|• 10-Q • EX-15 • EX-31.1 • EX-31.2 • EX-32.1 • EX-32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABELS LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT|
WASHINGTON, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
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: 000-51103
GFI GROUP INC.
(Exact name of registrant as specified in its charter)
Registrants 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):
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 registrants common stock outstanding on April 30, 2012 was 119,975,240.
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 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 SECs 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 site 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.
(In thousands, except share and per share amounts)
See notes to condensed consolidated financial statements
(In thousands, except share and per share amounts)
See notes to condensed consolidated financial statements
GFI GROUP INC. AND SUBSIDIARIES
(1) Amounts are net of benefit from income taxes of $40 and $117 for the three months ended March 31, 2012 and 2011, respectively.
See notes to condensed consolidated financial statements
See notes to condensed consolidated financial statements
GFI GROUP INC. AND SUBSIDIARIES
Non-Cash Investing and Financing Activities:
The Company did not have any non-cash investing and financing activity during the three months ended March 31, 2012 and 2011, respectively.
See notes to condensed consolidated financial statements
(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 brokerage services, clearing services, trading system software and market data and analytical software products to institutional clients in markets for a range of fixed income, financial, equity and commodity instruments. The Company complements its brokerage capabilities with value-added services, such as market data and software systems and products for decision support, which it licenses primarily to companies in the financial services industry. The Companys principal operating subsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI Group LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd., GFI Group Pte. Ltd., GFI Korea Money Brokerage Limited, Amerex Brokers LLC, Fenics Limited (Fenics), Trayport Limited (Trayport), and The Kyte Group Limited and Kyte Capital Management Limited (collectively Kyte). As of March 31, 2012, Jersey Partners, Inc. (JPI) owned approximately 41% of the Companys outstanding shares of common stock. The Companys chief executive officer, Michael Gooch, is the controlling shareholder of JPI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of PresentationThe Companys 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.
These Condensed Consolidated Financial Statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. References to the Companys 2011 Form 10-K are to the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The condensed consolidated financial information as of December 31, 2011 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.
Certain amounts in the Condensed Consolidated Statement of Financial Position as of December 31, 2011 and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 have been reclassified to conform to the current year presentation.
During the second quarter of 2011, the Company changed the name of its income statement line item Equity in earnings of unconsolidated brokerage businesses to Equity in net earnings of unconsolidated businesses in order to better describe the results included in this line item. In addition, certain amounts related to equity in net earnings (losses) of unconsolidated businesses totaling $(1,448) for the three months ended March 31, 2011 were previously presented in the Other expenses line item in the Condensed Consolidated Statements of Operations. In order to enhance transparency in the presentation of the Condensed Consolidated Statements of Operations, these amounts have been reclassified to the Equity in net earnings of unconsolidated businesses line item.
During the fourth quarter of 2011, the Company segregated the classification of Amortization of prepaid bonuses and forgivable loans and mark-to-market of the future purchase commitment from Other assets and Other liabilities, respectively, within the Condensed Consolidated Statements of Cash Flows.
Consolidation PoliciesThe 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 shareholders equity of such subsidiaries is presented as Non-controlling interests in the Condensed Consolidated Statements of Financial Condition. All intercompany transactions and balances have been eliminated.
GFI GROUP INC. AND SUBSIDIARIES
Variable Interest EntitiesThe Company determines whether the Company holds any interests in entities deemed to be a variable interest entity (VIE). A VIE is an entity that either (i) has equity investors that lack certain essential characteristics of a controlling financial interest or (ii) does not have sufficient equity to finance its activities without additional subordinated financial support from other parties. If an entity has either of these characteristics, it is considered a VIE and must be consolidated by its primary beneficiary. The primary beneficiary is the party that has both (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. As of March 31, 2012, 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. The remaining VIEs are not consolidated as it was determined that the Company is not the primary beneficiary. See Note 15 for disclosures on Variable Interest Entities.
Cash and Cash EquivalentsCash and cash equivalents consist of cash and highly liquid investments with maturities, when purchased, of three months or less.
Cash Segregated Under Federal and Other RegulationsThe Company holds cash that belongs to customers as support for their trading activities. As a result, certain of the Companys subsidiaries are required to segregate or set aside such cash to satisfy regulations designed to protect customer assets.
Commissions ReceivableCommissions receivable represents amounts due from brokers, dealers, banks and other financial and nonfinancial institutions for the execution of securities, commodities, foreign exchange and other derivative brokerage transactions. 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 clients 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.
