 

 

(990

)

(38.8

)

Remeasurement of foreign currency transactions and balances

 

(1,038

)

 

(92

)

 

(946

)

1,028.3

 

Net realized and unrealized gains from foreign currency hedges

 

3,601

 

 

202

 

 

3,399

 

1,682.7

 

Interest income on short-term investments

 

78

 

 

124

 

 

(46

)

(37.1

)

Interest income from clearing services

 

297

 

 

528

 

 

(231

)

(43.8

)

Other

 

14,925

 

 

4,390

 

 

10,535

 

240.0

 

Total other revenues

$

45,183

 

$

33,471

 

$

11,712

 

35.0

 %

 


*                             Denotes % change of dollar amount of revenue for the three months ended March 31, 2015 as compared to the three months ended March 31, 2015

 

Other revenues increased by $11.7 million for the three months ended March 31, 2015 as compared to the same quarter in 2014. The increase was primarily due to an increase in Other, as a result of a legal settlement gain during the first quarter of 2015. The increase in Other revenues was also due, in part, to an increase in net realized and unrealized gains largely associated with foreign currency forward contracts used to hedge revenues and certain foreign currency assets, and was primarily driven by the strengthening of the U.S. Dollar against the British Pound.  In addition, the organic growth of our Trayport subsidiary, whose software revenues are included in Software, analytics and market data, was more than offset by the adverse impact the strengthening of the U.S. Dollar against the British Pound had on its reported revenues.

 

Interest and Transaction-Based Expenses

 

·                  The decrease in total interest and transaction-based expenses of $12.4 million in the three months ended March 31, 2015 as compared to the same period in 2014 was primarily due to the disposal of the Kyte clearing business during March 2015.

 

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Expenses

 

The following table sets forth the changes in expenses for the three months ended March 31, 2015 as compared to the same period in 2014 (dollars in thousands, except percentage data):

 

 

 

For the Three Months Ended March 31,

 

 

 

2015

 

%*

 

2014

 

%*

 

 

Increase (Decrease)

 

%**

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 $

147,217

 

71.6

%

 $

137,697

 

68.0

%

 $

9,520

 

6.9

%

Communications and market data

 

 

12,042

 

5.8

 

 

13,347

 

6.6

 

 

(1,305

)

(9.8

)

Travel and promotion

 

 

6,383

 

3.1

 

 

7,779

 

3.8

 

 

(1,396

)

(17.9

)

Rent and occupancy

 

 

6,927

 

3.4

 

 

8,086

 

4.0

 

 

(1,159

)

(14.3

)

Depreciation and amortization

 

 

7,321

 

3.6

 

 

8,596

 

4.3

 

 

(1,275

)

(14.8

)

Professional fees

 

 

18,436

 

9.0

 

 

6,171

 

3.1

 

 

12,265

 

198.8

 

Interest on borrowings

 

 

7,868

 

3.8

 

 

7,784

 

3.8

 

 

84

 

1.1

 

Merger termination fees

 

 

24,728

 

12.0

 

 

 

0.0

 

 

24,728

 

100.0

 

Other expenses

 

 

6,233

 

3.0

 

 

7,464

 

3.7

 

 

(1,231

)

(16.5

)

Total other expenses

 

 $

237,155

 

115.3

%

 $

196,924

 

97.3

%

 $

40,231

 

20.4

 %

 


*                                         Denotes % of revenues, net of interest and transaction-based expenses

**                                  Denotes % change of dollar amount of expense for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014

 

Compensation and Employee Benefits

 

·                  Compensation and employee benefits expense increased $9.5 million for the three months ended March 31, 2015 as compared with the same prior year period. The increase was predominantly due to (i) $11.5 million of incremental compensation costs related to the modification of outstanding RSUs (as discussed in Note 11 of the Condensed Consolidated Financial Statements) and (ii) a $9.2 million increase in severance costs mostly as a result of the BGC acquisition. Partially offsetting these increases was (i) lower broker performance bonus expense resulting from lower brokerage revenues, (ii) lower broker salary expense on reduced brokerage personnel headcount and (iii) a decrease in amortization expense on previously paid sign-on and retention bonuses.

 

·                  Total compensation and employee benefits as a percentage of revenues, net of interest and transaction-based expenses, increased to 71.6% for the three months ended March 31, 2015 compared to 68.0% for the same period in 2014, though the increase was largely due to non-recurring charges, including incremental compensation costs related to the modification of outstanding RSUs and severance costs related to the BGC acquisition.

 

·                  Performance bonus expense represented 42.2% and 39.1% of total compensation and employee benefits expense for the three months ended March 31, 2015 and 2014, respectively.  This increase was primarily driven by the incremental compensation costs associated with the modification of our RSUs. Additionally, sign-on and retention bonus expense, which includes the amortization of cash sign-on and retention bonuses initially paid in prior periods, represented 4.3% and 6.3% of total compensation and employee benefits expense for the three months ended March 31, 2015 and 2014, respectively.

 

All Other Expenses

 

·                  As discussed in Note 2 to the Condensed Consolidated Financial Statements, pursuant to the terms of the CME Merger Agreement, we were required to pay CME a termination fee of $24.7 million (including reimbursement to CME of $7.1 million of its merger related expenses) during the three months ended March 31, 2015.

