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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 SEPTEMBER 30, 2014

 

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 October 31, 2014 was 127,501,200.

 

 

 



Table of Contents

 

Table of Contents

 

 

Part I—Financial Information

 

 

 

 

Page
Number

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition as of September 30, 2014 (unaudited) and December 31, 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)

 

7

 

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 (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

 

68

 

 

 

 

Item 4.

Controls and Procedures

 

68

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

69

 

 

 

 

Part II—Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

70

 

 

 

 

Item 1A.

Risk Factors

 

71

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

 

 

 

 

Item 6.

Exhibits

 

74

 

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)

 

 

 

 

September 30,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

 $

165,850

 

$

174,606

 

Cash and securities segregated under federal and other regulations

 

54,907

 

62,863

 

Accounts receivable, net of allowance for doubtful accounts of $1,957 and $1,958 at September 30, 2014 and December 31, 2013, respectively

 

104,789

 

87,502

 

Receivables from brokers, dealers and clearing organizations

 

723,869

 

295,727

 

Property, equipment and leasehold improvements, net of depreciation and amortization of $196,986 and $188,196 at September 30, 2014 and December 31, 2013, respectively

 

59,990

 

61,396

 

Goodwill

 

134,702

 

255,920

 

Intangible assets, net

 

38,132

 

45,684

 

Other assets

 

191,822

 

177,844

 

TOTAL ASSETS

 

 $

1,474,061

 

$

1,161,542

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accrued compensation

 

 $

67,308

 

$

77,841

 

Accounts payable and accrued expenses

 

49,339

 

37,409

 

Payables to brokers, dealers and clearing organizations

 

586,793

 

126,900

 

Payables to clearing services customers

 

134,958

 

177,523

 

Short-term borrowings

 

10,000

 

10,000

 

Long-term debt

 

240,000

 

240,000

 

Other liabilities

 

83,088

 

83,071

 

Total Liabilities

 

 $

1,171,486

 

$

752,744

 

Commitments and contingencies (Note 11)

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at September 30, 2014 and December 31, 2013

 

 

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 144,361,405 and 140,599,626 shares issued at September 30, 2014 and December 31, 2013, respectively

 

1,443

 

1,405

 

Additional paid in capital

 

396,124

 

393,965

 

Retained (deficit) earnings

 

(24,492

)

83,180

 

Treasury stock, 16,929,318 and 17,312,957 shares of common stock at cost, at September 30, 2014 and December 31, 2013, respectively

 

(74,059

)

(75,018

)

Accumulated other comprehensive income

 

1,902

 

3,744

 

Total Stockholders’ Equity

 

300,918

 

407,276

 

Non-controlling interests

 

1,657

 

1,522

 

Total Equity

 

302,575

 

408,798

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 $

1,474,061

 

$

1,161,542

 

 

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

 

 

 

 

 

 

 

 

Agency commissions

 

$

112,303

 

$

109,365

 

$

343,410

 

$

358,413

 

Principal transactions

 

41,453

 

41,841

 

139,090

 

143,468

 

Total brokerage revenues

 

153,756

 

151,206

 

482,500

 

501,881

 

Clearing services revenues

 

26,373

 

32,722

 

89,139

 

110,225

 

Interest income from clearing services

 

579

 

455

 

1,679

 

1,623

 

Equity in net earnings of unconsolidated businesses

 

639

 

1,566

 

4,686

 

6,925

 

Software, analytics and market data

 

26,095

 

22,472

 

77,455

 

66,438

 

Other income, net

 

2,859

 

4,012

 

13,686

 

12,011

 

Total revenues

 

210,301

 

212,433

 

669,145

 

699,103

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

24,786

 

31,620

 

84,362

 

106,952

 

Transaction fees on brokerage services

 

4,330

 

4,430

 

14,488

 

15,572

 

Interest expense from clearing services

 

206

 

143

 

560

 

390

 

Total interest and transaction-based expenses

 

29,322

 

36,193

 

99,410

 

122,914

 

Revenues, net of interest and transaction-based expenses

 

180,979

 

176,240

 

569,735

 

576,189

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

122,720

 

121,109

 

390,420

 

392,737

 

Communications and market data

 

13,335

 

13,747

 

40,202

 

41,077

 

Travel and promotion

 

7,184

 

7,380

 

22,924

 

23,298

 

Rent and occupancy

 

7,835

 

7,901

 

23,811

 

22,152

 

Depreciation and amortization

 

8,480

 

8,320

 

25,873

 

24,962

 

Professional fees

 

13,650

 

5,712

 

29,928

 

18,824

 

Interest on borrowings

 

8,466

 

7,612

 

24,393

 

22,475

 

Impairment of goodwill

 

 

 

121,619

 

 

Other expenses

 

6,825

 

5,615

 

21,526

 

24,138

 

Total other expenses

 

188,495

 

177,396

 

700,696

 

569,663

 

(Loss) income before benefit from income taxes

 

(7,516

)

(1,156

)

(130,961

)

6,526

 

Benefit from income taxes

 

(56

)

(1,127

)

(30,239

)

(5,267

)

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

 

(7,460

)

(29

)

(100,722

)

11,793

 

Less: Net income attributable to non-controlling interests

 

231

 

432

 

762

 

889

 

GFI’s net (loss) income

 

$

(7,691

)

$

(461

)

$

(101,484

)

$

10,904

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share available to common stockholders

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

$

(0.00

)

$

(0.82

)

$

0.09

 

Diluted

 

$

(0.06

)

$

(0.00

)

$

(0.82

)

$

0.09

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

125,407,225

 

120,331,179

 

124,237,643

 

118,138,756

 

Diluted

 

125,407,225

 

120,331,179

 

124,237,643

 

126,858,459

 

Dividends declared per share of common stock

 

$

0.00

 

$

0.05

 

$

0.10

 

$

0.10

 

 

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

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

 

$

(7,460

)

$

(29

)

(100,722

)

$

11,793

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(5,458

)

7,722

 

(1,066

)

(3,074

)

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

 

 

316

 

(1,069

)

748

 

Total other comprehensive (loss) income

 

(5,458

)

8,038

 

(2,135

)

(2,326

)

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income including non-controlling stockholders

 

(12,918

)

8,009

 

(102,857

)

9,467

 

Comprehensive (loss) income attributable to non-controlling stockholders

 

(50

)

595

 

469

 

968

 

GFI’s comprehensive (loss) income

 

$

(12,868

)

$

7,414

 

$

(103,326

)

$

8,499

 

 


(1)         Amounts are net of provision for income taxes of $0 and $97 for the three months ended September 30, 2014 and 2013, respectively. Amounts are net of (benefit from) provision for income taxes of $(341) and $227 for the nine months ended September 30, 2014 and 2013, 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)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

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

 

$

(100,722

)

$

11,793

 

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

 

 

 

 

 

Depreciation and amortization

 

25,873

 

24,962

 

Share-based compensation

 

18,955

 

22,414

 

Tax expense related to share-based compensation

 

821

 

1,877

 

Amortization of prepaid bonuses and forgivable loans

 

17,893

 

19,904

 

Benefit from deferred taxes

 

(44,135

)

(12,155

)

(Gains) losses on foreign exchange derivative contracts, net

 

(3,389

)

1,516

 

Earnings from equity method investments, net

 

473

 

(1,931

)

Amortization of deferred financing fees

 

1,376

 

1,649

 

Mark-to-market of future purchase commitment

 

 

(2,203

)

Mark-to-market of contingent consideration liabilities

 

(2,832

)

 

Impairment charges

 

122,230

 

 

Translation gain on liquidation of foreign subsidiary

 

 

(1,645

)

Other non-cash charges, net

 

629

 

257

 

(Increase) decrease in operating assets:

 

 

 

 

 

Cash and securities segregated under federal and other regulations

 

7,956

 

(13,289

)

Accounts receivable

 

(17,609

)

(21,460

)

Receivables from brokers, dealers and clearing organizations

 

(428,142

)

(394,333

)

Other assets

 

(9,302

)

15,098

 

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accrued compensation

 

(10,618

)

(16,150

)

Accounts payable and accrued expenses

 

10,853

 

12,006

 

Payables to brokers, dealers and clearing organizations

 

459,893

 

348,125

 

Payables to clearing services customers

 

(42,565

)

(3,412

)

Other liabilities

 

3,054

 

4,235

 

Cash provided by (used in) operating activities

 

10,692

 

(2,742

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Business acquisitions, net of cash acquired, and purchases of intangible and other assets

 

 

(1,650

)

Proceeds from disposition of interests in unconsolidated businesses

 

8,140

 

 

Return of capital from unconsolidated businesses

 

413

 

2,962

 

Proceeds from disposition of available-for-sale securities

 

5,882

 

68

 

Purchases of interests in unconsolidated businesses

 

 

(13,109

)

Purchases of property, equipment and leasehold improvements

 

(5,842

)

(10,213

)

Capitalization of internally developed software

 

(6,232

)

(7,525

)

Proceeds on foreign exchange derivative contracts

 

2,605

 

1,377

 

Payments on foreign exchange derivative contracts

 

(550

)

(2,445

)

Other, net

 

58

 

(644

)

Cash provided by (used in) investing activities

 

4,474

 

(31,179

)

 

 

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)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

160,000

 

 

 

125,000

 

Repayment of short-term borrowings

 

 

(160,000

)

 

 

(115,000

)

Repurchase and retirement of a portion of long-term debt

 

 

 

 

 

(9,385

)

Cash dividends paid to common stockholders

 

 

(12,482

)

 

 

(12,095

)

Shares withheld for taxes on vested restricted stock units

 

 

(9,114

)

 

 

(8,679

)

Tax expense related to share-based compensation

 

 

(821

)

 

 

(1,877

)

Other, net

 

 

25

 

 

 

(1,587

)

Cash used in financing activities

 

 

(22,392

)

 

 

(23,623

)

Effects of exchange rate changes on cash and cash equivalents

 

 

(1,530

)

 

 

(1,019

)

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(8,756

)

 

 

(58,563

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

174,606

 

 

 

227,441

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

165,850

 

 

$

168,878

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

29,663

 

 

$

25,687

 

Cash paid for income taxes

 

$

11,667

 

 

$

10,189

 

Cash received from income tax refunds

 

$

899

 

 

$

2,382

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment through seller financing arrangement

 

$

1,229

 

 

$

 

 

 

 

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
Earnings
(Deficit)

 

Accumulated
Other
Comprehensive
Income

 

Total
Stockholders’
Equity

 

Non-
Controlling
Interests

 

Total
Equity

 

Balance, January 1, 2014

 

$

1,405

 

  $

393,965

 

$

(75,018

)

$

83,180

 

  $

3,744

 

$

407,276

 

$

1,522

 

  $

408,798

 

Issuance of treasury stock

 

 

(955

)

959

 

 

 

4

 

 

4

 

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

 

38

 

422

 

 

 

 

460

 

 

460

 

Withholding of restricted stock units in satisfaction of tax requirements

 

 

(9,114

)

 

 

 

(9,114

)

 

(9,114

)

Tax expense associated with share-based awards

 

 

(821

)

 

 

 

(821

)

 

(821

)

Foreign currency translation adjustment

 

 

 

 

 

(773

)

(773

)

(293

)

(1,066

)

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

 

 

 

 

 

(1,069

)

(1,069

)

 

(1,069

)

Dividends to stockholders

 

 

(6,294

)

 

(6,188

)

 

(12,482

)

 

(12,482

)

Share-based compensation

 

 

18,938

 

 

 

 

18,938

 

 

18,938

 

Other capital adjustments

 

 

(17

)

 

 

 

(17

)

(334

)

(351

)

Net (loss) income

 

 

 

 

(101,484

)

 

(101,484

)

762

 

(100,722

)

Balance, September 30, 2014

 

$

1,443

 

  $

396,124

 

$

(74,059

)

$

(24,492

)

  $

1,902

 

$

300,918

 

$

1,657

 

  $

302,575

 

 

 

See notes to condensed consolidated financial statements

 

9



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

(In thousands except share and per share amounts)

 

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. As of September 30, 2014, Jersey Partners, Inc. (“JPI”) owned approximately 37% of the Company’s outstanding shares of common stock. The Company’s executive chairman, Michael Gooch, is the controlling shareholder of JPI.

 

2.     CME MERGER AND UNSOLICITED TENDER OFFER BY BGC

 

On July 30, 2014, the Company entered into an Agreement and Plan of Merger (the “CME Merger Agreement”) with CME Group Inc. (“CME”) whereby the Company agreed to merge with and into a wholly owned subsidiary of CME (the “CME Merger”). At the effective time of the CME Merger, each share of GFI common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive a fraction of a share (the “Exchange Ratio”) of CME Class A common stock (“CME Class A Common Stock”).  The Exchange Ratio is a fraction, the numerator of which equals $4.55 and the denominator of which equals the average closing sales price of CME Class A Common Stock as reported on the NASDAQ Global Select Market for the ten trading days ending upon and including the trading day immediately before the closing date of the CME Merger.  Concurrently with the CME Merger, pursuant to an agreement and plan of merger entered into on July 30, 2014, JPI will merge with and into a wholly owned subsidiary of CME and immediately following the CME Merger, pursuant to a purchase agreement entered into on July 30, 2014, a private consortium of current GFI management will acquire GFI’s wholesale brokerage and clearing businesses for $165,000 in cash and the assumption, at closing, of approximately $63,000 of unvested deferred compensation and other obligations.  These transactions, which are expected to close during the first quarter of 2015, are subject to approval by GFI shareholders, including the affirmative vote of a majority of the disinterested GFI shareholders, as well as customary regulatory review and approvals. Upon the closing of the transactions, GFI’s wholesale brokerage business, including the Kyte Group, is expected to continue as a privately owned company.

 

On September 8, 2014, Shaun D. Lynn, President of BGC Partners, Inc., a Delaware corporation (“BGC”), sent a letter to the Company’s board of directors (the “Board”) notifying the Board of BGC’s plan to commence a tender offer for 100% of the outstanding common stock of the Company at $5.25 per share in cash (the “BGC Proposal”). On September 11, 2014, following consultation with its legal and financial advisors, a special committee of the Company board of directors (the “Special Committee”) unanimously determined, which determination is required pursuant to the CME Merger Agreement, that the BGC Proposal could reasonably be expected to lead to a Superior Proposal (as defined in the CME Merger Agreement).  Following the meeting of the Special Committee, the Board met and determined in good faith, after consultation with outside legal counsel and independent financial advisors, that the BGC Proposal could reasonably be expected to lead to a Superior Proposal. On September 15, 2014, the Company issued a press release indicating the same.

 

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.

 

Certain prior year amounts have been reclassified to conform to the current year presentation, including amounts in the Condensed Consolidated Statements of Cash Flows and Note 14, Derivative Financial Instruments. The Company has revised its tables summarizing (i) Derivative contracts, by counterparty and (ii) Fair values of derivative contracts on a gross and net basis, within Note 14, to exclude gross balances associated with long and short futures contracts.  The Company continues to include variation margin on open futures contract within Receivables from and payables to brokers, dealers and clearing organizations on the Condensed Consolidated Statements of Financial Condition.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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, 2013 (the “2013 Form 10-K”). The condensed consolidated financial information as of December 31, 2013 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 September 30, 2014, 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 15 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 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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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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 5 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 September 30, 2014 and December 31, 2013, the Company had prepaid bonuses of $18,957 and $23,499, respectively. At September 30, 2014 and December 31, 2013, the Company had forgivable employee loans and advances to employees of $17,645 and $24,109, respectively. Amortization of prepaid bonuses and forgivable employee loans for the nine months ended September 30, 2014 and 2013 was $17,893 and $19,904, 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 September 30, 2014 and December 31, 2013, the Company had equity method investments with a carrying value of $28,716 and $36,976, 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 September 30, 2014 and December 31, 2013, the Company had cost method investments of $1,778 and $5,087, 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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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

The Company accounts for its marketable equity securities and its debt securities in accordance with ASC 320-10, Investments—Debt and Equity Securities (“ASC 323-10”). 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 $0 and $5,465 as of September 30, 2014 and December 31, 2013, 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 13 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 14 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.

 

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.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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 may pay certain performance bonuses in restricted stock units (“RSUs”) or as deferred cash awards, both of which generally vest over a future service period. 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 consists 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. See Note 10 for further information.

 

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 benefits expected to be paid, and provides for recognition of compensation expense over the expected service period, net of estimated forfeitures. See Note 10 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 $56 for the three months ended September 30, 2014, as compared to $1,127 for the three months ended September 30, 2013.  The net decrease in benefit from income taxes was primarily due to U.S. taxes associated with repatriations of earnings from the Company’s non-U.S. subsidiaries.  The remaining change in income tax expense relative to the same period in 2013 is primarily due to a change in the geographical mix of pre-tax profits and losses.