Receivables From and Payables to Brokers, Dealers and Clearing Organizations Receivables from and payables to broker, dealers and clearing organizations primarily represent principal transactions for which the stated settlement dates have not yet been reached and principal transactions which have not settled as of their stated settlement dates, cash held at clearing organizations, including deposits, and exchanges to facilitate settlement and clearance of matched principal transactions, and spreads on matched principal transactions that have not yet been remitted from/to clearing organizations and exchanges.
Property, Equipment and Leasehold ImprovementsProperty, 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 IntangiblesGoodwill 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 AssetsGoodwill 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 Companys businesses are managed and how they are reviewed by the Companys chief operating decision maker. Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions.
In accordance with ASC 350, goodwill and other indefinite lived intangible assets are not amortized, but instead are periodically tested for impairment. The Company reviews goodwill and other indefinite lived intangible assets 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.
GFI GROUP INC. AND SUBSIDIARIES
Prior to the Companys annual goodwill impairment test on November 1, 2011, the Company early adopted Accounting Standards Update No. 2011-08 (ASU 2011-08) Intangibles Goodwill and Other (Topic 350). In accordance with the amended guidance prescribed by ASU 2011-08, the Company first assesses qualitative factors to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment is based on reviewing the totality of several factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other entity specific events (for example, changes in management) or other events such as selling or disposing of a reporting unit. After assessing qualitative factors, if the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, no further testing is necessary. If the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step goodwill impairment test, prescribed by ASC 350, must be performed, whereby management first compares the fair value of each reporting unit with recorded goodwill to that reporting units book value. If management determines, as a result of this first step, that the fair value of the reporting unit is less than its carrying value, a second step in the impairment test process would require that the recorded goodwill at that reporting unit be written down to the value implied by the reporting units recent valuation and the estimated fair value of the assets and liabilities. Based on the Companys qualitative assessment for 2011, the Company performed a quantitative analysis for EMEA Brokerage and Clearing and Backed Trading in accordance with ASC 350. Based on the results of the annual impairment test, no goodwill impairment was recognized during the year ended December 31, 2011.
For the reporting units where a quantitative analysis was performed, the primary valuation methods used by the Company to estimate the fair value of its reporting units are the income and market approach. In applying the income approach, projected cash flows available for distribution and the terminal value are discounted to present value to derive an indication of fair value of the business enterprise. The market approach compares the reporting unit to selected reasonably similar publicly-traded companies. Trading and transaction comparables are used as general indicators to assess the general reasonableness of the estimated fair values.
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. See Note 5 for further information.
Prepaid Bonuses and Forgivable Employee LoansPrepaid bonuses and forgivable loans to employees are stated at historical value net of amortization when the agreement between the Company and the employee provides for the return of proportionate amounts of the bonus or loan outstanding if employment is terminated in certain circumstances prior to the end of the term of the agreement. Amortization is calculated using the straight-line method over the term of the contract, which is generally two to four years, and is recorded in compensation and employee benefits. The Company generally expects to recover the unamortized portion of prepaid bonuses and forgivable loans when employees voluntarily terminate their employment or if their employment is terminated for cause prior to the end of the term of the agreement. The prepaid bonuses and forgivable loans are included in Other assets in the Condensed Consolidated Statements of Financial Condition. At March 31, 2012 and December 31, 2011, the Company had prepaid bonuses of $34,328 and $36,797, respectively. At March 31, 2012 and December 31, 2011, the Company had forgivable employee loans and advances to employees of $33,912 and $23,909, respectively. Amortization of prepaid bonuses and forgivable employee loans for the three months ended March 31, 2012 and 2011 was $6,881 and $6,433, respectively and is included within Compensation and employee benefits.
InvestmentsWhen the Company does not have a controlling financial interest in an entity but can exert significant influence over the entitys operating and financial policies, the investment is accounted for under the equity method of accounting in accordance with ASC 323-10, InvestmentsEquity Method and Joint Ventures (ASC 323-10). Significant influence generally exists when the Company owns 20% to 50% of the entitys common stock or in-substance common stock. The Company initially records the investment at cost and adjusts the carrying amount each period to recognize its share of the earnings and losses of the investee based on the percentage of ownership. At March 31, 2012 and December 31, 2011, the Company had equity method investments with a carrying value of $28,474 and $28,997, respectively, included within Other assets. 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, InvestmentsOther (ASC 325-10). At March 31, 2012 and December 31, 2011, the Company had cost method investments of $4,000 and $4,059, respectively, included within Other assets. The Company monitors its equity and cost method investments for indicators of impairment each reporting period.
