XNYS:GFIG GFI Group, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 JUNE 30, 2012

 

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: 000-51103

 

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 July 31, 2012 was 118,251,034.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

 

Page
Number

Part I—Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Statements of Financial Condition as of June 30, 2012 (unaudited) and December 31, 2011

 

4

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 (unaudited) and June 30, 2011 (unaudited)

 

5

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 (unaudited) and June 30, 2011 (unaudited)

 

6

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 (unaudited) and June 30, 2011 (unaudited)

 

7

 

Condensed Consolidated Statement Of Changes in Stockholders’ Equity for the six months ended June 30, 2012 (unaudited)

 

9

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

 

Item 2.

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

 

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

59

Item 4.

Controls and Procedures

 

60

 

Report of Independent Registered Public Accounting Firm

 

61

 

 

 

 

Part II—Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

62

Item 1A.

Risk Factors

 

62

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 6.

Exhibits

 

64

 

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 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 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.

 

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)

 

 

 

June 30,
2012

 

December 31,
2011

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

207,784

 

$

245,879

 

Cash and securities segregated under federal and other regulations

 

44,996

 

12,756

 

Commissions receivable, net of allowance for doubtful accounts of $1,116 and $1,453 at June 30, 2012 and December 31, 2011, respectively

 

102,607

 

94,971

 

Receivables from brokers, dealers and clearing organizations

 

713,711

 

251,794

 

Property, equipment and leasehold improvements, net of depreciation and amortization of $160,947 and $150,850 at June 30, 2012 and December 31, 2011, respectively

 

58,966

 

61,947

 

Goodwill

 

267,055

 

266,506

 

Intangible assets, net

 

53,273

 

58,027

 

Other assets

 

195,635

 

198,669

 

TOTAL ASSETS

 

$

1,644,027

 

$

1,190,549

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accrued compensation

 

$

98,225

 

$

127,089

 

Accounts payable and accrued expenses

 

46,171

 

56,547

 

Payables to brokers, dealers and clearing organizations

 

522,374

 

89,529

 

Payables to clearing services customers

 

192,480

 

120,909

 

Long-term obligations

 

250,000

 

250,000

 

Other liabilities

 

84,213

 

97,563

 

Total Liabilities

 

$

1,193,463

 

$

741,637

 

Commitments and contingencies (Note 11)

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at June 30, 2012 and December 31, 2011

 

 

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 134,020,197 and 131,669,676 shares issued at June 30, 2012 and December 31, 2011, respectively

 

1,340

 

1,317

 

Additional paid in capital

 

361,715

 

365,835

 

Retained earnings

 

159,158

 

160,934

 

Treasury stock, 15,136,536 and 14,145,038 shares of common stock at cost, at June 30, 2012 and December 31, 2011, respectively

 

(67,917

)

(73,919

)

Accumulated other comprehensive loss

 

(5,362

)

(6,955

)

Total Stockholders’ Equity

 

448,934

 

447,212

 

Non-controlling interests

 

1,630

 

1,700

 

Total Equity

 

450,564

 

448,912

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,644,027

 

$

1,190,549

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

Agency commissions

 

$

123,457

 

$

136,513

 

$

268,037

 

$

283,996

 

Principal transactions

 

51,964

 

54,475

 

114,552

 

124,962

 

Total brokerage revenues

 

175,421

 

190,988

 

382,589

 

408,958

 

Clearing services revenues

 

29,635

 

27,680

 

57,762

 

55,350

 

Interest income from clearing services

 

382

 

670

 

903

 

1,012

 

Equity in net earnings of unconsolidated businesses

 

2,478

 

4,757

 

3,898

 

5,683

 

Software, analytics and market data

 

20,468

 

18,403

 

40,467

 

35,491

 

Other income (loss)

 

9,346

 

1,233

 

12,286

 

(1,313

)

Total revenues

 

237,730

 

243,731

 

497,905

 

505,181

 

Interest and transaction-based expenses

 

 

 

 

 

 

 

 

 

Transaction fees on clearing services

 

28,606

 

26,752

 

55,568

 

53,821

 

Transaction fees on brokerage services

 

6,153

 

6,079

 

12,278

 

12,684

 

Interest expense from clearing services

 

158

 

617

 

598

 

943

 

Total interest and transaction-based expenses

 

34,917

 

33,448

 

68,444

 

67,448

 

Revenues, net of interest and transaction-based expenses

 

202,813

 

210,283

 

429,461

 

437,733

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

135,650

 

146,839

 

291,428

 

306,320

 

Communications and market data

 

15,694

 

15,106

 

31,360

 

30,177

 

Travel and promotion

 

9,285

 

10,198

 

19,374

 

20,401

 

Rent and occupancy

 

6,884

 

5,988

 

13,676

 

11,861

 

Depreciation and amortization

 

9,108

 

9,801

 

18,256

 

19,675

 

Professional fees

 

5,377

 

5,672

 

11,545

 

12,775

 

Interest on borrowings

 

6,527

 

3,276

 

13,342

 

6,212

 

Other expenses

 

6,671

 

5,573

 

15,144

 

12,206

 

Total other expenses

 

195,196

 

202,453

 

414,125

 

419,627

 

Income before provision for income taxes

 

7,617

 

7,830

 

15,336

 

18,106

 

Provision for income taxes

 

2,282

 

2,036

 

5,061

 

4,708

 

Net income before attribution to non-controlling shareholders

 

5,335

 

5,794

 

10,275

 

13,398

 

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

 

15

 

(357

)

163

 

501

 

GFI’s net income

 

$

5,320

 

$

6,151

 

$

10,112

 

$

12,897

 

 

 

 

 

 

 

 

 

 

 

Earnings per share available to common shareholders

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.05

 

$

0.09

 

$

0.11

 

Diluted

 

$

0.04

 

$

0.05

 

$

0.08

 

$

0.10

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

117,186,760

 

120,341,423

 

116,342,469

 

119,935,282

 

Diluted

 

122,978,459

 

127,559,237

 

124,164,300

 

127,882,378

 

Dividends declared per share of common stock

 

$

0.05

 

$

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 INCOME (UNAUDITED)

(In thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income before attribution to non-controlling shareholders

 

$

5,335

 

$

5,794

 

$

10,275

 

$

13,398

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(4,283

)

189

 

1,680

 

1,879

 

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

 

8

 

49

 

(77

)

(255

)

Comprehensive income

 

1,060

 

6,032

 

11,878

 

15,022

 

Net income (loss) attributable to non-controlling interests

 

15

 

(357

)

163

 

501

 

Other comprehensive (loss) income attributable to non-controlling interests

 

10

 

152

 

10

 

(129

)

GFI’s comprehensive income

 

$

1,035

 

$

6,237

 

$

11,705

 

$

14,650

 

 


(1)   Amounts are net of provision for income taxes of $3 and $19 for the three months ended June 30, 2012 and 2011, respectively. Amounts are net of benefit from income taxes of $37 and $98 for the six months ended June 30, 2012 and 2011, 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)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income before attribution to non-controlling shareholders

 

$

10,275

 

$

13,398

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,256

 

19,675

 

Share-based compensation

 

16,913

 

15,408

 

Tax expense (benefit) related to share-based compensation

 

1,762

 

(619

)

Amortization of prepaid bonuses and forgivable loans

 

13,172

 

12,276

 

Benefit from deferred taxes

 

(2,434

)

(10,161

)

(Gains) losses on foreign exchange derivative contracts, net

 

(2,867

)

10,359

 

Losses (gains) from equity method investments, net

 

163

 

(1,202

)

Amortization of loan fees

 

1,091

 

489

 

Provision for doubtful accounts

 

(452

)

60

 

Impairment of investments

 

2,700

 

 

Mark-to-market of future purchase commitment

 

(7,017

)

(1,563

)

Other non-cash charges, net

 

314

 

2,061

 

Decrease (increase) in operating assets:

 

 

 

 

 

Cash and securities segregated under federal and other regulations

 

(24,074

)

16,046

 

Commissions receivable

 

(7,181

)

(22,059

)

Receivables from brokers, dealers and clearing organizations

 

(470,083

)

(412,612

)

Other assets

 

(18,711

)

(24,803

)

(Decrease) increase in operating liabilities:

 

 

 

 

 

Accrued compensation

 

(28,864

)

5,727

 

Accounts payable and accrued expenses

 

(10,385

)

5,043

 

Payables to brokers, dealers and clearing organizations

 

432,845

 

337,493

 

Payables to clearing services customers

 

71,571

 

15,554

 

Other liabilities

 

(1,543

)

17,032

 

Cash used in operating activities

 

(4,549

)

(2,398

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

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

 

 

(510

)

Proceeds from other investments

 

1,106

 

2,567

 

Purchases of other investments

 

(2,303

)

(4,299

)

Purchase of property, equipment and leasehold improvements

 

(2,292

)

(4,762

)

Payments for internally developed software

 

(5,633

)

(7,565

)

Proceeds on foreign exchange derivative contracts

 

3,730

 

1,129

 

Payments on foreign exchange derivative contracts

 

(1,304

)

(7,854

)

Issuance of notes receivable

 

 

(2,778

)

Cash used in investing activities

 

(6,696

)

(24,072

)

 

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)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from short-term borrowings

 

145,000

 

55,000

 

Repayment of short-term borrowings

 

(145,000

)

(55,000

)

Purchases of treasury stock

 

(5,208

)

(11,653

)

Cash dividends paid

 

(11,888

)

(12,305

)

Payment of loan fees

 

(134

)

(491

)

Proceeds from exercise of stock options

 

 

23

 

Cash paid for taxes on vested restricted stock units

 

(8,004

)

(7,441

)

Payment of contingent consideration liabilities

 

(342

)

(1,293

)

Tax (expense) benefit related to share-based compensation

 

(1,762

)

619

 

Cash used in financing activities

 

(27,338

)

(32,541

)

Effects of exchange rate changes on cash and cash equivalents

 

488

 

3,128

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(38,095

)

(55,883

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

245,879

 

313,875

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

207,784

 

$

257,992

 

SUPPLEMENTAL DISCLOSURE:

 

 

 

 

 

Interest paid

 

$

13,060

 

$

6,234

 

Cash paid for income taxes

 

$

5,843

 

$

13,812

 

Cash received from income tax refunds

 

$

1,512

 

$

8,019

 

 

Non-Cash Investing and Financing Activities:

 

The Company did not have any non-cash investing and financing activity during the six months ended June 30, 2012 and 2011, respectively.

 

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

 

Accumulated
Other
Comp.
Income (loss)

 

Total
Stockholders’
Equity

 

Non-
Controlling
Interests

 

Total
Equity

 

Balance, January 1, 2012

 

$

1,317

 

$

365,835

 

$

(73,919

)

$

160,934

 

$

(6,955

)

$

447,212

 

$

1,700

 

$

448,912

 

Purchase of treasury stock

 

 

 

(5,298

)

 

 

(5,298

)

 

(5,298

)

Issuance of treasury stock

 

 

(11,293

)

11,300

 

 

 

7

 

 

7

 

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

 

23

 

(30

)

 

 

 

(7

)

 

(7

)

Withholding of restricted stock units in satisfaction of tax requirements

 

 

(8,004

)

 

 

 

(8,004

)

 

(8,004

)

Tax expense associated with share-based awards

 

 

(1,762

)

 

 

 

(1,762

)

 

(1,762

)

Foreign currency translation adjustment, net of tax

 

 

 

 

 

1,670

 

1,670

 

10

 

1,680

 

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

 

 

 

 

 

(77

)

(77

)

 

(77

)

Dividends to stockholders

 

 

 

 

(11,888

)

 

(11,888

)

(243

)

(12,131

)

Share-based compensation

 

 

16,969

 

 

 

 

16,969

 

 

16,969

 

Net income

 

 

 

 

10,112

 

 

10,112

 

163

 

10,275

 

Balance, June 30, 2012

 

$

1,340

 

$

361,715

 

$

(67,917

)

$

159,158

 

$

(5,362

)

$

448,934

 

$

1,630

 

$

450,564

 

 

See notes to condensed consolidated financial statements

 

9



Table of Contents

 

GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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 Company’s 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 June 30, 2012, Jersey Partners, Inc. (“JPI”) owned approximately 41% of the Company’s outstanding shares of common stock. The Company’s chief executive officer, Michael Gooch, is the controlling shareholder of JPI.

 

2.     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.

 

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, 2011. References to the Company’s “2011 Form 10-K” are to the Company’s 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 six months ended June 30, 2011 have been reclassified to conform to the current year presentation.

 

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 Policies— 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 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.

 

Variable Interest Entities—The 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

 

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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)

 

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 June 30, 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 Equivalents—Cash and cash equivalents consist of cash and highly liquid investments with maturities, when purchased, 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.

 

Commissions Receivable—Commissions 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 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.

 

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, 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/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.

 

In accordance with ASC 350, goodwill and other intangible assets with indefinite lives are not amortized, but instead are periodically tested for impairment. The Company reviews goodwill and other intangible assets with indefinite lives 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.

 

Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. See Note 5 for further information.

 

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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)

 

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 June 30, 2012 and December 31, 2011, the Company had prepaid bonuses of $33,108 and $36,797, respectively. At June 30, 2012 and December 31, 2011, the Company had forgivable employee loans and advances to employees of $34,202 and $23,909, respectively. Amortization of prepaid bonuses and forgivable employee loans for the six months ended June 30, 2012 and 2011 was $13,172 and $12,276, 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 June 30, 2012 and December 31, 2011, the Company had equity method investments with a carrying value of $26,150 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, Investments—Other (“ASC 325-10”). At June 30, 2012 and December 31, 2011, the Company had cost method investments of $4,649 and $4,059, respectively, included within Other assets. The Company monitors its equity and cost method investments for indicators of impairment each reporting period.

 

During the six months ended June 30, 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, Investments—Debt and Equity Securities. 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 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 income, net of tax. The fair value of the Company’s available-for-sale securities was $5,482 and $8,263 as of June 30, 2012 and December 31, 2011, respectively, 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.

 

Trading securities are reported at fair value, with gains and losses resulting from changes in fair value recognized in Other income (loss). 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 (loss) 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.

 

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

(In thousands except share and per share amounts)

 

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.

 

Brokerage Transactions—The Company provides brokerage services to its clients in the form of either agency or principal transactions.

 

Agency Commissions—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.

 

Principal Transactions—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.

 

In the normal course of its matched principal and principal trading businesses, the Company may hold securities 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 (Loss) —Included within Other income (loss) 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, gains and losses on certain investments, and interest income earned on short-term investments.

 

Compensation and Employee Benefits—The Company’s compensation and employee benefits have both a fixed and variable component. Base salaries and benefit costs are primarily fixed for all employees while bonuses constitute the variable portion of compensation and employee benefits. The Company 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 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

 

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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)

 

price on the date of grant. See Note 10 for further information.

 

Income Taxes— In 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 Company’s effective tax rate for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011 was primarily due to a shift in the geographic mix of the Company’s 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 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 income and included in accumulated other comprehensive loss in stockholders’ equity. Net (losses) gains resulting from remeasurement of foreign currency transactions and balances were $(2,050) and $1,803, respectively, for the three months ended June 30, 2012 and 2011, and $(2,722) and $4,046,  respectively, for the six months ended June 30, 2012 and 2011, and are included in Other income (loss) in the Condensed Consolidated Statement of Operations.

 

Recent Accounting Pronouncements—In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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”). 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 Company’s Condensed Consolidated Financial Statements and the Company has included the disclosures required by this guidance in Note 13.

 

In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income (“ASU 2011-05”). 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 (1) a single continuous statement of comprehensive income or (2) in 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 Company’s 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 No. 2011-08 Intangibles — Goodwill and Other (Topic 350) (“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

 

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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)

 

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 Company’s Condensed Consolidated Financial Statements.

 

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). 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 Company’s Condensed Consolidated Financial Statements.

 

In July 2012, the FASB issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amended guidance simplifies how entities test for impairment of indefinite-lived intangible assets. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount as a basis for determining if performing a quantitative test is necessary. The amendments do not change the measurement of impairment losses. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not expect the adoption of ASU 2012-02 to have a material impact on its 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:

 

 

 

June 30,
2012

 

December 31,
2011

 

Receivables from brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to deliver

 

$

513,509

 

$

86,097

 

Receivables from and deposits with clearing organizations and financial institutions

 

190,098

 

165,303

 

Net pending trades

 

10,104

 

394

 

Total

 

$

713,711

 

$

251,794

 

Payables to brokers, dealers and clearing organizations:

 

 

 

 

 

Contract value of fails to receive

 

$

493,544

 

$

87,254

 

Balance payable to clearing organizations and financial institutions

 

28,830

 

2,275

 

Total

 

$

522,374

 

$

89,529

 

 

Substantially all fail to deliver and fail to receive balances at June 30, 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 $192,480 and $120,909 at June 30, 2012 and December 31, 2011, respectively. These amounts represent cash payable to the Company’s clearing customers, which amounts are held at the Company’s third party general clearing members and are included within Receivables from brokers, dealers and clearing organizations or Cash and securities segregated under federal and other regulations.

 

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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.    ACQUISITIONS

 

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 Company’s 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 Kyte’s 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 Company’s common stock, all of which will be delivered to the selling shareholders of Kyte upon the satisfaction of certain conditions related to one of Kyte’s 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 June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30,
2012

 

December 31,
2011

 

Fair Value of Future Purchase Commitment (included within Other liabilities)

 

$

5,600

 

$

12,562

 

Discount Rate

 

16.0

%

16.0

%

 

The amount of the future purchase commitment accrued in the Condensed Consolidated Statements of Financial Condition at June 30, 2012 decreased from December 31, 2011, primarily due to differences between previous forecasts and actual results for the first half of 2012, as well as changes to the forecasted performance for Kyte for the remaining period ending June 30, 2013, slightly offset by an increase in the net present value of the liability due to the passage of time.

 

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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)

 

5.    GOODWILL AND INTANGIBLE ASSETS

 

GoodwillChanges in the carrying amount of the Company’s goodwill for the three months ended June 30, 2012 were as follows:

 

 

 

December 31,
2011

 

Goodwill
acquired

 

Foreign currency
translation

 

June 30,
2012

 

Goodwill

 

 

 

 

 

 

 

 

 

Americas Brokerage

 

$

83,289

 

$

 

$

 

$

83,289

 

EMEA Brokerage

 

13,851

 

 

125

 

13,976

 

Asia Brokerage

 

 

 

 

 

Clearing and Backed Trading

 

40,675

 

 

424

 

41,099

 

All Other

 

128,691

 

 

 

128,691

 

 

 

$

266,506

 

$

 

$

549

 

$

267,055

 

 

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. 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:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

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

 

$

77,426

 

$

31,982

 

$

45,444

 

$

77,151

 

$

27,606

 

$

49,545

 

Trade names

 

8,951

 

5,960

 

2,991

 

8,951

 

5,719

 

3,232

 

Core technology

 

6,400

 

5,307

 

1,093

 

6,400

 

4,777

 

1,623

 

Non compete agreements

 

3,874

 

3,570

 

304

 

3,874

 

3,463

 

411

 

Favorable lease agreements

 

620

 

460

 

160

 

620

 

420

 

200

 

Patents

 

3,131

 

474

 

2,657

 

3,131

 

225

 

2,906

 

Licenses

 

537

 

23

 

514

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proprietary knowledge

 

110

 

 

110

 

110

 

 

110

 

Total

 

$

101,049

 

$

47,776

 

$

53,273

 

$

100,237

 

$

42,210

 

$

58,027

 

 

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 June 30, 2012 and 2011 was $2,934 and $3,073, respectively.  Amortization expense for six months ended June 30, 2012 and 2011 was $5,840 and $6,105, respectively.

 

At June 30, 2012, expected amortization expense for the definite lived intangible assets is as follows:

 

2012 (remaining six months) 

 

$

5,413

 

2013

 

9,279

 

2014

 

8,547

 

2015

 

8,452

 

2016

 

6,484

 

Thereafter

 

14,988

 

Total

 

$

53,163

 

 

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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:

 

 

 

June 30,
2012

 

December 31,
2011

 

Prepaid bonuses

 

$

33,108

 

$

36,797

 

Deferred tax assets

 

41,128

 

47,617

 

Investments accounted for under the cost method and equity method (1)

 

30,799

 

33,059

 

Forgivable employee loans and advances to employees

 

34,202

 

23,909

 

Software inventory, net

 

6,719

 

6,909

 

Financial instruments owned

 

10,055

 

6,864

 

Deferred financing fees (1)

 

9,159

 

10,290

 

Other (1)

 

30,465

 

33,224

 

Total Other assets

 

$

195,635

 

$

198,669

 

 


(1)          Balances as of December 31, 2011 have been reclassified for comparative presentation.

 

On November 30, 2011, the Company exchanged its membership interests in a third party 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 Company’s discretion, the Note may be converted into a 49% membership interest in this third party brokerage firm. 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. On April 2, 2012, the Note was modified to reduce its face value from $14,059 to $5,000 and to change the percentage of membership interests the Note may be converted into, which may vary depending on whether this third party brokerage firm can raise additional capital. Due to these modifications, the Company recorded a $2,700 impairment charge in the first quarter of 2012 in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. The impairment is recognized within Other expenses in the Condensed Consolidated Statement of Operations. The Company accounted for the Note as an available-for-sale security.  As of June 30, 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.

 

Other liabilities consisted of the following:

 

 

 

June 30,
2012

 

December 31,
 2011

 

Deferred revenues

 

$

14,852

 

$

16,879

 

Payroll related liabilities

 

17,608

 

16,364

 

Future purchase commitment and contingent consideration liabilities

 

6,377

 

13,681

 

Deferred tax liabilities

 

8,732

 

14,962

 

Unrecognized tax benefits

 

11,187

 

11,187

 

Financial instruments sold, not yet purchased

 

1,698

 

976

 

Other

 

23,759

 

23,514

 

Total Other liabilities

 

$

84,213

 

$

97,563

 

 

7.    SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS

 

The Company had outstanding Long-term obligations as of June 30, 2012 and December 31, 2011 as follows:

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Maturity Date

 

2012

 

2011

 

Long-term obligations:

 

 

 

 

 

 

 

8.375% Senior Notes

 

July 2018

 

$

250,000

 

$

250,000

 

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Act”).  The notes were priced to investors at 100% of their principal amount, and mature in July 2018. Interest on these notes 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. On April 23, 2012, Standard & Poor’s lowered its credit rating on the Company’s 8.375% Senior Notes one notch to BB+, which, pursuant to the terms of the 8.375% Senior Notes, increased the applicable per annum interest rate, effective July 19, 2012, by 25 basis points, equating to an additional $625 of interest per annum.  At June 30, 2012 and December 31, 2011, unamortized deferred financing fees related to the 8.375% Senior Notes of $7,855 and $8,552, respectively, were recorded within Other assets and the Company was in compliance with all applicable covenants.

 

Credit Agreement

 

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 Company’s subsidiaries.

 

The Company had outstanding borrowings under its Credit Agreement as of June 30, 2012 and December 31, 2011 as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Loans Available (1)

 

$

129,500

 

$

129,500

 

Loans Outstanding

 

$

 

$

 

 


(1)          Amounts available include up to $50,000 for letters of credit as of June 30, 2012 and December 31, 2011.

 

The Company’s 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 June 30, 2012 and December 31, 2011, unamortized deferred financing fees related to the Credit Agreement were $1,304 and $1,738, respectively.

 

The Credit Agreement contains certain financial and other covenants. The Company was in compliance with all applicable covenants at June 30, 2012 and December 31, 2011.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

determined by the Company’s 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 June 30, 2012, the Company repurchased 1,469,402 shares of its common stock on the open market at an average price of $2.98 per share for a total cost of $4,422, including sales commissions. During the six months ended June 30, 2012, the Company repurchased 1,694,402 shares of its common stock on the open market at an average price of $3.10 per share for a total cost of $5,298, including sales commissions. During the three months ended June 30, 2011, the Company repurchased 1,792,567 shares of its common stock on the open market at an average price of $4.61 per share for a total cost of $8,323, including sales commissions. During the six months ended June 30, 2011, the Company repurchased 2,442,567 shares of its common stock on the open market at an average price of $4.74 per share for a total cost of $11,653, including sales commissions. The repurchased shares were recorded at cost as treasury stock in the Condensed Consolidated Statements of Financial Condition.

 

During the three months ended June 30, 2012 and 2011, the Company reissued 369,118 and 135,402 shares of its Treasury stock, respectively, in relation to the settlement of vested RSUs. During the six months ended June 30, 2012 and 2011, the Company reissued 702,904 and 204,696 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 June 30, 2012 and 2011 were $4,801 and $2,412, respectively. The total amounts reduced from Treasury stock relating to the settlement of RSUs during the six months ended June 30, 2012 and 2011 were $11,300 and $3,647, respectively.

 

On each of March 30 and May 31, 2012, 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 $5,991, respectively. On each of March 31 and May 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 $6,100 and $6,205, 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 and six months ended June 30, 2012 and 2011 were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

GFI’s net income

 

$

5,320

 

$

6,151

 

$

10,112

 

$

12,897

 

Weighted average common shares outstanding

 

117,186,760

 

120,341,423

 

116,342,469

 

119,935,282

 

Basic earnings per share

 

$

0.05

 

$

0.05

 

$

0.09

 

$

0.11

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

GFI’s net income

 

$

5,320

 

$

6,151

 

$

10,112

 

$

12,897

 

Weighted average common shares outstanding

 

117,186,760

 

120,341,423

 

116,342,469

 

119,935,282

 

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

 

5,791,699

 

7,217,814

 

7,821,831

 

7,947,096

 

Weighted average shares outstanding and common stock equivalents

 

122,978,459

 

127,559,237

 

124,164,300

 

127,882,378

 

Diluted earnings per share

 

$

0.04

 

$

0.05

 

$

0.08

 

$

0.10

 

 

Excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were the following: (i) 12,840,663 RSUs and 77,476 options for the three months ended June 30, 2012, (ii) 2,536,783 RSUs and 116,896 options for the three months ended June 30, 2011, (iii) 8,985,460 RSUs and 77,476 options for the six months ended

 

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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)

 

June 30, 2012 and (iv) 3,305,994 RSUs and 106,717 options for the six months ended June 30, 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 Company’s stockholders on June 11, 2008 (as amended, the “2008 Equity Incentive Plan”). The 2008 Equity Incentive Plan was subsequently amended at each of the Company’s 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 June 30, 2012, there were 12,438,002 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 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 during the six months ended June 30, 2012:

 

 

 

RSUs

 

Weighted-
Average
Grant Date
Fair Value

 

Outstanding December 31, 2011

 

17,957,726

 

$

4.84

 

Granted

 

6,436,829

 

3.66

 

Vested

 

(5,142,021

)

4.92

 

Cancelled

 

(254,741

)

5.42

 

Outstanding June 30, 2012

 

18,997,793

 

$

4.41

 

 

The weighted average grant-date fair value of RSUs granted for the six months ended June 30, 2012 was $3.66 per unit, compared with $4.98 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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Compensation expense

 

$

7,850

 

$

7,917

 

$

16,902

 

$

15,408

 

Income tax benefits

 

$

2,391

 

$

2,058

 

$

5,147

 

$

4,006

 

 

At June 30, 2012, total unrecognized compensation cost related to the RSUs prior to the consideration of expected forfeitures was approximately $68,005 and is expected to be recognized over a weighted-average period of 1.98 years. The total fair value of RSUs vested during the six months ended June 30, 2012 and 2011 was $25,282 and $20,221, respectively.

 

As of June 30, 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 Company’s initial public offering, which occurred in January 2005. Options outstanding under both plans are exercisable for shares of the Company’s 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

Plan, respectively, upon the exercise of option grants under such plans.

 

During the six months ended June 30, 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 June 30, 2012:

 

 

 

GFI Group 2002 Plan

 

GFInet 2000 Plan

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Outstanding June 30, 2012

 

585,748

 

$

3.28

 

16,844

 

$

2.97

 

 

During the six months ended June 30, 2011, there were 4,212 stock options exercised under the GFI Group 2002 Plan and 2,104 stock options exercised and 23,260 stock options expired under the GFInet 2000 Plan.

 

11.    COMMITMENTS AND CONTINGENCIES

 

Purchase ObligationsThe 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 June 30, 2012, the Company had total purchase commitments for market data of approximately $29,404 with $22,587 due within the next twelve months and $6,817 due between one to three years. Additionally, the Company has purchase commitments for capital expenditures of $4,924, primarily related to network implementations in the U.S. and U.K., and $796 for hosting and software license agreements. Of these purchase commitments, capital expenditures of approximately $1,630 and fees for hosting and software license agreements of approximately $612 are due within the next twelve months.

 

In connection with the acquisition of 70% of the equity ownership interests in Kyte, the Company agreed to purchase the residual 30% equity interest in Kyte for an additional cash payment in an amount to be determined pursuant to a formula based on Kyte’s earnings, such payment to be made following June 30, 2013. See Note 4 to the Condensed Consolidated Financial Statements for further information.

 

Contingencies—In the normal course of business, the Company and certain subsidiaries included in the condensed consolidated financial statements are, and have been in the past, named as defendants in various lawsuits and proceedings and are, and have been in the past, involved in certain regulatory examinations. Additional actions, investigations or proceedings may be brought from time to time in the future. 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. 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. The Company accrues a liability for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the reporting period.

 

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

 

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

 

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 statements. 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.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

upon the trading volumes of the various securities, commodities, foreign exchange and other 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 2011 Form 10-K. There have been no material changes to these risks during the six months ended June 30, 2012.

 

13.    FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Certain of the Company’s assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers and clearing organizations and payables to clearing services customers. These receivables and payables to brokers, dealers and clearing organizations are short-term in nature, and following June 30, 2012, substantially all have settled at the contracted amounts. The Company’s marketable equity securities are recorded at fair value based on their quoted market price. The Company’s investments that are accounted for under the cost and equity methods are investments in companies that are not publicly traded and for which no established market for their securities exists. The fair value of these investments is only estimated if there are identified events or changes in circumstances that may have a significant adverse effect on the carrying value of the investment.

 

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

 

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

 

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

 

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

 

·        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), and

 

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.

 

The Company’s debt obligations are carried at historical amounts. The fair value of the Company’s Long-term obligations, categorized within Level 2 of the fair value hierarchy, was estimated using market rates of interest available to the Company for debt obligations of similar types as of June 30, 2012 and December 31, 2011 as follows:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Long-term obligations, at estimated fair value:

 

 

 

 

 

8.375% Senior Notes

 

$

220,000

 

$

231,250

 

 

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 corporate equity 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.

 

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 - 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.

 

Convertible note receivable, available-for-sale — As discussed in Note 6, the Company exchanged its membership interest in a private company for a convertible senior secured promissory note in that company. This security is measured using valuation techniques involving quoted prices of or market data for comparable companies, including credit ratings, peer company ratios and discounted cash flow analyses. As the inputs used in estimating the fair value of this convertible debt security was both unobservable and significant to the overall fair value measurement of this asset, the asset is categorized within Level 3 of the fair value hierarchy.

 

Future Purchase Commitment - In connection with the acquisition of 70% of the equity ownership interests in Kyte, the Company agreed to purchase the residual 30% equity interest in Kyte for an additional cash payment in an amount to be determined pursuant to a formula based on Kyte’s earnings, such payment to be made following June 30, 2013. In applying the income approach, the Company assumed a 16.0% discount rate as of June 30, 2012 and December 31, 2011, respectively, and used forecasted financial information for Kyte for the remaining period ended June 30, 2013. As the inputs used in estimating the fair value of this future purchase commitment are both unobservable and significant to the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands except share and per share amounts)

 

overall fair value measurement of this liability, the liability is categorized in Level 3 of the fair value hierarchy.

 

Contingent Consideration —The category consists primarily of contingent consideration related to the acquisition of a retail energy brokerage business, completed on November 1, 2009. This contingent liability is remeasured at fair value and is based on estimated future collections of accounts receivable of the business over approximately the next two years. As the inputs used in estimating the fair value of this contingent consideration are both unobservable and significant to the overall fair value measurement of this liability, the liability is categorized in Level 3 of the fair value hierarchy.

 

In the three and six months ended June 30, 2012 and 2011, the Company did not have any material  transfers amongst Level 1, Level 2, and Level 3.

 

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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)

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of June 30, 2012 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
June 30,
2012

 

Assets

 

 

 

 

 

 

 

 

 

Receivables from brokers, dealers and clearing organizations:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

500

 

$

 

$

 

$

500

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

1,289

 

$

199

 

$

 

$

1,488

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

2

 

$

75,992

 

$

 

$

75,994

 

Fixed income derivative contracts

 

1,440

 

 

 

1,440

 

Equity derivative contracts

 

9,406

 

 

2,375

 

11,781

 

Netting (1)

 

(7,238

)

(73,410

)

 

(80,648

)

Total derivative contracts

 

$

3,610

 

$

2,582

 

$

2,375

 

$

8,567

 

Total financial instruments owned

 

$

4,899

 

$

2,781

 

$

2,375

 

$

10,055

 

Other assets: Other:

 

 

 

 

 

 

 

 

 

Equity security, available-for-sale

 

$

2,820

 

$

 

$

 

$

2,820

 

Convertible note receivable, available-for-sale

 

 

 

2,662

 

2,662

 

Total

 

$

8,219

 

$

2,781

 

$

5,037

 

$

16,037

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

997

 

$

 

$

 

$

997

 

Foreign government bonds

 

$

 

 

 

$

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

85

 

$

74,026

 

$

 

$

74,111

 

Fixed income derivative contracts

 

1,445

 

 

 

1,445

 

Equity derivative contracts

 

5,796

 

 

 

5,796

 

Netting (1)

 

(7,238

)

(73,413

)

 

(80,651

)

Total derivative contracts

 

$

88

 

$

613

 

$

 

$

701

 

Total financial instruments sold, not yet purchased

 

$

1,085

 

$

613

 

$

 

$

1,698

 

Other liabilities: Future purchase commitment

 

$

 

$

 

$

5,600

 

$

5,600

 

Other liabilities: Contingent consideration

 

$

 

$

 

$

777

 

$

777

 

Total

 

$

1,085

 

$

613

 

$

6,377

 

$

8,075

 

 


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

 

Excluded from the table above is variation margin on long and short derivative contracts related to exchange traded futures and options in the amount of $4,596 which are included within Payables to brokers, dealers and clearing organizations.

 

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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)

 

Financial Assets and Liabilities measured at fair value on a recurring basis as of December 31, 2011 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,
2011

 

Assets

 

 

 

 

 

 

 

 

 

Receivables from brokers, dealers and clearing organizations:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

500

 

$

 

$

 

$

500

 

Other assets: Financial instruments owned:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

480

 

$

208

 

$

 

$

688

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

16

 

$

185,933

 

$

 

$

185,949

 

Fixed income derivative contracts

 

1,628

 

 

 

1,628

 

Equity derivative contracts

 

1,453

 

 

1,937

 

3,390

 

Netting (1)

 

(1,210

)

(183,581

)

 

(184,791

)

Total derivative contracts

 

$

1,887

 

$

2,352

 

$

1,937

 

$

6,176

 

Total financial instruments owned

 

$

2,367

 

$

2,560

 

$

1,937

 

$

6,864

 

Other assets: Other:

 

 

 

 

 

 

 

 

 

Equity security, available-for-sale

 

$

2,901

 

$

 

$

 

$

2,901

 

Convertible note receivable, available-for-sale

 

$

 

$

 

$

5,362

 

$

5,362

 

Total

 

$

5,768

 

$

2,560

 

$

7,299

 

$

15,627

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities: Financial instruments sold, not yet purchased:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

129

 

$

22

 

$

 

$

151

 

Derivative contracts:

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

$

7

 

$

184,354

 

$

 

$

184,361

 

Fixed income derivative contracts

 

384

 

 

 

384

 

Equity derivative contracts

 

819

 

 

 

819

 

Netting (1)

 

(1,210

)

(183,529

)

 

(184,739

)

Total derivative contracts

 

$

 

$

825

 

$

 

$

825

 

Total financial instruments sold, not yet purchased

 

$

129

 

$

847

 

$

 

$

976

 

Other liabilities: Future purchase commitment

 

$

 

$

 

$

12,562

 

$

12,562

 

Other liabilities: Contingent consideration

 

$

 

$

 

$

1,119

 

$

1,119

 

Total

 

$

129

 

$

847

 

$

13,681

 

$

14,657

 

 


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

 

Excluded from the table above is variation margin on long and short derivative contracts related to exchange traded futures and options on futures in the amount of $1,125 which are included within Receivables from brokers, dealers and clearing organizations.

 

27



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 three months ended June 30, 2012 are as follows:

 

 

 

Beginning
Balance

 

Total realized
and
unrealized
gains (losses)
included in
Income (1)

 

Unrealized gains
(losses) included
in Other
comprehensive
(income) loss

 

Purchases

 

Issuances

 

Sales

 

Settlements

 

Ending
Balance at
June 30, 2012

 

Unrealized gains
(losses) for Level
3 Assets /
Liabilities
Outstanding at
June 30, 2012

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity derivative contracts

 

$

1,621

 

$

188

 

$

 

$

566

 

$

 

$

 

$

 

$

2,375

 

$

188

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible note receivable, available-for- sale

 

$

2,662

 

$

 

$

 

$