 

·                  The increase in professional fees of $12.3 million was primarily attributable to merger and acquisition related services provided to the Company during the first quarter of 2015.

 

·                  The decrease in travel and promotion expense of $1.4 million was due, in large part, to the effect of cost savings initiatives.

 

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Table of Contents

 

·                  The decrease in communications and market data expense of $1.3 million was primarily attributable to lower expenditures on price quotation systems, due, in part, to lower broker headcount.

 

·                  The decrease in depreciation and amortization expense of $1.3 million in the first quarter of 2015 was largely due lower intangible amortization expense as a result of the disposal of the Kyte clearing business.

 

 

·                  The decrease in rent and occupancy expense of $1.2 million was due to a combination of individually small items, including a decrease in rental obligations due to the disposal of the Kyte clearing business.

 

Income Taxes

 

·                  We recorded a benefit from income taxes of $12.4 million for the three months ended March 31, 2015, as compared to a provision for income taxes of $1.1 million for the three months ended March 31, 2014.  The change from a provision for income taxes to a benefit from income taxes was primarily due to an allowable U.S. income tax deduction as a result of the merger termination fee paid to CME following the termination of the CME Merger Agreement in January 2015. The effective tax rates for both periods were impacted by a geographical mix of pre-tax profits and losses.

 

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Table of Contents

 

Results of Segment Operations

 

Based on the nature of our operations, products and services in each geographic region, we determined that we have four reportable segments: (i) Americas Brokerage, (ii) Europe, Middle East and Africa (“EMEA”) Brokerage, (iii) Asia Brokerage and (iv) Clearing and Backed Trading. Our brokerage operations provide brokerage services in four broad product categories: fixed income, financial, equity and commodity. Our Clearing and Backed Trading segment encompasses our clearing, risk management, settlement and other back-office services, as well as the capital we provide to start-up trading groups, small hedge funds, market-makers and individual traders. All Other includes the results of our software, analytics and market data operations. All Other also includes revenues and expenses that are not directly assignable to one of our reportable segments, primarily consisting of indirect costs related to our brokerage segments as well as all our corporate business activities.

 

Segment Results for the Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

 

The following tables summarize our Total revenues, Revenues, net of interest and transaction-based expenses, Other expenses and Income (loss) before income taxes by segment (dollars in thousands):

 

 

 

Three Months Ended March 31, 2015

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

57,552

 

 $

84,500

 

 $

20,757

 

 $

28,253

 

 $

40,460

 

 $

231,522

 

Revenues, net of interest and
transaction-based expenses

 

54,926

 

81,654

 

20,663

 

7,217

 

41,156

 

205,616

 

Other expenses

 

38,446

 

54,032

 

13,004

 

5,916

 

125,757

 

237,155

 

Income (loss) before income taxes

 

16,480

 

27,622

 

7,659

 

1,301

 

(84,601

)

(31,539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

61,698

 

 $

89,300

 

 $

19,223

 

 $

44,293

 

 $

26,225

 

 $

240,739

 

           Revenues, net of interest and
transaction-based expenses

 

58,752

 

86,427

 

19,103

 

11,140

 

27,005

 

202,427

 

Other expenses

 

44,410

 

57,723

 

13,471

 

10,209

 

71,111

 

196,924

 

Income (loss) before income taxes

 

14,342

 

28,704

 

5,632

 

931

 

(44,106

)

5,503

 

 

Total Revenues

 

·                  Total revenues for Americas Brokerage and EMEA Brokerage decreased $4.1 million, or 6.7%, and $4.8 million, or 5.4%, respectively, for the first quarter of 2015. Total revenues for Asia Brokerage increased $1.5 million, or 8.0%, for the three months ended March 31, 2015. Total revenues for our three brokerage segments in total decreased by $7.4 million, or 4.4%, to $162.8 million for the three months ended March 31, 2015. The decrease in total revenues for our brokerage segments was primarily due to the factors described above under “Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014”.

 

·                  Total revenues for Clearing and Backed Trading decreased $16.0 million, or 36.2%, for the three months ended March 31, 2015. The decrease was primarily due to the disposal of the Kyte clearing business in March 2015.

 

·                  Total revenues for All Other increased by $14.2 million, or 54.3%, for the three months ended March 31, 2015. This increase was primarily due to (i) a legal settlement gain during the first quarter of 2015 and (ii) net realized and unrealized gains largely associated with foreign currency forward contracts used to hedge revenues and certain foreign currency assets.

 

Total interest and transaction-based expenses

 

·                  Total interest and transaction-based fees for our three brokerage segments decreased to $5.6 million for the three months ended March 31, 2015, as compared to $5.9 million for the same period in 2014.

 

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·                  Total interest and transaction-based fees for Clearing and Backed Trading decreased by $12.2 million to $21.0 million for the three months ended March 31, 2015 from $33.2 million for the prior year first quarter, primarily due to the disposal of the Kyte clearing business in March 2015.

 

Other Expenses

 

·                  Other expenses for Americas, EMEA and Asia Brokerages decreased $6.0 million, or 13.4%, $3.7 million, or 6.4%, and $0.5 million, or 3.5%, respectively, for the first quarter of 2015. The decrease for the Americas and EMEA brokerage segments was largely due to a decrease in compensation and employee benefits expense resulting from (i) lower cash performance bonus expense on lower brokerage revenues and (ii) lower broker salary expense on reduced brokerage headcount.  The decrease for the Asia brokerage segment was primarily due to a decrease in compensation and employee benefits expense resulting from lower broker salary expense on reduced brokerage headcount. Total Other expenses for our three brokerage segments decreased by $10.1 million, or 8.8%, to $105.5 million for the three months ended March 31, 2015.