GFI GROUP INC. AND SUBSIDIARIES
During the three months ended March 31, 2011, the Company recorded a $1,863 loss related to the accounting impact of an increased ownership stake in an equity method investment previously accounted for under the cost method.
The Company accounts for its marketable equity securities and its debt securities in accordance with ASC 320-10, InvestmentsDebt and Equity Securities. Investments that are owned by the Companys broker-dealer subsidiaries are recorded at fair value with realized and unrealized gains and losses reported in net income. Investments designated as available-for-sale that are owned by the Companys non broker-dealer subsidiaries are recorded at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of tax. The fair value of the Companys available-for-sale securities was $5,526 and $8,263 as of March 31, 2012 and December 31, 2011, respectively, included within Other assets.
Fair Value of Financial InstrumentsIn 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.
Trading securities are reported at fair value, with gains and losses resulting from changes in fair value recognized in Other income. See Note 13 for further information.
Derivative Financial InstrumentsThe 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 Companys 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 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 CustomersPayables to clearing services customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers.
Brokerage TransactionsThe Company provides brokerage services to its clients in the form of either agency or principal transactions.
Agency CommissionsIn 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.
Principal TransactionsPrincipal 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.
In the normal course of its matched principal and principal trading businesses, the Company may hold positions overnight. These positions are marked to market on a daily basis.
Clearing Services RevenuesThe 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 is 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 Companys license agreements for such products do not provide for a right of return.
Other Income (Loss) Included within Other income (loss) on the Companys Condensed Consolidated Statements of Operations are revaluations of foreign currency derivative contracts, realized and unrealized transaction gains and losses on certain foreign currency denominated items and gains and losses on certain investments and interest income earned on short-term investments.
Compensation and Employee BenefitsThe Companys 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). 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 CompensationThe Companys share-based compensation consists of stock options and 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 issued 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 Companys common stock, measured as of the closing price on the date of grant. See Note 10 for further information.
Income TaxesIn accordance with ASC 740, Income Taxes, 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 increase in the Companys effective tax rate for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was primarily due to a shift in the geographic mix of the Companys earnings to jurisdictions with higher tax rates, as well as the establishment of valuation allowances against deferred tax assets in jurisdictions where the Company has determined they are unlikely to be utilized.
Treasury StockThe 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 Companys 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 income and included in accumulated other comprehensive loss in stockholders equity. Net (losses) gains
resulting from remeasurement of foreign currency transactions and balances for the three months ended March 31, 2012 and 2011 were $(673) and $2,244, respectively, and are included in Other income (loss) in the Condensed Consolidated Statement of Operations.
Recent Accounting PronouncementsIn May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04 (ASU 2011-04) Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends current guidance to result in common fair value measurement and disclosures between accounting principles generally accepted in the United States and International Financial Reporting Standards. The amendments result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments in ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Companys Condensed Consolidated Financial Statements and the Company has included the disclosures required by this guidance in Note 13.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (ASU 2011-05) Comprehensive Income (Topic 220) Presentation of Comprehensive Income. The main objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income (OCI) by eliminating the option to present components of OCI as part of the statement of changes in stockholders equity. The amendments in this standard requires entities to report the components of comprehensive income in either in (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI. The amendments in ASU 2011-05 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption of ASU 2011-05 did not have a material impact on the Companys Condensed Consolidated Financial Statements as the Company was previously in compliance with the presentation requirements of this ASU.
In September 2011, the FASB issued ASU 2011-08 which amends current guidance to allow entities to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no further testing is necessary. If an entity determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then the traditional two-step goodwill impairment test must be performed. The amendments in ASU 2011-08 are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company early adopted ASU 2011-08 effective the fourth quarter of 2011. The adoption of ASU 2011-08 did not have a material impact on the Companys Condensed Consolidated Financial Statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11 (ASU 2011-11), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires additional disclosure about financial instruments and derivatives instruments that are subject to netting arrangements to assist users of the financial statements in understanding the effect of those arrangements on its financial position. The new disclosures are required for reporting periods beginning on or after January 1, 2013, including retrospectively for all comparative periods presented. The Company is evaluating the effect of this guidance and does not expect the adoption of ASU 2011-11 to have a material impact on the Companys Condensed Consolidated Financial Statements.