 

The Company recorded a benefit from income taxes of $30,239 for the nine months ended September 30, 2014, as compared to $5,267 for the nine months ended September 30, 2013.  The benefit from income taxes for the nine months ended September 30, 2014 was primarily a result of a $29,151 discrete tax benefit attributable to non-cash goodwill impairment charges recorded in the U.S. during the second quarter of 2014.  The nine months ended September 30, 2013 were primarily impacted by the following items:  (i) a tax benefit of $2,655 under the American Taxpayer Relief Act of 2012 related to taxes previously provided for, (ii) a tax benefit of $1,177 arising from a change in our view about the deductibility of a reserve previously deemed nondeductible, as a result of new information received in the first quarter of 2013 and (iii) the release of a tax liability of $1,359 in a foreign subsidiary where the statute of limitations has now expired.  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 gains (losses) resulting from remeasurement of foreign currency transactions and balances were $(2,809) and $2,212 for the three months ended September 30, 2014 and 2013, respectively, and $(2,694) and $1,757 for the nine months ended September 30, 2014 and 2013, respectively.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Recent Accounting Pronouncements—In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, “Foreign Currency Matters” (“ASU 2013-05”), which clarifies the accounting for the cumulative translation adjustment when a parent either sells or transfers a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a foreign subsidiary or group of assets. ASU 2013-05 provides that the parent should release cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance was effective for the Company’s fiscal year beginning January 1, 2014, and is being applied prospectively.  The adoption of ASU 2013-05 does not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or tax credit carryforward, unless such tax loss or credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes resulting from the disallowance of a tax position. In the event that the tax position is disallowed or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The guidance was effective for the Company’s fiscal year beginning January 1, 2014, and is being applied prospectively. The Company does not expect that the adoption of ASU 2013-11 will have a material impact on its Condensed Consolidated Financial Statements.

 

In April 2014, the FASB issued 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 is effective beginning in the first quarter of 2015. The Company is currently evaluating the impact of the new guidance on the Company’s Condensed 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 Condensed 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. This standard 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 Condensed Consolidated Financial Statements.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

4.     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:

 

 

 

September 30,
2014

 

December 31,
2013

 

Receivables from brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to deliver

 

$

585,618

 

$

123,470

 

Receivables from and deposits with clearing organizations and financial institutions

 

132,329

 

172,257

 

Net pending trades

 

5,922

 

 

Total

 

$

723,869

 

$

295,727

 

Payables to brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to receive

 

$

570,361

 

$

123,393

 

Payables to clearing organizations and financial institutions

 

16,432

 

3,052

 

Net pending trades

 

 

455

 

Total

 

$

586,793

 

$

126,900

 

 

Substantially all fail to deliver and fail to receive balances at September 30, 2014 have subsequently settled at the contracted amounts. All fail to deliver and fail to receive balances at December 31, 2013 have subsequently settled at the contracted amounts.

 

In addition to the balances above, the Company had Payables to clearing services customers of $134,958 and $177,523 at September 30, 2014 and December 31, 2013, respectively. These amounts represent cash payable to the Company’s clearing customers that is held at the Company’s third-party general clearing members and are 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:

 

 

 

September 30,
2014

 

December 31,
2013

 

Cash and cash equivalents

 

$

2,661

 

 

Cash segregated under federal and other regulations

 

54,745

 

62,684

 

Receivables from brokers, dealers, and clearing organizations

 

77,552

 

114,839

 

Total

 

$

134,958

 

$

177,523

 

 

5.     GOODWILL AND INTANGIBLE ASSETS

 

GoodwillChanges in the carrying amount of the Company’s goodwill for the nine months ended September 30, 2014 were as follows:

 

 

 

December 31,
2013

 

Goodwill
acquired

 

Impairment
charges

 

Adjustments

 

Foreign currency
translation

 

September 30,
2014

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas Brokerage

 

$

83,289

 

$

 

$

(83,289

)

$

 

$

 

$

 

EMEA Brokerage

 

14,637

 

 

(14,790

)

 

153

 

 

Clearing and Backed Trading

 

23,259

 

 

(23,540

)

 

281

 

 

All Other

 

134,735

 

 

 

(60

)

27

 

134,702

 

 

 

$

255,920

 

$

 

$

(121,619

)

$

(60

)

$

461

 

$

134,702

 

 

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. The Company performs its annual goodwill impairment test as of November 1st of each fiscal year.  Based on the results of the most recent annual impairment tests performed as of November 1, 2013, an impairment charge of $18,918 was recognized at the Clearing and Backed Trading reporting unit during the fourth quarter of 2013, while the Americas Brokerage reporting unit’s fair value exceeded its carrying value by less than 10%.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Certain factors may result in the need to perform an impairment test prior to the annual impairment testing date, including significant under-performance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, significant decline in the Company’s market capitalization for an extended period of time relative to net book value, and events affecting a reporting unit such as the expectation of disposing all, or a portion of, a reporting unit. As discussed in Note 2, the Company entered into a definitive agreement with CME whereby CME will acquire all of the outstanding shares of GFI.  Immediately following CME’s acquisition of GFI, a private consortium of current GFI management will acquire GFI’s brokerage and clearing businesses for $165,000 in cash and the assumption, at closing, of approximately $63,000 of unvested deferred compensation and other obligations.  The agreements with CME indicated potential impairment of the Americas and EMEA brokerage and clearing and backed trading reporting units.  As a result, the Company conducted an impairment analysis on those reporting units during the second quarter of 2014.  During this interim impairment testing it was determined that the carrying value as of June 30, 2014 of the Americas Brokerage, EMEA Brokerage and Clearing and Backed Trading reporting units exceeded the fair value indicated by the transaction price.  Consequently, the Company performed a second step to measure the amount of impairment loss, if any, to each reporting unit’s goodwill.  As a result, the Company determined that the fair value of each reporting unit’s goodwill was $0, resulting in impairment charges to write-off the $121,619 in goodwill detailed in the table above.

 

Intangible AssetsIntangible assets consisted of the following:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Gross
amount

 

Accumulated
amortization
and foreign
currency
translation

 

Net
carrying
value

 

Gross
amount

 

Accumulated
amortization
and foreign
currency
translation

 

Net
carrying
value

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

77,196

 

$

48,134

 

$

29,062

 

$

77,196

 

$

42,151

 

$

35,045

 

Trade names

 

8,951

 

7,070

 

1,881

 

8,951

 

6,674

 

2,277

 

Core technology

 

11,950

 

6,968

 

4,982

 

11,950

 

6,285

 

5,665

 

Non-compete agreements

 

3,865

 

3,515

 

350

 

3,865

 

3,478

 

387

 

Favorable lease agreements

 

620

 

620

 

 

620

 

580

 

40

 

Patents

 

3,131

 

1,595

 

1,536

 

3,131

 

1,221

 

1,910

 

Other

 

647

 

326

 

321

 

647

 

287

 

360

 

Total

 

$

106,360

 

$

68,228

 

$

38,132

 

$

106,360

 

$

60,676

 

$

45,684

 

 

Intangible amortization expense for the three months ended September 30, 2014 and 2013 was $2,438 and $2,339, respectively. Intangible amortization expense for the nine months ended September 30, 2014 and 2013 was $7,355 and $7,308, respectively.

 

At September 30, 2014, expected amortization expense for the definite lived intangible assets is as follows:

 

2014 (remaining three months)

 

  $

2,377

 

2015

 

9,443

 

2016

 

7,574

 

2017

 

4,302

 

2018

 

3,481

 

Thereafter

 

10,955

 

Total

 

  $

38,132

 

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

6.     OTHER ASSETS AND OTHER LIABILITIES

 

Other assets consisted of the following:

 

 

 

September 30,
2014

 

December 31,
2013

Deferred tax assets

 

  $

88,559

 

 

  $

45,694

 

Investments accounted for under the cost method and equity method

 

30,494

 

 

42,063

 

Prepaid bonuses

 

18,957

 

 

23,499

 

Forgivable employee loans and advances to employees

 

17,645

 

 

24,109

 

Deferred financing fees

 

5,510

 

 

6,786

 

Software inventory, net

 

4,103

 

 

4,749

 

Financial instruments owned

 

1,834

 

 

1,416

 

Other

 

24,720

 

 

29,528

 

Total Other assets

 

  $

191,822

 

 

  $

177,844

 

 

Other liabilities consisted of the following:

 

 

 

September 30,
2014

 

December 31,
2013

Payroll related liabilities

 

  $

29,040

 

 

  $

15,896

 

Deferred revenues

 

9,765

 

 

9,199

 

Unrecognized tax benefits

 

8,396

 

 

8,676

 

Deferred tax liabilities

 

6,056

 

 

6,835

 

Contingent consideration liabilities

 

1,293

 

 

4,317

 

Financial instruments sold, not yet purchased

 

865

 

 

993

 

Other

 

27,673

 

 

37,155

 

Total Other liabilities

 

  $

83,088

 

 

  $

83,071

 

 

7.     SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

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

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

8.375% Senior Notes due 2018

 

  $

240,000

 

 

  $

240,000

 

Loans pursuant to Credit Agreement

 

10,000

 

 

10,000

 

Total

 

  $

250,000

 

 

  $

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:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

8.375% Senior Notes

$

240,000

$

283,800

$

240,000

$

251,100

 

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. 

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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.

 

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 September 30, 2014.

 

At September 30, 2014 and December 31, 2013, unamortized deferred financing fees related to the 8.375% Senior Notes of $4,733 and $5,669, 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.

 

On December 9, 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 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.

 

The Credit Agreement contains certain financial and other covenants. In July 2014 we entered into an agreement to amend and restate the Credit Agreement. 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 $121,619 in goodwill impairment recorded in the three months ended June 30, 2014 reduced our consolidated capital below $375,000. The amendment executed in July 2014 reduces 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. The Company was in compliance with all applicable covenants at September 30, 2014 and December 31, 2013.

 

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 3.40% at September 30, 2014. At September 30, 2014 and December 31, 2013, unamortized deferred financing fees related to the Credit Agreement of $777 and $1,117, respectively, were recorded within Other assets.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

8.     STOCKHOLDERS’ EQUITY

 

In August 2007, the Company’s Board of Directors authorized the Company to implement a stock repurchase program to repurchase a limited number of shares of the Company’s common stock. Under the repurchase plan, the Board of Directors authorized the Company to repurchase shares of the Company’s common stock on the open market in such amounts as determined by the Company’s management, provided, however, such amounts are not to exceed, during any calendar year, the number of shares issued upon the exercise of stock options plus the number of shares underlying grants of RSUs that are granted or which management reasonably anticipates will be granted in such calendar year. During the three months and nine months ended September 30, 2014, and September 30, 2013 the Company did not repurchase any shares of its common stock.

 

On each of March 28 and May 30, 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 and $6,294, respectively.  During the second quarter of 2014, as a result of the pending CME Merger, the payment of a quarterly dividend was suspended, and accordingly, the Company did not pay a cash dividend during the third quarter of 2014. On May 31, 2013 and August 30, 2013, the Company paid a cash dividend of $0.05 per share, which, based upon the number of shares outstanding on the record date for such dividends, totaled $5,999 and $6,096, respectively. In December 2012, the Company’s Board of Directors declared a dividend for the fourth quarter of 2012 on an accelerated basis. The dividend was declared and paid in December 2012 and the Company, therefore, did not pay a cash dividend during the first quarter of 2013.

 

9.     (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 and nine months ended September 30, 2014 and 2013 were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Basic (loss) earnings per share

 

 

 

 

 

 

 

 

GFI’s net (loss) income

 

$

(7,691

)

$

(461

)

$

(101,484

)

$

10,904

Weighted average common shares outstanding

 

125,407,225

 

120,331,179

 

124,237,643

 

118,138,756

Basic (loss) earnings per share

 

$

(0.06

)

$

(0.00

)

$

(0.82

)

$

0.09

Diluted (loss) earnings per share

 

 

 

 

 

 

 

 

GFI’s net (loss) income

 

$

(7,691

)

$

(461

)

$

(101,484

)

$

10,904

Weighted average common shares outstanding

 

125,407,225

 

120,331,179

 

124,237,643

 

118,138,756

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

 

 

 

 

8,719,703

Weighted average shares outstanding and common stock equivalents

 

125,407,225

 

120,331,179

 

124,237,643

 

126,858,459

Diluted (loss) earnings per share

 

$

(0.06

)

$

(0.00

)

$

(0.82

)

$

0.09

 

As a result of the net loss for the three and nine months ended September 30, 2014 and three months ended September 30, 2013, the following stock options, RSUs and contingently issuable shares outstanding were excluded from the computation of diluted loss per share for each respective period, as their inclusion would be anti-dilutive:

 

 

 

Three Months Ended
September 30,

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2014

 

2013

 

2014

Stock Options

 

$

6,316

 

    $ 

356,008

 

$

6,316

RSUs

 

14,552,349

 

18,683,552

 

14,552,349

Contingently issuable shares

 

1,171,879

 

1,171,879

 

1,171,879

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Excluded from the computation of diluted earnings per share for the nine months ended September 30, 2013 because their effect would be anti-dilutive were the following:

 

 

 

Nine Months Ended
September 30,

 

 

2013

Stock Options

 

$

69,476

RSUs

 

2,660,905

 

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 2,736,121 contingently issuable shares for the nine months ended September 30, 2013.

 

10.     DEFERRED COMPENSATION

 

Share-based Compensation

 

The Company’s Amended and Restated GFI Group Inc. 2008 Equity Incentive Plan, which was approved by the Company’s stockholders on June 6, 2013 (as amended and restated, the “2008 Equity Incentive Plan”) permits 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 issues shares from authorized but unissued shares and authorized and issued shares reacquired and held as treasury shares, which are reserved for issuance upon the vesting of RSUs granted pursuant to the 2008 Equity Incentive Plan.  As of September 30, 2014, there were 8,398,540 shares of common stock available for future grants of awards under the 2008 Equity Incentive Plan.

 

As of September 30, 2014, the Company had stock options outstanding under the GFI Group 2002 Stock Option Plan (the “GFI Group 2002 Plan”). No additional grants will be made under this option plan.

 

Restricted Stock Units

 

The fair value of RSUs is based on the closing price of the Company’s common stock on the date of grant and is recorded as compensation expense over the service period, net of estimated forfeitures. The following is a summary of RSU transactions under both the 2008 Equity Incentive Plan and the 2004 Equity Incentive Plan:

 

 

 

RSUs

 

Weighted-
Average
Grant Date
Fair Value

Outstanding December 31, 2013

 

18,483,001

 

$

4.01

Granted

 

3,205,621

 

3.59

Vested

 

(6,378,362

)

4.04

Cancelled

 

(757,911

)

3.65

Outstanding September 30, 2014

 

14,552,349

 

4.02

 

The weighted average grant-date fair value of RSUs granted for the nine months ended September 30, 2014 was $3.59 per unit, compared with $3.71 per unit for the same period in the prior year. Total compensation expense and related income tax benefits recognized in relation to RSUs are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Compensation expense

 

$

5,516

 

$

6,870

 

$

18,866

 

$

22,372

Income tax benefits

 

$

1,547

 

$

1,913

 

$

5,342

 

$

6,655

 

At September 30, 2014, total unrecognized compensation cost related to the RSUs prior to the consideration of expected forfeitures was approximately $39,411 and is expected to be recognized over a weighted-average period of 1.53 years. The total fair value of RSUs vested during the nine months ended September 30, 2014 and 2013 was $25,793 and $28,395, respectively.

 

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Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Stock Options

 

The following is a summary of stock options outstanding under the GFI Group 2002 Plan as of September 30, 2014:

 

 

 

Options

 

Weighted
Average
Exercise
Price

Outstanding December 31, 2013

 

139,164

 

  $

4.16

Exercised

 

(22,948

)

2.97

Cancelled

 

 

Expired

 

(109,900

)

4.28

Outstanding September 30, 2014

 

6,316

 

5.25

 

As of September 30, 2014 and 2013, there was no unrecognized compensation cost related to stock options.

 

Deferred Cash Compensation

 

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 is as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Compensation expense

 

$

55

 

$

8

 

$

69

 

$

15

 

At September 30, 2014, total unrecognized compensation cost related to deferred cash compensation prior to the consideration of expected forfeitures was approximately $3,890 and is expected to be recognized over a weighted-average period of 2.93 years.

 

11.     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 September 30, 2014, the Company had total purchase commitments for market data of approximately $25,751, with $20,262 due within the next twelve months and $5,489 due between one to three years. Additionally, the Company had $5,333 of other purchase commitments including $1,253 primarily related to network upgrades, and $4,080 for hosting and software license agreements. Of these other purchase commitments, approximately $3,126 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.

 

22



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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.

 

Shareholder Class Action Suits.

 

Following the announcement of the GFI/CME Merger, nine putative class action complaints challenging the GFI/CME Merger were filed on behalf of purported GFI Stockholders (one of which also purports 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 are captioned Coyne v. GFI Group Inc., et al., Index No. 652704/2014 (N.Y. Sup. Ct.), Suprina v. GFI Group, Inc., et al., Index No. 652668/2014 (N.Y. Sup. Ct.), Brown v. GFI Group Inc., et al., Civil Action No. 10082-VCL (Del. Ch.), Hughes v. CME Group, Inc., et al., Civil Action No. 10103-VCL (Del. Ch.), Al Ammary v. Gooch, et al., Civil Action No. 10125-VCL (Del. Ch.), Giardalas v. GFI Group, Inc., Civil Action No. 10132-VCL (Del. Ch.), City of Lakeland Employees’ Pension Plan v. Gooch, et al., Civil Action No. 10136-VCL (Del. Ch.), Michocki v. Gooch., et al., Civil Action No. 10166-VCL (Del. Ch.) and Szarek v. GFI Group Inc., et al., Case No. 14-CV-8228 (S.D.N.Y.). On September 26, 2014, 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 under the caption In re GFI Group Inc. Stockholder Litigation, Consolidated C.A. No. 10136-VCL.