 

·                  For our brokerage segments, we record certain direct expenses, including compensation and employee benefits; however, we do not allocate certain expenses that are managed separately at the corporate level to these operating segments. The unallocated costs including rent and occupancy, depreciation and amortization, professional fees, interest and other expenses are included in the expenses for All Other described below. Management does not believe that allocating these costs to our brokerage segments is optimal for evaluating the performance of its brokerage segments.

 

·                  Other expenses for Clearing and Backed Trading decreased $4.3 million, or 42.1% for the three months ended March 31, 2015. The decrease was primarily due to the disposal of the Kyte clearing business during March 2015.

 

·                  Other expenses for All Other increased by $54.6 million, or 76.8% for the three months ended March 31, 2015. The increase was primarily attributable to (i) the $24.7 million merger termination fee which we were required to pay to CME upon the termination of the merger in January 2015, (ii) $11.5 million of incremental compensation costs related to the modification of outstanding RSUs during the first quarter of 2015 and (iii) an increase in merger and acquisition related professional fees.

 

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Table of Contents

 

Quarterly Results of Operations

 

The following table sets forth, by quarter, our unaudited statement of operations data for the period from April 1, 2013 to March 31, 2015. Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business.

 

 

 

Quarter Ended

 

 

 

March 31,
2015

 

December
31, 2014

 

September
30, 2014

 

June 30,
2014

 

March 31,
2014

 

December
31, 2013

 

September 30,
2013

 

June 30,
2013

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency commissions

 

$

117,991

 

$

111,194

 

$

112,303

 

$

109,692

 

$

121,415

 

$

103,278

 

$

109,365

 

$

122,476

 

Principal transactions

 

47,010

 

41,240

 

41,453

 

45,948

 

51,689

 

40,246

 

41,841

 

51,562

 

Total brokerage revenues

 

165,001

 

152,434

 

153,756

 

155,640

 

173,104

 

143,524

 

151,206

 

174,038

 

Clearing services revenues

 

21,338

 

26,359

 

26,373

 

28,602

 

34,164

 

28,911

 

32,722

 

39,439

 

Interest income from clearing services

 

297

 

550

 

579

 

572

 

528

 

570

 

455

 

431

 

Equity in net earnings of unconsolidated businesses

 

1,564

 

2,925

 

639

 

1,493

 

2,554

 

1,241

 

1,566

 

2,300

 

Software, analytics and market data

 

25,756

 

25,543

 

26,095

 

25,595

 

25,765

 

24,100

 

22,472

 

21,808

 

Other income, net

 

17,566

 

4,079

 

2,859

 

6,203

 

4,624

 

4,001

 

4,012

 

4,262

 

Total revenues

 

231,522

 

211,890

 

210,301

 

218,105

 

240,739

 

202,347

 

212,433

 

242,278

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

20,495

 

24,102

 

24,786

 

26,936

 

32,640

 

27,213

 

31,620

 

38,424

 

Transaction fees on brokerage services

 

5,283

 

4,832

 

4,330

 

4,655

 

5,503

 

4,183

 

4,430

 

5,335

 

Interest expense from clearing services

 

128

 

261

 

206

 

185

 

169

 

180

 

143

 

87

 

Total interest and transaction-based expenses

 

25,906

 

29,186

 

29,322

 

31,776

 

38,312

 

31,576

 

36,193

 

43,846

 

Revenues, net of interest and transaction-based expenses

 

205,616

 

182,704

 

180,979

 

186,329

 

202,427

 

170,771

 

176,240

 

198,432

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

147,217

 

121,112

 

122,720

 

130,003

 

137,697

 

123,485

 

121,109

 

134,613

 

Communications and market data

 

12,042

 

12,620

 

13,335

 

13,520

 

13,347

 

12,798

 

13,747

 

13,743

 

Travel and promotion

 

6,383

 

8,341

 

7,184

 

7,961

 

7,779

 

7,555

 

7,380

 

7,857

 

Rent and occupancy

 

6,927

 

7,488

 

7,835

 

7,890

 

8,086

 

6,228

 

7,901

 

7,039

 

Depreciation and amortization

 

7,321

 

8,461

 

8,480

 

8,797

 

8,596

 

8,333

 

8,320

 

8,334

 

Professional fees

 

18,436

 

11,976

 

13,650

 

10,107

 

6,171

 

5,703

 

5,712

 

6,385

 

Interest on borrowings

 

7,868

 

7,905

 

8,466

 

8,143

 

7,784

 

7,822

 

7,612

 

7,175

 

Merger termination fees

 

24,728

 

 

 

 

 

 

 

 

Impairment of goodwill and long-lived assets

 

 

4,061

 

 

121,619

 

 

19,602

 

 

 

Other expenses

 

6,233

 

6,595

 

6,825

 

7,237

 

7,464

 

7,116

 

5,615

 

5,699

 

Total other expenses

 

237,155

 

188,559

 

188,495

 

315,277

 

196,924

 

198,642

 

177,396

 

190,845

 

(Loss) income before (benefit from) provision for income taxes

 

(31,539

)

(5,855

)

(7,516

)

(128,948

)

5,503

 

(27,871

)

(1,156

)

7,587

 

(Benefit from) provision for income taxes

 

(12,392

)

276

 

(56

)

(31,277

)

1,094

 

2,994

 

(1,127

)

719

 

Net (loss) income before attribution to non-controlling stockholders

 

(19,147

)

(6,131

)

(7,460

)

(97,671

)

4,409

 

(30,865

)

(29

)

6,868

 

Less: Net income attributable to non-controlling interests

 

776

 

428

 

231

 

125

 

406

 

37

 

432

 

177

 

GFI’s net (loss) income

 

$

(19,923

)

$

(6,559

)

$

(7,691

)

$

(97,796

)

$

4,003

 

$

(30,902

)

$

(461

)

$

6,691

 

 

56



Table of Contents

 

The following table sets forth our quarterly results of operations as a percentage of our Revenues, net of interest and transaction-based expenses, for the indicated periods:

 

 

 

Quarter Ended

 

 

 

March 31,
2015

 

December 31,
2014

 

September 30,
2014

 

June 30,
2014

 

March 31,
2014

 

December 31,
2013

 

September 30,
2013

 

June 30,
2013

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency commissions

 

57.4

%

60.9

%

62.1

%

58.9

%

60.0

%

60.5

%

62.1

%

61.7

%

Principal transactions

 

22.9

 

22.6

 

22.9

 

24.7

 

25.5

 

23.6

 

23.7

 

26.0

 

Total brokerage revenues

 

80.3

 

83.5

 

85.0

 

83.6

 

85.5

 

84.1

 

85.8

 

87.7

 

Clearing services revenues

 

10.4

 

14.4

 

14.6

 

15.4

 

16.9

 

16.9

 

18.5

 

19.9

 

Interest income from clearing services

 

0.1

 

0.3

 

0.3

 

0.3

 

0.2

 

0.3

 

0.3

 

0.2

 

Equity in net earnings of unconsolidated businesses

 

0.8

 

1.6

 

0.3

 

0.8

 

1.3

 

0.7

 

0.9

 

1.2

 

Software, analytics and market data

 

12.5

 

14.0

 

14.4

 

13.7

 

12.7

 

14.1

 

12.7

 

11.0

 

Other income, net

 

8.5

 

2.2

 

1.6

 

3.3

 

2.3

 

2.4

 

2.3

 

2.1

 

Total revenues

 

112.6

 

116.0

 

116.2

 

117.1

 

118.9

 

118.5

 

120.5

 

122.1

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

9.9

 

13.2

 

13.7

 

14.5

 

16.1

 

15.9

 

17.9

 

19.4

 

Transaction fees on brokerage services

 

2.6

 

2.6

 

2.4

 

2.5

 

2.7

 

2.5

 

2.5

 

2.7

 

Interest expense from clearing services

 

0.1

 

0.2

 

0.1

 

0.1

 

0.1

 

0.1

 

0.1

 

0.0

 

Total interest and transaction-based expenses

 

12.6

 

16.0

 

16.2

 

17.1

 

18.9

 

18.5

 

20.5

 

22.1

 

Revenues, net of interest and transaction based expenses

 

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

71.6

 

66.3

 

67.8

 

69.8

 

68.0

 

72.3

 

68.7

 

67.8

 

Communications and market data

 

5.8

 

6.9

 

7.3

 

7.2

 

6.6

 

7.5

 

7.8

 

6.9

 

Travel and promotion

 

3.1

 

4.6

 

4.0

 

4.3

 

3.8

 

4.4

 

4.2

 

4.0

 

Rent and occupancy

 

3.4

 

4.1

 

4.3

 

4.2

 

4.0

 

3.6

 

4.5

 

3.5

 

Depreciation and amortization

 

3.6

 

4.6

 

4.7

 

4.7

 

4.3

 

4.9

 

4.7

 

4.2

 

Professional fees

 

9.0

 

6.6

 

7.5

 

5.4

 

3.1

 

3.3

 

3.3

 

3.2

 

Interest on borrowings

 

3.8

 

4.3

 

4.7

 

4.4

 

3.8

 

4.6

 

4.3

 

3.6

 

Merger termination fees

 

12.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

Impairment of goodwill and long-lived assets

 

0.0

 

2.2

 

0.0

 

65.3

 

0.0

 

11.5

 

0.0

 

0.0

 

Other expenses

 

3.0

 

3.6

 

3.8

 

3.9

 

3.7

 

4.2

 

3.2

 

2.9

 

Total other expenses

 

115.3

%

103.2

%

104.1

%

169.2

%

97.3

%

116.3

%

100.7

%

96.1

%

(Loss) income before (benefit from) provision for income taxes

 

(15.3

)

(3.2

)

(4.1

)

(69.2

)

2.7

 

(16.3

)

(0.7

)

3.9

 

(Benefit from) provision for income taxes

 

(6.0

)

0.2

 

0.0

 

(16.8

)

0.5

 

1.8

 

(0.6

)

0.4

 

Net (loss) income before attribution to non-controlling stockholders

 

(9.3

)

(3.4

)

(4.1

)

(52.4

)

2.2

 

(18.1

)

(0.1

)

3.5

 

Less: Net income attributable to non-controlling interests

 

0.4

 

0.2

 

0.1

 

0.1

 

0.2

 

0.0

 

0.2

 

0.1

 

GFI’s net (loss) income

 

(9.7

)%

(3.6

)%

(4.2

)%

(52.5

)%

2.0

%

(18.1

)%

(0.3

)%

3.4

%

 

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Table of Contents

 

Liquidity and Capital Resources

 

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less. At March 31, 2015, we had $131.9 million of cash and cash equivalents compared to $183.4 million at December 31, 2014. Included in this amount are $70.0 million and $110.8 million of cash and cash equivalents held by subsidiaries outside of the United States at March 31, 2015 and December 31, 2014, respectively. Excluded from the preceding balances as of March 31, 2015 and December 31, 2014  is $12.2 million and $38.1 million, respectively, of cash and cash equivalents classified within Assets held for sale on the Condensed Consolidated Statements of Financial Condition (See Note 4 to the Condensed Consolidated Financial Statements for further information). We have historically asserted the intent to indefinitely reinvest, with very limited exceptions, the unremitted profits of our foreign subsidiaries.  We continue to assert that our historic profits earned in foreign subsidiaries are indefinitely reinvested, however, management has concluded that profits earned in certain overseas subsidiaries commencing from January 1, 2013 will ultimately be repatriated to the United States. For profits earned during the three months ended March 31, 2015 that are not permanently reinvested, the deferred tax liability for those earnings is zero due to the excess foreign tax credits that will be generated as a result of repatriation.

 

Included within Receivables from brokers, dealers and clearing organizations are cash, including deposits, held at clearing organizations and exchanges to facilitate settlement and clearance of matched principal transactions, and spreads on matched principal transactions that have not yet been remitted from clearing organizations and exchanges. We estimate that cash held at clearing organizations, net of amounts owed to our clearing customers and net of clearing customer cash included within Cash and cash equivalents, was $59.6 million and $44.4 million as of March 31, 2015 and December 31, 2014, respectively.

 

The following table summarizes our cash position as of March 31, 2015 and December 31, 2014, respectively.

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

131,870

 

$

183,432

 

Cash held at clearing organizations, net of customer cash (1) 

 

59,595

 

44,358

 

Cash included in Assets held for sale

 

14,279

 

40,065

 

Total balance sheet cash

 

$

205,744

 

$

267,855

 

 


(1)         As the transaction to sell KGL was completed in March 2015 there was no balance due to our clearing customers or any clearing customer cash as of March 31, 2015.

 

We believe that, based on current levels of operations, our cash from operations, together with our current cash holdings and available borrowings under our credit agreement with Bank of America N.A. and certain other lenders (the “Credit Agreement”), will be sufficient to fund our operations for at least the next twelve months. Poor financial results, unanticipated expenses or unanticipated acquisitions or strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that the financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.

 

Sources and Uses of Cash

 

Net cash used in operating activities was $65.5 million for the three months ended March 31, 2015 compared with $21.0 million for the three months ended March 31, 2014, a net increase in cash used of $44.5 million. This increase was primarily due to (i) a change of $23.6 million in net (loss) income before attribution to non-controlling stockholders and (ii) a $11.4 million decrease in non-cash items that reconcile net (loss) income to net cash used in operating activities for the three months ended March 31, 2015, compared with the same prior year period.  The decrease in non-cash items was largely related to an increase in benefit from deferred taxes and gains on foreign exchange derivative contracts, net, partially offset by an increase in deferred compensation, which was primarily a result of the incremental compensation costs associated with the modification of RSUs. In addition, the increase was also due to a $9.6 million increase in working capital employed in the business in the three months ended March 31, 2015. Such working capital changes include (i) receivables from/payables to brokers, dealers, and clearing organizations, (ii) payables to clearing service customers, (iii) accrued compensation, (iv) accounts receivable, and (v) other assets and liabilities.

 

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Net cash used in investing activities for the three months ended March 31, 2015 was $58.0 million compared with $7.1 million of net cash provided by investing activities for the three months ended March 31, 2014, a net increase in cash used of $65.1 million. This increase in net cash used in investing activities was primarily due to (i) $60.0 million of loans provided to BGC during the first quarter of 2015 and (ii) a decrease in proceeds from the disposition of interests in unconsolidated businesses and available-for-sale securities, year over year.

 

Net cash provided by financing activities for the three months ended March 31, 2015 was $49.3 million compared to $11.7 million of cash used during the three months ended March 31, 2014, an increase in cash provided of $61.0 million. This increase in net cash used was primarily due an increase in net proceeds in short-term borrowings, and to a lesser extent, a decrease in cash dividends paid to shareholders during the first quarter of 2015.

 

Regulatory Requirements

 

Our liquidity and available cash resources are, in part, restricted by the regulatory capital requirements of certain of our material operating subsidiaries, including GFI Securities LLC, Amerex Brokers LLC, GFI Swaps Exchange LLC, GFI Securities Limited, GFI Brokers Limited, Kyte Broking Limited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd, GFI Group PTE Ltd and GFI Korea Money Brokerage Limited. These operating subsidiaries are subject to minimum capital requirements and/or licensing and financial requirements imposed by their respective market regulators. In addition, these subsidiaries may be prohibited from repaying the borrowings of their parents or affiliates, paying cash dividends, making loans to their parent or affiliates or otherwise entering into transactions, in each case, that result in a significant reduction in their regulatory capital position without prior notification or approval from their principal regulator. See Note 17 to the Condensed Consolidated Financial Statements for further details on our regulatory requirements.

 

Short and Long Term Debt

 

Our outstanding debt at March 31, 2015 consisted of $240.0 million of our 8.375% Senior Notes and $60.0 million of borrowings under our Credit Agreement. The unused borrowing capacity under our Credit Agreement at March 31, 2015 and December 31, 2014 was $15.0 million and $65.0 million, respectively. The 8.375% Senior Notes mature in July 2018 and the Credit Agreement matures in December 2015. See Note 8 to the Condensed Consolidated Financial Statements for further details on our debt.

 

The Credit Agreement contains certain financial and other covenants. The financial covenants contained in our Credit Agreement require that we maintain minimum consolidated capital, as defined, of no less than $375.0 million at any time.  The amendment to the Credit Agreement executed in July 2014 reduced the required minimum amount of consolidated capital by any goodwill or asset impairment charge in an aggregate amount not to exceed $160.0 million contained in our financial statements in any of the fiscal quarters ending June 30, 2014, September 30, 2014 or December 31, 2014.  In April 2015, GFI entered into a fourth amendment to the Credit Agreement, whereby the minimum consolidated capital the Company is required to maintain was adjusted to $215.0 million.

 

Failure to comply with this financial covenant would result in an event of default under our Credit Agreement unless waived by our lenders. An event of default under our Credit Agreement can result in the acceleration of our indebtedness under the facilities, which in turn would result in an event of default and possible acceleration of indebtedness under the agreements governing our debt securities as well. As of March 31, 2015, we were in full compliance with the financial covenant described above.

 

In February 2015, in connection with the transactions contemplated by the tender offer agreement, the Company entered into a third amendment to the Credit Agreement to permit the transactions contemplated by the tender offer agreement, including by amending the definition of “Change of Control” to permit BGC to acquire shares of the equity of the Company in excess of 35% without triggering a “Change of Control” under the Credit Agreement.

 

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Credit Ratings

 

As of March 31, 2015, we maintained the following public long-term credit ratings:

 

 

 

Rating

 

Moody’s Investor Services

 

B1

 

Standard & Poor’s

 

B

 

Fitch Ratings Inc.

 

B

 

 

Credit ratings and outlooks can be revised at any time if such rating agency decides the circumstances warrant a revision.  In addition, a reduction in our rating may affect the availability of future debt financing and the terms that are available to us.

 

On January 18, 2013, Moody’s Investor Services (“Moody’s”) lowered its credit rating on our 8.375% Senior Notes two notches to B1, which increased our applicable per annum interest, effective January 19, 2013, by an additional 50 basis points. On April 19, 2013, Fitch lowered its credit rating on our 8.375% Senior Notes two notches to BB and revised its outlook from Stable to Negative. This credit rating downgrade by Fitch increased our applicable per annum interest, effective July 19, 2013, by an additional 50 basis points. On June 26, 2013, Standard & Poor’s (“S&P”) further lowered its credit rating on our 8.375% Senior Notes one notch to B+ and revised its outlook from Negative to Stable. This credit rating downgrade by S&P increased our applicable per annum interest by an additional 25 basis points, effective July 19, 2013.

 

Pursuant to the terms of the 8.375% Senior Notes, the cumulative effect of downgrades to our credit rating by the various rating agencies during 2012 and 2013 increased the per annum interest rate on the 8.375% Senior Notes by 200 basis points over the original interest rate, which is the maximum increase permitted under the indenture.  The increased interest rate equates to $4.8 million in additional interest expense per annum, based on the aggregate amount of outstanding principal as of December 31, 2014.

 

On June 19, 2014, S&P further lowered its credit rating on our 8.375% Senior Notes one notch to B.  On June 24, 2014, Fitch further lowered its credit rating on our 8.375% Senior Notes one notch to BB-. The June 2014 downgrades did not have an impact on the per annum interest rate on our 8.375% Senior Notes, as the maximum interest rate increase permitted under the indenture has already been reached.

 

On July 30, 2014, Moody’s placed our 8.375% Senior Notes rating on review for upgrade following the announcement of the CME Merger. On October 23, 2014, Moody’s continued its review for upgrade following the announcement of BGC’s unsolicited conditional tender offer to purchase all outstanding shares of our common stock. On July 30, 2014, S&P placed our 8.375% Senior Notes rating on CreditWatch with positive implications following the announcement of the CME Merger. On October 29, 2014, S&P indicated its rating on our 8.375% Senior Notes remained on CreditWatch with positive implications following BGC’s unsolicited conditional tender offer to purchase all outstanding shares of our common stock.  On July 31, 2014, Fitch placed our 8.375% Senior Notes rating on Rating Watch Positive following the announcement of the CME Merger.  On September 11, 2014, Fitch indicated its rating on our 8.375% Senior Notes remains on Rating Watch Positive.

 

On February 3, 2015, Fitch further lowered its credit rating on our 8.375% Senior Notes two notches to B and placed the 8.375% Senior Notes rating on Rating Watch Evolving, following the termination of the CME Merger. On February 4, 2015, Moody’s placed our 8.375% Senior Notes rating on review for downgrade following the termination of the CME Merger. On February 5, 2015, S&P placed our 8.375% Senior Notes rating on CreditWatch Developing following the termination of the CME Merger.

 

On February 24, 2015, Moody’s continued its review for downgrade on our 8.375% Senior Notes after our Board of Directors unanimously agreed to support BGC’s tender offer for all of the outstanding shares of GFI common stock. On March 3, 2015, Fitch placed our 8.375% Senior Notes rating on Rating Watch Positive following the successful completion of BGC’s tender offer for GFI shares.  On March 9, 2015, S&P placed our 8.375% Senior Notes rating on CreditWatch Positive following the successful completion of BGC’s tender offer for GFI shares.

 

On April 29, 2015, S&P raised its credit rating on our 8.375% Senior Notes four notches to BB+, following the announcement that BGC gained the two-thirds ownership necessary to effect the full merger of GFI. See Note 20 of the Condensed Consolidated Financial Statements under “Related party transactions” for further information on GFI’s issuance of shares to BGC. S&P indicated its rating on our 8.375% Senior Notes remained on CreditWatch with positive implications. On May 6, 2015, Fitch increased its credit rating on our 8.375% Senior Notes four notches to BB+ and has also removed our 8.375% Senior Notes rating  the from Rating Watch Positive and assigned a Positive Rating Outlook, following the purchase of additional GFI shares by BGC. The recent upgrades from S&P and Fitch will lower our interest rate by 100 basis points. Any upgrade from Moody’s could also lower our rate on the Senior Notes up to a maximum of 50 basis points.

 

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Table of Contents

 

Dividends Paid

 

Prior to 2008, we retained all earnings for investment in our business. In February 2008, our Board of Directors approved a policy of paying quarterly dividends, subject to available cash flow from operations, other considerations and the determination of the amount by our Board of Directors. The payment of quarterly dividends was suspended by the Company’s Board during the third quarter of 2014, in conjunction with the then-pending Amended CME Merger Agreement.  Following the Company’s acquisition by BGC the payment of quarterly dividends continues to be suspended. Therefore, the Company did not pay a cash dividend during the first quarter of 2015. Cash dividends paid for the three months ended March 31, 2014 were approximately $6.2 million.

 

Common Stock

 

We may purchase additional shares of our common stock on the open market from time to time in accordance with a stock repurchase program authorized by our Board of Directors. See Note 9 to our Condensed Consolidated Financial Statements for further discussion of stock repurchases.

 

Contractual Obligations and Commitments

 

The following table summarizes certain of our contractual obligations as of March 31, 2015:

 

 

 

Payments Due by Period

 

 

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

 

 

(in thousands)

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

133,077

 

$

13,711

 

$

23,825

 

$

23,262

 

$

72,279

 

Short-term borrowings

 

60,000

 

60,000

 

 

 

 

Interest on Long-term debt (1) 

 

87,150

 

24,900

 

49,800

 

12,450

 

 

Long-term debt

 

240,000

 

 

 

240,000

 

 

Purchase obligations (2) 

 

23,472

 

18,711

 

4,470

 

291

 

 

Total

 

$

543,699

 

$

117,322

 

$

78,095

 

$

276,003

 

$

72,279

 

 


(1)         The amounts listed under Interest on Long-term debt includes increases to our applicable per annum interest on our 8.375% Senior Notes that were effective as a result of downgrades to our credit rating by the various credit agencies in 2012 and 2013. In the event that our credit ratings are subsequently increased or decreased, the applicable per annum interest could change and the amounts disclosed in this table would change; provided, however, the applicable per annum interest rate cannot increase by more than 200 basis points over the original interest rate, which is the maximum increase permitted under the indenture. See Note 8 and Note 20 to the Condensed Consolidated Financial Statements for further details.

 

(2)         The amounts listed under Purchase Obligations include agreements for quotes with various information service providers. Additionally, such amounts include purchase commitments for capital expenditures. See Note 12 to our Condensed Consolidated Financial Statements for further discussion.

 

We have unrecognized tax benefits (net of the federal benefit on state positions) of approximately $8.0 million, excluding interest of $1.2 million. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all liabilities for uncertain tax positions that have not been paid are excluded from the Contractual Obligations and Commitments table.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements at March 31, 2015 as defined in Item 303(A)(4)(ii) of SEC Regulation S-K.

 

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Table of Contents

 

Critical Accounting Policies and Estimates

 

We have disclosed in Note 3 to our Condensed Consolidated Financial Statements and in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2014 Form 10-K those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since our 2014 Form 10-K. The accounting principles utilized by us in preparing our Condensed Consolidated Financial Statements conform in all material respects to generally accepted accounting principles in the United States of America.

 

Recent Accounting Pronouncements

 

Refer to Note 3 to our Condensed Consolidated Financial Statements for a discussion of new accounting pronouncements.

 

ITEM 3.               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our quantitative and qualitative disclosures about market risk are described in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitative and Qualitative Disclosures about Market Risk” contained in the 2014 Form 10-K. Except as described below in this Form 10-Q, there have been no material changes to those market risks during the three months ended March 31, 2015.

 

Foreign Currency Exposure Risk

 

We are exposed to risks associated with changes in foreign exchange rates related to our international operations. As foreign currency exchange rates change, the U.S. Dollar equivalent of revenues and expenses denominated in foreign currencies change. Our U.K. operations generate a large majority of their revenues in U.S. Dollars and Euros but pay a significant amount of their expenses in British Pounds. We enter into foreign exchange forward contracts (“Foreign Exchange Derivative Contracts”) to mitigate our exposure to foreign currency exchange rate fluctuations. At March 31, 2015 and December 31, 2014, we had no Foreign Exchange Derivative Contracts that were designated as foreign currency cash flow hedges. We do not use derivative contracts for speculative purposes.

 

We are also exposed to counterparty credit risk for nonperformance of Foreign Exchange Derivative Contracts and in the event of nonperformance, to market risk for changes in currency rates. The counterparties with whom we execute foreign exchange derivative contracts are major international financial institutions. We monitor our positions with, and the credit quality of, these financial institutions and we do not anticipate nonperformance by the counterparties.

 

While our international results of operations, as measured in U.S. Dollars, are subject to foreign exchange rate fluctuations, we do not consider the related risk to be material to our results of operations. If the Euro strengthened against the U.S. Dollar by 10% and the British Pound Sterling weakened by 10% against the U.S. Dollar, the net impact to our net income would be a reduction of approximately $3.2 million as of March 31, 2015.

 

ITEM 4.              CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective as of the end of the period covered by this report.

 

In addition, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) and determined that there have been no changes in our internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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Table of Contents

 

Other Financial Information

 

PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Securities Act”) for their report on the unaudited consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act.

 

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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

GFI Group Inc.:

 

We have reviewed the accompanying condensed consolidated statement of financial condition of GFI Group Inc. and its subsidiaries as of March 31, 2015, and the related condensed consolidated statements of operations and comprehensive (loss) income for the three-month periods ended March 31, 2015 and March 31, 2014 and the condensed consolidated statement of cash flows for the three month periods ended March 31, 2015 and March 31, 2014.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 2014, and the related consolidated statement of operations and comprehensive loss, and of cash flows for the year then ended (not presented herein), and in our report dated March 13, 2015, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated statement of financial condition from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

May 11, 2015

 

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Table of Contents

 

PART II—OTHER INFORMATION

 

ITEM 1.               LEGAL PROCEEDINGS

 

See Note 12—“Commitments and Contingencies” to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference herein.

 

ITEM 1A.      RISK FACTORS

 

Except as set forth below, there have been no material changes in our risk factors from those disclosed in the 2014 Form 10-K. For a discussion of those risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 2014 Form 10-K.

 

ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below sets forth the information with respect to purchases made by the Company of its common stock during the quarterly period ended March 31, 2015.

 

Issuer Purchases of Equity Securities

 

Period

 

Total
Number of
Shares
Purchased

 

Average Price
Paid Per
Share

 

January

 

 

 

 

 

Employee Transactions(a)

 

101,898

 

$

5.61

 

 

 

 

 

 

 

February

 

 

 

 

 

Employee Transactions(a)

 

 

$

 

 

 

 

 

 

 

March

 

 

 

 

 

Employee Transactions(a)

 

 

$

 

 


(a)                                 Under our 2008 Equity Incentive Plan, we withhold shares of common stock to satisfy minimum statutory tax withholding obligations arising on the vesting and settlement of restricted stock units. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of the shares of our common stock by us on the date of withholding.

 

ITEM 5. Other Information

 

Subsequent Event:

 

On May 7, 2015, the Company’s Board appointed Sean A. Windeatt as the Company’s Chief Operating Officer.  Mr. Windeatt, 41, has been the Chief Operating Officer of BGC Partners Inc. since January 2009. Prior to that, Mr. Windeatt was an Executive Managing Director and Vice President of BGC Partners since 2007 and served as a Director of Cantor Fitzgerald International from 2004 to 2007. Mr. Windeatt has also served as a Business Manager and member of the finance department of Cantor Fitzgerald International from 1997 to 2003.

 

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Table of Contents

 

ITEM 6.               EXHIBITS

 

Exhibits:

 

Exhibit No.

 

Description

10.1

 

Fourth Amendment to Credit Agreement, dated as of April 30, 2015, among GFI Group Inc. and GFI Holdings Limited, as Borrowers, certain subsidiaries of the Company as Guarantors, various Lenders and Bank of America, N.A., as Administrative Agent

 

 

 

10.2

 

Employment Agreement, dated as of April 15, 2015, between BGC Partners, L.P., GFI Group Inc., and Michael A. Gooch

 

 

 

10.3

 

Amended and Restated Employment Agreement, dated as of April 30, 2015, between BGC Partners, L.P., GFI Group Inc., and Colin Heffron

 

 

 

10.4

 

Separation from Employment Agreement, dated as of April 30, 2015, between GFI Group Inc. and Ronald Levi

 

 

 

31.1

 

Certification of Principal Executive Officer.

 

 

 

31.2

 

Certification of Principal Financial Officer.

 

 

 

32.1

 

Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

 

32.2

 

Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


 

(*) Filed with this Quarterly Report on Form 10-Q and included in Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014, (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (iii) the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2015 and 2014,  (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (v) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and (vi) Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of May, 2015.

 

 

 

GFI GROUP INC.

 

 

 

 

 

 

 

 

 

 

 

 

By:

 

/s/ JAMES A. PEERS

 

 

 

Name:

James A. Peers

 

 

 

Title:

Chief Financial Officer

 

 

 

 

(principal financial and accounting officer)

 

67