3. 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:
Substantially all fail to deliver and fail to receive balances at March 31, 2012 and December 31, 2011 have subsequently settled at the contracted amounts.
In addition to the balances above, the Company had Payables to clearing services customers of $121,536 and $120,909 at March 31, 2012 and December 31, 2011, respectively. These amounts represent cash payable to the Companys clearing customers, which amounts are held at the Companys third party general clearing members and are included within Receivables from brokers, dealers and clearing organizations or Cash segregated under federal and other regulations.
Mortgage-Backed Security Brokerage Business
On May 27, 2010, the Company completed the acquisition of a mortgage-backed security brokerage business for consideration of $5,095. The purchase price was comprised of 681,433 shares of the Companys common stock with a fair value of $4,095 and contingent consideration estimated at $1,000, which was previously recorded as a liability within Other liabilities. This contingent liability was remeasured to fair value at each reporting date until the targets for this contingent liability were achieved in the second quarter of 2011, which resulted in a payment of $1,000.
The Kyte Group Limited and Kyte Capital Management Limited
On July 1, 2010, the Company acquired a 70% equity ownership interest in each of The Kyte Group Limited and Kyte Capital Management Limited (collectively Kyte). The Company will acquire the residual 30% equity interest in Kyte for an additional cash payment to be made in or about the third quarter of 2013 in an amount to be determined pursuant to a formula based on Kytes post-acquisition earnings. Kyte has been included in the Condensed Consolidated Financial Statements as a wholly-owned subsidiary since the acquisition date, with a liability recorded for the future payment to be made in 2013. Included as part of the purchase price is £5,000 (or approximately $7,592) that was deposited into an escrow account with a third-party escrow agent and 1,339,158 contingently issuable shares of the Companys common stock, all of which will be delivered to the selling shareholders of Kyte upon the satisfaction of certain conditions related to one of Kytes investments in a third party. As part of the purchase agreement, over the period from initial acquisition to when the Company will acquire the residual 30% equity interest in Kyte, the Company agreed to make up to £20,000 available to Kyte Capital Management Limited for investments in new trading entities subject to certain approvals.
The future purchase commitment requires the Company to pay an additional cash payment based on the performance of Kyte during the three year period ending June 30, 2013. The Company elected the fair value option for this purchase commitment as of the date of acquisition and determined the fair value using the income approach. Subsequent changes in the fair value of the future purchase commitment are recorded in Other income (loss) in the Condensed Consolidated Statements of Operations. The fair value of the future purchase commitment at the acquisition date was $19,264, which assumed a 17.7% discount rate and was recorded as a liability within Other liabilities. In applying the income approach, the Company used forecasted financial information for Kyte for the remaining period ending June 30, 2013.
The fair value of the future purchase commitment and the discount rate used in its estimated fair value as of March 31, 2012 and December 31, 2011 were as follows:
The amount of the future purchase commitment accrued in the Condensed Consolidated Statements of Financial Condition at March 31, 2012 decreased from December 31, 2011, primarily due to differences between previous forecasts and actual results for the current quarter slightly offset by an increase in the net present value of the liability due to the passage of time.
5. GOODWILL AND INTANGIBLE ASSETS
GoodwillChanges in the carrying amount of the Companys goodwill for the three months ended March 31, 2012 were as follows:
Goodwill is required to be tested for impairment at least annually and more frequently when indicators of impairment exist. All of the Companys goodwill is allocated to its reporting units and the goodwill impairment tests are performed at the reporting unit level. As discussed in Note 2, based on the results of the annual impairment test, no goodwill impairment was recognized during the year ended December 31, 2011. Subsequent to December 31, 2011, no events or changes in circumstances occurred which would indicate any goodwill impairment.
Intangible AssetsIntangible assets consisted of the following:
In July 2011, the Company completed an asset purchase of certain patents from a third party for consideration in the amount of $3,100. The patents have a weighted-average useful life of approximately 6 years.
Amortization expense for three months ended March 31, 2012 and 2011 was $2,906 and $3,032, respectively.
At March 31, 2012, expected amortization expense for the definite lived intangible assets is as follows:
6. OTHER ASSETS AND OTHER LIABILITIES
Other assets consisted of the following:
(1) Balances as of December 31, 2011 have been reclassified for comparative presentation.