 

The complaints name as defendants various combinations of GFI, IDB Buyer, the members of the GFI Board, GFI’s managing director Mr. Brown, CME, Merger Sub 1, Merger Sub 2, Cheetah Acquisition Corp., Cheetah Acquisition LLC, JPI and New JPI.  The complaints generally allege, among other things, that the members of the GFI Board breached their fiduciary duties to GFI Stockholders during merger negotiations by entering into the GFI/CME Merger Agreement and approving the GFI/CME Merger, and that GFI, CME, Merger Sub 1, Merger Sub 2, 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 GFI/CME Merger Agreement undervalues GFI, (ii) that the sales process leading up to the GFI/CME Merger was flawed due to the members of the GFI Board’s and Jefferies’ conflicts of interest, and (iii) that certain provisions of the GFI/CME Merger Agreement inappropriately favor CME and preclude or impede third parties from submitting potentially superior proposals.

 

In addition, the Hughes complaint asserts a derivative claim on behalf of GFI against the members of the GFI Board for breaching their fiduciary duties of loyalty and care to GFI by negotiating and agreeing to the GFI/CME Merger and against defendants Gooch and Heffron for usurping a corporate opportunity. The Michocki complaint alleges that the GFI/CME Merger is not a solitary transaction, but a series of related transactions and further alleges 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 GFI/CME Merger, (iii) a declaration that the members of the GFI Board breached their fiduciary duties and that certain provisions of the GFI/CME Merger Agreement are unlawful, (iv) a directive to the members of the GFI Board to execute their fiduciary duties to obtain a transaction in the best interest of GFI Stockholders, (v) rescission of the GFI/CME Merger to the extent already implemented, (iv) granting of rescissory damages and an accounting of all of the damages suffered as a result of the alleged wrongdoing, (v) and reimbursement of fees and costs. The Coyne and Suprina Complaints also demand a jury trial.

 

The 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. 

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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 $8.1 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.

 

The purchase price paid in connection with the acquisition of Contigo Limited included contingent consideration with an estimated net present value, at the time of the acquisition, of £2,458 (or approximately $3,942). Subsequent changes in the estimated fair value of the contingent consideration, which is to be settled in 2015, will be recorded in Other income, net in the Condensed Consolidated Statements of Operations and the estimated fair value of the contingent consideration as of September 30, 2014 is included within Other liabilities in the Condensed Consolidated Statements of Financial Condition. See Note 13 for further information.

 

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.

 

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.

 

12.     MARKET AND CREDIT RISKS

 

Disclosure regarding the Company’s financial instruments with market and credit risks are described in “Note 15—Market and Credit Risks” of the Notes to the Consolidated Financial Statements contained in the Company’s 2013 Form 10-K. There have been no material changes to these risks during the three months ended September 30, 2014.

 

13.     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).

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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. 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 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.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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 will be settled in a combination of cash and up to 50% of the Company’s common stock at the Company’s discretion, will be remeasured at fair value and is principally based on the acquired business’ future financial performance, including revenues and operating margins, from May 1, 2014 through April 30, 2015.  The payment of the contingent consideration, if expected financial results are met by Contigo Limited, would not significantly impact the Company’s financial position, results of operations or cash flows.

 

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

 

In the three and nine months ended September 30, 2014 and 2013, the Company did not have any material transfers among Level 1, Level 2, and Level 3.

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of September 30, 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
September 30,
2014

 

Assets

 

 

 

 

 

 

 

 

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

 $

 

 $

163

 

 $

 

 $

163

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

 $

138

 

 $

1,533

 

 $

 

 $

1,671

 

Commodities derivative contracts

 

110

 

 

 

110

 

Netting (1) 

 

(110

)

 

 

(110

)

Total derivative contracts

 

 $

138

 

 $

1,533

 

 $

 

 $

1,671

 

Total financial instruments owned

 

 $

138

 

 $

1,696

 

 $

 

 $

1,834

 

Total

 

 $

138

 

 $

1,696

 

 $

 

 $

1,834

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Debt securities

 

 $

 

 $

311

 

 $

 

 $

311

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

 $

 

 $

513

 

 $

 

 $

513

 

Commodities derivative contracts

 

151

 

 

 

151

 

Netting (1) 

 

(110

)

 $

 

 $

 

 $

(110

)

Total derivative contracts

 

 $

41

 

 $

513

 

 $

 

 $

554

 

Total financial instruments sold, not yet purchased

 

 $

41

 

 $

824

 

 $

 

 $

865

 

Other liabilities: Contingent consideration

 

 $

 

 $

 

 $

1,293

 

 $

1,293

 

Total

 

 $

41

 

 $

824

 

 $

1,293

 

 $

2,158

 

 


 

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

 

Excluded from the table above is variation margin on net long derivative contracts related to exchange traded futures in the amount of $147 included within Receivables from brokers, dealers and clearing organizations.  Also excluded from the table above is variation margin on net short derivative contracts related to exchange traded futures in the amount of $47 included within Payables from brokers, dealers and clearing organizations.

 

26



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of December 31, 2013 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,
2013

 

Assets

 

 

 

 

 

 

 

 

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

546

 

$

177

 

$

 

$

723

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

 

$

679

 

$

 

$

679

 

Equity derivative contracts

 

 

 

14

 

14

 

Netting (1) 

 

 

 

 

 

 

 

Total derivative contracts

 

$

 

$

679

 

$

14

 

$

693

 

Total financial instruments owned

 

$

546

 

$

856

 

$

14

 

$

1,416

 

Other assets: Other:

 

 

 

 

 

 

 

 

 

Equity security, available-for-sale

 

$

5,465

 

$

 

$

 

$

5,465

 

  Total

 

$

6,011

 

$

856

 

$

14

 

$

6,881

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

 

$

993

 

$

 

$

993

 

Netting (1) 

 

 

 

 

 

Total derivative contracts

 

$

 

993

 

 

993

 

Total financial instruments sold, not yet purchased

 

$

 

$

993

 

$

 

$

993

 

Other liabilities: Contingent consideration

 

$

 

$

 

$

4,317

 

$

4,317

 

  Total

 

$

 

$

993

 

$

4,317

 

$

5,310

 

 


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

 

Excluded from the table above is variation margin on net long derivative contracts related to exchange traded futures in the amount of $388 included within Receivables from brokers, dealers and clearing organizations.  Also excluded from the table above is variation margin on net short derivative contracts related to exchange traded futures in the amount of $596 included within Payables to brokers, dealers and clearing organizations.

 

27



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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the three months ended September 30, 2014 are as follows:

 

 

Opening
Balance

 

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

 

Unrealized gains
(losses)
included
in Other
comprehensive
loss

 

Purchases

 

Issues

 

Sales

 

Settlements

 

Closing
Balance at
September 30,
2014

 

Unrealized
gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
September 30,
2014

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Contingent consideration:

 

$

1,519

 

$

150

 

$

76

 

$

 

$

 

$

 

$

 

$

1,293

 

$

150

 

 


(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 September 30, 2013 are as follows:

 

 

Opening
Balance

 

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

 

Unrealized gains
(losses) included
in Other
comprehensive
income

 

Purchases

 

Issuances

 

Sales

 

Settlements

 

Closing
Balance at
September
30,
2013

 

Unrealized gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
September 30,
2013

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

14

 

$

 

$

 

$

 

$

 

$

 

$

 

$

14

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future purchase commitment

 

$

798

 

$

 

$

 

$

 

$

 

$

 

$

(798

)

$

 

$

 

Contingent consideration

 

$

204

 

$

(55

)

$

 

$

 

$

 

$

 

$

(159

)

$

100

 

$

(55

)

 


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

 

28



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

 

Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2014 are as follows:

 

 

Opening
Balance

 

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

 

Unrealized gains
(losses)
included
in Other
comprehensive
loss

 

Purchases

 

Issues

 

Sales

 

Settlements

 

Closing
Balance at
September 30,
2014

 

Unrealized
gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
September 30,
2014

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

14

 

$

(14

)

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

4,317

 

$

2,832

 

$

(5

)

$

 

$

 

$

 

$

197

 

$

1,293

 

$

2,865

 

 


(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 nine months ended September 30, 2013 are as follows:

 

 

Opening
Balance

 

Total realized
and unrealized
gains (losses)
included in
Net income 
(1)

 

Unrealized gains
included
in Other
comprehensive
loss

 

Purchases

 

Issues

 

Sales

 

Settlements

 

Closing
Balance at
September 30,
2013

 

Unrealized
gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
September 30,
2013

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

28

 

$

(14

)

$

 

$

 

$

 

$

 

$

 

$

14

 

$

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future purchase commitment

 

$

3,209

 

$

2,203

 

$

208

 

$

 

$

 

$

 

$

(798

)

$

 

$

 

Contingent consideration

 

$

518

 

$

(55

)

$

 

$

 

$

 

$

 

$

(473

)

$

100

 

$

(55

)

 


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

 

29



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

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 September 30, 2014 and December 31, 2013, respectively:

 

 

 

Fair Value as of
September 30,
2014

 

Valuation
Technique(s)

 

Unobservable Input(s)

 

Range (Weighted
Average) (a)

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

1,293

 

Present value of expected payments

 

Discount rate

 

17

%

 

 

 

 

 

 

Forecasted financial information

 

(b)

 

 

 

Fair Value as of
December 31,
2013

 

Valuation
Technique(s)

 

Unobservable Input(s)

 

Range (Weighted
Average) (a)

 

Assets

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

14

 

Black-Scholes Merton Model

 

Expected volatility

 

30

%

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

4,317

 

Present value of expected payments

 

Discount rate

 

17

%

 

 

 

 

 

 

Forecasted financial information

 

(b)

 

 


(a)         As of September 30, 2014 and December 31, 2013, each asset and liability type consists of one security.

 

(b)         The Company’s estimate of contingent consideration as of September 30, 2014 and December 31, 2013, respectively, was 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

 

Equity derivative contracts - The significant unobservable inputs used in the fair value of the Company’s equity derivative contracts are the expected volatility and an estimated share price. Significant increases (decreases) in expected volatility or estimated share price would result in a higher (lower) fair value measurement.

 

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.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

14. 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 September 30, 2014 and December 31, 2013, 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.

 

Fair values of derivative contracts on a gross and net basis as of September 30, 2014 and December 31, 2013 are as follows:

 

 

 

September 30, 2014

 

December 31, 2013

 

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

 

$

1,671

 

$

513

 

$

679

 

$

993

 

Commodity derivative contracts

 

110

 

151

 

 

 

Fixed income derivative contracts

 

 

 

 

 

Equity derivative contracts

 

 

 

14

 

 

Total fair value of derivative contracts

 

$

1,781

 

$

664

 

$

693

 

$

993

 

Counterparty netting

 

(110

)

(110

)

 

 

Total fair value

 

$

1,671

 

$

554

 

$

693

 

$

993

 

 


(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 13 for further details about variation margin balances on open long and short futures contracts as of September 30, 2014 and December 31, 2013.  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 September 30, 2014 and December 31, 2013, the Company had outstanding forward foreign exchange hedge contracts with a combined notional value of $78,884 and $86,170, respectively. Approximately $21,474 and $27,659 of these forward foreign exchange contracts represent a hedge of Euro, British pound and Swiss franc-denominated balance sheet positions at September 30, 2014 and December 31, 2013, respectively. The remaining outstanding forward foreign exchange contracts are hedges of anticipated future cash flows.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

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 September 30, 2014 and December 31, 2013:

 

 

 

September 30, 2014 (1)

 

 

December 31, 2013 (2)

 

 

 

Long

 

Short

 

Long

 

Short

 

Foreign exchange derivative contracts

 

$

346

 

$

162,223

 

$

 

$

 

Commodity derivative contracts

 

1,237,496

 

1,237,614

 

349,004

 

342,573

 

Fixed income derivative contracts

 

6,264,927

 

6,142,614

 

9,415,546

 

10,047,771

 

Equity derivative contracts

 

3,901

 

3,804

 

5,731

 

220

 

Total derivative notional amounts

 

$

7,506,670

 

$

7,546,255

 

$

9,770,281

 

$

10,390,564

 

 


(1)                     Notional amounts include gross notionals on open long and short futures contracts of $7,506,390 and $7,546,026, respectively, as of September 30, 2014.

(2)                     Notional amounts include gross notionals on open long and short futures contracts of $9,652,419 and $10,248,687, respectively, as of December 31, 2013.

 

The following is a summary of the effect of derivative contracts on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2014 and 2013:

 

 

 

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 September 30, 2014

 

For the Three Months Ended
September 30, 2013

 

Foreign exchange derivative contracts

 

(1)

 

$

2,308

 

$

(500

)

Commodity derivative contracts

 

Principal transactions

 

2,498

 

1,398

 

Fixed income derivative contracts

 

Principal transactions

 

1,096

 

3,129

 

Equity derivative contracts

 

(2)

 

57

 

24

 

 

 


(1)         For the three months ended September 30, 2014, approximately $2,199 of gains on foreign exchange derivative contracts were included within Other income, net and approximately $109 of gains on foreign currency options were included within Principal transactions.  For the three months ended September 30, 2013, approximately $736 of losses on foreign exchange derivative contracts were included within Other income, net and approximately $236 of gains on foreign currency options were included within Principal transactions.

(2)         For the three months ended September 30, 2014, approximately $57 of gains on equity derivative contracts were included within Principal transactions. For the three months ended September 30, 2013, approximately $24 of gains on equity derivative contracts included within Principal transactions.

 

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Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

The following is a summary of the effect of derivative contracts on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2014 and 2013:

 

 

 

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 Nine Months
Ended September 30, 2014

 

For the Nine Months Ended
September 30, 2013

 

Foreign exchange derivative contracts

 

(1)

 

3,671

 

$

(1,926

)

Commodity derivative contracts

 

Principal transactions

 

6,812

 

6,621

 

Fixed income derivative contracts

 

Principal transactions

 

5,971

 

11,126

 

Equity derivative contracts

 

(2)

 

148

 

(164

)

 


(1)   For the nine months ended September 30, 2014, approximately $3,389 of gains on foreign exchange derivative contracts were included within Other income, net and approximately $283 of gains on foreign currency options were included within Principal transactions.  For the nine months ended September 30, 2013, approximately $1,517 of losses on foreign exchange derivative contracts were included within Other income, net and approximately $409 of losses on foreign currency options were included within Principal transactions.

(2)         For the nine months ended September 30, 2014, approximately $14 of losses on equity derivative contracts were included within Other income, net and approximately $162 of gains on equity derivative contracts were included within Principal transactions. For the nine months ended September 30, 2013, approximately $14 of losses on equity derivative contracts were included within Other income, net and approximately $150 of losses on equity derivative contracts were included within Principal transactions.

 

33



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

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 September 30, 2014:

 

 

 

 

 

 

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

 

$

1,166

 

$

 

$

1,166

 

$

 

$

 

$

1,166

 

Counterparty B

 

248

 

(110

)

138

 

 

 

138

 

Counterparty C

 

367

 

 

367

 

 

 

367

 

 Total

 

$

1,781

 

$

(110

)

$

1,671

 

$

 

$

 

$

1,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

$

50

 

$

 

$

50

 

$

 

$

 

$

50

 

Counterparty B

 

151

 

(110

)

41

 

 

 

41

 

Counterparty C

 

463

 

 

463

 

 

 

463

 

Total

 

$

664

 

$

(110

)

$

554

 

$

 

$

 

$

554

 

 


(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 13 for further details about variation margin balances on open long and short futures contracts as of September 30, 2014.

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

(3)         As of September 30, 2014, the Company does not have any derivative positions under a master netting agreement that are not netted.

 

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Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

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, 2013:

 

 

 

 

 

 

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

 

$

268

 

$

 

$

268

 

$

 

$

 

$

268

 

 Counterparty C

 

411

 

 

411

 

 

 

411

 

 Counterparty D

 

14

 

 

14

 

 

 

14

 

Total

 

$

693

 

$

 

$

693

 

$

 

$

 

$

693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 Counterparty A

 

$

834

 

$

 

$

834

 

$

 

$

 

$

834

 

 Counterparty C

 

159

 

 

159

 

 

 

159

 

Total

 

$

993

 

$

 

$

993

 

$

 

$

 

$

993

 

 


(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 13 for further details about variation margin balances on open long and short futures contracts as of December 31, 2013.

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

(3)         As of December 31, 2013, the Company does not have any derivative positions under a master netting agreement that are not netted.

 

35



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

15. 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 September 30, 2014 and December 31, 2013, 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 $3,410 as of September 30, 2014 and $3,954 as of December 31, 2013, 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 $3,973 as of September 30, 2014 and $4,592 as of December 31, 2013, respectively.

 

As of September 30, 2014 and December 31, 2013, the Company 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. The Company also provides clearing and other administrative services to these non-consolidated VIEs. The carrying amount of these VIEs was $77 as of September 30, 2014 and $1,653 as of December 31, 2013, and was recorded within Receivables from brokers, dealers and clearing organizations.  The maximum exposure to loss of these VIEs was $77 as of September 30, 2014 and $1,653 as of December 31, 2013.

 

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 $10,092 at September 30, 2014 and $8,953 as of December 31, 2013, which primarily consisted of clearing margin. There were no material restrictions on the consolidated VIE’s assets. The consolidated VIE had total liabilities of $3,439 at September 30, 2014 and $2,652 at December 31, 2013.

 

16.    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 Securities Exchange Commission (“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 September 30, 2014, 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 September 30, 2014, 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 September 30, 2014, each of these subsidiaries was in compliance with its regulatory capital requirements.

 

36



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

The regulatory requirements referred to above may restrict the Company’s ability to withdraw capital from its regulated subsidiaries. As of September 30, 2014, the Company had the following aggregate regulatory capital, in individually regulated entities, in each of its operating regions:

 

 

 

Americas

 

EMEA

 

Asia

 

Regulatory capital

 

$

34,447

 

$

138,402

 

$

33,900

 

Minimum regulatory capital required

 

7,507

 

112,654

 

9,227

 

Excess regulatory capital

 

$

26,940

 

$

25,748

 

$

24,673

 

 

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.

 

17.    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.

 

37



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

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

 

 

 

Three Months Ended September 30, 2014

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

55,443

 

$

78,355

 

$

19,472

 

$

32,382

 

$

24,649

 

$

210,301

 

Revenues, net of interest and transaction-based expenses

 

52,875

 

76,170

 

19,377

 

7,097

 

25,460

 

180,979

 

(Loss) income before income taxes

 

15,586

 

24,449

 

5,678

 

(1,906

)

(51,323

)

(7,516

)

 

 

 

Three Months Ended September 30, 2013

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

60,384

 

$

72,275

 

$

15,730

 

$

40,721

 

$

23,323

 

$

212,433

 

Revenues, net of interest and transaction-based expenses

 

57,995

 

70,283

 

15,653

 

8,702

 

23,607

 

176,240

 

Income (loss) before income taxes

 

15,515

 

19,078

 

3,438

 

(1,067

)

(38,120

)

(1,156

)

 

 

 

Nine Months Ended September 30, 2014

 

 

 

Americas
Brokerage

 

 

EMEA
Brokerage

 

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

173,561

 

$

248,913

 

$

55,797

 

$

112,154

 

$

78,720

 

$

669,145

 

Revenues, net of interest and transaction-based expenses

 

165,434

 

241,683

 

55,436

 

26,236

 

80,946

 

569,735

 

(Loss) income before income taxes

 

(39,883

)

62,574

 

15,468

 

(25,604

)

(143,516

)

(130,961

)

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

202,765

 

$

237,102

 

$

52,952

 

$

140,960

 

$

65,324

 

$

699,103

 

Revenues, net of interest and transaction-based expenses

 

194,372

 

230,031

 

52,693

 

32,840

 

66,253

 

576,189

 

Income (loss) before income taxes

 

56,139

 

65,756

 

13,257

 

2,492

 

(131,118

)

6,526

 

 

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 5 for goodwill by reportable segment.

 

38



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

For the three and nine months ended September 30, 2014 and 2013, 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 and nine months ended September 30, 2014 and 2013, and information regarding long-lived assets (defined as property, equipment, leasehold improvements and software inventory) in geographic areas as of September 30, 2014 and December 31, 2013, are as follows:

 

 

 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

United States

 

$

54,075

 

$

61,067

 

$

172,383

 

$

203,544

 

United Kingdom

 

105,938

 

105,471

 

343,286

 

346,166

 

Other

 

50,288

 

45,895

 

153,476

 

149,393

 

Total

 

$

210,301

 

$

212,433

 

$

669,145

 

$

699,103

 

 

 

 

Three Months Ended
 September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues, net of interest and transaction-based expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

53,356

 

$

60,010

 

$

169,697

 

$

199,181

 

United Kingdom

 

79,354

 

72,764

 

253,485

 

235,884

 

Other

 

48,269

 

43,467

 

146,553

 

141,124

 

Total

 

$

180,979

 

$

176,240

 

$

569,735

 

$

576,189

 

 

 

 

September 30,
2014

 

December 31,
2013

 

Long-lived Assets, as defined:

 

 

 

 

 

United States

 

$

49,982

 

$

49,987

 

United Kingdom

 

10,132

 

11,762

 

Other

 

3,979

 

4,396

 

Total

 

$

64,093

 

$

66,145

 

 

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

 

18.    RELATED PARTIES

 

As of September 30, 2014, entities affiliated with BGC were the beneficial owner of more than 10 percent of the Company’s common stock.  Certain of the Company’s subsidiaries transact with BGC and its affiliated entities.  For the three and nine months ended September 30, 2014, the Company earned software revenues related to transactions with BGC and its affiliated entities.  In addition, for the three and nine months ended September 30, 2014 and 2013, the Company earned brokerage revenues from 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.

 

As discussed in Note 2 of the Condensed Consolidated Financial Statements, on July 30, 2014, the Company entered into the CME Merger Agreement with CME. Certain of the Company’s subsidiaries transact with CME and its affiliated entities.  For the three and nine months ended September 30, 2014 and 2013, the Company earned software and brokerage revenues related to transactions with CME and its affiliated entities.  For the three and nine months ended September 30, 2014 and 2013, the Company incurred communications and market data expenses directly related to CME and its affiliates. The revenues earned and expenses incurred related to CME and its affiliated entities did not have a material impact on any of the periods presented in the Company’s Condensed Consolidated Financial Statements.

 

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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

19.    SUBSEQUENT EVENTS

 

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

 

CME Registration Statement on Form S-4

 

On October 16, 2014, CME filed with the SEC a registration statement on Form S-4, which constituted (i) a prospectus of CME under Section 5 of the Securities Act of 1933, as amended, with respect to the shares of CME Class A Common Stock to be issued to  Company stockholders pursuant to the CME Merger Agreement, (ii) a proxy statement/prospectus of the Company under Section 14(a) of the Securities Exchange Act of 1934, as amended and (iii) notice of meeting with respect to a special meeting of Company stockholders, at which Company stockholders will be asked to consider and vote upon the adoption of the CME Merger Agreement.

 

BGC Unsolicited Tender Offer

 

On October 22, 2014, BGC, through its operating subsidiary, BGC Partners, L.P., a Delaware limited partnership, made an unsolicited conditional tender offer to purchase all outstanding shares of the Company’s common stock at a purchase price of $5.25 per share of the Company’s common stock, net to the seller in cash, without interest and less any required withholding taxes. On November 3, 2014, the  Special Committee again met with its financial and legal advisors, and after careful consideration, the Special Committee  unanimously recommended that the Company’s stockholders reject the offer and not tender their shares of the Company’s common stock because the Special Committee  believes that BGC’s tender offer (i) is illusory because it is subject to significant conditionality, including regulatory and other uncertainty, and (ii) is opportunistic based on the Corporation’s then traded market value. On November  4, 2014, the Company, acting upon the direction of the Special Committee  filed with the SEC a Recommendation/Solicitation Statement on Schedule 14D–9 detailing the recommendation of the Special Committee  in response to BGC’s tender offer and the reasons it rejected the offer.

 

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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 2013 Form 10-K;

 

                  the occurrence of any event, change or other circumstances that could give rise to the termination of the definitive agreements related to the CME Merger and related transactions (the “Definitive Agreements”);

 

                  the inability to complete the transactions contemplated by the Definitive Agreements due to the failure to obtain the required stockholder approval;

 

                  the inability to satisfy the other conditions specified in the Definitive Agreements, including without limitation the receipt of necessary governmental or regulatory approvals required to complete the transactions;

 

                  the risk that the proposed transactions disrupt current plans and operations, increase operating costs and difficulties associated with loss of customers and employee retention as a result of the announcement and consummation of the transactions;

 

                  the outcome of any legal proceedings that may be instituted against the Company, CME or others following announcement of the transactions;

 

                  the impact of BGC’s unsolicited tender offer to acquire all of the Company’s outstanding common stock, including distracting the attention of management and employees, requiring expenditure of substantial time and resources, disrupting our business activities and increasing the volatility of our stock price;

 

                  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;

 

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                  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;

 

                  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.

 

CME Merger and Unsolicited Tender Offer by BGC

 

On July 30, 2014, we entered into an Agreement and Plan of Merger with CME Group Inc. (“CME”) whereby we agreed to merge with and into a wholly owned subsidiary of CME (the “CME Merger”). At the effective time of the CME Merger, each share of GFI common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive a fraction of a share (the “Exchange Ratio”) of CME Class A common stock (“CME Class A Common Stock”).  The Exchange Ratio is a fraction, the numerator of which equals $4.55 and the denominator of which equals the average closing sales price of CME Class A Common Stock as reported on the NASDAQ Global Select Market for the ten trading days ending upon and including the trading day immediately before the closing date of the CME Merger. Concurrently with the CME Merger, pursuant to an agreement and plan of merger entered into on July 30, 2014, JPI will merge with and into a wholly owned subsidiary of CME and immediately following the CME Merger, pursuant a purchase agreement entered into on July 30, 2014, a private consortium of current GFI management will acquire GFI’s wholesale brokerage and clearing businesses for $165 million in cash and the assumption, at closing, of approximately $63 million of unvested deferred compensation and other obligations.  These transactions, which are expected to close during the first quarter of 2015, are subject to approval by GFI shareholders, including the affirmative vote of a majority of the disinterested GFI shareholders, as well as customary regulatory review and approvals. Upon the closing of the transactions, GFI’s wholesale brokerage business, including the Kyte Group, is expected to continue as a privately owned company.

 

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On September 8, 2014, Shaun D. Lynn, President of BGC Partners, Inc., a Delaware corporation (“BGC”), sent a letter to GFI’s board of directors (the “Board”) notifying the Board of BGC’s plan to commence a tender offer for 100% of the outstanding common stock of GFI at $5.25 per share in cash (the “BGC Proposal”). On September 11, 2014, following consultation with its legal and financial advisors, a special committee of the Company board of directors (the “Special Committee”) unanimously determined, which determination is required pursuant to the CME Merger Agreement, that the BGC Proposal could reasonably be expected to lead to a Superior Proposal (as defined in the CME Merger Agreement).  Following the meeting of the Special Committee, the Board met and determined in good faith, after consultation with outside legal counsel and independent financial advisors, that the BGC Proposal could reasonably be expected to lead to a Superior Proposal. On September 15, 2014, the Company issued a press release indicating the same.

 

On October 16, 2014, CME filed with the SEC a registration statement on Form S-4, which constituted (i) a prospectus of CME under Section 5 of the Securities Act of 1933, as amended, with respect to the shares of CME Class A Common Stock to be issued to Company stockholders pursuant to the CME Merger Agreement, (ii) a proxy statement/prospectus of the Company under Section 14(a) of the Securities Exchange Act of 1934, as amended and (iii) notice of meeting with respect to a special meeting of Company stockholders, at which Company stockholders will be asked to consider and vote upon the adoption of the CME Merger Agreement.

 

On October 22, 2014, BGC, through its operating subsidiary, BGC Partners, L.P., a Delaware limited partnership, made an unsolicited conditional tender offer to purchase all outstanding shares of GFI’s common stock at a purchase price of $5.25 per share of GFI’s common stock, net to the seller in cash, without interest and less any required withholding taxes. On November 3, 2014, the Special Committee again met with its financial and legal advisors, and after careful consideration, the Special Committee unanimously recommended that GFI’s stockholders reject the offer and not tender their shares of GFI’s common stock because the Special Committee believes that BGC’s tender offer (i) undervalues GFI and its prospects, (ii) is illusory because it is subject to significant regulatory and other uncertainty, and (iii) is opportunistic based on the Corporation’s then traded market value. On November 4, 2014, GFI, acting upon the direction of the Special Committee filed with the SEC a Recommendation/Solicitation Statement on Schedule 14D-9 detailing the recommendation of the Special Committee in response to BGC’s tender offer and the reasons it rejected the offer.

 

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. 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 lower in the third quarter of 2014 than that of the same period in 2013. However, currency market volatility began to increase during the latter half of the quarter, which led to increased trading volumes in the foreign currency markets in the third quarter of 2014 relative to the same quarter of 2013.  Many dealer banks reported increases in their fixed income, currencies and commodities revenues for the second quarter of 2014, 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.

 

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OTC market volumes were generally mixed across most asset classes during the third quarter of 2014, as compared to the same period in 2013. OTC markets continued to confront higher capital requirements and a low global short-term interest rate environment. The level of the Chicago Board Options Exchange Volatility Index (“VIX”), on average, was approximately 8% lower during the third quarter of 2014 compared with the same period in the prior year. The Bank of America Merrill Lynch (“BAML”) Global Financial Stress Index was also lower during the third quarter of 2014 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 third quarter of 2014, while market volatility in this product category generally declined compared to the same period in 2013. In addition, corporate bond issuances decreased for the three months ended September 30, 2014 as compared to the same prior year period, with the Securities Industry and Financial Markets Association (“SIFMA”) reporting an 18% decrease in corporate bond issuances, year over year.  However, SIFMA also reported a 14% increase in average daily volumes (“ADV”) for U.S. corporate debt in the third quarter of 2014 compared with the same prior year period, while BrokerTec, an electronic trading platform in the fixed income market, reported increased ADV of 3%, year over year.  Conversely, IntercontinentalExchange Inc. (“ICE”) reported a 6% decline in credit default swap trade execution revenues compared with the same period in 2013.  In comparison, our fixed income volumes increased on the majority of our desks in the third quarter of 2014 from the same period in 2013, while our margins generally declined.  Our brokerage revenues from fixed income products declined 1% in the three months ended September 30, 2014, 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 third quarter of 2014, compared with the third quarter of 2013, predominately driven by an increase in volatility during the period.  CME’s foreign exchange derivatives ADVs increased 1% in the third quarter of 2014, while EBS, an electronic trading platform for spot currencies, reported a 10% increase in volumes, year over year.  In addition, reported volumes for interest rate products generally increased in the three months ended September 30, 2014, as compared to the same period in 2013, with CME reporting a 23% increase in interest rate derivatives ADVs for the third quarter of 2014. Similarly, our volumes increased in the financial products category in the third quarter of 2014 from the same prior year period, while our margins were generally flat to down.  Overall, our brokerage revenues from financial products increased 21% in the three months ended September 30, 2014, 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.  Cash equity and equity derivative volume indicators in Europe and the U.S. were generally mixed in the third quarter of 2014 compared with the same prior year period.  International Securities Exchange’s equity derivative volumes declined 18% in the third quarter of 2014 as compared to the same period in 2013, while Eurex European equity derivative volumes declined 2% over that same period.  However, Options Clearing Corporation reported an 8% increase in cleared equity option contract volumes. In addition, ADVs for NYSE’s U.S. cash products declined 4% during the third quarter of 2014, while ADVs for Euronext’s European cash products (the vast majority of which are cash equity products) increased 2%, year over year. Our equity volumes improved on a majority of our desks in the third quarter of 2014 as compared to the same prior year period, with less favorable trading margins having a negative impact on certain products within our cash equity business. Our brokerage revenues from all equity products declined 9% in the third quarter of 2014, 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 declined in the third quarter of 2014 as compared to the same period in 2013. CME’s Energy derivatives ADVs decreased 3% in the three months ended September 30, 2014 compared with the same prior year period, while ICE’s Energy derivatives ADVs decreased 8%, year over year. In addition, ICE reported an increase of approximately 11% in the quarterly rate per contract (“RPC”), while CME’s reported RPC declined approximately 1%. Our volumes across the various energy products for which we provide brokerage services generally declined in the third quarter of 2014, from the comparable period in 2013, while, revenues for certain commodity products were negatively impacted by a decrease in margins. Our brokerage revenues from commodity products declined 11% in the third quarter of 2014, as compared to the same period in the prior year.

 

Clearing Services Volumes.  Our Kyte subsidiary’s clearing operations are subject to many of the same drivers that influence OTC market volumes.  Kyte’s clearing revenues declined for the three months ended September 30, 2014 compared with the same prior year period, primarily due to a decrease in trading volume.

 

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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. 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 continue to exit or reduce 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 in their infancy and there remains significant confusion regarding the interpretation of these regulations and 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 year, we have continued to expand 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 the impact of the Dodd-Frank Act will encourage the growth of hybrid electronic trading for a number of products we broker and we believe that our technological capability will position us well in the future as regulatory rules are finalized and implemented.  For example, revenues from our electronic matching sessions in cash fixed income increased in the third quarter of 2014 compared to the same quarter of 2013.

 

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 September 30, 2014:

 

Our total revenues decreased 1.0% to $210.3 million for the three months ended September 30, 2014 from $212.4 million for the three months ended September 30, 2013. The main factors contributing to this decrease in our revenues were:

 

                  Decreased clearing services revenues due to a decline in the number of trades cleared by our Kyte subsidiary;

                  Low volatility in certain markets in which we provide brokerage services, in addition to low global interest rate environments adversely impacting trading volumes for much of the quarter; 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:

 

                  Increased trading volumes in our financial product category, particularly towards the latter half of the third quarter, as currency market volatility began to increase from historically low rates;

 

                  Increased customer usage of our electronic trading platforms and matching sessions in cash fixed income products; and

 

                  The continued strong performance of our Trayport subsidiary, which led to an increase in our software, analytics and market data revenue.

 

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 1.3% to $122.7 million for the three months ended September 30, 2014 from $121.1 million for the three months ended September 30, 2013.

 

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. Additionally, a portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period. For many of our brokerage employees, bonuses constitute a significant component of their overall compensation. Broker performance bonuses increased to $34.4 million for the three months ended September 30, 2014 from $32.6 million for the three months ended September 30, 2013.

 

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, restricted stock units (“RSUs”) or as deferred cash awards, or a combination thereof, and are typically expensed over the term of the related employment agreement for cash bonuses and the related service period for RSUs and deferred cash awards, 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 and forfeiture provisions for unvested RSUs and deferred cash 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 decreased to $6.9 million for the three months ended September 30, 2014, as compared to $8.0 million for the three months ended September 30, 2013.

 

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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 September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

(dollars in thousands)

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Agency commissions

 

$

112,303

 

$

109,365

 

$

343,410

 

$

358,413

 

Principal transactions

 

41,453

 

41,841

 

139,090

 

143,468

 

Total brokerage revenues

 

153,756

 

151,206

 

482,500

 

501,881

 

Clearing services revenues

 

26,373

 

32,722

 

89,139

 

110,225

 

Interest income from clearing services

 

579

 

455

 

1,679

 

1,623

 

Equity in net earnings of unconsolidated businesses

 

639

 

1,566

 

4,686

 

6,925

 

Software, analytics and market data

 

26,095

 

22,472

 

77,455

 

66,438

 

Other income, net

 

2,859

 

4,012

 

13,686

 

12,011

 

Total revenues

 

210,301

 

212,433

 

669,145

 

699,103

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

24,786

 

31,620

 

84,362

 

106,952

 

Transaction fees on brokerage services

 

4,330

 

4,430

 

14,488

 

15,572

 

Interest expense from clearing services

 

206

 

143

 

560

 

390

 

Total interest and transaction-based expenses

 

29,322

 

36,193

 

99,410

 

122,914

 

 Revenues, net of interest and transaction-based expenses

 

180,979

 

176,240

 

569,735

 

576,189

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

122,720

 

121,109

 

390,420

 

392,737

 

Communications and market data

 

13,335

 

13,747

 

40,202

 

41,077

 

Travel and promotion

 

7,184

 

7,380

 

22,924

 

23,298

 

Rent and occupancy

 

7,835

 

7,901

 

23,811

 

22,152

 

Depreciation and amortization

 

8,480

 

8,320

 

25,873

 

24,962

 

Professional fees

 

13,650

 

5,712

 

29,928

 

18,824

 

Interest on borrowings

 

8,466

 

7,612

 

24,393

 

22,475

 

Impairment of goodwill

 

 

 

121,619

 

 

Other expenses

 

6,825

 

5,615

 

21,526

 

24,138

 

Total other expenses

 

188,495

 

177,396

 

700,696

 

569,663

 

(Loss) income before benefit from income taxes

 

(7,516

)

(1,156

)

(130,961

)

6,526

 

Benefit from income taxes

 

(56

)

(1,127

)

(30,239

)

(5,267

)

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

 

(7,460

)

(29

)

(100,722

)

11,793

 

Less: Net income attributable to non-controlling interests

 

231

 

432

 

762

 

889

 

GFI’s net (loss) income

 

$

(7,691

)

$

(461

)

$

(101,484

)

$

10,904

 

 

47



Table of Contents

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

 

 

 

 

 

 

 

 

Agency commissions

 

62.1

%

62.1

%

60.3

%

62.2

%

Principal transactions

 

22.9

 

23.7

 

24.4

 

24.9

 

Total brokerage revenues

 

85.0

 

85.8

 

84.7

 

87.1

 

Clearing services revenues

 

14.6

 

18.5

 

15.6

 

19.1

 

Interest income from clearing services

 

0.3

 

0.3

 

0.3

 

0.3

 

Equity in net earnings of unconsolidated businesses

 

0.3

 

0.9

 

0.8

 

1.2

 

Software, analytics and market data

 

14.4

 

12.7

 

13.6

 

11.5

 

Other income, net

 

1.6

 

2.3

 

2.4

 

2.1

 

Total revenues

 

116.2

 

120.5

 

117.4

 

121.3

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

13.7

 

17.9

 

14.8

 

18.5

 

Transaction fees on brokerage services

 

2.4

 

2.5

 

2.5

 

2.7

 

Interest expense from clearing services

 

0.1

 

0.1

 

0.1

 

0.1

 

Total interest and transaction-based expenses

 

16.2

 

20.5

 

17.4

 

21.3

 

Revenues, net of interest and transaction-based expenses

 

100.0

%

100.0

%

100.0

%

100.0

%

Expenses

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

67.8

 

68.7

 

68.5

 

68.2

 

Communications and market data

 

7.3

 

7.8

 

7.1

 

7.1

 

Travel and promotion

 

4.0

 

4.2

 

4.0

 

4.0

 

Rent and occupancy

 

4.3

 

4.5

 

4.2

 

3.9

 

Depreciation and amortization

 

4.7

 

4.7

 

4.5

 

4.3

 

Professional fees

 

7.5

 

3.3

 

5.3

 

3.3

 

Interest on borrowings

 

4.7

 

4.3

 

4.3

 

3.9

 

Impairment of goodwill

 

0.0

 

0.0

 

21.3

 

0.0

 

Other expenses

 

3.8

 

3.2

 

3.8

 

4.2

 

Total other expenses

 

104.1

%

100.7

%

123.0

%

98.9

%

(Loss) income before benefit from income taxes

 

(4.1

)

(0.7

)

(23.0

)

1.1

 

Benefit from income taxes

 

0.0

 

(0.6

)

(5.3

)

(0.9

)

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

 

(4.1

)

(0.1

)

(17.7

)

2.0

 

Less: Net income attributable to non-controlling interests

 

0.1

 

0.2

 

0.1

 

0.1

 

GFI’s net (loss) income

 

(4.2

)%

(0.3

)%

(17.8

)%

1.9

%

 

48



Table of Contents

 

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

 

Net Loss

 

GFI’s net loss was $7.7 million for the three months ended September 30, 2014 compared to net loss of $0.5 million for the same period in 2013. We generated total revenues of $210.3 million for the third quarter of 2014 compared with $212.4 million for the same period in the prior year. The net decrease in total revenues reflected lower clearing services revenues, partially offset by increased revenues from Software, analytics and market data and higher brokerage revenues, principally due to the factors set forth above under heading “Financial Overview.”

 

Total interest and transaction-based expenses decreased by $6.9 million for the three months ended September 30, 2014 from the same quarter in 2013. The decrease was primarily as a result of lower transaction fees on clearing services at our Kyte subsidiary, predominantly due to a decrease in the number of trades cleared.

 

Total expenses, excluding interest and transaction-based expenses, were $188.5 million for the three months ended September 30, 2014 compared with $177.4 in the same prior year period.  The increase was primarily attributable to an increase in professional fees related to the pending CME Merger, and, to a lesser extent, an increase in compensation and employee benefits expense.

 

We recorded a benefit from income taxes of $56 thousand for the three months ended September 30, 2014 as compared to $1.1 million for the three months ended September 30, 2013. 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 September 30, 2014 as compared to the same period in 2013 (dollars in thousands, except percentage data):

 

 

 

For the Three Months Ended September 30,

 

 

 

2014

 

%*

 

2013

 

%*

 

Increase
(Decrease)

 

%**

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

 

$

41,154

 

22.8

%

$

41,583

 

23.6

%

$

(429

)

(1.0

)%

Equity

 

23,475

 

13.0

 

25,866

 

14.7

 

(2,391

)

(9.2

)

Financial

 

54,175

 

29.9

 

44,700

 

25.4

 

9,475

 

21.2

 

Commodity

 

34,952

 

19.3

 

39,057

 

22.1

 

(4,105

)

(10.5

)

Total brokerage revenues

 

153,756

 

85.0

 

151,206

 

85.8

 

2,550

 

1.7

 

Clearing services revenues

 

26,373

 

14.6

 

32,722

 

18.5

 

(6,349

)

(19.4

)

Other revenues

 

30,172

 

16.6

 

28,505

 

16.2

 

1,667

 

5.8

 

Total revenues

 

210,301

 

116.2

 

212,433

 

120.5

 

(2,132

)

(1.0

)

Total interest and transaction-based expenses

 

29,322

 

16.2

 

36,193

 

20.5

 

(6,871

)

(19.0

)

Revenues, net of interest and transaction-based expenses

 

$

180,979

 

100.0

%

$

176,240

 

100.0

%

$

4,739

 

2.7

%

 


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

**                                  Denotes % change of dollar amount of revenue for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013

 

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 September 30, 2014 as compared to the same period in 2013.

 

·                  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 September 30, 2014 increased approximately 10%, as compared to the same prior year period.

 

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Table of Contents

 

Management periodically reevaluates its estimation of brokerage headcount by product category with regard to brokers who broker multiple products and with regard to employees whose positions may have changed between front-office and support staff.   For comparative purposes, prior year average monthly brokerage personnel headcount amounts disclosed below have been adjusted to conform to the methodology used in the current period.

 

·                  Fixed income product brokerage revenues decreased $0.4 million, or 1.0%, for the three months ended September 30, 2014 compared to the same period in 2013.  Revenues from fixed income derivative products decreased approximately 9.6%, while revenues from fixed income cash products increased by approximately 4.4%, year over year.  The decrease in our fixed income derivative revenues was largely as a result of continued low global interests rates and low volatility in the fixed income product category.  Partially offsetting this decrease was an increase in our fixed income brokerage revenues generated by certain desks in Europe and Asia. Our average monthly brokerage personnel headcount for fixed income products decreased by 34 to 279 employees for the three months ended September 30, 2014.

 

·                  The decrease in equity product brokerage revenues of $2.4 million, or 9.2%, for the three months ended September 30, 2014 compared with the same prior year period, was primarily attributable to lower equity derivative trading volumes in the U.S.  Our average monthly brokerage personnel headcount for equity products decreased by 21 to 159 employees for the three months ended September 30, 2014.

 

·                  The increase in financial product brokerage revenues of $9.5 million, or 21.2%, for the three months ended September 30, 2014 compared with the same period in 2013, was primarily attributable to increased trading volumes in this product category, particularly towards the latter half of the third quarter, as currency market volatility began to increase from historically low rates.   Our average monthly brokerage personnel headcount for financial products decreased by 38 to 347 employees for the three months ended September 30, 2014.

 

·                  Commodity product brokerage revenues decreased $4.1 million, or 10.5%, for the three months ended September 30, 2014 compared to the same prior year quarter.  The decrease was primarily attributable to lower trading volumes in the U.S., principally as a result of reduced trading operations of certain commodities dealers amid the uncertainty surrounding the regulatory landscape for market participants and transactions.  This decrease was partially offset by an increase in our commodity brokerage revenues in Europe.  Our average monthly brokerage personnel headcount for commodity products increased by 2 to 275 employees for the three months ended September 30, 2014.

 

Clearing Services Revenue

 

·                  Clearing services revenues decreased by $6.3 million, or 19.4%, in the three months ended September 30, 2014 compared to the same prior year period, primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.  Clearing services revenues are related solely to the operations of Kyte and consist of fees charged to our clearing service customers for clearing, settlement and other services. Kyte also incurs exchange fees on behalf of its customers, which Kyte then charges to its customers, and are therefore included in equal amounts in both revenues and expenses.

 

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Table of Contents

 

Other Revenues

 

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

 

 

 

For the Three Months Ended September 30,

 

 

 

2014

 

2013

 

Increase
(Decrease)

 

%*

 

Software, analytics and market data

 

$

26,095

 

$

22,472

 

$

3,623

 

16.1

%

Equity in net earnings of unconsolidated businesses

 

639

 

1,566

 

(927

)

(59.2

)

Remeasurement of foreign currency transactions and balances

 

(2,809

)

2,212

 

(5,021

)

(227.0

)

Net realized and unrealized gains (losses) from foreign currency hedges

 

2,199

 

(735

)

2,934

 

(399.2

)

Interest income on short-term investments

 

166

 

175

 

(9

)

(5.1

)

Interest income from clearing services

 

579

 

455

 

124

 

27.3

 

Other

 

3,303

 

2,360

 

943

 

40.0

 

Total other revenues

 

$

30,172

 

$

28,505

 

$

1,667

 

5.8

%

 


*                             Denotes % change of dollar amount of revenue for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013

 

Other revenues increased by $1.7 million for the three months ended September 30, 2014 as compared to the same quarter in 2013. The increase primarily reflected the continued growth at our Trayport subsidiary, which is included in our Software, analytics and market data revenue line.  Revenues at Trayport grew primarily due to an expansion of product and service offerings to its existing customer base. The increase in Other revenues was also due, in part, to an increase in net realized and unrealized gains related to foreign currency forward hedges.  These increases were partially offset by an increase in net losses on remeasurement of foreign currency transactions and balances primarily due to (i) fluctuations in certain foreign currency exchange rates and (ii) a translation gain on liquidation of foreign subsidiary during the third quarter of 2013.

 

Interest and Transaction-Based Expenses

 

·                  The decrease in total interest and transaction-based expenses of $6.9 million in the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.  Kyte pays to use the services of third parties who act as general clearing members of clearing houses in order to clear cash and derivative products for its customers. Kyte also incurs exchange fees on each trade on behalf of its clients, which are pass-through costs and are therefore included in equal amounts in both revenues and expenses. The margin on clearing services revenues increased to 6.0% for the three months ended September 30, 2014 as compared to 3.4% for the year-ago period, principally due to lower trading volumes during the quarter, and more favorable margins obtained from the restructuring of certain contracts with clearing customers.

 

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Table of Contents

 

Expenses

 

The following table sets forth the changes in expenses for the three months ended September 30, 2014 as compared to the same period in 2013 (dollars in thousands, except percentage data):

 

 

 

For the Three Months Ended September 30,

 

 

 

2014

 

%*

 

2013

 

%*

 

Increase
(Decrease)

 

%**

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

$

122,720

 

67.8

%

$

121,109

 

68.7

%

$

1,611

 

1.3

%

Communications and market data

 

13,335

 

7.4

 

13,747

 

7.8

 

(412

)

(3.0

)

Travel and promotion

 

7,184

 

4.0

 

7,380

 

4.2

 

(196

)

(2.7

)

Rent and occupancy

 

7,835

 

4.3

 

7,901

 

4.5

 

(66

)

(0.8

)

Depreciation and amortization

 

8,480

 

4.7

 

8,320

 

4.7

 

160

 

1.9

 

Professional fees

 

13,650

 

7.5

 

5,712

 

3.3

 

7,938

 

139.0

 

Interest on borrowings

 

8,466

 

4.7

 

7,612

 

4.3

 

854

 

11.2

 

Other expenses

 

6,825

 

3.8

 

5,615

 

3.2

 

1,210

 

21.5

 

Total other expenses

 

$

188,495

 

104.2

%

$

177,396

 

100.7

%

$

11,099

 

6.3

%

 


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

**                                  Denotes % change of dollar amount of expense for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013

 

Compensation and Employee Benefits

 

·                  Compensation and employee benefits expense increased $1.6 million for the three months ended September 30, 2014 as compared with the same prior year period. The increase was predominantly due to (i) higher back office salaries expense partially related to the hiring of additional technology and regulatory compliance personnel and (ii) higher performance bonus expense on increased brokerage revenues. The increase in these employee compensation costs was also impacted by less favorable foreign exchange rates in the third quarter of 2014.  Partially offsetting these increases was a decrease in amortization expense on previously paid sign-on and retention bonuses and share-based compensation.

 

·                  Total compensation and employee benefits as a percentage of revenues, net of interest and transaction-based expenses, decreased to 67.8% for the three months ended September 30, 2014 compared to 68.7% for the same period in 2013.

 

·                  Performance bonus expense represented 33.7% and 33.3% of total compensation and employee benefits expense for the three months ended September 30, 2014 and 2013, respectively. A portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period. Additionally, sign-on and retention bonus expense, which includes the amortization of cash sign-on and retention bonuses initially paid in prior periods, represented 5.8% and 7.1% of total compensation and employee benefits expense for the three months ended September 30, 2014 and 2013, respectively.

 

All Other Expenses

 

·                  The increase in professional fees of $7.9 million was primarily attributable to services provided to the Company related to the pending CME Merger during the third quarter of 2014.

 

·                  The increase in other expenses of $1.2 million was due to various individually small non-recurring items.

 

Income Taxes

 

·                  We recorded a benefit from income taxes of $56 thousand for the three months ended September 30, 2014, as compared to $1.1 million for the three months ended September 30, 2013.  The net increase in benefit from income taxes was primarily due to U.S. taxes associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries. The remaining change in income tax expense relative to the same period in 2013 is primarily due to a change in the geographical mix of pre-tax profits and losses.

 

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Table of Contents

 

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

 

Net (Loss) Income

 

GFI’s net loss was $101.5 million for the nine months ended September 30, 2014 compared to net income of $10.9 million for the same period in 2013.  We generated total revenues of $669.1 million for the nine months ended September 30, 2014 compared with $699.1 million for the same period in the prior year. The net decrease in total revenues was largely as result of lower clearing services revenues, which declined $21.1 million, or 19.1%, primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.  In addition, the net decrease in total revenues was also partly attributable to lower brokerage revenues, which decreased $19.4 million, or 3.9%, primarily due to lower trading volumes, which were adversely impacted by a combination of ongoing regulatory change, a continuously low global short-term interest rate environment, and low volatility for most of the period.  Partially offsetting the decline in these revenues was an increase in software, analytics and market data revenues, of $11.0 million, or 16.6%, mostly due to an increase in revenues at our Trayport subsidiary resulting from an expansion of product and service offerings to its existing customer base.

 

Total interest and transaction-based expenses decreased by $23.5 million for the nine months ended September 30, 2014 from the same period in 2013. The decrease was primarily as a result of lower transaction fees on clearing services at our Kyte subsidiary, largely due to a decrease in the number of trades cleared.

 

Total expenses, excluding interest and transaction-based expenses, were $700.7 million for the nine months ended September 30, 2014 compared with $569.7 million in the same prior year period. The increase was primarily related to aggregate non-cash goodwill impairment charges of $121.6 million recorded in the second quarter of 2014 and, to a lesser extent, an increase in professional fees related to the pending CME Merger. Slightly offsetting these charges were (i) a decrease in compensation and employee benefits expense due to lower performance bonus expense on lower brokerage revenues and lower broker salary expense on reduced brokerage personnel headcount and (ii) a decrease in other expenses, principally related to legal costs incurred during the first quarter of 2013 in connection with previously opened desks and offices.

 

We recorded a benefit from income taxes of $30.2 million for the nine months ended September 30, 2014 as compared to $5.3 million for the nine months ended September 30, 2013. The change was primarily due to the factors set forth below under the section “Income Taxes.”

 

53



Table of Contents

 

Revenues

 

The following table sets forth the changes in revenues for the nine months ended September 30, 2014 as compared to the same period in 2013 (dollars in thousands, except percentage data):

 

 

 

For the Nine Months Ended September 30,

 

 

 

2014

 

%*

 

2013

 

%*

 

Increase
(Decrease)

 

%**

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

 

$

136,747

 

24.0

%

$

136,903

 

23.8

%

$

(156

)

(0.1

)%

Equity

 

79,205

 

13.9

 

90,188

 

15.7

 

(10,983

)

(12.2

)

Financial

 

152,373

 

26.8

 

151,030

 

26.2

 

1,343

 

0.9

 

Commodity

 

114,175

 

20.0

 

123,760

 

21.4

 

(9,585

)

(7.7

)

Total brokerage revenues

 

482,500

 

84.7

 

501,881

 

87.1

 

(19,381

)

(3.9

)

Clearing services revenues

 

89,139

 

15.6

 

110,225

 

19.1

 

(21,086

)

(19.1

)

Other revenues

 

97,506

 

17.1

 

86,997

 

15.1

 

10,509

 

12.1

 

Total revenues

 

669,145

 

117.4

 

699,103

 

121.3

 

(29,958

)

(4.3

)

Total interest and transaction-based expenses

 

99,410

 

17.4

 

122,914

 

21.3

 

(23,504

)

(19.1

)

Revenues, net of interest and transaction-based expenses

 

$

569,735

 

100.0

%

$

576,189

 

100.0

%

$

(6,454

)

(1.1

)%

 


 

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

**                                  Denotes % change of dollar amount of revenue for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013

 

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 nine months ended September 30, 2014 as compared to the same period in 2013.

 

·                  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 nine months ended September 30, 2014 increased approximately 4%, as compared to the same prior year period.

 

Management periodically reevaluates its estimation of brokerage headcount by product category with regard to brokers who broker multiple products and with regard to employees whose positions may have changed between front-office and support staff.  For comparative purposes, prior year average monthly brokerage personnel headcount amounts disclosed below have been adjusted to conform to the methodology used in the current period.

 

·                  Fixed income product brokerage revenues decreased $0.2 million, or less than 1%, for the nine months ended September 30, 2014 compared to the same period in 2013. Revenues from cash fixed income products increased approximately 4.3%, while revenues from fixed income derivative products decreased by 7.2%, year over year. The overall increase in fixed income product revenues was primarily attributable to revenues generated by new desks which commenced operations during the second quarter of 2013, as well as an increase in revenues generated by our electronic matching sessions. Largely offsetting this increase was a decrease in our fixed income derivative revenues primarily as a result of continued low global interests rates and low volatility, as well as ongoing regulatory change which had an adverse effect on this product category. Our average monthly brokerage personnel headcount for fixed income products decreased by 14 to 282 employees for the nine months ended September 30, 2014.

 

·                  The decrease in equity product brokerage revenues of $10.9 million, or 12.2%, for the nine months ended September 30, 2014 compared with the same period in 2013, was primarily attributable to lower equity derivative trading volumes in the U.S. and Europe, and reduced brokerage personnel headcount in this product category. Our average monthly brokerage personnel headcount for equity products decreased by 24 to 165 employees for the nine months ended September 30, 2014.

 

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Table of Contents

 

·                  Financial product brokerage revenues increased $1.3 million, or slightly less than 1%, for the nine months ended September 30, 2014 compared with same prior year period. The increase was primarily attributable to increased trading volumes in this product category towards the latter half of the third quarter as currency market volatility began to increase from historically low rates.  Partially offsetting this third quarter increase was low trading volumes exhibited throughout a large portion of the period, which was characterized by low volatility and the unfavorable effects of an evolving regulatory environment.  Our average monthly brokerage personnel headcount for financial products decreased by 38 to 355 employees for the nine months ended September 30, 2014.

 

·                  The decrease in commodity product brokerage revenues of $9.6 million, or 7.7%, in the nine months ended September 30, 2014 was primarily attributable to lower trading volumes in the U.S., principally as a result of reduced trading operations of certain commodities dealers amid the uncertainty surrounding the regulatory landscape for certain market participants and transactions.  This decrease was partially offset by an increase in our commodity brokerage revenues in Europe. Our average monthly brokerage personnel headcount for commodity products decreased by 12 to 270 employees for the nine months ended September 30, 2014.

 

Clearing Services Revenue

 

·                  Clearing services revenues decreased by $21.1 million, or 19.1%, in the nine months ended September 30, 2014 compared to the same period in 2013, primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.  Clearing services revenues are related solely to the operations of Kyte and consist of fees charged to our clearing service customers for clearing, settlement and other services. Kyte also incurs exchange fees on behalf of its customers, which Kyte then charges to its customers, and are therefore included in equal amounts in both revenues and expenses.

 

Other Revenues

 

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

 

 

 

For the Nine Months Ended September 30,

 

 

 

2014

 

2013

 

Increase
(Decrease)

 

%*

 

Software, analytics and market data

 

$

77,455

 

$

66,438

 

$

11,017

 

16.6

%

Equity in net earnings of unconsolidated businesses

 

4,686

 

6,925

 

(2,239

)

(32.3

)

Remeasurement of foreign currency transactions and balances

 

(2,694

)

1,757

 

(4,451

)

(253.3

)

Net realized and unrealized gains (losses) from foreign currency hedges

 

3,389

 

(1,516

)

4,905

 

(323.5

)

Interest income on short-term investments

 

421

 

514

 

(93

)

(18.1

)

Interest income from clearing services

 

1,679

 

1,623

 

56

 

3.5

 

Other

 

12,570

 

11,256

 

1,314

 

11.7

 

Total other revenues

 

$

97,506

 

$

86,997

 

$

10,509

 

12.1

%

 


*                             Denotes % change of dollar amount of revenue for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013

 

Other revenues increased by $10.5 million for nine months ended September 30, 2014 as compared to the same period in 2013. The increase primarily reflected the continued growth at our Trayport subsidiary, which is included in our Software, analytics and market data revenue line.  Revenues at Trayport grew primarily due to an expansion of product and service offerings to its existing customer base. The increase in Other revenues was also due, in part, to an increase in net unrealized gains related to foreign currency forward hedges.  These increases were partially offset by an increase in net losses on remeasurement of foreign currency transactions and balances primarily due to (i) fluctuations in certain foreign currency exchange rates and (ii) a translation gain on liquidation of a foreign subsidiary during the third quarter of 2013.  Also offsetting these increases was a decrease in equity in net earnings of unconsolidated businesses primarily as a result of a decline in earnings of several Kyte backed traders during the nine months ended September 30, 2014

 

Interest and Transaction-Based Expenses

 

·                  The decrease in total interest and transaction-based expenses of $23.5 million in the nine months ended September 30, 2014 from the same period in 2013 was primarily due to a decrease in the number of trades cleared by our Kyte subsidiary. 

 

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                        Kyte pays to use the services of third parties who act as general clearing members of clearing houses in order to clear cash and derivative products for its customers. Kyte also incurs exchange fees on each trade on behalf of its clients, which are pass-through costs and are therefore included in equal amounts in both revenues and expenses. The margin on clearing services revenues increased to 5.4% for the nine months ended September 30, 2014 as compared to 3.0% for the same year-ago period, principally due to lower trading volumes during the nine months ended September 30, 2014 and more favorable margins obtained from the restructuring of certain contracts with clearing customers.

 

Expenses

 

The following table sets forth the changes in expenses for the nine months ended September 30, 2014 as compared to the same period in 2013 (dollars in thousands, except percentage data):

 

 

 

For the Nine Months Ended September 30,

 

 

 

2014

 

%*

 

2013

 

%*

 

Increase
(Decrease)

 

%**

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

$

390,420

 

68.5

%

$

392,737

 

68.2

%

$

(2,317

)

(0.6

)%

Communications and market data

 

40,202

 

7.1

 

41,077

 

7.1

 

(875

)

(2.1

)

Travel and promotion

 

22,924

 

4.0

 

23,298

 

4.0

 

(374

)

(1.6

)

Rent and occupancy

 

23,811

 

4.2

 

22,152

 

3.9

 

1,659

 

7.5

 

Depreciation and amortization

 

25,873

 

4.5

 

24,962

 

4.3

 

911

 

3.6

 

Professional fees

 

29,928

 

5.3

 

18,824

 

3.3

 

11,104

 

59.0

 

Interest on borrowings

 

24,393

 

4.3

 

22,475

 

3.9

 

1,918

 

8.5

 

Impairment of goodwill

 

121,619

 

21.3

 

 

0.0

 

121,619

 

0.0

 

Other expenses

 

21,526

 

3.8

 

24,138

 

4.2

 

(2,612

)

(10.8

)

Total other expenses

 

$

700,696

 

123.0

%

$

569,663

 

98.9

%

$

131,033

 

23.0

 

 


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

**                                  Denotes % change of dollar amount of expense for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013

 

Compensation and Employee Benefits

 

·                  The decrease in compensation and employee benefits expense of $2.3 million for the nine months ended September 30, 2014 was predominately due to (i) lower performance bonus expense on lower brokerage revenues for the nine months ended September 30, 2014, (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 and share-based compensation. Partially offsetting this decrease was higher back office salaries expense related to the hiring of additional technology and regulatory compliance personnel.

 

·                  Total compensation and employee benefits as a percentage of revenues, net of interest and transaction-based expenses, increased to 68.5% for the nine months ended September 30, 2014 compared to 68.2% for the same period in 2013.

 

·                  Performance bonus expense represented 35.7% and 36.5% of total compensation and employee benefits expense for the nine months ended September 30, 2014 and 2013, respectively. A portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period. Additionally, sign-on and retention bonus expense, which includes the amortization of cash sign-on and retention bonuses initially paid in prior periods, represented 6.1% and 7.2% of total compensation and employee benefits expense for the nine months ended September 30, 2014 and 2013, respectively.

 

All Other Expenses

 

·                  The increase in professional fees of $11.1 million was largely attributable to services provided to the Company related to the pending CME Merger during the nine months ended September 30, 2014.

 

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·                  The decrease in other expenses of $2.6 million was primarily attributable to legal costs incurred during the nine months ended September 30, 2013 in connection with previously opened desks and offices.

 

·                  The increase in interest on borrowings of $1.9 million was largely due to higher interest expense on our 8.375% Senior Notes as a result of the effect of downgrades to the Company’s credit rating by rating agencies in 2013.

 

·                  The increase in rent and occupancy expense of $1.7 million was due, in part, to one of our U.K. subsidiaries relocating to office space with a higher rental cost during the second quarter of 2013.

 

·                  As discussed in Note 5 to the Condensed Consolidated Financial Statements, during the second quarter of 2014, we recorded non-cash, pre-tax charges of $121.6 million related to the impairment of goodwill in three of our reporting units: (i) $83.3 million recorded in Americas Brokerage, (ii) $14.8 million recorded in EMEA Brokerage and (iii) $23.5 million recorded in our Clearing and Backed Trading.

 

Income Taxes

 

·                  We recorded a benefit from income taxes of $30.2 million for the nine months ended September 30, 2014, as compared to $5.3 million for the nine months ended September 30, 2013.  The benefit from income taxes for the nine months ended September 30, 2014 was primarily a result of a $29.2 million discrete tax benefit attributable to non-cash goodwill impairment charges recorded in the U.S. during the second quarter of 2014.  The nine months ended September 30, 2013 were primarily impacted by the following items:  (i) a tax benefit of $2.7 million under the American Taxpayer Relief Act of 2012 related to taxes previously provided for, (ii) a tax benefit of $1.2 million arising from a change in our view about the deductibility of a reserve previously deemed nondeductible, as a result of new information received in the first quarter of 2013 and (iii) the release of a tax liability of $1.4 million in a foreign subsidiary where the statute of limitations has now expired.  The effective tax rates for both periods were impacted by a geographical mix of pre-tax profits and losses.

 

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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 September 30, 2014 Compared to the Three Months Ended September 30, 2013

 

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 September 30, 2014

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

55,443

 

$

78,355

 

$

19,472

 

$

32,382

 

$

24,649

 

$

210,301

 

Revenues, net of interest and transaction-based expenses

 

52,875

 

76,170

 

19,377

 

7,097

 

25,460

 

180,979

 

Other expenses

 

37,289

 

51,721

 

13,699

 

9,003

 

76,783

 

188,495

 

(Loss) income before income taxes

 

15,586

 

24,449

 

5,678

 

(1,906

)

(51,323

)

(7,516

)

 

 

 

 

Three Months Ended September 30, 2013

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

60,384

 

$

72,275

 

$

15,730

 

$

40,721

 

$

23,323

 

$

212,433

 

Revenues, net of interest and transaction-based expenses

 

57,995

 

70,283

 

15,653

 

8,702

 

23,607

 

176,240

 

Other expenses

 

42,480

 

51,205

 

12,215

 

9,769

 

61,727

 

177,396

 

Income (loss) before income taxes

 

15,515

 

19,078

 

3,438

 

(1,067

)

(38,120

)

(1,156

)

 

Total Revenues

 

·                  Total revenues for EMEA Brokerage and Asia Brokerage increased $6.1 million, or 8.4%, and $3.7 million, or 23.8%, respectively, for the third quarter of 2014. Total revenues for Americas Brokerage decreased $4.9 million, or 8.2%, for the three months ended September 30, 2014. Total revenues for our three brokerage segments in total increased by $4.9 million, or 3.3%, to $153.3 million for the three months ended September 30, 2014. The decrease in total revenues for our brokerage segments was primarily due to the factors described above under “Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013”.

 

·                  Total revenues for Clearing and Backed Trading decreased $8.3 million, or 20.5%, for the three months ended September 30, 2014. The decrease was primarily due to a decrease in clearing services revenues as a result of a lower number of trades cleared by our Kyte subsidiary, and to a lesser extent, lower trading revenues for this segment.

 

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·                  Total revenues for All Other increased by $1.3 million, or 5.7%, for the three months ended September 30, 2014. This increase was due, in large part, to (i) an increase in software revenues at our Trayport subsidiary, primarily attributable to an expansion of product and service offerings to its existing customer base. This increase was partially offset by a net decrease in Other income, net associated with net losses on remeasurement of foreign currency transactions and balances primarily due to (i) fluctuations in certain foreign currency exchange rates and (ii) a translation gain on liquidation of foreign subsidiary during the third quarter of 2013.

 

Total interest and transaction-based expenses

 

·                  Total interest and transaction-based fees for our three brokerage segments increased to $4.8 million for the three months ended September 30, 2014, as compared to $4.5 million for the same period in 2013.

 

·                  Total interest and transaction-based fees for Clearing and Backed Trading decreased by $6.7 million to $25.3 million for the three months ended September 30, 2014 from $32.0 million for the prior year third quarter, primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.

 

Other Expenses

 

·                  Other expenses for Americas Brokerage decreased $5.2 million, or 12.2% for the third quarter of 2014. The decrease for the Americas brokerage segment was largely due to a decrease in compensation and employee benefits expense resulting from (i) lower performance bonus expense on lower brokerage revenues for the third quarter of 2014 and (ii) lower broker salary expense on reduced brokerage headcount. Other expenses for Asia Brokerage and EMEA Brokerage increased $1.5 million, or 12.1%, and $0.5 million, or 1.0%, respectively, for the three months ended September 30, 2014, compared with the same period in 2013. The increase for the Asia brokerage segment was primarily due to an increase in compensation and employee benefits expense resulting from higher performance bonus expense on higher brokerage revenues. Total Other expenses for our three brokerage segments decreased by $3.2 million, or 3.0%, to $102.7 million for the three months ended September 30, 2014.

 

·                  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 $0.8 million, or 7.8% for the three months ended September 30, 2014. The decrease was due, in part, to a decrease in communications and market data expense.

 

·                  Other expenses for All Other increased by $15.1 million, or 24.4% for the three months ended September 30, 2014. The increase was primarily attributable to (i) an increase in professional fees related to the pending CME Merger, (ii) higher back office salaries expense related to the hiring of additional technology and regulatory compliance personnel and (iii) higher interest expense on our 8.375% Senior Notes as a result of the cumulative effect of downgrades to the Company’s credit rating by various rating agencies in 2013.

 

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Table of Contents

 

Segment Results for the Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

 

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):

 

 

 

Nine Months Ended September 30, 2014

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

173,561

 

$

248,913

 

$

55,797

 

$

112,154

 

$

78,720

 

$

669,145

 

Revenues, net of interest and transaction-based expenses

 

165,434

 

241,683

 

55,436

 

26,236

 

80,946

 

569,735

 

Other expenses

 

205,317

 

179,109

 

39,968

 

51,840

 

224,462

 

700,696

 

(Loss) income before income taxes

 

(39,883

)

62,574

 

15,468

 

(25,604

)

(143,516

)

(130,961

)

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Americas
Brokerage

 

EMEA
Brokerage

 

Asia
Brokerage

 

Clearing
and Backed
Trading

 

All Other

 

Total

 

Total revenues

 

$

202,765

 

$

237,102

 

$

52,952

 

$

140,960

 

$

65,324

 

$

699,103

 

Revenues, net of interest and transaction-based expenses

 

194,372

 

230,031

 

52,693

 

32,840

 

66,253

 

576,189

 

Other expenses

 

138,233

 

164,275

 

39,436

 

30,348

 

197,371

 

569,663

 

Income (loss) before income taxes

 

56,139

 

65,756

 

13,257

 

2,492

 

(131,118

)

6,526

 

 

Total Revenues

 

·                  Total revenues for EMEA Brokerage and Asia Brokerage increased by $11.8 million, or 5.0%, and $2.8 million, or 5.4%, respectively, for the nine months ended September 30, 2014. Total revenues for Americas Brokerage decreased by $29.2 million, or 14.4%, for the nine months ended September 30, 2014. Total revenues for our three brokerage segments in total decreased by $14.5 million, or 3.0%, to $478.3 million for the nine months ended September 30, 2014. The decrease in total revenues for our brokerage segments was primarily due to the factors described above under “Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2014”.

 

·                  Total revenues for Clearing and Backed Trading decreased by $28.8 million, or 20.4%, for the nine months ended September 30, 2014. The decrease was primarily attributable to a decrease in clearing services revenues as a result of a lower number of trades cleared by our Kyte subsidiary.

 

·                  Total revenues for All Other increased by $13.4 million, or 20.5%, for the nine months ended September 30, 2014. This increase was due, in large part, to (i) an increase in software revenues at our Trayport subsidiary, primarily attributable to an expansion of product and service offerings to its existing customer base and (ii) a net increase in Other income, net largely related to a gain on the mark-to-market of the contingent consideration liability associated with the acquisition of Contigo Limited.

 

Total interest and transaction-based expenses

 

·                  Total interest and transaction-based fees for our three brokerage segments remained flat at $15.7 million for the nine months ended September 30, 2014, as compared to $15.7 million for the same period in 2013.

 

·                  Total interest and transaction-based fees for Clearing and Backed Trading decreased by $22.2 million to $85.9 million for the nine months ended September 30, 2014 from $108.1 million for the same prior year period, primarily due to a decrease in the number of trades cleared by our Kyte subsidiary.

 

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Other Expenses

 

·                  Other expenses for Americas Brokerage and EMEA Brokerage increased $67.1 million, or 48.5%, and $14.8 million, or 9.0%, respectively, for the nine months ended September 30, 2014. These increases were primarily due to non-cash impairment charges related to goodwill of $83.3 million at Americas Brokerage and $14.8 million at EMEA Brokerage, during the second quarter of 2014. The increase at both segments was partially offset by a decrease in compensation and employee benefits expense for the nine months ended September 30, 2014.  Other expenses for Asia Brokerage increased by $0.5 million, or 1.3%, for the nine months ended September 30, 2014, compared with the same period in 2013, largely as a result of increased employee compensation and benefits expense. Total Other expenses for our three brokerage segments increased by $82.5 million, or 24.1%, to $424.4 million for the nine months ended September 30, 2014.

 

·                  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 increased $21.5 million, or 70.8% for the nine months ended September 30, 2014. The increase was primarily related to $23.5 million of non-cash impairment charges recorded on goodwill during the second quarter of 2014, slightly offset by a decrease in communications and market data expenses during the nine months ended September 30, 2014.

 

·                  Other expenses for All Other increased by $27.1 million, or 13.7%, for the nine months ended September 30, 2014. The increase was primarily attributable to (i) higher back office salaries expense related to the hiring of additional technology and regulatory compliance personnel, (ii) an increase in professional fees related to the pending CME Merger and (iii) higher interest expense on our 8.375% Senior Notes as a result of the cumulative effect of downgrades to the Company’s credit rating by various rating agencies in 2013.  These increases were partially offset by legal costs incurred during the first nine months of 2013 in connection with previously opened desks and offices.

 

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Quarterly Results of Operations

 

The following table sets forth, by quarter, our unaudited statement of operations data for the period from October 1, 2012 to September 30, 2014. 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

 

 

 

September 30,
2014

 

June 30,
2014

 

March 31,
2014

 

December 31,
2013

 

September 30,
2013

 

June 30,
2013

 

March 31,
2013

 

December 31,
2012

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency commissions

 

$

112,303

 

$

109,692

 

$

121,415

 

$

103,278

 

$

109,365

 

$

122,476

 

$

126,572

 

$

104,110

 

Principal transactions

 

41,453

 

45,948

 

51,689

 

40,246

 

41,841

 

51,562

 

50,065

 

46,329

 

Total brokerage revenues

 

153,756

 

155,640

 

173,104

 

143,524

 

151,206

 

174,038

 

176,637

 

150,439

 

Clearing services revenues

 

26,373

 

28,602

 

34,164

 

28,911

 

32,722

 

39,439

 

38,064

 

29,704

 

Interest income from clearing services

 

579

 

572

 

528

 

570

 

455

 

431

 

737

 

639

 

Equity in net earnings of unconsolidated businesses

 

639

 

1,493

 

2,554

 

1,241

 

1,566

 

2,300

 

3,059

 

2,327

 

Software, analytics and market data

 

26,095

 

25,595

 

25,765

 

24,100

 

22,472

 

21,808

 

22,158

 

22,482

 

Other income, net

 

2,859

 

6,203

 

4,624

 

4,001

 

4,012

 

4,262

 

3,737

 

1,703

 

Total revenues

 

210,301

 

218,105

 

240,739

 

202,347

 

212,433

 

242,278

 

244,392

 

207,294

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

24,786

 

26,936

 

32,640

 

27,213

 

31,620

 

38,424

 

36,908

 

28,738

 

Transaction fees on brokerage services

 

4,330

 

4,655

 

5,503

 

4,183

 

4,430

 

5,335

 

5,807

 

4,831

 

Interest expense from clearing services

 

206

 

185

 

169

 

180

 

143

 

87

 

160

 

293

 

Total interest and transaction-based expenses

 

29,322

 

31,776

 

38,312

 

31,576

 

36,193

 

43,846

 

42,875

 

33,862

 

Revenues, net of interest and transaction-based expenses

 

180,979

 

186,329

 

202,427

 

170,771

 

176,240

 

198,432

 

201,517

 

173,432

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

122,720

 

130,003

 

137,697

 

123,485

 

121,109

 

134,613

 

137,015

 

124,574

 

Communications and market data

 

13,335

 

13,520

 

13,347

 

12,798

 

13,747

 

13,743

 

13,587

 

14,131

 

Travel and promotion

 

7,184

 

7,961

 

7,779

 

7,555

 

7,380

 

7,857

 

8,061

 

8,503

 

Rent and occupancy

 

7,835

 

7,890

 

8,086

 

6,228

 

7,901

 

7,039

 

7,212

 

2,908

 

Depreciation and amortization

 

8,480

 

8,797

 

8,596

 

8,333

 

8,320

 

8,334

 

8,308

 

9,122

 

Professional fees

 

13,650

 

10,107

 

6,171

 

5,703

 

5,712

 

6,385

 

6,727

 

5,768

 

Interest on borrowings

 

8,466

 

8,143

 

7,784

 

7,822

 

7,612

 

7,175

 

7,688

 

6,805

 

Impairment of goodwill and intangibles

 

 

121,619

 

 

19,602

 

 

 

 

 

Other expenses

 

6,825

 

7,237

 

7,464

 

7,116

 

5,615

 

5,699

 

12,824

 

11,047

 

Total other expenses

 

188,495

 

315,277

 

196,924

 

198,642

 

177,396

 

190,845

 

201,422

 

182,858

 

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

 

(7,516

)

(128,948

)

5,503

 

(27,871

)

(1,156

)

7,587

 

95

 

(9,426

)

(Benefit from) provision for income taxes

 

(56

)

(31,277

)

1,094

 

2,994

 

(1,127

)

719

 

(4,859

)

1,688

 

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

 

(7,460

)

(97,671

)

4,409

 

(30,865

)

(29

)

6,868

 

4,954

 

(11,114

)

Less: Net income (loss) attributable to non-controlling interests

 

231

 

125

 

406

 

37

 

432

 

177

 

280

 

258

 

GFI’s net (loss) income

 

$

(7,691

)

$

(97,796

)

$

4,003

 

$

(30,902

)

$

(461

)

$

6,691

 

$

4,674

 

$

(11,372

)

 

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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

 

 

 

September 30,
2014

 

June 30,
2014

 

March 31,
2014

 

December 31,
2013

 

September 30,
2013

 

June 30,
2013

 

March 31,
2013

 

December 31,
2012

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency commissions

 

62.1

%

58.9

%

60.0

%

60.5

%

62.1

%

61.7

%

62.8

%

60.0

%

Principal transactions

 

22.9

 

24.7

 

25.5

 

23.6

 

23.7

 

26.0

 

24.8

 

26.7

 

Total brokerage revenues

 

85.0

 

83.6

 

85.5

 

84.1

 

85.8

 

87.7

 

87.6

 

86.7

 

Clearing services revenues

 

14.6

 

15.4

 

16.9

 

16.9

 

18.5

 

19.9

 

18.9

 

17.1

 

Interest income from clearing services

 

0.3

 

0.3

 

0.2

 

0.3

 

0.3

 

0.2

 

0.4

 

0.4

 

Equity in net earnings of unconsolidated businesses

 

0.3

 

0.8

 

1.3

 

0.7

 

0.9

 

1.2

 

1.5

 

1.3

 

Software, analytics and market data

 

14.4

 

13.7

 

12.7

 

14.1

 

12.7

 

11.0

 

11.0

 

13.0

 

Other income, net

 

1.6

 

3.3

 

2.3

 

2.4

 

2.3

 

2.1

 

1.9

 

1.0

 

Total revenues

 

116.2

 

117.1

 

118.9

 

118.5

 

120.5

 

122.1

 

121.3

 

119.5

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

13.7

 

14.5

 

16.1

 

15.9

 

17.9

 

19.4

 

18.3

 

16.6

 

Transaction fees on brokerage services

 

2.4

 

2.5

 

2.7

 

2.5

 

2.5

 

2.7

 

2.9

 

2.8

 

Interest expense from clearing services

 

0.1

 

0.1

 

0.1

 

0.1

 

0.1

 

0.0

 

0.1

 

0.1

 

Total interest and transaction-based expenses

 

16.2

 

17.1

 

18.9

 

18.5

 

20.5

 

22.1

 

21.3

 

19.5

 

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

 

67.8

 

69.8

 

68.0

 

72.3

 

68.7

 

67.8

 

68.0

 

71.8

 

Communications and market data

 

7.3

 

7.2

 

6.6

 

7.5

 

7.8

 

6.9

 

6.8

 

8.1

 

Travel and promotion

 

4.0

 

4.3

 

3.8

 

4.4

 

4.2

 

4.0

 

4.0

 

4.9

 

Rent and occupancy

 

4.3

 

4.2

 

4.0

 

3.6

 

4.5

 

3.5

 

3.6

 

1.7

 

Depreciation and amortization

 

4.7

 

4.7

 

4.3

 

4.9

 

4.7

 

4.2

 

4.1

 

5.3

 

Professional fees

 

7.5

 

5.4

 

3.1

 

3.3

 

3.3

 

3.2

 

3.3

 

3.3

 

Interest on borrowings

 

4.7

 

4.4

 

3.8

 

4.6

 

4.3

 

3.6

 

3.8

 

3.9

 

Impairment of goodwill and intangibles

 

0.0

 

65.3

 

 

11.5

 

 

 

 

 

Other expenses

 

3.8

 

3.9

 

3.7

 

4.2

 

3.2

 

2.9

 

6.4

 

6.4

 

Total other expenses

 

104.1

%

169.2

%

97.3

%

116.3

%

100.7

%

96.1

%

100.0

%

105.4

%

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

 

(4.1

)

(69.2

)

2.7

 

(16.3

)

(0.7

)

3.9

 

0.0

 

(5.4

)

(Benefit from) provision for income taxes

 

0.0

 

(16.8

)

0.5

 

1.8

 

(0.6

)

0.4

 

(2.4

)

1.0

 

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

 

(4.1

)

(52.4

)

2.2

 

(18.1

)

(0.1

)

3.5

 

2.4

 

(6.4

)

Less: Net income (loss) attributable to non-controlling interests

 

0.1

 

0.1

 

0.2

 

0.0

 

0.2

 

0.1

 

0.1

 

0.2

 

GFI’s net (loss) income

 

(4.2

)%

(52.5

)%

2.0

%

(18.1

)%

(0.3

)%

3.4

%

2.3

%

(6.6

)%

 

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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 September 30, 2014, we had $165.9 million of cash and cash equivalents compared to $174.6 million at December 31, 2013. Included in this amount are $101.0 million and $89.5 million of cash and cash equivalents held by subsidiaries outside of the United States at September 30, 2014 and December 31, 2013, respectively.  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 and we will accrue additional income taxes, if any, on such international profits. For profits earned subsequent to January 1, 2013 that are not permanently reinvested, we will not incur a material United States tax charge and we continue to believe we will not incur a material charge on the repatriation of profits in the future.

 

In addition, included within Receivables from brokers, dealers and clearing organizations are cash balances which represent amounts clearing customers have on deposit with Kyte, our subsidiary which provides clearing services. Kyte deposits these amounts with third parties who act as general clearing members of clearing houses in order to clear cash and derivative products for Kyte’s customers. These amounts, while due to us from the general clearing members, ultimately represent cash payable to our clearing customers. Also 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 $57.0 million and $52.4 million as of September 30, 2014 and December 31, 2013, respectively.

 

The following table summarizes our cash position as of September 30, 2014 and December 31, 2013, respectively.

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

165,850

 

$

174,606

 

Cash held at clearing organizations, net of customer cash

 

57,001

 

52,414

 

Total balance sheet cash

 

$

222,851

 

$

227,020

 

 

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 provided by operating activities was $10.7 million for the nine months ended September 30, 2014 compared with net cash used in operating activities of $2.7 million for the nine months ended September 30, 2013, a net increase in cash provided of $13.4 million. This increase was due, in part, to a $42.7 million reduction in working capital employed in the business in the nine months ended September 30, 2014. Such working capital changes include (i) receivables from/payables to brokers, dealers, and clearing organizations, (ii) payables to clearing service customers, (iii) and other assets and liabilities. In addition, the increase in cash provided by operating activities was also attributable to an $83.2 million increase in non-cash items that reconcile net (loss) income to net cash provided by (used in) operating activities for the nine months ended September 30, 2014, compared with the same prior year period.  The increase in non-cash items was primarily related to goodwill impairment charges of $121.6 million recorded during the second quarter of 2014, partially offset by an increase in benefit for deferred taxes in the nine months ended September 30, 2014.

 

Net cash provided by investing activities for the nine months ended September 30, 2014 was $4.5 million compared with $31.2 million of net cash used by investing activities for the nine months ended September 30, 2013, a net increase in cash provided of $35.7 million. This increase in net cash provided from investing activities was primarily due to proceeds received from the disposition of available-for-sale securities, as well as a decrease in net purchases of interests in unconsolidated businesses in the nine months ended September 30, 2014.

 

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Table of Contents

 

Net cash used in financing activities for the nine months ended September 30, 2014 was $22.4 million compared to $23.6 million for the nine months ended September 30, 2013, a decrease in cash used of $1.2 million. This decrease in net cash used was due, in part, to settlements of contingent consideration and a future purchase commitment during the third quarter of 2013.

 

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, The Kyte Group 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 16 to the Condensed Consolidated Financial Statements for further details on our regulatory requirements.

 

Short and Long Term Debt

 

Our outstanding debt at September 30, 2014 consisted of $240.0 million of our 8.375% Senior Notes and $10.0 million of borrowings under our Credit Agreement. The unused borrowing capacity under our Credit Agreement at September 30, 2014 and December 31, 2013 was $65.0 million. The 8.375% Senior Notes mature in July 2018 and the Credit Agreement matures in December 2015. See Note 7 to the Condensed Consolidated Financial Statements for further details on our debt.

 

In July 2014 we entered into an agreement to amend and restate the Credit Agreement. 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 $121,619 in goodwill impairment recorded in the three months ended June 30, 2014 reduced our consolidated capital below $375,000. The amendment executed in July 2014 reduces 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.

 

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 September 30, 2014, we were in full compliance with the financial covenant described above.

 

Credit Ratings

 

As of September 30, 2014, we maintained the following public long-term credit ratings and associated outlooks:

 

 

 

Rating

 

Outlook

Moody’s Investor Services

 

B1

 

Positive

Standard & Poor’s

 

B

 

Positive

Fitch Ratings Inc.

 

BB-

 

Positive

 

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.

 

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Table of Contents

 

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 September 30, 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.

 

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. Cash dividends paid for the nine months ended September 30, 2014 were approximately $12.5 million.  During the second quarter of 2014, as a result of the pending CME Merger, the payment of a quarterly dividend was suspended, therefore, the Company did not pay a cash dividend during the third quarter of 2014. In December 2012, our Board of Directors declared a dividend for the fourth quarter of 2012 on an accelerated basis. The dividend was declared and paid in December 2012 and we, therefore, did not pay a cash dividend during the first quarter of 2013. Cash dividends paid for the nine months ended September 30, 2013 were approximately $12.1 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 8 to our Condensed Consolidated Financial Statements for further discussion of the stock repurchase program.

 

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Table of Contents

 

Contractual Obligations and Commitments

 

The following table summarizes certain of our contractual obligations as of September 30, 2014:

 

 

 

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

 

$

142,139

 

$

14,720

 

$

24,695

 

$

23,307

 

$

79,417

 

Short-term borrowings

 

10,000

 

10,000

 

 

 

 

Interest on Long-term debt (1) 

 

99,600

 

24,900

 

49,800

 

24,900

 

 

Long-term debt

 

240,000

 

 

 

240,000

 

 

Purchase obligations (2) 

 

31,084

 

23,388

 

7,517

 

179

 

 

Total

 

$

522,823

 

$

73,008

 

$

82,012

 

$

288,386

 

$

79,417

 

 


(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 7 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 11 to our Condensed Consolidated Financial Statements for further discussion.

 

We have unrecognized tax benefits (net of the federal benefit on state positions) of approximately $8.4 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.

 

We have contingent consideration liabilities with an aggregate estimated fair value of $1.3 million as of September 30, 2014. Due to the uncertainty of the amounts to be ultimately paid, these liabilities have been excluded from the Contractual Obligations and Commitments table.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements at September 30, 2014 as defined in Item 303(A)(4)(ii) of SEC Regulation S-K.

 

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 2013 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 2013 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.

 

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Table of Contents

 

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 2013 Form 10-K. Except as described below in this Form 10-Q, there have been no material changes to those market risks during the nine months ended September 30, 2014.

 

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 September 30, 2014 and December 31, 2013, 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 $5.6 million as of September 30, 2014.

 

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.

 

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 September 30, 2014, and the related condensed consolidated statements of operations and comprehensive (loss) income for the three-month and nine-month periods ended September 30, 2014 and September 30, 2013 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2014 and September 30, 2013.  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, 2013, 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, 2014, 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, 2013, 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

November 10, 2014

 

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Table of Contents

 

PART II—OTHER INFORMATION

 

 

ITEM 1.               LEGAL PROCEEDINGS

 

In the normal course of business, we are, and have been in the past, involved in, litigations, claims and arbitrations that involve claims for substantial amounts. These proceedings have generally involved either proceedings against our competitors in connection with employee hires, or claims from former employees in connection with the termination of their employment from us. There is also potential for client claims alleging the occurrence of errors in the execution of brokerage transactions. We are also currently, and have been in the past, involved in examinations, investigations or proceedings by government agencies and self-regulatory organizations. These examinations or investigations could result in substantial fines or administrative proceedings that could result in censure, the issuance of cease and desist orders, the suspension or expulsion of a broker dealer and its affiliated persons, officers or employees or other similar consequences.

 

One of our European subsidiaries is currently defending a claim that they improperly hired a number of employees of a competitor.  Although the case is in its preliminary stages, the claimant is seeking a multi-million dollar award. We intend to vigorously defend against this action and believe that we have substantial defenses to the claims asserted against us.

 

Following the announcement of the CME Merger, nine putative class action complaints challenging the CME Merger were filed on behalf of purported stockholders of the Company(one of which also purports to be brought derivatively on behalf of the Company), 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 are captioned Coyne v. GFI Group Inc., et al., Index No. 652704/2014 (N.Y. Sup. Ct.), Suprina v. GFI Group, Inc., et al., Index No. 652668/2014 (N.Y. Sup. Ct.), Brown v. GFI Group Inc., et al., Civil Action No. 10082-VCL (Del. Ch.), Hughes v. CME Group, Inc., et al., Civil Action No. 10103-VCL (Del. Ch.), Al Ammary v. Gooch, et al., Civil Action No. 10125-VCL (Del. Ch.), Giardalas v. GFI Group, Inc., Civil Action No. 10132-VCL (Del. Ch.), City of Lakeland Employees’ Pension Plan v. Gooch, et al., Civil Action No. 10136-VCL (Del. Ch.), Michocki v. Gooch., et al., Civil Action No. 10166-VCL (Del. Ch.) and Szarek v. GFI Group Inc., et al., Case No. 14-CV-8228 (S.D.N.Y.). On September 26, 2014, 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 under the caption In re GFI Group Inc. Stockholder Litigation, Consolidated C.A. No. 10136-VCL. Discovery has commenced in the consolidated Delaware litigation.

 

The complaints name as defendants various combinations of the Company, GFI Brokers Holdco Ltd., the members of the Board, GFI’s managing director Mr. Brown, CME, Merger Sub 1, Merger Sub 2, Cheetah Acquisition Corp., Cheetah Acquisition LLC, JPI and New JPI Inc.  The complaints generally allege, among other things, that the members of the Board breached their fiduciary duties to stockholders of the Company during merger negotiations by entering into the CME Merger Agreement and approving the CME Merger, and that the Company, CME, Merger Sub 1, Merger Sub 2, GFI Brokers Holdco Ltd., Cheetah Acquisition Corp., Cheetah Acquisition LLC, JPI, and New JPI Inc. 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 undervalues the Company, (ii) that the sales process leading up to the CME Merger was flawed due to the members of the Board’s and Jefferies’ conflicts of interest, and (iii) that certain provisions of the CME Merger Agreement inappropriately favor CME and preclude or impede third parties from submitting potentially superior proposals.

 

In addition, the Hughes complaint asserts a derivative claim on behalf of the Company against the members of the Board 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 alleges that the CME Merger is not a solitary transaction, but a series of related transactions and further alleges that the IDB Transaction must be approved by an affirmative two-thirds vote of the Shares pursuant to the terms of the Company’s 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 Board breached their fiduciary duties and that certain provisions of the CME Merger Agreement are unlawful, (iv) a directive to the members of the Board to execute their fiduciary duties to obtain a transaction in the best interest of stockholders of the Company, (v) rescission of the CME Merger to the extent already implemented, (iv) granting of rescissory damages and an accounting of all of the damages suffered as a result of the alleged wrongdoing, (v) and reimbursement of fees and costs. The Coyne and Suprina Complaints also demand a jury trial.

 

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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.

 

ITEM 1A.      RISK FACTORS

 

Except as set forth below, there have been no material changes in our risk factors from those disclosed in the 2013 Form 10-K. For a discussion of those risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 2013 Form 10-K.

 

Failure to consummate or delay in consummating the proposed CME Merger announced on July 30, 2014 for any reason could materially and adversely affect our business, financial condition, results of operations and stock price.

 

There is no assurance that the closing of the proposed CME Merger will occur or that it will close under the same terms and conditions contained in the CME Merger Agreement. These include: failure to satisfy the various conditions to consummation of the CME Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; the ability to obtain shareholder approval (including the affirmative vote of a majority of the disinterested GFI shareholders) and governmental and regulatory approvals of the CME Merger on the timing and terms thereof; and unanticipated difficulties and/or expenditures relating to the merger, any of which events would likely have a material adverse effect on the market value of our common stock.

 

Other materials terms of the CME Merger Agreement are described in our Form 8-K report filed on July 31, 2014 and other filings we have made with the Securities and Exchange Commission (“SEC”).

 

If the CME Merger is not consummated for any reason, we will be subject to a number of risks, including without limitation:

 

·                  under certain circumstances as set forth in the CME Merger Agreement, we may be required to pay to CME a termination fee equal to $20,143,121 and we may be required to reimburse CME up to $10,000,000 in expenses in certain other instances;

 

·                  the market price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the CME Merger will be consummated;

 

·                  we will remain liable for significant transaction costs that would be payable even if the CME Merger is not consummated;

 

·                  the possibility exists that certain key employees may terminate their employment with us as a result of the proposed CME Merger even if the proposed merger is not ultimately consummated; and

 

·                  the diversion of management’s attention away from our day-to-day business, limitations on the conduct of our business prior to completing the CME Merger and other restrictive covenants contained in the Merger Agreement that may impact the manner in which our management is able to conduct our business during the period prior to the consummation of the merger and the unavoidable disruption to our employees and our business relationships during the period prior to the consummation of the merger, may make it difficult for us to regain our financial and market position if the CME Merger does not occur.

 

In addition, if the CME Merger Agreement is terminated and our board of directors determines to seek another business combination, there can be no assurance that we will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided to stockholders in the CME Merger.

 

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Shareholder litigation against GFI and our directors could delay or prevent the CME Merger and cause us to incur significant costs and expenses.

 

Transactions such as the CME Merger are sometimes subject to lawsuits by shareholders. One of the conditions to the merger is that no temporary restraining order, injunction or other order prevent the CME Merger. Consequently, if any shareholder lawsuit with respect to the merger prevented or delayed the merger from becoming effective within the expected time frame, we are likely to incur additional costs. In addition, if a shareholder lawsuit is filed, we would incur additional costs in connection with those lawsuits, including costs associated with the indemnification of our directors and officers.

 

The unsolicited takeover attempt by BGC will likely require us to incur significant additional costs.

 

On October 22, 2014, BGC, through its operating subsidiary, BGC Partners, L.P., a Delaware limited partnership, made an unsolicited conditional tender offer to purchase all outstanding shares of the Company’s common stock at a purchase price of $5.25 per share of the Company’s common stock, net to the seller in cash, without interest and less any required withholding taxes (the “BGC Offer”). On November 3, 2014, the Special Committee met with its financial and legal advisors, and after careful consideration, the Special Committee  unanimously recommended that the Company’s stockholders reject the offer and not tender their shares of the Company’s common stock because the Special Committee believes that the BGC Offer (i) is highly conditional and places the Company and its stockholders at substantial risk that it will never be consummated, (ii) certain conditions to the BGC Offer may not be capable of being, or are unlikely to be, satisfied, BGC has not made any commitment to extend the BGC Offer long enough to permit required regulatory approvals (including, among others, necessary approvals or waiting periods under the competition laws), which are a condition to the BGC Offer, to be satisfied and (iv) the CME Merger will allow the Company’s stockholders to realize potential long-term value. On November  4, 2014, the Company, acting upon the direction of the Special Committee filed with the SEC a Recommendation/Solicitation Statement on Schedule 14D-9 detailing the recommendation of the Special Committee  in response to BGC’s tender offer and the reasons it rejected the offer.

 

We anticipate that we will incur significant additional legal, investment banking and other fees in the future in connection with BGC’s unsolicited tender offer.

 

BGC’s unsolicited tender offer is disruptive to our business.

 

The review and consideration of BGC’s unsolicited tender offer and related actions by BGC, have been, and may continue to be, a significant distraction for our management and employees and have required, and may continue to require, the expenditure of significant time and resources by the Company. BGC’s tender offer and related actions have also created uncertainty for the Company’s employees, and this uncertainty may adversely affect our ability to retain key employees and hire new talent. Further, BGC’s tender offer and related actions may create uncertainty for the Company’s current and potential business partners. This uncertainty may cause our current and potential business partners to change or terminate their business relationship with us.

 

Uncertainty and speculation regarding BGC’s tender offer and related actions may cause increased volatility and wide price fluctuations in our stock price. In addition, if a transaction does not occur, or the market perceives that a transaction is unlikely to occur, our stock price may decline.

 

BGC’s tender offer and related actions have created and may continue to create uncertainty for the Corporation’s current and potential customers. This uncertainty may cause our current customers to change or terminate their business relationship with us and our potential customers not to commence a business relationship with us.

 

If the BGC Offer is consummated but BGC does not acquire effective control of the Company, the existence of two significant shareholders may negatively affect the Company’s business.

 

BGC has stated that it is seeking to acquire 100% of the outstanding Shares in the BGC Offer.  However, given that certain stockholders, including Jersey Partners Inc., which owns approximately 37.8% of the Company’s issued and outstanding Shares, are restricted pursuant to a certain support agreement with CME from tendering their shares in the BGC Offer, it is probable that, if the BGC Offer is consummated and BGC does not acquire all of the outstanding Shares either in the offer or thereafter, the Company will have two significant shareholders, one of them a competitor to the Company, with potentially conflicting and/or opposing views and neither of which would have the ability, acting alone, to effect a merger transaction of the Company in the near term.  In addition, given the Company’s classified board structure and charter provisions that prevent shareholders from altering the composition of the board outside of annual meetings, even if BGC acquired a majority of the outstanding Shares, it would not be able to elect a majority of the directors until the 2016 annual meeting.  The ability of management to work effectively and efficiently with shareholders may be affected, and as a result, the Company’s business may be adversely impacted.  In addition, the aforementioned potential for conflict could affect the treatment of the Company and its business by applicable governmental and regulatory authorities.  Lastly, the failure to acquire a controlling position may cause BGC to seek from time to time to influence the Company and its business through proxy solicitations, shareholder approvals and other attempts to effect changes or acquire control over the Company, which may distract the Company and its management.

 

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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 September 30, 2014.

 

Issuer Purchases of Equity Securities

 

Period

 

Total
Number of
Shares
Purchased

 

Average Price
Paid Per
Share

 

July

 

 

 

 

 

Employee Transactions(a)

 

30,240

 

$

4.53

 

August

 

 

 

 

 

Employee Transactions(a)

 

56,776

 

$

3.84

 

September

 

 

 

 

 

Employee Transactions(a)

 

402,512

 

$

5.41

 

 


(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.

 

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ITEM 6.               EXHIBITS

 

 

Exhibits:

 

Exhibit No.

 

Description

2.1

 

Agreement and Plan of Merger, dated as of July 30, 2014, by and among GFI Group Inc., CME Group Inc., Commodore Acquisition Corp. and Commodore Acquisition LLC (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014)

2.2

 

Agreement and Plan of Merger, dated as of July 30, 2014, by and among CME Group Inc., CME Acquisition Corp., CME Acquisition LLC, Jersey Partners Inc., New JPI Inc. and the other individual signatories thereto (incorporated by reference from Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014)

2.3

 

Purchase Agreement, dated as of July 30, 2014, by and among Commodore Acquisition LLC, GFI Brokers Holdco Ltd., CME Group Inc., Jersey Partners Inc., and New JPI Inc. (incorporated by reference from Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014)

2.4

 

Commitment Letter, dated as of July 30, 2014, between Jefferies Finance LLC and GFI Holdco Inc. (incorporated by reference from Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014)

10.1

 

Support Agreement, dated as of July 30, 2014, by and among CME Group Inc., Jersey Partners Inc., New JPI Inc., and the other signatories thereto (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014)

10.2

 

Second Amendment to Credit Agreement, dated as of July 28, 2014, 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 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 1, 2014)

15

 

Letter re: Unaudited Interim Financial Information.

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

 

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(*) 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 September 30, 2014 and December 31, 2013, (ii) the Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2014 and 2013, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months and nine months ended September 30, 2014 and 2013, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (v) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 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 10th day of November, 2014.

 

 

 

GFI GROUP INC.

 

 

 

 

 

 

 

 

 

 

By:

/s/ JAMES A. PEERS

 

 

 

Name:

James A. Peers

 

 

 

Title:

Chief Financial Officer

 

 

 

 

(principal financial officer)

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ THOMAS J. CANCRO

 

 

 

Name:

Thomas J. Cancro

 

 

 

Title:

Chief Accounting Officer

 

 

 

 

(principal accounting officer)

 

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