On November 30, 2011, the Company exchanged its membership interests in an independent brokerage firm with a proprietary trading platform for a convertible senior secured promissory note (the Note) due in 2016 with a face value of $14,059. At the Companys discretion, the Note may be converted into a 49% membership interest in the target. Upon the exchange of its membership interests, the Company recognized a loss of $4,094 for the difference between the book value of the membership interests and the fair value of the Note. The Company accounted for the Note as an available-for-sale security. As of March 31, 2012 and December 31, 2011, the Note had a fair value of $2,662 and $5,362, respectively, recorded within Other assets in the Condensed Consolidated Statement of Financial Condition. In the first quarter of 2011, the Company recorded a $2,700 impairment charge on the Note within Other expenses in the Condensed Consolidated Statement of Operations.
Other liabilities consisted of the following:
7. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
The Company had outstanding Long-term obligations as of March 31, 2012 and December 31, 2011 as follows:
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 accrues at a rate of 8.375% per annum and is payable, commencing in January 2012, semi-annually in arrears on the 19th of January and July. Transaction costs of approximately $9,100 related to the 8.375% Senior Notes will be deferred and amortized over the term of the notes. On December 21, 2011, the Company completed an exchange offer for the 8.375% Senior Notes whereby it exchanged $250,000 in aggregate principal amount of the 8.375% Senior Notes for 8.375% Senior Notes that are registered under the Securities Act. At March 31, 2012 and December 31, 2011, unamortized deferred financing fees related to the 8.375% Senior Notes of $8,183 and $8,552, respectively, were recorded within Other assets and the Company was in compliance with all applicable covenants.
In December 2010, the Company entered into a second amended and restated credit agreement (as amended and restated, the Credit Agreement) with Bank of America, N.A. and certain other lenders. The Credit Agreement matures on December 20, 2013 and provides for maximum borrowings of up to $129,500, which includes up to $50,000 for letters of credit. 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, letter of credit fees per annum are equal to the applicable margin times the outstanding amount drawn under such letter of credit and base rate loans bear interest at a rate per annum equal to a prime rate plus the applicable margin in effect for that interest period. As long as no default has occurred under the Credit Agreement, the applicable margin for both the base rate and Eurocurrency rate loans is based on a matrix that varies with a ratio of outstanding debt to EBITDA, as defined in the Credit Agreement.
In July 2011, the Company used $135,319 of the net proceeds from the Offering of the 8.375% Senior Notes to repay all then outstanding amounts under the Credit Agreement, including accrued and unpaid interest.
As a result of the Offering, the available borrowing capacity under the Credit Agreement decreased from $200,000 to approximately $129,500. Pursuant to the terms of the Credit Agreement, following the redemption of the 7.17% Senior Notes, the lenders released all of the security supporting the Credit Agreement and the Company is no longer required to secure amounts outstanding under the Credit Agreement with any of its assets or the assets of the Companys subsidiaries.
The Company had outstanding borrowings under its Credit Agreement as of March 31, 2012 and December 31, 2011 as follows:
(1) Amounts available include up to $50,000 for letters of credit as of March 31, 2012 and December 31, 2011.
The Companys commitments for outstanding letters of credit relate to potential collateral requirements associated with its matched principal business. Since commitments associated with these outstanding letters of credit may expire unused, the amounts shown above do not necessarily reflect actual future cash funding requirements.
At March 31, 2012 and December 31, 2011, unamortized deferred financing fees related to the Credit Agreement were $1,521 and $1,738, respectively.
The Credit Agreement contains certain financial and other covenants. The Company was in compliance with all applicable covenants at March 31, 2012 and December 31, 2011.
8. STOCKHOLDERS EQUITY
In August 2007, the Companys Board of Directors authorized the Company to implement a stock repurchase program to repurchase a limited number of shares of the Companys common stock. Under the repurchase plan, the Board of Directors authorized the Company to repurchase shares of the Companys common stock on the open market in such amounts as determined by the Companys management provided that such amounts do not exceed, during any calendar year, the number of shares issued upon exercise of stock options plus the number of shares underlying grants of RSUs that are granted during such calendar year, or which management reasonably anticipates will be granted in such calendar year. During the three months ended March 31, 2012, the Company repurchased 225,000 shares of its common stock on the open market at an average price of $3.86 per share for a total cost of $876, including sales commissions. During the three months ended March 31, 2011, the Company repurchased 650,000 shares of its common stock on the open market at an average price of $5.09 per share for a total cost of $3,330, including sales commissions. These repurchased shares were recorded at cost as treasury stock in the Condensed Consolidated Statement of Financial Condition.
During the three months ended March 31, 2012 and 2011, the Company reissued 333,786 and 69,294 shares of its Treasury stock, respectively, in relation to the settlement of vested RSUs. The reissuance of these shares is accounted for as a reduction of Treasury stock on a first-in, first-out basis. The total amounts reduced from Treasury stock relating to the settlement of RSUs during the three months ended March 31, 2012 and 2011 were $6,499 and $1,235, respectively.
On March 30, 2012 and March 31, 2011, 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 $5,897 and $6,100, respectively. The dividends were reflected as reductions of retained earnings in the Condensed Consolidated Statements of Financial Condition.
9. EARNINGS PER SHARE
Basic earnings per share for common stock is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net 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 earnings per share for the three months ended March 31, 2012 and 2011 were as follows:
Excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were the following: 5,130,257 RSUs and 77,476 options for the three months ended March 31, 2012 and 4,083,752 RSUs and 96,424 options for the three months ended March 31, 2011.
10. SHARE-BASED COMPENSATION
The Company issues RSUs to its employees under the GFI Group Inc. 2008 Equity Incentive Plan, which was approved by the Companys stockholders on June 11, 2008 (as amended, the 2008 Equity Incentive Plan). The 2008 Equity Incentive Plan was subsequently amended at each of the Companys annual stockholders meetings since the Plan was initially approved in order to increase the number of shares of common stock available for grant under the Plan. Prior to June 11, 2008, the Company issued RSUs under the GFI Group Inc. 2004 Equity Incentive Plan (the 2004 Equity Incentive Plan).
The 2008 Equity Incentive Plan permits the grant of non-qualified 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, which are reserved for issuance upon the vesting of RSUs granted pursuant to the 2008 Equity Incentive Plan. As of March 31, 2012, there were 6,400,955 shares of common stock available for future grants of awards under this plan, which amount, pursuant to the terms of the 2008 Equity Incentive Plan, may be increased for the number of shares subject to awards under the 2004 Equity Incentive Plan that are ultimately not delivered to employees. The fair value of RSUs is based on the closing price of the Companys common stock on the date of
grant and is recorded as compensation expense over the service period, net of estimated forfeitures.
Modified RSUs are reflected as cancellations and grants in the summary of RSUs below.
The following is a summary of RSU transactions under both the 2008 Equity Incentive Plan and the 2004 Equity Incentive Plan during the three months ended March 31, 2012:
The weighted average grant-date fair value of RSUs granted for the three months ended March 31, 2012 was $3.76 per unit, compared with $5.02 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:
At March 31, 2012, total unrecognized compensation cost related to the RSUs prior to the consideration of expected forfeitures was approximately $72,289 and is expected to be recognized over a weighted-average period of 2.19 years. The total fair value of RSUs vested during the three months ended March 31, 2012 and 2011 was $20,972 and $16,095, respectively.
As of March 31, 2012, the Company had stock options outstanding under two plans: the GFI Group 2002 Stock Option Plan (the GFI Group 2002 Plan) and the GFInet Inc. 2000 Stock Option Plan (the GFInet 2000 Plan). No additional grants will be made under these plans. Under each plan: options were granted to employees, non-employee directors or consultants to the Company; both incentive and non-qualified stock options were available for grant; options were issued with terms up to ten years from date of grant; and options were generally issued with an exercise price equal to or greater than the fair market value at the time the option was granted. In addition to these terms, both the GFI Group 2002 Plan and the GFInet 2000 Plan contained events that had to occur prior to any options becoming exercisable. Under both plans, the options became exercisable upon the completion of the Companys initial public offering, which occurred in January 2005. Options outstanding under both plans are exercisable for shares of the Companys common stock. The Company issues shares from the authorized but unissued shares reserved for issuance under the GFI Group 2002 Plan or the GFInet 2000 Plan, respectively, upon the exercise of option grants under such plans.
During the three months ended March 31, 2012 there were no stock option transactions under the GFI Group 2002 Plan or GFInet 2000 Plan. The following is a summary of stock options outstanding under both the GFI Group 2002 Plan and the GFInet 2000 Plan as of March 31, 2012: