XNAS:BGCP BGC Partners Inc Class A 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

 

 

 

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

 

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

Commission File Numbers: 0-28191, 1-35591

 

 

BGC Partners, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-4063515

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

499 Park Avenue, New York, NY   10022
(Address of principal executive offices)   (Zip Code)

(212) 610-2200

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  No

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).    x  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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    x  No

On August 3, 2012, the registrant had 111,539,933 shares of Class A common stock, $0.01 par value, and 34,848,107 shares of Class B common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

BGC PARTNERS, INC.

TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

  

ITEM 1

  Financial Statements (unaudited)      5   
  Condensed Consolidated Statements of Financial Condition—At June 30, 2012 and December 31, 2011      5   
  Condensed Consolidated Statements of Operations—For the Three and Six Months Ended June 30, 2012 and June 30, 2011      6   
  Condensed Consolidated Statements of Comprehensive Income—For the Three and Six Months Ended June 30, 2012 and June 30, 2011      7   
  Condensed Consolidated Statements of Cash Flows—For the Six Months Ended June 30, 2012 and June 30, 2011      8   
  Condensed Consolidated Statements of Changes in Equity—For the Year Ended December 31, 2011      10   
  Condensed Consolidated Statements of Changes in Equity—For the Six Months Ended June 30, 2012      11   
  Notes to Condensed Consolidated Financial Statements      12   

ITEM 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      40   

ITEM 3

  Quantitative and Qualitative Disclosures About Market Risk      72   

ITEM 4

  Controls and Procedures      73   

PART II—OTHER INFORMATION

  

ITEM 1

  Legal Proceedings      74   

ITEM 1A

  Risk Factors      74   

ITEM 2

  Unregistered Sales of Equity Securities and Use of Proceeds      80   

ITEM 3

  Defaults Upon Senior Securities      80   

ITEM 4

  Mine Safety Disclosures      80   

ITEM 5

  Other Information      80   

ITEM 6

  Exhibits      81   

SIGNATURES

     82   

 

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SPECIAL NOTE ON FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements.

Our actual results and the outcome and timing of certain events may differ significantly from the expectations discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to:

 

   

pricing and commissions and market position with respect to any of our products and services and those of our competitors;

 

   

the effect of industry concentration and reorganization, reduction of customers and consolidation;

 

   

liquidity, regulatory and clearing capital requirements and the impact of credit market events;

 

   

market conditions, including trading volume and volatility, potential deterioration of the equity and debt capital markets and our ability to access the capital markets;

 

   

our relationships with Cantor Fitzgerald, L.P., which we refer to as “Cantor” and its affiliates, including Cantor Fitzgerald & Co., which we refer to as “CF&Co,” any related conflicts of interest, competition for and retention of brokers and other managers and key employees, support for liquidity and capital and other relationships, including Cantor’s holding of our 8.75% Convertible Notes, CF&Co’s acting as our sales agent under our controlled equity or other offerings, and CF&Co’s acting as our financial advisor in connection with one or more business combinations or other transactions;

 

   

economic or geopolitical conditions or uncertainties;

 

   

extensive regulation of our businesses, changes in regulations relating to the financial services and other industries, and risks relating to compliance matters, including regulatory examinations, inspections, investigations and enforcement actions, and any resulting costs, fines, penalties, sanctions, enhanced oversight, increased financial and capital requirements, and changes to or restrictions or limitations on specific activities, operations, compensatory arrangements, and growth opportunities, including acquisitions, hiring, and new business, products, or services;

 

   

factors related to specific transactions or series of transactions, including credit, performance and unmatched principal risk, counterparty failure, and the impact of fraud and unauthorized trading;

 

   

costs and expenses of developing, maintaining and protecting our intellectual property, as well as employment and other litigation and their related costs, including judgments or settlements paid or received;

 

   

certain financial risks, including the possibility of future losses and negative cash flows from operations, an increased need for short-term or long-term borrowings or other sources of cash, related to acquisitions or other matters, potential liquidity and other risks relating to our ability to obtain financing or refinancing of existing debt on terms acceptable to us, if at all, and risks of the resulting leverage, including potentially causing a reduction in our credit ratings and/or the associated outlooks given by the rating agencies to those credit ratings, increased borrowing costs, as well as interest and currency rate fluctuations;

 

   

our ability to enter new markets or develop new products, trading desks, marketplaces or services and to induce customers to use these products, trading desks, marketplaces or services and to secure and maintain market share;

 

   

our ability to enter into marketing and strategic alliances and business combination or other transactions in the financial services, real estate and other industries, including acquisitions, dispositions, reorganizations, partnering opportunities and joint ventures and to meet our financial reporting obligations with respect thereto, and the integration of any completed transaction;

 

   

our ability to hire and retain personnel;

 

   

our ability to expand the use of technology for hybrid and fully electronic trading;

 

   

our ability to effectively manage any growth that may be achieved, while ensuring compliance with all applicable regulatory requirements;

 

   

our ability to identify and remediate any material weaknesses in our internal controls that could affect our ability to prepare financial statements and reports in a timely manner, control our policies, procedures, operations and assets, assess and manage our operational, regulatory, and financial risks, and integrate our acquired businesses;

 

   

the effectiveness of our risk management policies and procedures, and the impact of unexpected market moves and similar events;

 

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the fact that the prices at which shares of our Class A common stock are sold in one or more of our controlled equity offerings or in other offerings or other transactions may vary significantly, and purchasers of shares in such offerings or transactions, as well as existing stockholders, may suffer significant dilution if the price they paid for their shares is higher than the price paid by other purchasers in such offerings or transactions;

 

   

our ability to meet expectations with respect to payments of dividends and distributions and repurchases of shares of our Class A common stock and purchases of limited partnership interests of BGC Holdings, L.P., which we refer to as “BGC Holdings,” or other equity interests in our subsidiaries, including from Cantor, our executive officers, other employees, partners, and others, and the net proceeds to be realized by us from offerings of our shares of Class A common stock;

 

   

the effect on the market for and trading price of our Class A common stock of various offerings and other transactions, including our controlled equity and other offerings of our Class A common stock and convertible securities, our repurchases of shares of our Class A common stock and purchases of BGC Holdings limited partnership interests or other equity interests of our subsidiaries, our payment of dividends on our Class A common stock and distributions on BGC Holdings limited partnership interests, convertible arbitrage, hedging, and other transactions engaged in by holders of our 4.50% convertible notes and counterparties to our capped call transactions, and resales of shares of our Class A common stock acquired from us or Cantor, including pursuant to our employee benefit plans, conversion of our convertible notes, and distributions from Cantor pursuant to Cantor’s distribution rights obligations and other distributions to Cantor partners; and

 

   

the risk factors described in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission, which we refer to as the “SEC,” and any updates to those risk factors or new risk factors contained herein and in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

The foregoing risks and uncertainties, as well as those risks and uncertainties set forth in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the forward-looking statements. Information in this Form 10-Q is given as of the date of filing the Form 10-Q with the SEC, and future events or circumstances could differ significantly from such information. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

WHERE YOU CAN FIND MORE INFORMATION

Our Internet website address is www.bgcpartners.com. Through our Internet website, we make available, free of charge, the following documents as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: our Annual Reports on Form 10-K; our proxy statements for our annual and special stockholder meetings; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; Forms 3, 4 and 5 and Schedules 13D filed on behalf of Cantor, our directors and our executive officers; and amendments to those documents. In addition, our Internet website is the primary location for press releases regarding our business, including our quarterly and year-end financial results.

 

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share data)

(unaudited)

 

     June 30,
2012
    December 31,
2011
 

Assets

    

Cash and cash equivalents

   $ 367,757      $ 369,713   

Cash segregated under regulatory requirements

     6,083        2,968   

Securities owned

     37,856        16,282   

Marketable securities

     —          1,238   

Receivables from broker-dealers, clearing organizations, customers and related broker-dealers

     548,663        192,053   

Accrued commissions receivable, net

     245,452        222,293   

Loans, forgivable loans and other receivables from employees and partners, net

     220,097        192,658   

Fixed assets, net

     141,918        136,068   

Investments

     32,008        20,367   

Goodwill

     142,204        141,142   

Other intangible assets, net

     21,249        16,994   

Receivables from related parties

     6,457        5,754   

Other assets

     105,777        87,655   
  

 

 

   

 

 

 

Total assets

   $ 1,875,521      $ 1,405,185   
  

 

 

   

 

 

 

Liabilities, Redeemable Partnership Interest, and Equity

    

Short-term borrowings

   $ —        $ 13,600   

Accrued compensation

     141,499        143,800   

Payables to broker-dealers, clearing organizations, customers and related broker-dealers

     492,897        144,683   

Payables to related parties

     43,991        19,667   

Accounts payable, accrued and other liabilities

     251,412        250,552   

Notes payable and collateralized borrowings

     302,216        181,916   

Notes payable to related parties

     150,000        150,000   
  

 

 

   

 

 

 

Total liabilities

     1,382,015        904,218   

Redeemable partnership interest

     80,435        86,269   

Equity

    

Stockholders’ equity:

    

Class A common stock, par value $0.01 per share; 500,000 shares authorized; 126,423 and 115,217 shares issued at June 30, 2012 and December 31, 2011, respectively; and 108,381 and 97,220 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     1,264        1,152   

Class B common stock, par value $0.01 per share; 100,000 shares authorized; 34,848 shares issued and outstanding at June 30, 2012 and December 31, 2011, convertible into Class A common stock

     348        348   

Additional paid-in capital

     536,071        489,369   

Contingent Class A common stock

     16,078        20,133   

Treasury stock, at cost: 18,042 and 17,997 shares of Class A common stock at June 30, 2012 and December 31, 2011, respectively

     (110,090     (109,870

Retained deficit

     (117,963     (80,726

Accumulated other comprehensive loss

     (5,333     (3,752
  

 

 

   

 

 

 

Total stockholders’ equity

     320,375        316,654   

Noncontrolling interest in subsidiaries

     92,696        98,044   
  

 

 

   

 

 

 

Total equity

     413,071        414,698   
  

 

 

   

 

 

 

Total liabilities, redeemable partnership interest, and equity

   $ 1,875,521      $ 1,405,185   
  

 

 

   

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Revenues:

        

Commissions

   $ 308,030      $ 239,132      $ 580,518      $ 483,846   

Principal transactions

     83,686        102,007        183,431        200,116   

Real estate management services

     31,674        —          32,566        —     

Fees from related parties

     13,494        16,206        26,041        31,641   

Market data

     3,990        4,598        8,954        9,174   

Software solutions

     2,487        2,257        4,936        4,390   

Interest income

     1,543        954        3,738        2,360   

Other revenues

     7,286        803        9,423        1,114   

Losses on equity investments

     (2,652     (1,399     (5,108     (3,060
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     449,538        364,558        844,499        729,581   

Expenses:

        

Compensation and employee benefits

     308,029        218,729        554,898        427,698   

Allocations of net income to limited partnership units and founding/working partner units

     1,909        9,237        7,889        18,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total compensation and employee benefits

     309,938        227,966        562,787        446,135   

Occupancy and equipment

     39,092        35,740        75,321        65,026   

Fees to related parties

     3,169        3,018        6,688        5,619   

Professional and consulting fees

     19,515        15,211        38,834        28,552   

Communications

     21,402        21,801        43,360        43,131   

Selling and promotion

     23,513        19,443        42,959        39,629   

Commissions and floor brokerage

     5,833        6,932        11,513        13,027   

Interest expense

     7,578        4,768        15,136        9,163   

Other expenses

     15,048        6,199        24,539        31,280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     445,088        341,078        821,137        681,562   

Income from operations before income taxes

     4,450        23,480        23,362        48,019   

Provision for income taxes

     70        6,031        7,272        13,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 4,380      $ 17,449      $ 16,090      $ 34,587   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interest in subsidiaries

     2,422        7,785        5,943        16,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,958      $ 9,664      $ 10,147      $ 18,330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Basic earnings per share

        

Net income available to common stockholders

   $ 1,958      $ 9,664      $ 10,147      $ 18,330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.01      $ 0.09      $ 0.07      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted-average shares of common stock outstanding

     140,368        112,644        138,257        105,027   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted earnings per share

        

Net income for fully diluted shares

   $ 3,878      $ 21,160      $ 19,668      $ 41,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted earnings per share

   $ 0.01      $ 0.09      $ 0.07      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     274,756        244,110        269,482        240,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 0.17      $ 0.17      $ 0.34      $ 0.31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared and paid per share of common stock

   $ 0.17      $ 0.17      $ 0.34      $ 0.31   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Consolidated net income

   $ 4,380      $ 17,449      $ 16,090      $ 34,587   

Other comprehensive (loss) income, net of tax:

        

Foreign currency translation adjustments

     (3,630     1,648        (1,910     4,007   

Unrealized (loss) gain on securities available for sale

     (41     (1,006     —          (2,309
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (3,671     642        (1,910     1,698   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     709        18,091        14,180        36,285   

Less: comprehensive income attributable to noncontrolling interest in subsidiaries, net of tax

     1,762        7,929        5,614        16,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to common stockholders

   $ (1,053   $ 10,162      $ 8,566      $ 19,585   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Consolidated net income

   $ 16,090      $ 34,587   

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

    

Fixed asset depreciation and intangible asset amortization

     24,752        24,092   

Employee loan amortization

     14,371        16,213   

Equity-based compensation

     61,943        41,979   

Allocations of net income to limited partnership units and founding/working partner units

     7,889        18,437   

Losses on equity investments

     5,108        3,060   

Accretion of discount on convertible notes

     2,172        —     

Impairment of fixed assets

     991        —     

Impairment loss on marketable securities

     291        —     

Deferred tax (benefit) provision

     (4,115     2,259   

Sublease provision adjustment

     (1,959     4,244   

Other

     133        1,678   

Decrease (increase) in operating assets:

    

Receivables from broker-dealers, clearing organizations, customers and related broker-dealers

     (354,646     (364,560

Loans, forgivable loans and other receivables from employees and partners, net

     (41,779     (40,817

Accrued commissions receivable, net

     18,062        (45,888

Securities owned

     (22,038     (1,495

Receivables from related parties

     (59     (2,449

Cash segregated under regulatory requirements

     (3,115     (1,212

Other assets

     (7,050     1,053   

Increase (decrease) in operating liabilities:

    

Payables to broker-dealers, clearing organizations, customers and related broker-dealers

     348,162        345,929   

Payables to related parties

     24,315        (2,576

Accounts payable, accrued and other liabilities

     1,985        (20,172

Accrued compensation

     (7,927     (18,494
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $ 83,576      $ (4,132

 

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(in thousands)

(unaudited)

     Six Months Ended
June 30,
 
     2012     2011  

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of fixed assets

   $ (19,532   $ (15,127

Capitalization of software development costs

     (6,701     (6,937

Investment in unconsolidated entities

     (16,828     (884

Payments for acquisitions, net of cash acquired

     (25,679     —     

Purchase of notes receivable

     (22,000     —     

Capitalization of trademarks, patent defense and registration costs

     (234     (468

Sale of marketable securities

     906        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (90,068     (23,416

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Notes payable and collateralized borrowings

     118,128        (2,768

Short-term borrowings

     (13,600     —     

Earnings distributions to limited partnership interests and other noncontrolling interests

     (47,821     (43,283

Redemption of limited partnership interests

     (13,255     (468

Dividends to stockholders

     (47,385     (34,136

Proceeds from offering of Class A common stock, net

     11,939        13,590   

Repurchase of Class A common stock

     (337     (126

Cancellation of restricted stock units in satisfaction of withholding tax requirements

     (1,974     (1,362

Proceeds from exercises of stock options

     —          8,195   

Tax impact on exercise/delivery of equity awards

     —          2,760   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     5,695        (57,598

Effect of exchange rate changes on cash and cash equivalents

     (1,159     7,281   

Net (decrease) increase in cash and cash equivalents

     (1,956     (77,865

Cash and cash equivalents at beginning of period

     369,713        364,104   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 367,757      $ 286,239   
  

 

 

   

 

 

 

Supplemental cash information:

    

Cash paid during the period for taxes

   $ 3,219      $ 16,694   
  

 

 

   

 

 

 

Cash paid during the period for interest

   $ 12,580      $ 10,794   
  

 

 

   

 

 

 

Supplemental non-cash information:

    

Issuance of Class A common stock upon exchange of limited partnership interests

   $ 37,155      $ 12,460   

Donations with respect to Charity Day

     7,446        3,900   

Issuance of Class A common stock upon purchase of notes receivable

     3,055        —     

Issuance of Class A common stock upon exchange of Cantor units

     —          8,407   

Issuance of Class B common stock upon exchange of Cantor units

     —          8,407   

Use of notes receivable in business acquisition

     25,492        —     

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Year Ended December 31, 2011

(in thousands, except share amounts)

(unaudited)

 

     BGC Partners, Inc. Stockholders              
     Class A
Common
Stock
     Class B
Common
Stock
     Additional
Paid-in
Capital
    Contingent
Class A
Common
Stock
     Treasury
Stock
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest in
Subsidiaries
    Total  

Balance, January 1, 2011

   $ 881       $ 258       $ 366,827      $ 3,171       $ (109,627   $ (23,616   $ (977   $ 94,939      $ 331,856   

Comprehensive income:

                     

Consolidated net income

     —           —           —          —           —          20,137        —          18,223        38,360   

Other comprehensive loss, net of tax

                     

Change in cumulative translation adjustment

     —           —           —          —           —          —          (3,471     (508     (3,979

Unrealized gain (loss) on securities available for sale

     —           —           —          —           —          —          696        (25     671   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —           —           —          —           —          20,137        (2,775     17,690        35,052   

Equity-based compensation, 1,937,093 shares

     19         —           4,337        —           —          —          —          4,365        8,721   

Dividends to common stockholders

     —           —           —          —           —          (77,244     —          —          (77,244

Earnings distributions to limited partnership interests

     —           —           —          —           —          —          —          (69,816     (69,816

Grant of exchangeability and redemption of limited partnership interests, issuance of 12,259,184 shares

     123         —           79,928        —           —          —          —          31,836        111,887   

Issuance of Class A common stock (net of costs), 3,829,176 shares

     39         —           14,774        —           —          —          —          11,952        26,765   

Issuance of Class A common stock upon exchange of Cantor units, 9,000,000 shares

     90         —           8,317        —           —          —          —          (8,407     —     

Issuance of Class B common stock upon exchange of Cantor units, 9,000,000 shares

     —           90         8,317        —           —          —          —          (8,407     —     

Redemption of founding/working partner units, 236,741 units

     —           —           (395     —           —          —          —          (531     (926

Repurchase of Class A common stock, 60,929 shares

     —           —           —          —           (243     —          —          (149     (392

Capital contribution by founding/working partners with respect to Charity Day

     —           —           5,130        —           —          —          —          3,046        8,176   

Re-allocation of equity due to additional investment by founding/working partners

     —           —           —          —           —          —          —          (6,121     (6,121

Purchase of capped call, net of tax

     —           —           (6,219     —           —          —          —          (3,692     (9,911

Equity component of convertible notes, net of tax

     —           —           10,073        —           —          —          —          5,980        16,053   

Acquisition of CantorCO2e, L.P.

     —           —           (1,255     —           —          —          —          (745     (2,000

Issuance of contingent Class A common stock for acquisitions, 4,716,848 shares

     —           —           236        16,962         —          —          —          9,580        26,778   

Newmark noncontrolling interest

     —           —           —          —           —          —          —          14,384        14,384   

Other

     —           —           (701     —           —          (3     —          2,140        1,436   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 1,152       $ 348       $ 489,369      $ 20,133       $ (109,870   $ (80,726   $ (3,752   $ 98,044      $ 414,698   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY—(Continued)

For the Six Months Ended June 30, 2012

(in thousands, except share amounts)

(unaudited)

 

     BGC Partners, Inc. Stockholders              
     Class A
Common
Stock
     Class B
Common
Stock
     Additional
Paid-in
Capital
    Contingent
Class A
Common
Stock
    Treasury
Stock
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest in
Subsidiaries
    Total  

Balance, January 1, 2012

   $ 1,152       $ 348       $ 489,369      $ 20,133      $ (109,870   $ (80,726   $ (3,752   $ 98,044      $ 414,698   

Comprehensive income:

                    

Consolidated net income

     —           —           —          —          —          10,147        —          5,943        16,090   

Other comprehensive income, net of tax

                    

Change in cumulative translation adjustment

     —           —           —          —          —          —          (1,581     (329     (1,910
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —           —           —          —          —          10,147        (1,581     5,614        14,180   

Equity-based compensation, 876,289 shares

     9         —           1,065        —          —          —          —          977        2,051   

Dividends to common stockholders

     —           —           —          —          —          (47,385     —          —          (47,385

Earnings distributions to limited partnership interests and other noncontrolling interests

     —           —           —          —          —          —          —          (47,821     (47,821

Grant of exchangeability and redemption of limited partnership interests, issuance of 6,004,888 shares

     60         —           33,084        —          —          —          —          32,702        65,846   

Issuance of Class A common stock (net of costs), 2,952,161 shares

     29         —           12,582        —          —          —          —          6,716        19,327   

Issuance of Class A common stock upon purchase of notes receivable, 453,172 shares

     5         —           1,991        —          —          —          —          1,059        3,055   

Redemption of founding/working partner units, 1,907,851 units

     —           —           (6,082     —          —          —          —          (3,279     (9,361

Repurchase of Class A common stock, 44,013 shares

     —           —           —          —          (220     —          —          (117     (337

Cantor purchase of Cantor units from BGC Holdings upon redemption of founding/working partner units, 920,729 units

     —           —           —          —          —          —          —          2,732        2,732   

Re-allocation of equity due to additional investment by founding/working partners

     —           —           —          —          —          —          —          (144     (144

Issuance of contingent and Class A common stock for acquisitions, 918,835 shares

     9         —           4,921        (4,441     —          —          —          236        725   

Newmark noncontrolling interest

     —           —           (828     386        —          —          —          (3,940     (4,382

Other

     —           —           (31     —          —          1        —          (83     (113
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 1,264       $ 348       $ 536,071      $ 16,078      $ (110,090   $ (117,963   $ (5,333   $ 92,696      $ 413,071   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization and Basis of Presentation

BGC Partners, Inc. (together with its subsidiaries, “BGC Partners,” “BGC” or the “Company”) is a leading global brokerage company primarily servicing the wholesale financial and real estate markets. The Company specializes in the brokering of a broad range of products, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commercial real estate, commodities, futures and structured products. BGC Partners also provides a full range of services, including trade execution, broker-dealer services, clearing, processing, information, and other back-office services to a broad range of financial and non-financial institutions. BGC Partners’ integrated platform is designed to provide flexibility to customers with regard to price discovery, execution and processing of transactions, and enables them to use voice, hybrid, or in many markets, fully electronic brokerage services in connection with transactions executed either over-the-counter (“OTC”) or through an exchange.

Through its eSpeed, BGC Trader™ and BGC Market Data brands, BGC Partners offers financial technology solutions, market data, and analytics related to select financial instruments and markets. Through its Newmark Grubb Knight Frank brand, the Company offers commercial real estate tenants, owners, investors and developers a wide range of brokerage services as well as property and facilities management. BGC Partners’ customers include many of the world’s largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers and investment firms. BGC Partners has offices in dozens of major markets, including New York and London, as well as in Atlanta, Beijing, Boston, Chicago, Copenhagen, Dubai, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Rio de Janeiro, São Paulo, Seoul, Singapore, Sydney, Tokyo, Toronto, Washington, D.C. and Zurich.

The Company’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements include the Company’s accounts and all subsidiaries in which the Company has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the unaudited condensed consolidated statements of financial condition, the unaudited condensed consolidated statements of operations, the unaudited condensed consolidated statements of comprehensive income, the unaudited condensed consolidated statements of cash flows and the unaudited condensed consolidated statements of changes in equity of the Company for the periods presented. The results of operations for the 2012 interim periods are not necessarily indicative of results to be expected for the entire fiscal year, which will end on December 31, 2012.

Recently Adopted Accounting Pronouncements:

In December 2010, the FASB issued guidance that modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity shall consider whether there are any adverse qualitative factors indicating that impairment may exist. This FASB guidance became effective with the first reporting period that began after December 15, 2010 and was adopted by the Company on January 1, 2011. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Beginning with the quarter ended September 30, 2011, the Company early adopted the FASB’s guidance on Comprehensive Income—Presentation of Comprehensive Income. This guidance requires (i) presentation of other comprehensive income either in a continuous statement of comprehensive income or in a separate statement presented consecutively with the statement of operations and (ii) presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The adoption of this FASB guidance did not have an impact on the Company’s unaudited condensed consolidated financial statements as it requires only a change in presentation. The Company has presented other comprehensive income in a separate statement following the Company’s unaudited condensed consolidated statements of operations.

In May 2011, the FASB issued guidance on Fair Value Measurement—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance expands the disclosure requirements around fair

 

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value measurements categorized in Level 3 of the fair value hierarchy. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in stockholders’ equity. This FASB guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Beginning with the year ended December 31, 2011, the Company adopted the FASB’s guidance on Intangibles—Goodwill and Other—Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. This guidance allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a more than 50% likelihood exists that the fair value is less than the carrying amount, then a two-step goodwill impairment test must be performed. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

New Accounting Pronouncements:

In December 2011, the FASB issued guidance on Disclosures about Offsetting Assets and Liabilities, which will require entities to disclose information about offsetting and related arrangements to enable users of financial statements to evaluate the potential effect of netting arrangements on an entity’s financial position, including the potential effect of rights of set-off. This FASB guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013. The adoption of this FASB guidance is not expected to have a material impact on the Company’s unaudited condensed consolidated financial statements, as this guidance only requires additional disclosures concerning offsetting and related arrangements.

 

2. Limited Partnership Interests in BGC Holdings

BGC Holdings, L.P. (“BGC Holdings”) is a consolidated subsidiary of the Company for which the Company is the general partner. The Company and BGC Holdings jointly own BGC Partners, L.P. (“BGC US”) and BGC Global Holdings L.P. (“BGC Global”), the two operating partnerships. Listed below are the limited partnership interests in BGC Holdings. The founding/working partner units, limited partnership units and Cantor units held by Cantor Fitzgerald, L.P. (“Cantor”), each as defined below, collectively represent all of the “limited partnership interests” in BGC Holdings.

Founding/Working Partner Units

Founding/working partners have a limited partnership interest in BGC Holdings. The Company accounts for founding/working partner units outside of permanent capital, as “Redeemable partnership interest,” in the Company’s unaudited condensed consolidated statements of financial condition. This classification is applicable to founding/working partner units because founding/working partner units are redeemable upon termination of a partner, which includes the termination of employment, which can be at the option of the partner and not within the control of the issuer.

Founding/working partner units are held by limited partners who are employees and generally receive quarterly allocations of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. Upon termination of employment or otherwise ceasing to provide substantive services, the founding/working partner units are redeemed, and the unit holders are no longer entitled to participate in the quarterly cash distributed allocations of net income. Since these allocations of net income are cash distributed on a quarterly basis and are contingent upon services being provided by the unit holder, they are reflected as a separate component of compensation expense under “Allocations of net income to limited partnership units and founding/working partner units” in the Company’s unaudited condensed consolidated statements of operations.

Limited Partnership Units

Certain employees hold limited partnership interests in BGC Holdings (e.g., REUs, RPUs, PSUs, and PSIs, collectively the “limited partnership units”). Generally, such units receive quarterly allocations of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. These allocations are cash distributed on a quarterly basis and are generally contingent upon services being provided by the unit holders. As prescribed in FASB guidance, the quarterly allocations of net income on such limited partnership units are reflected as a separate component of compensation expense under “Allocations of net income to limited partnership units and founding/working partner units” in the Company’s unaudited condensed consolidated statements of operations.

Certain of these limited partnership units entitle the holders to receive post-termination payments equal to the notional amount of the units in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards, and in accordance with FASB guidance the Company records compensation expense for the awards based on the change in value at each reporting date in the Company’s unaudited condensed consolidated statements of operations as part of “Compensation and employee benefits.”

 

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Cantor Units

Cantor’s limited partnership interest (“Cantor units”) in BGC Holdings is reflected as a component of “Noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of financial condition. Cantor receives allocations of net income based on its weighted-average pro rata share of economic ownership of the operating subsidiaries for each quarterly period. This allocation is reflected as a component of “Net income attributable to noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of operations. In quarterly periods in which the Company has a net loss, the amount reflected as a component of “Net income attributable to noncontrolling interest in subsidiaries” represents the loss allocation for founding/working partner units, limited partnership units and Cantor units.

General

Certain of the limited partnership interests, described above, have been granted exchangeability into Class A common stock on a one-for-one basis (subject to adjustment); additional limited partnership interests may become exchangeable for Class A common stock on a one-for-one basis (subject to adjustment). Any exchange of limited partnership interests into Class A common shares would not impact the total number of shares and units outstanding. Because these limited partnership interests generally receive quarterly allocations of net income, such exchange would have no significant impact on the cash flows or equity of the Company. Each quarter, net income is allocated between the limited partnership interests and the common stockholders. In quarterly periods in which the Company has a net loss, the loss allocation for founding/working partner units, limited partnership units and Cantor units is reflected as a component of “Net income attributable to noncontrolling interest in subsidiaries.” In subsequent quarters in which the Company has net income, the initial allocation of income to the limited partnership interests is to “Net income attributable to noncontrolling interests,” to recover any losses taken in earlier quarters. The remaining income is allocated to the limited partnership interests based on their weighted-average pro rata share of economic ownership of the operating subsidiaries for the quarter. This income allocation process has no impact on the net income allocated to common stockholders.

 

3. Acquisitions

Newmark

On October 14, 2011, the Company completed the acquisition of Newmark. Certain former shareholders of Newmark have also agreed to transfer their interests in certain other related companies for nominal consideration at the request of BGC. All of these former shareholders of Newmark have agreed to provide services to affiliates of BGC commencing at the closing. The total consideration transferred for Newmark was $90.1 million. The excess of the consideration transferred plus the fair value of the noncontrolling interest over the fair value of the net assets acquired has been recorded as goodwill of $59.5 million and was allocated to the Company’s Real Estate Services segment. The consideration transferred included approximately 4.83 million shares of the Company’s Class A common stock that may be issued over a five-year period contingent on certain revenue targets being met, with an estimated fair value of $26.8 million. The Company had total direct costs of approximately $3.2 million related to the acquisition of Newmark.

During the six months ended June 30, 2012, the Company purchased a majority interest in another affiliated company of Newmark for total consideration transferred of approximately $2.1 million. As a result of such transaction, the Company recognized additional goodwill of approximately $1.8 million, which was allocated to the Company’s Real Estate Services segment. Also, during the six months ended June 30, 2012, the Company purchased additional noncontrolling interests related to Newmark for approximately $5.6 million.

The Company has made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed as of the acquisition date. The Company expects to finalize its analysis of the intangible assets and receivables (including contingent receivables) acquired within the first year of the acquisition, and therefore adjustments to goodwill, intangible assets, brokerage receivables and commissions payable may occur.

Grubb & Ellis

On April 13, 2012, the Company completed the acquisition of substantially all of the assets of Grubb & Ellis Company (“Grubb & Ellis”).

The total consideration transferred for Grubb & Ellis was $47.1 million.

The consideration transferred included the extinguishment of approximately $30.0 million (principal amount) pre-bankruptcy senior secured debt (the “Prepetition Debt”), which the Company purchased at a discount, and which had a fair value of approximately $25.6 million as of the acquisition date. The consideration transferred also included approximately $5.5 million under debtor-in-possession term loans and

 

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$16.0 million in cash to the bankruptcy estate for the benefit of Grubb & Ellis’ unsecured creditors. The Company had total direct costs of approximately $2.8 million related to the acquisition of Grubb & Ellis. For the three months ended June 30, 2012, Grubb & Ellis’ total U.S. GAAP revenues subsequent to its acquisition by the Company were $65.6 million.

The following tables summarize the preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed as of the acquisition date (in millions). The Company expects to finalize its analysis of the intangible assets and receivables (including contingent receivables) acquired within the first year of the acquisition, and therefore adjustments may occur.

Calculation of estimated consideration transferred

 

Prepetition Debt

   $ 25.6   

Debtor-in-possession term loans

     5.5   

Cash paid to the bankruptcy estate

     16.0   
  

 

 

 

Total fair value of consideration transferred

     47.1   

Total fair value of net assets acquired

     47.1   
  

 

 

 

Preliminary goodwill related to Grubb & Ellis

   $ —     
  

 

 

 

Preliminary allocation of estimated consideration transferred to net assets acquired

 

     April 13,
2012
 

Assets

  

Cash and cash equivalents

   $ 0.6   

Brokerage receivables, net

     40.0   

Fixed assets

     2.8   

Intangible assets

     6.3   

Other assets

     10.5   
  

 

 

 

Total assets acquired

     60.2   

Liabilities

  

Other liabilities and accrued expenses

     13.1   
  

 

 

 

Total liabilities assumed

     13.1   
  

 

 

 

Net assets acquired

   $ 47.1   
  

 

 

 

The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of Grubb & Ellis had occurred on January 1, 2011. Grubb & Ellis’ results for the second quarter of 2012 prior to its acquisition by the Company are not material and, as a result, pro forma unaudited supplemental information has not been provided for the three months ended June 30, 2012 as the amounts are materially consistent with the amounts recognized in the unaudited condensed consolidated statements of operations for the three months ended June 30, 2012. These pro forma results are not indicative of operations that would have been achieved, nor are they indicative of future results of operations. The pro forma results do not reflect any potential cost savings or other operational efficiencies that could result from the acquisition. The historical financials of Grubb & Ellis and the pro forma information contain unusual and non-recurring expenses incurred during the distressed period leading up to the Grubb & Ellis bankruptcy. The pro forma information also does not include any adjustments for expenses with respect to assets or liabilities not acquired or assumed by the Company.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
In millions    2011      2012      2011  

Pro forma revenues

   $ 495.3       $ 927.4       $ 969.8   

Pro forma consolidated net income

     12.7         9.3         20.0   

The results of operations of Newmark and Grubb & Ellis have been included in the Company’s consolidated financial statements subsequent to their respective dates of acquisition.

 

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4. Earnings Per Share

FASB guidance on Earnings Per Share (“EPS”) establishes standards for computing and presenting EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average shares of common stock outstanding. Net income is allocated to each of the economic ownership classes described above in Note 2 — “Limited Partnership Interests in BGC Holdings,” and the Company’s outstanding common stock, based on each class’s pro rata economic ownership of the operating subsidiaries.

The Company’s earnings for the three and six months ended June 30, 2012 and 2011 were allocated as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Net income available to common stockholders

   $ 1,958       $ 9,664       $ 10,147       $ 18,330   

Allocation of net income to limited partnership interests in BGC Holdings

   $ 3,034       $ 16,047       $ 13,471       $ 33,805   

The following is the calculation of the Company’s basic EPS (in thousands, except per share data):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Basic earnings per share:

           

Net income available to common stockholders

   $ 1,958       $ 9,664       $ 10,147       $ 18,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted-average shares of common stock outstanding

     140,368         112,644         138,257         105,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.01       $ 0.09       $ 0.07       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted EPS is calculated utilizing net income available for common stockholders plus net income allocations to the limited partnership interests in BGC Holdings, as well as adjustments related to the interest expense on the Convertible Notes (if applicable) (see Note 16 — “Notes Payable, Collateralized and Short-Term Borrowings”) and expense related to dividend equivalents for certain restricted stock units (“RSUs”) (if applicable) as the numerator. The denominator is comprised of the Company’s weighted-average outstanding shares of common stock and, if dilutive, the weighted-average number of limited partnership interests, and other contracts to issue shares of common stock, including Convertible Notes, stock options, RSUs and warrants. The limited partnership interests are potentially exchangeable into shares of Class A common stock; as a result, they are included in the fully diluted EPS computation to the extent that the effect would be dilutive.

The following is the calculation of the Company’s fully diluted EPS (in thousands, except per share data):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Fully diluted earnings per share:

           

Net income available to common stockholders

   $ 1,958       $ 9,664       $ 10,147       $ 18,330   

Allocation of net income to limited partnership interests in BGC Holdings, net of tax

     1,836         11,055         9,373         23,224   

Dividend equivalent expense on RSUs, net of tax

     84         441         148         441   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income for fully diluted shares

   $ 3,878       $ 21,160       $ 19,668       $ 41,995   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares:

           

Common stock outstanding

     140,368         112,644         138,257         105,027   

Limited partnership interests in BGC Holdings

     132,035         129,461         129,158         133,372   

RSUs (Treasury stock method)

     585         1,768         765         1,979   

Other

     1,768         237         1,302         325   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     274,756         244,110         269,482         240,703   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted earnings per share

   $ 0.01       $ 0.09       $ 0.07       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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For the three months ended June 30, 2012 and 2011, approximately 48.4 million and 27.6 million shares underlying Convertible Notes, stock options, RSUs, and warrants were not included in the computation of fully diluted EPS because their effect would have been anti-dilutive. Anti-dilutive securities for the three months ended June 30, 2012 included, on a weighted-average basis, 39.1 million shares underlying Convertible Notes and 9.3 million other securities or other contracts to issue shares of common stock.

Additionally, for the three months ended June 30, 2012 and 2011, respectively, approximately 3.5 million and 0.5 million shares of contingent Class A common stock were excluded from the computation of fully diluted EPS because the conditions for issuance had not been met by the end of the respective periods.

Business Partner Warrants

As of June 30, 2012, the Company had a balance of 175 thousand business partner warrants with a weighted-average exercise price of $8.75 and a weighted-average remaining contractual term of 0.1 years. The Company did not recognize any expense related to the business partner warrants for the three or six months ended June 30, 2012 and 2011.

 

5. Unit Redemptions and Stock Transactions

Unit Redemptions and Stock Repurchase Program

During the three months ended June 30, 2012, the Company redeemed approximately 2.6 million limited partnership units at an average price of $6.47 per unit and approximately 0.3 million founding/working partner units at an average price of $7.76 per unit. During the three months ended June 30, 2011, the Company redeemed approximately 0.8 million limited partnership units at an average price of $7.88 per unit and approximately 18 thousand founding/working partner units at an average price of $8.99 per unit.

During the six months ended June 30, 2012, the Company redeemed approximately 5.4 million limited partnership units at an average price of $6.61 per unit and approximately 1.3 million founding/working partner units at an average price of $6.55 per unit. During the six months ended June 30, 2011, the Company redeemed approximately 1.0 million limited partnership units at an average price of $8.08 per unit and approximately 51 thousand founding/working partner units at an average price of $9.23 per unit.

The Company did not repurchase any shares of Class A common stock during the three months ended June 30, 2012. During the three months ended June 30, 2011, the Company repurchased 7,991 shares of Class A common stock at an aggregate purchase price of approximately $71 thousand for an average price of $8.94 per share.

During the six months ended June 30, 2012, the Company repurchased 44,013 shares of Class A common stock at an aggregate purchase price of approximately $0.3 million for an average price of $7.66 per share. During the six months ended June 30, 2011, the Company repurchased 14,445 shares of Class A common stock at an aggregate purchase price of approximately $126 thousand for an average price of $8.74 per share.

The Company’s Board of Directors and Audit Committee have authorized repurchases of the Company’s common stock and redemptions of BGC Holdings limited partnership interests or other equity interests in the Company’s subsidiaries. As of June 30, 2012, the Company had approximately $39.4 million remaining from its share repurchase and unit redemption authorization. From time to time, the Company may actively continue to repurchase shares or redeem units.

 

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Unit redemption and share repurchase activity for the six months ended June 30, 2012 was as follows:

 

Period

   Total Number of
Units Redeemed or
Shares Repurchased
     Average
Price Paid
per Unit
or Share
     Approximate
Dollar Value of
Units and
Shares That May
Yet Be Redeemed/
Purchased
Under the Plan
 
Redemptions         

January 1, 2012—March 31, 2012

     3,833,973       $ 6.60      

April 1, 2012—April 30, 2012

     1,522,783         7.12      

May 1, 2012—May 31, 2012

     624,179         6.01      

June 1, 2012—June 30, 2012

     775,279         6.06      
  

 

 

    

 

 

    

Total Redemptions

     6,756,214       $ 6.60      
Repurchases         

January 1, 2012—March 31, 2012

     44,013       $ 7.66      

April 1, 2012—April 30, 2012

     —           —        

May 1, 2012—May 31, 2012

     —           —        

June 1, 2012—June 30, 2012

     —           —        
  

 

 

    

 

 

    

Total Repurchases

     44,013       $ 7.66      
  

 

 

    

 

 

    

 

 

 

Total Redemptions and Repurchases

     6,800,227       $ 6.61       $ 39,423,017   

Stock Issuances

On various dates in 2010 and 2011, and most recently on February 15, 2012, the Company entered into controlled equity offering sales agreements with Cantor Fitzgerald & Co. (“CF&Co”) pursuant to which the Company may offer and sell up to an aggregate of 31 million shares of Class A common stock. CF&Co is a wholly-owned subsidiary of Cantor and an affiliate of the Company. Under these agreements, the Company has agreed to pay CF&Co 2% of the gross proceeds from the sale of shares.

During the three months ended June 30, 2012 and 2011, the Company issued 2,530,980 and 1,111,046 shares, respectively, of its Class A common stock related to redemptions and exchanges of limited partnership interests. During the six months ended June 30, 2012 and 2011, the Company issued 6,004,888 and 2,004,419 shares, respectively, of its Class A common stock related to redemptions and exchanges of limited partnership interests. The issuances related to redemptions of limited partnership interests did not impact the total number of shares and units outstanding.

During the three months ended June 30, 2012, the Company issued an aggregate of 839,120 shares of its Class A common stock in connection with the Company’s acquisitions. During the six months ended June 30, 2012, the Company issued an aggregate of 918,835 shares of its Class A common stock in connection with the Company’s acquisitions. The Company did not issue any shares of its Class A common stock in connection with the Company’s acquisitions during the three or six months ended June 30, 2011.

During the three months ended June 30, 2012 and 2011, the Company issued 201,316 and 989,400 shares, respectively, of its Class A common stock related to vesting of RSUs. Additionally, during the three months ended June 30, 2012, the Company issued an aggregate of 12,409 shares of its Class A common stock in connection with the Company’s Dividend Reinvestment and Stock Purchase Plan and 34,614 shares of its Class A common stock for general corporate purposes. The Company did not issue any shares of its Class A common stock related to the exercise of stock options during the three months ended June 30, 2012. During the three months ended June 30, 2011, the Company issued an aggregate of 51,313 shares of its Class A common stock related to the exercise of stock options and 11,111 shares of its Class A common stock to a former partner. During the three months ended June 30, 2011, the Company issued and donated an aggregate of 443,686 shares of Class A common stock to the Cantor Fitzgerald Relief Fund (the “Relief Fund”) in connection with the Company’s annual Charity Day. These shares have been registered for resale by the Relief Fund. During the three months ended June 30, 2011, the Company issued 9,000,000 shares of Class A common stock to Cantor upon Cantor’s exchange of 9,000,000 Cantor units. In addition, during the three months ended June 30, 2011, the Company issued 9,000,000 shares of Class B common stock of the Company to Cantor upon Cantor’s exchange of 9,000,000 Cantor units. All of these shares are restricted securities. These issuances did not change the fully diluted number of shares outstanding. The Company did not issue any shares of its Class A common stock related in connection with the Company’s Dividend Reinvestment and Stock Purchase Plan during the three months ended June 30, 2011.

During the six months ended June 30, 2012 and 2011, the Company issued 876,289 and 1,469,399 shares, respectively, of its Class A common stock related to vesting of RSUs. Additionally, during the six months ended June 30, 2012, the Company issued an aggregate of 25,524 shares of its Class A common stock in connection with the Company’s Dividend Reinvestment and Stock Purchase Plan and 1,876,637 shares of its Class A common stock for general corporate purposes. The Company did not issue any shares of its Class A common stock related to the

 

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exercise of stock options during the six months ended June 30, 2012. During the six months ended June 30, 2011, the Company issued 1,650,584 shares of its Class A common stock related to the exercise of stock options and 1,135,230 shares of its Class A common stock for general corporate purposes. The Company did not issue any shares of its Class A common stock related in connection with the Company’s Dividend Reinvestment and Stock Purchase Plan during the six months ended June 30, 2011.

During the six months ended June 30, 2012, the Company issued and donated an aggregate of 1,050,000 shares of Class A common stock to the Relief Fund in connection with the Company’s annual Charity Day, which shares have been registered for resale by the Relief Fund. Additionally, during the six months ended June 30, 2012, the Company issued an aggregate of 453,172 shares of Class A common stock upon purchase of notes receivable in connection with the Company’s acquisition.

During the six months ended June 30, 2011, the Company issued and donated an aggregate of 443,686 shares of Class A common stock to the Relief Fund. Additionally, the Company issued 9,000,000 shares of Class A common stock and 9,000,000 shares of Class B common stock to Cantor upon Cantor’s exchange of 18,000,000 Cantor units. In addition, the Company issued an aggregate of 11,111 shares of its Class A common stock to a former partner.

 

6. Securities Owned

Securities owned primarily consist of unencumbered U.S. Treasury bills held for liquidity purposes. Total securities owned were $37.9 million and $16.3 million as of June 30, 2012 and December 31, 2011, respectively.

Securities owned consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Government debt

   $ 37,720       $ 16,007   

Equities

     136         275   
  

 

 

    

 

 

 

Total

   $ 37,856       $ 16,282   
  

 

 

    

 

 

 

As of June 30, 2012, the Company has not pledged any of the securities owned to satisfy deposit requirements at exchanges or clearing organizations.

 

7. Marketable Securities

Marketable securities consist of the Company’s ownership of various investments. The Company had no marketable securities as of June 30, 2012. As of December 31, 2011, the Company had $1.2 million of marketable securities, which were classified as available-for-sale and recorded at fair value. During the three months ended March 31, 2012, the Company sold certain of its marketable securities for approximately $0.9 million. Unrealized gains or losses are generally included as part of “Accumulated other comprehensive loss” in the Company’s unaudited condensed consolidated statements of financial condition. When the fair value of an available-for-sale security is lower than its cost, the Company evaluates the security to determine whether the impairment is considered “other-than-temporary.” If the impairment is considered other-than-temporary, the Company records an impairment charge in the Company’s unaudited condensed consolidated statements of operations. The Company recorded impairment charges of $0.3 million for the three months ended June 30, 2012. No impairment charges were recorded for the three months ended June 30, 2011.

 

8. Receivables from and Payables to Broker-Dealers, Clearing Organizations, Customers and Related Broker-Dealers

Receivables from and Payables to broker-dealers, clearing organizations, customers and related broker-dealers primarily represent amounts due for undelivered securities, cash held at clearing organizations and exchanges to facilitate settlement and clearance of matched principal transactions, spreads on matched principal transactions that have not yet been remitted from/to clearing organizations and exchanges and amounts related to open derivative contracts. The Receivables from and Payables to broker-dealers, clearing organizations, customers and related broker-dealers consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Receivables from broker-dealers, clearing organizations, customers and related broker-dealers:

     

Contract values of fails to deliver

   $ 477,291       $ 130,675   

Receivables from clearing organizations

     54,638         48,681   

Other receivables from broker-dealers and customers

     7,574         8,060   

 

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Table of Contents
     June 30,
2012
     December 31,
2011
 

Open derivative contracts

     1,405         1,185   

Net pending trades

     7,755         3,452   
  

 

 

    

 

 

 

Total

   $ 548,663       $ 192,053   
  

 

 

    

 

 

 

Payables to broker-dealers, clearing organizations, customers and related broker-dealers:

     

Contract values of fails to receive

   $ 467,317       $ 124,282   

Payables to clearing organizations

     16,737         5,077   

Other payables to broker-dealers and customers

     8,843         14,990   

Open derivative contracts

     —           334   
  

 

 

    

 

 

 

Total

   $ 492,897       $ 144,683   
  

 

 

    

 

 

 

A portion of these receivables and payables are with Cantor. See Note 12 — “Related Party Transactions,” for additional information related to these receivables and payables.

Substantially all open fails to deliver, open fails to receive and pending trade transactions as of June 30, 2012 have subsequently settled at the contracted amounts.

 

9. Notes Receivable, Net

In connection with the Company’s agreement to acquire substantially all of the assets of Grubb & Ellis, on February 17, 2012, the Company purchased notes with a principal amount of approximately $30.0 million. The Company recorded interest income associated with the notes in “Interest income” on the Company’s unaudited condensed consolidated statements of operations. Total interest income recognized for the three months ended June 30, 2012 was approximately $0.1 million. Total interest income recognized for the six months ended June 30, 2012 was approximately $0.6 million. The Company did not recognize any interest income for the three or six months ended June 30, 2011. The notes were a component of the consideration transferred with respect to the acquisition of Grubb & Ellis on April 13, 2012. Prior to the acquisition of Grubb & Ellis, the notes were recorded at fair value and recorded in “Notes receivable, net” in the Company’s unaudited condensed consolidated statements of financial condition.

 

10. Derivatives

In the normal course of operations the Company enters into derivative contracts. These derivative contracts primarily consist of interest rate and foreign exchange swaps. The Company enters into derivative contracts to facilitate client transactions, to hedge principal positions and to facilitate hedging activities of affiliated companies.

Derivative contracts can be exchange-traded or OTC. Exchange-traded derivatives typically fall within Level 1 or Level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The Company generally values exchange-traded derivatives using the closing price of the exchange-traded derivatives. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.

The Company does not designate any derivative contracts as hedges for accounting purposes. FASB guidance requires that an entity recognize all derivative contracts as either assets or liabilities in the unaudited condensed consolidated statements of financial condition and measure those instruments at fair value. The fair value of all derivative contracts is recorded on a net-by-counterparty basis where a legal right to offset exists under an enforceable netting agreement. Derivative contracts are recorded as part of “Receivables from or payables to broker-dealers, clearing organizations, customers and related broker-dealers” in the Company’s unaudited condensed consolidated statements of financial condition. The change in fair value of derivative contracts is reported as part of “Principal transactions” in the Company’s unaudited condensed consolidated statements of operations.

The fair value of derivative financial instruments, computed in accordance with the Company’s netting policy, is set forth below (in thousands):

 

     June 30, 2012      December 31, 2011  
     Assets      Liabilities      Assets      Liabilities  

Interest rate swaps

   $ 1,182       $ —         $ 1,185       $ —     

Foreign exchange swaps

     223         —           —           334   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,405       $ —         $ 1,185       $ 334   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The notional amounts of the interest rate swaps transactions at June 30, 2012 and December 31, 2011 were $1.2 billion and $1.2 billion, respectively. These represent matched customer transactions settled through and guaranteed by a central clearing organization.

All of the Company’s foreign exchange swaps are with Cantor. The notional amounts of the foreign exchange swap transactions at June 30, 2012 and December 31, 2011 were $271.5 million and $234.1 million, respectively.

The replacement cost of contracts in a gain position at June 30, 2012 was $1.4 million.

As described in Note 16—“Notes Payable, Collateralized and Short-Term Borrowings,” on July 29, 2011, the Company issued the 4.50% Convertible Notes containing an embedded conversion feature. The conversion feature meets the requirements to be accounted for as an equity instrument, and the Company classifies the conversion feature within additional paid-in capital in the Company’s unaudited condensed consolidated statements of financial condition. The embedded conversion feature was measured in the amount of approximately $19.0 million on a pre-tax basis ($16.1 million net of taxes and issuance costs) at the issuance of the 4.50% Convertible Notes as the difference between the proceeds received and the fair value of a similar liability without the conversion feature and is not subsequently remeasured.

Also in connection with the issuance of the 4.50% Convertible Notes, the Company entered into capped call transactions. The capped call transactions meet the requirements to be accounted for as equity instruments, and the Company classifies the capped call transactions within additional paid-in capital in the Company’s unaudited condensed consolidated statements of financial condition. The purchase price of the capped call transactions resulted in a decrease to additional paid-in capital of $11.4 million on a pre-tax basis ($9.9 million on an after-tax basis) at the issuance of the 4.50% Convertible Notes, and such capped call transactions are not subsequently remeasured.

 

11. Fair Value of Financial Assets and Liabilities

The following tables set forth by level within the fair value hierarchy financial assets and liabilities, including marketable securities and those pledged as collateral, accounted for at fair value under FASB guidance at June 30, 2012 (in thousands):

 

     Assets at Fair Value at June 30, 2012 (1)  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Government debt

   $ 37,720       $ —         $ —         $ —         $ 37,720   

Interest rate swaps

     —           1,182         —           —           1,182   

Foreign exchange swaps

     —           223         —           —           223   

Securities owned—Equities

     136         —           —           —           136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,856       $ 1,405       $ —         $ —         $ 39,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Liabilities at Fair Value at June 30, 2012 (1)  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Total

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As required by FASB guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following tables set forth by level within the fair value hierarchy financial assets and liabilities, including marketable securities and those pledged as collateral, accounted for at fair value under FASB guidance at December 31, 2011 (in thousands):

 

     Assets at Fair Value at December 31, 2011 (1)  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Government debt

   $ 16,007       $ —         $ —         $ —         $ 16,007   

Marketable securities

     1,238         —           —           —           1,238   

Interest rate swaps

     —           1,185         —           —           1,185   

Securities owned—Equities

     275         —           —           —           275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,520       $ 1,185       $ —         $ —         $ 18,705   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Liabilities at Fair Value at December 31, 2011 (1)  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Foreign exchange swaps

   $ —         $ 334       $ —         $ —         $ 334   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 334       $ —         $ —         $ 334   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) As required by FASB guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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12. Related Party Transactions

Service Agreements

Throughout Europe and Asia, the Company provides Cantor with administrative services, technology services and other support for which it charges Cantor based on the cost of providing such services plus a mark-up, generally 7.5%. In the U.K., the Company provides these services to Cantor through Tower Bridge. The Company owns 52% of Tower Bridge and consolidates it, and Cantor owns 48%. Cantor’s interest in Tower Bridge is reflected as a component of “Noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of financial condition, and the portion of Tower Bridge’s income attributable to Cantor is included as part of “Net income attributable to noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of operations. In the U.S., the Company provides Cantor with technology services for which it charges Cantor based on the cost of providing such services.

The Company, together with other leading financial institutions, formed ELX Futures, L.P. (“ELX”), a limited partnership that has established a fully-electronic futures exchange. The Company now has a 49.0% voting interest in ELX and accounts for ELX under the equity method of accounting (see Note 13 — “Investments” for more details). During the six months ended June 30, 2012, the Company made a $16 million equity investment in ELX. During the six months ended June 30, 2011, the Company made no equity investments in ELX. The Company has entered into a technology services agreement with ELX pursuant to which the Company provides software technology licenses, monthly maintenance support and other technology services as requested by ELX. For the three months ended June 30, 2012 and 2011, the Company recognized related party revenues of $13.5 million and $16.2 million, respectively, for the services provided to Cantor and ELX. These revenues are included as part of “Fees from related parties” in the Company’s unaudited condensed consolidated statements of operations.

In the U.S., Cantor and its affiliates provide the Company with administrative services and other support for which Cantor charges the Company based on the cost of providing such services. In connection with the services Cantor provides, the Company and Cantor entered into an employee lease agreement whereby certain employees of Cantor are deemed leased employees of the Company. For the three months ended June 30, 2012 and 2011, the Company was charged $9.6 million and $10.0 million, respectively, for the services provided by Cantor and its affiliates, of which $6.4 million and $7.0 million, respectively, were to cover compensation to leased employees for the three months ended June 30, 2012 and 2011. For the six months ended June 30, 2012 and 2011, the Company was charged $17.1 million and $17.2 million, respectively, for the services provided by Cantor and its affiliates, of which $10.4 million and $11.6 million, respectively, were to cover compensation to leased employees for the six months ended June 30, 2012 and 2011. The fees paid to Cantor for administrative and support services, other than those to cover the compensation costs of leased employees, are included as part of “Fees to related parties” in the Company’s unaudited condensed consolidated statements of operations. The fees paid to Cantor to cover the compensation costs of leased employees are included as part of “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations.

As of June 30, 2012 and 2011, Cantor’s share of the net profit in Tower Bridge was $0.4 million and $0.9 million, respectively. Cantor’s noncontrolling interest is included as part of “Noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of financial condition.

Clearing Agreement

The Company receives certain clearing services (“Clearing Services”) from Cantor pursuant to its clearing agreement (“Clearing Agreement”). These Clearing Services are provided in exchange for payment by the Company of third-party clearing costs and allocated costs. The costs associated with these payments are included as part of “Fees to related parties” in the Company’s unaudited condensed consolidated statements of operations.

Receivables from and Payables to Related Broker-Dealers

Amounts due from or to Cantor and Freedom International Brokerage are for transactional revenues under a technology and services agreement with Freedom International Brokerage as well as for open derivative contracts. These are included as part of “Receivables from broker-dealers, clearing organizations, customers and related broker-dealers” or “Payables to broker-dealers, clearing organizations, customers and related broker-dealers” in the Company’s unaudited condensed consolidated statements of financial condition. As of June 30, 2012 and December 31, 2011, the Company had receivables from Cantor and Freedom International Brokerage of $3.2 million and $3.7 million, respectively. As of June 30, 2012 and December 31, 2011, the Company had $0.2 million receivable from Cantor and $0.3 million payable to Cantor, respectively, related to open derivative contracts.

 

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Loans, Forgivable Loans and Other Receivables from Employees and Partners, Net

The Company has entered into various agreements with certain of its employees and partners whereby these individuals receive loans which may be either wholly or in part repaid from the distribution earnings that the individual receives on some or all of their limited partnership interests or may be forgiven over a period of time. The forgivable portion of these loans is recognized as compensation expense over the life of the loan. From time to time, the Company may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements.

As of June 30, 2012 and December 31, 2011, the aggregate balance of these employee loans was $220.1 million and $192.7 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” in the Company’s unaudited condensed consolidated statements of financial condition. This increase was primarily due to employee loans related to recent acquisitions. Compensation expense for the above mentioned employee loans for the three months ended June 30, 2012 and 2011, was $7.4 million and $7.3 million, respectively. Compensation expense for the above mentioned employee loans for the six months ended June 30, 2012 and 2011, was $14.4 million and $16.2 million, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations.

8.75% Convertible Notes

On April 1, 2010 BGC Holdings issued an aggregate of $150.0 million principal amount of 8.75% Convertible Senior Notes due 2015 (the “8.75% Convertible Notes”) to Cantor in a private placement transaction. The Company used the proceeds of the 8.75% Convertible Notes to repay at maturity $150.0 million aggregate principal amount of Senior Notes due April 1, 2010. The Company recorded interest expense related to the 8.75% Convertible Notes in the amount of $3.3 million for both the three months ended June 30, 2012 and 2011. The Company recorded interest expense related to the 8.75% Convertible Notes in the amount of $6.6 million for both the six months ended June 30, 2012 and 2011. See Note 16 — “Notes Payable, Collateralized and Short-Term Borrowings,” for more information.

Controlled Equity Offerings/Payment of Commissions to CF&Co

As discussed in Note 5 — “Unit Redemptions and Stock Transactions,” the Company has entered into controlled equity offering agreements with CF&Co, as the Company’s sales agent. For the three months ended June 30, 2012 and 2011, the Company was charged approximately $0.3 million and $0.1 million, respectively, for services provided by CF&Co. For the six months ended June 30, 2012 and 2011, the Company was charged approximately $0.9 million and $0.4 million, respectively, for services provided by CF&Co. These expenses are included as part of “Professional and consulting fees” in the Company’s unaudited condensed consolidated statements of operations.

Cantor Rights upon Redemption of Founding/Working Partner Units by BGC Holdings

Cantor has the right to purchase Cantor units from BGC Holdings upon redemption of non-exchangeable founding/working partner units redeemed by BGC Holdings upon termination or bankruptcy of the founding/working partner. Any such Cantor units purchased by Cantor are exchangeable for shares of Class B common stock or, at Cantor’s election or if there are no additional authorized but unissued shares of Class B common stock, shares of Class A common stock, in each case on a one-for-one basis (subject to customary anti-dilution adjustments).

During the six months ended June 30, 2012, in connection with the redemption by BGC Holdings of an aggregate of 431,985 non-exchangeable founding partner units from founding partners of BGC Holdings for an aggregate consideration of $1,282,045, Cantor purchased 431,985 exchangeable limited partnership units from BGC Holdings for an aggregate of $1,282,045. The redemption of the non-exchangeable founding partner units and issuance of an equal number of exchangeable limited partnership units did not change the fully diluted number of shares outstanding. In addition, pursuant to the Sixth Amendment to the BGC Holdings Limited Partnership Agreement, during the six months ended June 30, 2012, Cantor purchased 488,744 exchangeable limited partnership units from BGC Holdings for an aggregate consideration of $1,449,663 in connection with the grant of exchangeability and exchange of 488,744 founding partner units. Such exchangeable limited partnership units are exchangeable by Cantor at any time on a one-for-one basis (subject to adjustment) for shares of Class A common stock of the Company.

As of June 30, 2012, there were 137,126 non-exchangeable founding/working partner units remaining in which BGC Holdings had the right to redeem and Cantor had the right to purchase an equivalent number of Cantor units.

BGC Partners’ Acquisition of CantorCO2e, L.P.

On August 2, 2011, the Company’s Board of Directors and Audit Committee approved the Company’s acquisition from Cantor of its North American environmental brokerage business, CantorCO2e, L.P. (“CO2e”). On August 9, 2011, the Company completed the acquisition of CO2e from Cantor for the assumption of approximately $2.0 million of liabilities and announced the launch of BGC

 

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Environmental Brokerage Services. Headquartered in New York, BGC Environmental Brokerage Services focuses on environmental commodities, offering brokerage, escrow and clearing, consulting, and advisory services to clients throughout the world in the industrial, financial and regulatory sectors.

Other Transactions

The Company is authorized to enter into loans, investments or other credit support arrangements for Aqua Securities L.P. (“Aqua”), an alternative electronic trading platform which offers new pools of block liquidity to the global equities markets, of up to $5.0 million in the aggregate; such arrangements would be proportionally and on the same terms as similar arrangements between Aqua and Cantor. A $2.0 million increase in this amount was authorized on November 1, 2010. Aqua is 51% owned by Cantor and 49% owned by the Company. Aqua is accounted for under the equity method of accounting. During the six months ended June 30, 2012 and 2011, the Company made $0.8 million and $0.9 million, respectively, in cash contributions to Aqua. These contributions are recorded as part of “Investments” in the Company’s unaudited condensed consolidated statements of financial condition.

On June 21, 2012, the Company signed an agreement with Thesys Technologies, the infrastructure affiliate of Tradeworx, Inc., to invest in the creation of high-speed microwave data networks for the financial community. In connection with the agreement, the Company has committed to fund up to approximately $13.0 million to Epsilon Networks, LLC as it meets certain milestone targets. During the six months ended June 30, 2012, the Company made loans of approximately $1.1 million to Epsilon Networks, LLC, which are recorded in “Receivables from related parties” in the Company’s unaudited condensed consolidated statements of financial condition.

The Company is authorized to enter into short-term arrangements with Cantor to cover any failed U.S. Treasury securities transactions and to share equally any net income resulting from such transactions, as well as any similar clearing and settlement issues. As of June 30, 2012, the Company had not entered into any arrangements to cover any failed U.S. Treasury transactions.

To more effectively manage the Company’s exposure to changes in foreign exchange rates, the Company and Cantor agreed to jointly manage the exposure. As a result, the Company is authorized to divide the quarterly allocation of any profit or loss relating to foreign exchange currency hedging between Cantor and the Company. The amount allocated to each party is based on the total net exposure for the Company and Cantor. The ratio of gross exposures of Cantor and the Company will be utilized to determine the shares of profit or loss allocated to each for the period. During the six months ended June 30, 2012, the Company recognized its share of foreign exchange loss of $17 thousand. This loss is included as part of “Other expenses” in the Company’s unaudited condensed consolidated statements of operations.

In March 2009, the Company and Cantor were authorized to utilize each other’s brokers to provide brokerage services for securities not brokered by such entity, so long as, unless otherwise agreed, such brokerage services were provided in the ordinary course and on terms no less favorable to the receiving party than such services are provided to typical third-party customers.

During the year ended December 31, 2011, the Company issued 9,000,000 shares of Class A common stock to Cantor upon Cantor’s exchange of 9,000,000 Cantor units. In addition, during the year ended December 31, 2011, the Company issued 9,000,000 shares of Class B common stock to Cantor upon Cantor’s exchange of 9,000,000 Cantor units. These issuances did not impact the total number of shares and units outstanding. As a result of these exchanges and the transactions described above, as of June 30, 2012, Cantor held an aggregate of 48,782,933 Cantor units. (See Note 5 — “Unit Redemptions and Stock Transactions.”)

On October 14, 2011, the Company completed the acquisition of Newmark (see Note 3 — “Acquisitions”). In connection with this acquisition, the Company paid an advisory fee of $1.4 million to CF&Co. This fee was recorded as part of “Professional and consulting fees” in the Company’s unaudited condensed consolidated statements of operations.

On April 13, 2012, the Company completed the acquisition of Grubb & Ellis (see Note 3 — “Acquisitions”). In connection with this acquisition, the Company will pay an advisory fee of $1.0 million to CF&Co. This fee is included as part of “Professional and consulting fees” in the Company’s unaudited condensed consolidated statements of operations.

On June 26, 2012, the Company issued an aggregate $112.5 million principal amount of 8.125% Senior Notes due 2042 (the “8.125% Senior Notes”). In connection with this issuance, the Company will pay fees of approximately $0.2 million to CF&Co. This fee is included as part of “Professional and consulting fees” in the Company’s unaudited condensed consolidated statements of operations.

During the year ended December 31, 2011, Howard W. Lutnick, the Company’s Chief Executive Officer, exercised an employee stock option with respect to 1,500,000 shares of Class A common stock at an exercise price of $5.10 per share. The exercise price was paid in cash from Mr. Lutnick’s personal funds.

During the year ended December 31, 2011, other executive officers of the Company exercised employee stock options with respect to 152,188 shares of Class A common stock at an average exercise price of $5.10 per share. A portion of these shares were withheld to pay the option exercise price and the applicable tax obligations. During the year ended December 31, 2011, these executive officers sold 6,454 of these shares of Class A common stock that they acquired upon exercise of options to the Company at an average price of $8.50 per share.

 

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During the six months ended June 30, 2012, the Company repurchased 44,013 shares of Class A common stock, at an average price of $7.66 per share. An aggregate of 41,523 of such shares were purchased from Stephen M. Merkel, the Company’s Executive Vice President, General Counsel and Secretary, and certain family trusts.

During the year ended December 31, 2011, the Company repurchased 60,929 shares of Class A common stock, at an average price of $6.43 per share, from a director, executive officers, and employees of the Company.

During the six months ended June 30, 2012, the Company issued and donated an aggregate of 1,050,000 shares of Class A common stock to the Relief Fund in connection with the Company’s annual Charity Day, which shares have been registered for resale by the Relief Fund.

 

13. Investments

Equity Method Investments

The Company’s equity method investments consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Equity method investments

   $ 32,008       $ 20,367   
  

 

 

    

 

 

 

On March 28, 2012, the Company made a further equity investment of $16.0 million in ELX. As a result of the additional equity investment and certain related transactions, (i) the Company’s voting and equity interests in ELX increased from 26.3% each to 49.0% and 56.7%, respectively, and (ii) the Company has been granted the authority to manage and conduct the day-to-day business, operations and affairs of ELX, subject to the oversight and control of the supervisory board.

The Company’s share of losses related to its investments was $2.7 million and $1.4 million for the three months ended June 30, 2012 and 2011, respectively. The Company’s share of losses related to its investments was $5.1 million and $3.1 million for the six months ended June 30, 2012 and 2011, respectively. The Company’s share of the losses is reflected in “Losses on equity investments” in the Company’s unaudited condensed consolidated statements of operations.

Investments in Variable Interest Entities

Certain of the Company’s equity method investments included in the equity method investment table above are considered variable interest entities (“VIE”), as defined under the accounting guidance for consolidation. The Company is not considered the primary beneficiary of, and therefore does not consolidate, any of the variable interest entities in which it holds a variable interest. The Company’s involvement with such entities is in the form of direct equity interests and related agreements. The Company’s maximum exposure to loss with respect to the variable interest entities is its investment in such entities as well as a credit facility and other funding commitments. The following table sets forth the Company’s investment in its unconsolidated variable interest entities and the maximum exposure to loss with respect to such entities as of June 30, 2012 and December 31, 2011. The amounts presented in the “Investment” column below are included in, and not in addition to, the equity method investment table above (in thousands):

 

     June 30,
2012
     December 31,
2011
 
     Investment      Maximum
Exposure to  Loss
     Investment      Maximum
Exposure to Loss
 

Variable interest entities(1)

   $ 19,998       $ 48,978       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In addition to its equity investments, the Company has entered into a credit agreement to lend one of its variable interest entities (ELX) up to $16.0 million. The commitment period for such credit facility extends through March 28, 2015. Additionally, the Company has committed to fund up to approximately $13.0 million to another variable interest entity (Epsilon Networks, LLC) as it meets certain milestone targets. The Company’s maximum exposure to loss with respect to its variable interest entities is the sum of its equity investment plus the $16.0 million credit facility and the funding commitment of approximately $13.0 million.

 

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14. Fixed Assets, Net

Fixed assets, net consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Computer and communications equipment

   $ 215,963       $ 198,322   

Software, including software development costs

     142,502         138,845   

Leasehold improvements and other fixed assets

     130,911         111,573   
  

 

 

    

 

 

 
     489,376         448,740   

Less: accumulated depreciation and amortization

     347,458         312,672   
  

 

 

    

 

 

 

Fixed assets, net

   $ 141,918       $ 136,068   
  

 

 

    

 

 

 

Depreciation expense was $9.3 million and $8.3 million for the three months ended June 30, 2012 and 2011, respectively. Depreciation expense was $18.2 million and $16.7 million for the six months ended June 30, 2012 and 2011, respectively. Depreciation is included as part of “Occupancy and equipment” in the Company’s unaudited condensed consolidated statements of operations.

In accordance with FASB guidance, the Company capitalizes qualifying computer software development costs incurred during the application development stage and amortizes them over their estimated useful life of three years on a straight-line basis. For the three months ended June 30, 2012 and 2011, software development costs totaling $2.7 million and $3.6 million, respectively, were capitalized. For the six months ended June 30, 2012 and 2011, software development costs totaling $6.7 million and $6.9 million, respectively, were capitalized. Amortization of software development costs totaled $2.0 million and $2.7 million for the three months ended June 30, 2012 and 2011, respectively. Amortization of software development costs totaled $4.7 million and $5.6 million for the six months ended June 30, 2012 and 2011, respectively. Amortization of software development costs is included as part of “Occupancy and equipment” in the Company’s unaudited condensed consolidated statements of operations.

Impairment charges of $0.2 million were recorded for the three months ended June 30, 2012, related to the evaluation of capitalized software projects for future benefit and for fixed assets no longer in service. Impairment charges of $1.0 million were recorded for the six months ended June 30, 2012, related to the evaluation of capitalized software projects for future benefit and for fixed assets no longer in service. Impairment charges related to capitalized software and fixed assets are reflected in “Occupancy and equipment” in the Company’s unaudited condensed consolidated statements of operations.

 

15. Goodwill and Other Intangible Assets, Net

The changes in the carrying amount of goodwill for the six months ended June 30, 2012 were as follows (in thousands):

 

     Financial
Services
    Real
Estate

Services
     Total  

Balance at December 31, 2011

   $ 81,602      $ 59,540       $ 141,142   

Additional goodwill related to Newmark

     —          1,829         1,829   

Cumulative translation adjustment

     (767     —           (767
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

   $ 80,835      $ 61,369       $ 142,204   
  

 

 

   

 

 

    

 

 

 

The Company acquired substantially all of the assets of Grubb & Ellis following the April 13, 2012 approval of the transaction by the U.S. Bankruptcy Court for the Southern District of New York. Based on the Company’s preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed, the Company does not expect to recognize any goodwill from the acquisition.

Goodwill is not amortized and is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with FASB guidance on Goodwill and Other Intangible Assets.

Other intangible assets consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Definite life intangible assets:

     

Patents

   $ 36,018       $ 35,944   

Customer base/relationships

     15,082         15,280   

Internally developed software

     5,722         5,722   

Noncompete agreements

     3,418         3,418   

All other

     3,786         3,778   
  

 

 

    

 

 

 

Total gross definite life intangible assets

     64,026         64,142   

Less: accumulated amortization

     54,962         52,996   
  

 

 

    

 

 

 

Net definite life intangible assets

     9,064         11,146   
  

 

 

    

 

 

 

 

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     June 30,
2012
     December 31,
2011
 

Indefinite life intangible assets:

     

Trade name

     10,685         4,348   

Horizon license

     1,500         1,500   
  

 

 

    

 

 

 

Total net intangible assets

   $ 21,249       $ 16,994   
  

 

 

    

 

 

 

Intangible amortization expense was $0.9 million and $0.9 million for the three months ended June 30, 2012 and 2011, respectively. Intangible amortization expense was $1.8 million and $1.8 million for the six months ended June 30, 2012 and 2011, respectively. Intangible amortization is included as part of “Other expenses” in the Company’s unaudited condensed consolidated statements of operations.

 

16. Notes Payable, Collateralized and Short-Term Borrowings

Notes payable, collateralized and short-term borrowings consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

8.75% Convertible Notes

   $ 150,000       $ 150,000   

4.50% Convertible Notes

     141,148         138,976   

8.125% Senior Notes

     108,723         —     

Collateralized borrowings

     52,345         42,940   

Short-term borrowings

     —           13,600   
  

 

 

    

 

 

 

Total

   $ 452,216       $ 345,516   
  

 

 

    

 

 

 

Convertible Notes

On April 1, 2010, BGC Holdings issued an aggregate of $150.0 million principal amount of the 8.75% Convertible Notes to Cantor in a private placement transaction. The Company used the proceeds of the 8.75% Convertible Notes to repay $150.0 million principal amount of Senior Notes that matured on April 1, 2010. The 8.75% Convertible Notes are senior unsecured obligations and rank equally and ratably with all existing and future senior unsecured obligations of the Company. The 8.75% Convertible Notes bear an annual interest rate of 8.75%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2010, and are currently convertible into 22,959,124 million shares of Class A common stock. The 8.75% Convertible Notes will mature on April 15, 2015, unless earlier repurchased, exchanged or converted. The Company recorded interest expense related to the 8.75% Convertible Notes of $3.3 million and $3.3 million for the three months ended June 30, 2012 and 2011, respectively, and $6.6 and $6.6 million for the six months ended June 30, 2012 and June 30, 2011, respectively.

The 8.75% Convertible Notes are currently convertible, at the holder’s option, at a conversion rate of 153.0608 shares of Class A common stock per $1,000 principal amount of notes, subject to customary adjustments upon certain corporate events, including stock dividends and stock splits on the Class A common stock and the Company’s payment of a quarterly cash dividend in excess of $0.10 per share of Class A common stock. The conversion rate will not be adjusted for accrued and unpaid interest to the conversion date.

On July 29, 2011, the Company issued an aggregate of $160.0 million principal amount of 4.50% Convertible Senior Notes due 2016 (the “4.50% Convertible Notes”). The 4.50% Convertible Notes are general senior unsecured obligations of BGC Partners, Inc. The 4.50% Convertible Notes pay interest semiannually at a rate of 4.50% per annum and were priced at par. The 4.50% Convertible Notes will mature on July 15, 2016, unless earlier repurchased, exchanged or converted. The Company recorded interest expense related to the 4.50% Convertible Notes of $2.9 million for the three months ended June 30, 2012. The Company recorded interest expense related to the 4.50% Convertible Notes of $5.8 million for the six months ended June 30, 2012. There was no interest expense related to the 4.50% Convertible Notes for the three or six months ended June 30, 2011.

The 4.50% Convertible Notes are currently convertible, at the holder’s option, at a conversion rate of 101.6260 shares of Class A common stock per $1,000 principal amount of notes, subject to adjustment in certain circumstances, including stock dividends and stock splits on the Class A common stock and the Company’s payment of a quarterly cash dividend in excess of $0.17 per share of Class A common stock. This conversion rate is equal to a conversion price of approximately $9.84 per share, a 20% premium over the $8.20 closing price of BGC’s Class A common stock on the NASDAQ on July 25, 2011. Upon conversion, the Company will pay or deliver, cash, shares of the Company’s Class A common stock, or a combination thereof at the Company’s election. The 4.50% Convertible Notes are currently convertible into approximately 16.3 million shares of Class A common stock.

 

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As prescribed by FASB guidance, Debt, the Company recognized the value of the embedded conversion feature of the 4.50% Convertible Notes as an increase to additional paid-in capital of approximately $19.0 million on a pre-tax basis ($16.1 million net of taxes and issuance costs). The embedded conversion feature was measured as the difference between the proceeds received and the fair value of a similar liability without the conversion feature. The value of the conversion feature is treated as a debt discount and reduced the initial carrying value of the 4.50% Convertible Notes to $137.1 million, net of debt issuance costs of $3.9 million allocated to the debt component of the instrument. The discount is amortized as interest cost and the carrying value of the notes will accrete up to the face amount over the term of the notes.

In connection with the offering of the 4.50% Convertible Notes, the Company entered into capped call transactions, which are expected generally to reduce the potential dilution of the Company’s Class A common stock upon any conversion of the 4.50% Convertible Notes in the event that the market value per share of the Company’s Class A common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions (which corresponds to the initial conversion price of the 4.50% Convertible Notes and is subject to certain adjustments similar to those contained in the 4.50% Convertible Notes). The capped call transactions have a cap price equal to $12.30 per share (50% above the last reported sale price of the Company’s Class A common stock on the NASDAQ on July 25, 2011). The purchase price of the capped call transactions resulted in a decrease to additional paid-in capital of $11.4 million on a pre-tax basis ($9.9 million on an after-tax basis). The capped call transactions cover approximately 16.3 million shares of BGC’s Class A common stock.

Below is a summary of the Company’s Convertible Notes (in thousands, except share and per share amounts):

 

     4.50% Convertible Notes     8.75% Convertible Notes  
     June 30,
2012
    December 31,
2011
    June 30,
2012
    December 31,
2011
 

Principal amount of debt component

   $ 160,000      $ 160,000      $ 150,000      $ 150,000   

Unamortized discount

     (18,852     (21,024     —          —     

Carrying amount of debt component

     141,148        138,976        150,000        150,000   

Carrying amount of equity component

     18,972        18,972        —          —     

Effective interest rate

     7.61     7.61     8.75     8.75

Maturity date (period through which discount is being amortized)

     7/15/2016        7/15/2016        4/15/2015        4/15/2015   

Conversion price

   $ 9.84      $ 9.84      $ 6.53      $ 6.66   

Number of shares to be delivered upon conversion

     16,260,160        16,260,160        22,959,124        22,508,095   

Amount by which the notes’ if-converted value exceeds their principal amount

   $ —        $ —        $ —        $ —     

Below is a summary of the interest expense related to the Company’s Convertible Notes (in thousands):

 

     4.50% Convertible Notes      8.75% Convertible Notes  
     Three Months
Ended
     Six Months Ended      Three Months
Ended
     Six Months Ended  
     June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
 

Coupon interest

   $ 1,800       $ —         $ 3,600       $ —         $ 3,281       $ 3,281       $ 6,562       $ 6,562   

Amortization of discount

     1,090         —           2,172         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 2,890       $ —         $ 5,772       $ —         $ 3,281       $ 3,281       $ 6,562       $ 6,562   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Senior Notes

On June 26, 2012, the Company issued an aggregate of $112.5 million principal amount of 8.125% Senior Notes due 2042 pursuant to the Company’s effective Shelf Registration Statement on Form S-3, as amended. The 8.125% Senior Notes are senior unsecured obligations of BGC Partners, Inc. The 8.125% Senior Notes may be redeemed for cash, in whole or in part, on or after June 26, 2017, at the Company’s option, at any time and from time to time, until maturity at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date. The 8.125% Senior Notes are listed on the New York Stock Exchange under the symbol “BGCA.” The Company intends to use the proceeds to repay short-term borrowings under its unsecured revolving credit facility and for general corporate purposes, including potential acquisitions.

The initial carrying value of the 8.125% Senior Notes was $108.7 million, net of debt issuance costs of $3.8 million. The issuance costs are amortized as interest cost and the carrying value of the notes will accrete up to the face amount over the term of the notes. The Company recorded interest expense related to the 8.125% Senior Notes of $0.1 million for the three and six months ended June 30, 2012. There was no interest expense related to the 8.125% Senior Notes for the three and six months ended June 30, 2011.

 

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Collateralized Borrowings

On various dates beginning in 2009 and most recently on June 29, 2012, the Company entered into secured loan arrangements under which it pledged certain fixed assets in exchange for loans. The secured loan arrangements have fixed rates between 2.62% and 8.09% per annum and are repayable in consecutive monthly installments with the final payments due in June 2016. The outstanding balance of the secured loan arrangements was $35.2 million and $20.6 million as of June 30, 2012 and December 31, 2011, respectively. The value of the fixed assets pledged was $31.6 million and $18.0 million as of June 30, 2012 and December 31, 2011, respectively. The secured loan arrangements are guaranteed by the Company. The Company recorded interest expense related to the secured loan arrangements of $0.3 million and $0.2 million for the three months ended June 30, 2012 and 2011, respectively. The Company recorded interest expense related to the secured loan arrangements of $0.7 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively.

On various dates during the years ended December 31, 2011 and 2010, the Company sold certain furniture, equipment and software for $34.2 million, net of costs and concurrently entered into agreements to lease the property back. The principal and interest on the leases are repayable in equal monthly installments for terms of 36 months (software) and 48 months (furniture and equipment) with maturities through September 2014. The outstanding balance of the leases was $17.2 million and $22.4 million as of June 30, 2012 and December 31, 2011, respectively. The value of the fixed assets pledged was $12.2 million and $17.0 million as of June 30, 2012 and December 31, 2011, respectively. The Company recorded interest expense of $0.3 million and $0.4 million for the three months ended June 30, 2012 and 2011, respectively. The Company recorded interest expense of $0.6 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.

Because assets revert back to the Company at the end of the leases, the transactions were capitalized. As a result, consideration received from the purchaser is included in the Company’s unaudited condensed consolidated statements of financial condition as a financing obligation, and payments made under the lease are being recorded as interest expense (at an effective rate of approximately 6%). Depreciation on these fixed assets will continue to be charged to “Occupancy and equipment” in the Company’s unaudited condensed consolidated statements of operations.

Credit Agreement

On June 23, 2011, the Company entered into a credit agreement with a bank syndicate (the “Credit Agreement”) which provides for up to $130.0 million of unsecured revolving credit through June 23, 2013. Borrowings under the Credit Agreement will bear interest at a per annum rate equal to, at the Company’s option, either (a) a base rate equal to the greatest of (i) the prime rate as established by the Administrative Agent from time to time, (ii) the average federal funds rate plus 0.5%, and (iii) the reserve adjusted one month LIBOR reset daily plus 1.0%, or (b) the reserve adjusted LIBOR for interest periods of one, two, three or six months, as selected by the Company, in each case plus an applicable margin. The applicable margin will initially be 2.0% with respect to base rate borrowings in (a) above and 3.0% with respect to borrowings selected as LIBOR borrowings in (b) above, but may increase to a maximum of 3.0% and 4.0%, respectively, depending upon the Company’s credit rating. The Credit Agreement also provides for an unused facility fee and certain upfront and arrangement fees. The Credit Agreement requires that the outstanding loan balance be reduced to zero every 270 days for three days. The Credit Agreement further provides for certain financial covenants, including minimum equity, tangible equity and interest coverage, as well as maximum levels for total assets to equity capital and debt to equity. The Credit Agreement also contains certain other affirmative and negative covenants. As of June 30, 2012, there were no borrowings outstanding under the Credit Agreement. The Company recorded interest expense related to the Credit Agreement of $0.7 million and $0.8 million for the three and six months ended June 30, 2012, respectively. There was no interest expense related to the Credit Agreement for the three or six months ended June 30, 2011.

 

17. Compensation

Limited Partnership Units

A summary of the activity associated with limited partnership units is as follows:

 

     Number of Units  

Balance at December 31, 2011

     45,814,354   

Granted

     19,356,090   

Redeemed/Exchanged units

     (6,151,058

Forfeited units

     (806,662
  

 

 

 

Balance at June 30, 2012

     58,212,724   
  

 

 

 

 

 

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Certain limited partnership units are granted exchangeability into Class A common stock on a one-for-one basis (subject to adjustment). Upon grant of exchangeability, the limited partnership units are cancelled, and the partner is granted a partnership unit that is exchangeable for shares of the Company’s Class A common stock. At the time exchangeability is granted, the Company recognizes an expense based on the fair value of the award on that date which is included in “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations. During the three months ended June 30, 2012 and 2011, the Company granted exchangeability on 6.2 million and 2.5 million limited partnership units for which the Company incurred compensation expense, before associated income taxes, of $38.1 million and $23.0 million, respectively. During the six months ended June 30, 2012 and 2011, the Company granted exchangeability on 10.1 million and 3.7 million limited partnership units for which the Company incurred compensation expense, before associated income taxes, of $64.1 million and $34.0 million, respectively.

The number of unvested limited partnership units as of June 30, 2012 and December 31, 2011 was 2.6 million and 2.6 million, respectively.

As of June 30, 2012 and December 31, 2011, the number of limited partnership units exchangeable into shares of Class A common stock at the discretion of the unit holder was 5.8 million and 1.8 million, respectively.

Compensation expense related to limited partnership units with a post-termination pay-out amount is recognized over the stated service period. These units generally vest over three years from the date of the grant. The Company recognized a pre-tax compensation expense of $1.2 million and $1.7 million for the three months ended June 30, 2012 and 2011, respectively, related to limited partnership units that were not redeemed. The Company recognized a pre-tax compensation expense of $1.5 million and $3.9 million for the six months ended June 30, 2012 and 2011, respectively, related to limited partnership units that were not redeemed. As of June 30, 2012 and December 31, 2011, the notional value of the applicable limited partnership units was $29.9 million and $37.6 million, respectively. As of June 30, 2012 and December 31, 2011, the aggregate estimated fair value of the limited partnership units held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was $11.5 million and $16.5 million, respectively.

Restricted Stock Units

A summary of the activity associated with RSUs is as follows:

 

     Restricted
Stock Units
    Weighted-
Average
Grant
Date Fair
Value
     Weighted-
Average
Remaining
Contractual
Term
(Years)
 

Balance at December 31, 2011

     2,721,820      $ 5.96         1.76   

Granted

     1,373,845        5.51      

Delivered units

     (1,180,050     4.84      

Forfeited units

     (187,766     6.19      
  

 

 

   

 

 

    

Balance at June 30, 2012

     2,727,849      $ 6.20         2.10   
  

 

 

   

 

 

    

The fair value of RSUs awarded to employees and directors is determined on the date of grant based on the market value of Class A common stock (adjusted if appropriate based upon the award’s eligibility to receive dividends), and is recognized, net of the effect of estimated forfeitures, ratably over the vesting period. The Company uses historical data, including historical forfeitures and turnover rates, to estimate expected forfeiture rates for both employee and director RSUs. Each RSU is settled in one share of Class A common stock upon completion of the vesting period.

During the six months ended June 30, 2012 and 2011, the Company granted 1.4 million and 1.0 million, respectively, of RSUs with aggregate estimated grant date fair values of approximately $7.6 million and $8.3 million, respectively, to employees and directors. These RSUs were awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses. RSUs granted to these individuals generally vest over a two to four-year period.

For RSUs that vested during the six months ended June 30, 2012, the Company withheld shares valued at $2.0 million to pay payroll taxes due at the time of vesting.

As of June 30, 2012 and December 31, 2011, the aggregate estimated grant date fair value of outstanding RSUs was approximately $16.9 million and $16.2 million, respectively.

Compensation expense related to RSUs, before associated income taxes, was approximately $1.1 million and $2.5 million for the three months ended June 30, 2012 and 2011, respectively. Compensation expense related to RSUs, before associated income taxes, was approximately $4.0 million and $4.6 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, there was approximately $14.8 million of total unrecognized compensation expense related to unvested RSUs.

 

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Stock Options

A summary of the activity associated with stock options is as follows:

 

     Options     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
(Years)
     Aggregate
Intrinsic
Value
 

Balance at December 31, 2011

     8,256,066      $ 14.07         2.9       $ —     

Forfeited options

     (96,977     9.34         
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance at June 30, 2012

     8,159,089      $ 14.13         2.4       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     8,159,089      $ 14.13         2.4       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

The Company did not grant any stock options during the six months ended June 30, 2012 and 2011. During the six months ended June 30, 2012, there were no exercises of options. During the six months ended June 30, 2011, the aggregate intrinsic value of options exercised was $0.6 million, determined as of the date of option exercise. The exercise prices for these options equaled the closing price of the Company’s Class A common stock on the date of grant of each option. Cash received from option exercises during the six months ended June 30, 2011 was $7.7 million.

The Company did not record any compensation expense related to stock options for the three or six months ended June 30, 2012 and 2011, as all of these options vested in prior years. As of June 30, 2012, there was no unrecognized compensation expense related to unvested stock options.

 

18. Commitments, Contingencies and Guarantees

Contingencies

In the ordinary course of business, various legal actions are brought and are pending against the Company and its affiliates in the U.S. and internationally. In some of these actions, substantial amounts are claimed. The Company is also involved, from time to time, in reviews, examinations, inspections, investigations and enforcement actions by governmental and self-regulatory agencies (both formal and informal) regarding the Company’s businesses. These matters may result in judgments, settlements, costs, fines, penalties, sanctions or other relief. The following generally does not include matters that the Company has pending against other parties which, if successful, would result in awards in favor of the Company or its subsidiaries.

Employment, Competitor-Related and Other Litigation

From time to time, the Company and its affiliates are involved in litigation, claims and arbitrations in the U.S. and internationally, relating to various employment matters, including with respect to termination of employment, hiring of employees currently or previously employed by competitors, terms and conditions of employment and other matters. In light of the competitive nature of the brokerage industry, litigation, claims and arbitration between competitors regarding employee hiring are not uncommon.

In August 2004, Trading Technologies International, Inc. (“TT”) commenced an action in the United States District Court, Northern District of Illinois, Eastern Division, against us. In its complaint, TT alleged that the Company infringed two of TT’s patents. TT later added eSpeed International Ltd., ECCO LLC and ECCO Ware LLC as defendants. On June 20, 2007, the Court granted eSpeed’s motion for partial summary judgment on TT’s claims of infringement covering the then current versions of certain products. As a result, the remaining products at issue in the case were the versions of the eSpeed and ECCO products that have not been on the market in the U.S. since around the end of 2004.

 

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On June 9, 2010, TT filed in the District Court a “Motion to Enforce the Money Judgment.” The Company opposed this motion on the ground that no money judgment was entered prior to the taking of the appeal by TT. A Magistrate Judge concluded there was no money judgment, but on its own initiative recommended the District Court amend the Final Judgment to include damages in the principal amount of $2.5 million. On March 29, 2011, the District Court affirmed. The parties subsequently stipulated to a further amendment to the judgment to apportion this amount in accordance with remitted jury verdict between eSpeed. The Company reserved its rights with respect to this amended judgment and on May 27, 2011 filed an appeal of the amended judgment. On June 6, 2012, the United States Court of Appeals for the Federal Circuit affirmed the amended judgment; its mandate issued on July 13, 2012. The amended judgment has been satisfied, while the issue of costs remains pending before the District Court.

On February 3, 2010, TT filed another civil action against the Company in the Northern District of Illinois, alleging direct and indirect infringement of three additional patents, U.S. Patents Nos. 7,533,056, 7,587,357, and 7,613,651, and by later amendment to the complaint No. 7,676,411 by the eSpeedometer product. On June 24, 2010, TT filed a Second Amended Complaint to add certain of the Company’s affiliates. On February 4, 2011, the Court ordered that the case be consolidated with nine other cases filed by TT in February 2010 against other defendants, involving some of the same patents. On May 25, 2011, TT filed a Third Amended Complaint substituting certain of the Company’s affiliates for the previously-named defendants. On June 15, 2011, TT filed a Fourth Amended Complaint adding claims of direct and indirect infringement of six additional U.S. Patents Nos. 7,685,055, 7,693,768, 7,725,382, 7,813,996, 7,904,374, and 7,930,240. On October 3, 2011 the Company filed an answer and counterclaims. On February 9, 2012, the Court granted a motion for partial summary judgment, holding that Patent No. 7,676,411 is invalid, and a motion for partial summary judgment that Patent No. 7,533,056 is not invalid for lack of written description. On July 31, 2012, the Court entered a final judgment of invalidity as Patents Nos. 7,676,411, 7,685,055, 7,693,768, and 7,904,374, and certified that final judgment for immediate interlocutory appeal. TT filed a notice of appeal from that final judgment on July 31, 2012.

On August 24, 2009, Tullett Liberty Securities LLC (“Tullett Liberty”) filed a claim with FINRA dispute resolution (the “FINRA Arbitration”) in New York, New York against BGC Financial, L.P., an affiliate of BGC Partners (“BGC Financial”), one of BGC Financial’s officers, and certain persons formerly or currently employed by Tullett Liberty subsidiaries. Tullett Liberty thereafter added Tullett Prebon Americas Corp. (“Tullett Americas,” together with Tullett Liberty, the “Tullett Subsidiaries”) as a claimant, and added 35 individual employees, who were formerly employed by the Tullett Subsidiaries, as respondents. In the FINRA Arbitration, the Tullett Subsidiaries allege that BGC Financial harmed their inter-dealer brokerage business by hiring 79 of their employees, and that BGC Financial aided and abetted various alleged wrongs by the employees, engaged in unfair competition, misappropriated trade secrets and confidential information, tortiously interfered with contract and economic relationships, and violated FINRA Rules of Conduct. The Tullett Subsidiaries also alleged certain breaches of contract and duties of loyalty and fiduciary duties against the employees. BGC Financial has generally agreed to indemnify the employees. In the FINRA Arbitration, the Tullett Subsidiaries claim compensatory damages of not less than $779 million and exemplary damages of not less than $500 million. The Tullett Subsidiaries also seek costs and permanent injunctions against the defendants.

The parties stipulated to consolidate the FINRA Arbitration with five other related arbitrations (FINRA Case Nos. 09-04807, 09-04842, 09-06377, 10-00139 and 10-01265)—two arbitrations previously commenced against Tullett Liberty by certain of its former brokers now employed by BGC Financial, as well as three arbitrations commenced against BGC Financial by brokers who were previously employed by BGC Financial before returning to Tullett Liberty. FINRA consolidated them. BGC Financial and the employees filed their Statement of Answer and BGC’s Statement of Counterclaim. Tullett Liberty responded to BGC’s Counterclaim. Tullett filed an action in the Supreme Court, New York County against three of BGC’s executives involved in the recruitment in the New York metropolitan area. Tullett agreed to discontinue the action in New York state court and add these claims to the FINRA Arbitration. Tullett and the Company have also agreed to join Tullett’s claims against BGC Capital Markets, L.P. to the FINRA Arbitration. The parties and FINRA also agreed to consolidate an eighth arbitration filed against the Tullett Subsidiaries by certain of its former brokers now employed by BGC Financial. The hearings in the FINRA Arbitration and the arbitrations consolidated therewith began in mid-April 2012.

On October 22, 2009, Tullett Prebon plc (“Tullett”) filed a complaint in the United States District Court for the District of New Jersey against BGC Partners captioned Tullett Prebon plc vs. BGC Partners, Inc. (the “New Jersey Action”). In the New Jersey Action, Tullett asserted claims relating to decisions made by approximately 81 brokers to terminate their employment with the Tullett Subsidiaries and join BGC Partners’ affiliates. In its complaint, Tullett made a number of allegations against BGC Partners related to raiding, unfair competition, New Jersey RICO, and other claims arising from the brokers’ current or prospective employment by BGC Partners’ affiliates. Tullett claimed compensatory damages against BGC Partners in excess of $1 billion for various alleged injuries as well as exemplary damages. It also sought costs and an injunction against additional hirings.

In response to a BGC motion, Tullett filed its First Amended Complaint (the “Amended New Jersey Complaint”), which largely repeated the allegations of injury and the claims asserted in the initial complaint. The Amended New Jersey Complaint incorporates the damages sought in the FINRA Arbitration, repeats many of the allegations raised in the FINRA Arbitration and also references hiring of employees of Tullett affiliates by BGC Partners or BGC Partners’ affiliates overseas, for which Tullett and/or the Tullett Subsidiaries have filed suit outside of the United States, including one in the High Court in London and another commenced by a Tullett affiliate against seven brokers at a BGC Partners affiliate in Hong Kong, on which the Company may have certain indemnity obligations. In the London action, the High Court found liability for certain of BGC Partners’ actions, affirmed on appeal, and the case

 

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was settled during the damages hearing thereafter. The Hong Kong case has also been settled. BGC Partners moved to dismiss the Amended New Jersey Complaint, or in the alternative, to stay the action pending the resolution of the FINRA Arbitration. In that motion, BGC Partners argued that Tullett lacked standing to pursue its claims, that the court lacked subject matter jurisdiction and that each of the causes of action in the Amended New Jersey Complaint failed to state a legally sufficient claim. On June 18, 2010, the District Court ordered that the First Amended Complaint be dismissed with prejudice. Tullett appealed. On May 13, 2011, the United States Court of Appeals for the Third Judicial Circuit affirmed the decision of the District Court dismissing the case with prejudice. Subsequently, Tullett, joined by two subsidiaries, has filed a complaint against BGC Partners in New Jersey state court alleging substantially the same claims. The New Jersey state action also raises claims related to employees who decided to terminate their employment with Tullett and join a BGC Partners affiliate subsequent to the federal complaint. BGC has moved to stay the New Jersey state action and has also moved to dismiss certain of the claims asserted therein. On November 9, 2011, the court granted BGC Partners’ motion to dismiss Tullett’s claim for “raiding,” but otherwise denied the motions to dismiss and for a stay. BGC Partners moved for leave to appeal the denial of its motions. On December 21, 2011, the Superior Court, Appellate Division, denied BGC Partners’ motion for leave to appeal. On December 22, 2011, BGC Partners filed its Answer and Affirmative Defenses. This action is proceeding to discovery.

Subsidiaries of Tullett filed additional claims with FINRA on April 4, 2011, seeking unspecified damages and injunctive relief against BGC Financial, and nine additional former employees of the Tullett subsidiaries alleging similar claims (similar to those asserted in the previously filed FINRA Arbitration) related to BGC Financial’s hiring of those nine employees in 2011. These claims have not been consolidated with the other FINRA proceedings. BGC Financial and those employees filed their Statement of Answer and the employees’ Statement of Counterclaims, and the Tullett subsidiaries responded to the employees’ counterclaims. This case is scheduled for hearings before FINRA in October 2012.

BGC Partners and its affiliates intend to vigorously defend against and seek appropriate affirmative relief in the FINRA Arbitration and the other actions, and believe that they have substantial defenses to the claims asserted against them in those proceedings, believe that the damages and injunctive relief sought against them in those proceedings are unwarranted and unprecedented, and believe that Tullett Liberty, Tullett and the Tullett Subsidiaries are attempting to use the judicial and industry dispute resolution mechanisms in an effort to shift blame to BGC Partners for their own failures. However, no assurance can be given as to whether Tullett, Tullett Liberty or any of the Tullett Subsidiaries may actually succeed against either BGC Partners or any of its affiliates.

In November 2010, the Company’s affiliates filed three proceedings against Tullett Prebon Information (C.I.) Ltd and certain of its affiliates. In these proceedings, the Company’s affiliates seek to recover significant damages relating to Tullett’s theft of BGCantor Market Data’s proprietary data. BGCantor Market Data (and two predecessors in interest) seek contractual damages and two of the Company’s brokerage affiliates seek disgorgement of profits due to unfair competition. An award has been rendered in the arbitration by BGCantor Market Data (and two predecessors in interest) in favor of the Company in the approximate amount of $0.8 million. The Company has moved to vacate the award because of its failure to award attorneys’ fees and award a greater amount in damages. Tullett has moved to confirm the award.

On March 9, 2012, a purported derivative action was filed in the Supreme Court of the State of New York, County of New York captioned International Painters and Allied Trades Industry Pension Fund, etc. v. Cantor Fitzgerald L.P., CF Group Management, Cantor Fitzgerald & Co., the Company and its directors, Index No. 650736-2012, which suit alleges that the terms of the April 1, 2010 8.75% Convertible Notes issued to Cantor were unfair to the Company, the Company’s Controlled Equity Offerings unfairly benefited Cantor at the Company’s expense and the August 2011 amendment to the change in control agreement of Mr. Lutnick was unfair to the Company. It seeks to recover for the Company unquantified damages, disgorgement of payments received by defendants, a declaration that the 8.75% Convertible Notes are void and attorneys’ fees. On April 2, 2012, a purported derivative action was filed in the Court of Chancery of the State of Delaware captioned Samuel Pill v. Cantor Fitzgerald L.P., CF Group Management, Cantor Fitzgerald & Co., the Company and its directors, Civil Action No. 7382-CS, which suit alleged that the terms of the April 1, 2010 8.75% Convertible Notes issued to Cantor were unfair to the Company, the Company’s Controlled Equity Offerings unfairly benefited Cantor at the Company’s expense and the August 2011 amendment to the change in control agreement of Mr. Lutnick was unfair to the Company. It seeks to recover for the Company unquantified damages, disgorgement of payments received by defendants, a declaration that the 8.75% Convertible Notes are void and attorneys’ fees. On April 12, 2012, this Complaint was subsequently amended to delete any claim for relief in connection with the 8.75% Convertible Notes. On June 8, 2012, Defendants filed a motion simultaneously in New York and Delaware requesting that the two actions proceed in one forum. In response to Defendants’ motion, Plaintiff Samuel Pill voluntarily dismissed the Delaware action, without prejudice, in the Court of Chancery in the State of Delaware on June 19, 2012. On the same date, Plaintiff Pill refiled his complaint in the Supreme Court of the State of New York, County of New York, captioned Samuel Pill v. Cantor Fitzgerald, L.P., CF Group Management, Cantor Fitzgerald & Co., the Company and its directors, Index No. 652126-2012. It is the Company’s expectation that the two actions now pending in New York will be consolidated. Responses to both complaints are not yet due. The Company believes that each of these allegations is without merit and intends to defend against them vigorously.

 

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In the ordinary course of business, various legal actions are brought and may be pending against the Company. The Company is also involved, from time to time, in other reviews, investigations and proceedings by governmental and self-regulatory agencies (both formal and informal) regarding the Company’s business. Any such actions may result in judgments, settlements, fines, penalties, injunctions or other relief.

Legal reserves are established in accordance with FASB guidance on Accounting for Contingencies, when a material legal liability is both probable and reasonably estimable. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change. The outcome of such items cannot be determined with certainty; therefore, the Company cannot predict what the eventual loss related to such matters will be. Management believes that, based on currently available information, the final outcome of these current pending matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Letter of Credit Agreements

The Company has irrevocable uncollateralized letters of credit with various banks, where the beneficiaries are clearing organizations through which it transacted, that are used in lieu of margin and deposits with those clearing organizations. As of June 30, 2012, the Company was contingently liable for $1.9 million under these letters of credit.

Risk and Uncertainties

The Company generates revenues by providing financial intermediary and securities trading and brokerage activities to institutional customers and by executing and, in some cases, clearing transactions for institutional counterparties. Revenues for these services are transaction-based. As a result, revenues could vary based on the transaction volume of global financial markets. Additionally, financing is sensitive to interest rate fluctuations, which could have an impact on its overall profitability.

Guarantees

The Company provides guarantees to securities clearing houses and exchanges which meet the definition of a guarantee under FASB interpretations. Under these standard securities clearing house and exchange membership agreements, members are required to guarantee, collectively, the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the clearing house or exchange, all other members would be required to meet the shortfall. In the opinion of management, the Company’s liability under these agreements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, the potential of being required to make payments under these arrangements is remote. Accordingly, no contingent liability has been recorded in the Company’s unaudited condensed consolidated statements of financial condition for these agreements.

 

19. Income Taxes

The Company’s unaudited condensed consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, (see Note 2 — “Limited Partnership Interests in BGC Holdings” for discussion of partnership interests) rather than the partnership entity. Income taxes are accounted for using the asset and liability method, as prescribed in FASB guidance on Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. No deferred U.S. federal income taxes have been provided for the undistributed foreign corporate earnings since they have been permanently reinvested in the Company’s foreign operations. It is not practical to determine the amount of additional tax that may be payable in the event these earnings are repatriated. Pursuant to FASB guidance on Accounting for Uncertainty in Income Taxes, the Company provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of June 30, 2012, the Company had $3.3 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to income tax matters in “Interest expense” and “Other expenses,” respectively, in the Company’s unaudited condensed consolidated statements of operations. As of June 30, 2012, we had approximately $0.5 million of accrued interest related to uncertain tax positions. During the three and six months ended June 30, 2012, the Company did not have any material charges with respect to interest and penalties.

 

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20. Regulatory Requirements

Many of the Company’s businesses are subject to regulatory restrictions and minimum capital requirements. These regulatory restrictions and capital requirements may restrict the Company’s ability to withdraw capital from its subsidiaries.

Certain U.S. subsidiaries of the Company are registered as U.S. broker-dealers or Futures Commissions Merchants subject to Rule 15c3-1 of the SEC and Rule 1.17 of the Commodity Futures Trading Commission, which specify uniform minimum net capital requirements, as defined, for their registrants, and also require a significant part of the registrants’ assets be kept in relatively liquid form. As of June 30, 2012, the Company’s U.S. subsidiaries had net capital in excess of their minimum capital requirements.

Certain European subsidiaries of the Company are regulated by the U.K. Financial Services Authority (“FSA”) and must maintain financial resources (as defined by the FSA) in excess of the total financial resources requirement of the FSA. As of June 30, 2012, the European subsidiaries had financial resources in excess of their requirements.

Certain other subsidiaries of the Company are subject to regulatory and other requirements of the jurisdictions in which they operate.

The regulatory requirements referred to above may restrict the Company’s ability to withdraw capital from its regulated subsidiaries. As of June 30, 2012, $362.7 million of net assets were held by regulated subsidiaries. These subsidiaries had aggregate regulatory net capital, as defined, in excess of the aggregate regulatory requirements, as defined, of $182.8 million.

 

21. Segment and Geographic Information

Segment Information

The Company’s business segments are determined based on the products and services provided and reflect the manner in which financial information is evaluated by management. Prior to the quarter ended June 30, 2012, the Company had one reportable segment. Following the acquisition of substantially all of the assets of Grubb & Ellis, the Company has changed its segment reporting structure. As a result, for the quarter ended June 30, 2012, the Company’s operations consisted of two reportable segments, Financial Services and Real Estate Services. Accordingly, all segment information presented herein reflects the Company’s revised segment reporting structure for all periods presented. Financial Services provides financial intermediary services to the financial markets, integrated voice and electronic brokerage and trade execution services in a broad range of products and services, including global fixed income securities, equities, futures, foreign exchange, derivatives and other instruments, including proprietary market data offerings thereon. Real Estate Services includes commercial real estate brokerage and sales and related financial services, consulting, project and development management, and property and facilities management.

The Company evaluates the performance and reviews the results of the segments based on each segment’s “income (loss) from operations before income taxes.” The Company’s segment information does not include analysis of assets by segment. Except for goodwill, the Company does not allocate assets by operating segment, nor does management evaluate operating segments using discrete asset information. See Note 15 — “Goodwill and Other Intangible Assets, Net” for goodwill by reportable segment.

Selected financial information for the Company’s segments is presented below. The amounts shown below for the Financial Services and Real Estate Services segments reflect the amounts that are used by management to allocate resources and assess performance, which is based on each segment’s “income (loss) from operations before income taxes.” In addition to the two business segments, the tables below include a “Corporate Items” category, which includes fees from related parties and interest income as well as unallocated expenses, such as the grant of exchangeability to limited partnership units, allocations of net income to founding/working partner units and limited partnership units, certain professional and consulting fees, executive compensation and interest expense, which are managed separately at the corporate level.

 

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Three months ended June 30, 2012 (dollars in thousands):

 

     Financial      Real
Estate
     Corporate        
     Services      Services      Items     Total  

Brokerage revenues:

          

Rates

   $ 134,403       $ —         $ —        $ 134,403   

Credit

     70,084         —           —          70,084   

Foreign exchange

     53,241         —           —          53,241   

Equities and other asset classes

     41,714         —           —          41,714   

Real estate

     —           92,274         —          92,274   

Real estate management services

     —           31,674         —          31,674   

Market data

     3,990         —           —          3,990   

Software solutions

     2,487         —           —          2,487   

Fees from related parties

     3,076         —           10,418        13,494   

Losses on equity investments

     —           —           (2,652     (2,652

Other revenues

     25         7,132         129        7,286   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     309,020         131,080         7,895        447,995   

Interest income

     223         117         1,203        1,543   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     309,243         131,197         9,098        449,538   

Interest expense

     1,426         77         6,075        7,578   

Other expenses

     249,341         125,974         62,195        437,510   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before taxes

   $ 58,476       $ 5,146       $ (59,172   $ 4,450   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended June 30, 2012, the Real Estate Services segment income from operations before taxes excludes $8.8 million related to the collection of receivables and associated expenses that were capitalized as part of acquisition accounting.

Three months ended June 30, 2011 (dollars in thousands):

 

     Financial      Real
Estate
     Corporate        
     Services      Services      Items     Total  

Brokerage revenues:

          

Rates

   $ 145,715       $ —         $ —        $ 145,715   

Credit

     78,134         —           —          78,134   

Foreign exchange

     55,630         —           —          55,630   

Equities and other asset classes

     61,660         —           —          61,660   

Real estate

     —           —           —          —     

Real estate management services

     —           —           —          —     

Market data

     4,598         —           —          4,598   

Software solutions

     2,257         —           —          2,257   

Fees from related parties

     2,981         —           13,225        16,206   

Losses on equity investments

     —           —           (1,399     (1,399

Other revenues

     565         —           238        803   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     351,540         —           12,064        363,604   

Interest income

     997         —           (43     954   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     352,537         —           12,021        364,558   

Interest expense

     384         —           4,384        4,768   

Other expenses

     280,292         —           56,018        336,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before taxes

   $ 71,861       $ —         $ (48,381   $ 23,480   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Six months ended June 30, 2012 (dollars in thousands):

 

     Financial      Real
Estate
     Corporate        
     Services      Services      Items     Total  

Brokerage revenues:

          

Rates

   $ 281,287       $ —         $ —        $ 281,287   

Credit

     154,455         —           —          154,455   

Foreign exchange

     111,972         —           —          111,972   

Equities and other asset classes

     85,535         —           —          85,535   

Real estate

     —           130,700         —          130,700   

Real estate management services

     —           32,566         —          32,566   

Market data

     8,954         —           —          8,954   

Software solutions

     4,936         —           —          4,936   

Fees from related parties

     5,980         —           20,061        26,041   

Losses on equity investments

     —           —           (5,108     (5,108

Other revenues

     46         9,057         320        9,423   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     653,165         172,323         15,273        840,761   

Interest income

     714         291         2,733        3,738   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     653,879         172,614         18,006        844,499   

Interest expense

     3,080         258         11,798        15,136   

Other expenses

     515,872         168,459         121,670        806,001   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before taxes

   $ 134,927       $ 3,897       $ (115,462   $ 23,362   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the six months ended June 30, 2012, the Real Estate Services segment income from operations before taxes excludes $11.4 million related to the collection of receivables and associated expenses that were capitalized as part of acquisition accounting.

Six months ended June 30, 2011 (dollars in thousands):

 

     Financial      Real
Estate
     Corporate        
     Services      Services      Items     Total  

Brokerage revenues:

          

Rates

   $ 298,525       $ —         $ —        $ 298,525   

Credit

     165,327         —           —          165,327   

Foreign exchange

     109,849         —           —          109,849   

Equities and other asset classes

     110,261         —           —          110,261   

Real estate

     —           —           —          —     

Real estate management services

     —           —           —          —     

Market data

     9,174         —           —          9,174   

Software solutions

     4,390         —           —          4,390   

Fees from related parties

     6,594         —           25,047        31,641   

Losses on equity investments

     —           —           (3,060     (3,060

Other revenues

     674         —           440        1,114   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     704,794         —           22,427        727,221   

Interest income

     374         —           1,986        2,360   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     705,168         —           24,413        729,581   

Interest expense

     790         —           8,373        9,163   

Other expenses

     560,326         —           112,073        672,399   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before taxes

   $ 144,052       $ —         $ (96,033   $ 48,019   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Geographic Information

The Company offers products and services in the U.S., U.K., Asia (including Australia), France, Other Americas, Other Europe, and the Middle East and Africa region (defined as the “MEA” region). Information regarding revenues for the three and six months ended June 30, 2012 and 2011, respectively, and information regarding long-lived assets (defined as loans, forgivable loans and other receivables from employees and partners, net, fixed assets, net, certain other investments, goodwill, other intangible assets, net of accumulated amortization, and rent and other deposits) in the geographic areas as of June 30, 2012 and December 31, 2011, were as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Revenues:

           

United States

   $ 218,906       $ 90,920       $ 364,103       $ 188,137   

United Kingdom

     134,355         157,468         277,370         319,357   

Asia

     52,029         60,746         108,807         118,507   

France

     22,731         34,621         51,254         63,275   

Other Americas

     10,818         11,977         22,706         22,964   

Other Europe/MEA

     10,699         8,826         20,259         17,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 449,538       $ 364,558       $ 844,499       $ 729,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30,      December 31,  
     2012      2011  

Long-lived assets:

     

United States

   $ 312,635       $ 293,912   

United Kingdom

     146,114         139,741   

Asia

     56,592         53,721   

France

     9,935         10,044   

Other Americas

     17,530         19,556   

Other Europe/MEA

     3,148         3,746   
  

 

 

    

 

 

 

Total long-lived assets

   $ 545,954       $ 520,720   
  

 

 

    

 

 

 

 

22. Subsequent Events

Second Quarter Dividend

On July 24, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share for the second quarter of 2012 payable on August 23, 2012 to Class A and Class B common stockholders of record as of August 9, 2012.

Controlled Equity Offering

During the period from July 1, 2012 through August 3, 2012, the Company issued, pursuant to its controlled equity offerings, 1,800,000 shares of Class A common stock related to exchanges and redemptions of limited partnership interests as well as for general corporate purposes.

Share Repurchase and Unit Redemption Authorization

On August 6, 2012 the Company’s Board of Directors increased the BGC Partners share repurchase and unit redemption authorization to $100.0 million.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of BGC Partners, Inc.’s financial condition and results of operations should be read together with BGC Partners, Inc.’s unaudited condensed consolidated financial statements and notes to those statements, as well as the cautionary statements relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), included elsewhere in this document. When used herein, the terms “BGC Partners,” “BGC,” the “Company,” “we,” “us” and “our” refer to BGC Partners, Inc., including consolidated subsidiaries.

This discussion summarizes the significant factors affecting our results of operations and financial condition during the three and six months ended June 30, 2012 and 2011. This discussion is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Report.

Overview and Business Environment

BGC Partners is a leading global brokerage company primarily servicing the wholesale financial and property markets. The Company specializes in the brokering of a broad range of products, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commercial real estate, commodities, futures, and structured products. BGC Partners also provides a full range of financial services, including trade execution, broker-dealer services, clearing, processing, information, and other back-office services to a broad range of financial and non-financial institutions. BGC Partners’ integrated platform is designed to provide flexibility to customers with regard to price discovery, execution and processing of transactions, and enables them to use voice, hybrid, or in many markets, fully electronic brokerage services in connection with transactions executed either over-the-counter (“OTC”) or through an exchange. Through its eSpeed, BGC Trader™ and BGC Market Data brands, BGC Partners offers financial technology solutions, market data, and analytics related to select financial instruments and markets.

In the second quarter of 2012, the Company completed the acquisition of substantially all of the assets of Grubb & Ellis Company and its direct and indirect subsidiaries (“Grubb & Ellis”) and has been integrating the Grubb & Ellis assets with its Newmark Knight Frank brand. The resulting brand, Newmark Grubb Knight Frank, is a full-service commercial real estate platform. Through this Newmark Grubb Knight Frank brand, the Company offers commercial real estate tenants, owners, investors and developers a wide range of services, including leasing and corporate advisory, investment sales and financial services, consulting, project and development management, and property and facilities management.

BGC Partners’ customers include many of the world’s largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers and investment firms. Named after fixed income trading innovator B. Gerald Cantor, BGC has offices in dozens of major markets, including New York and London, as well as in Atlanta, Beijing, Boston, Chicago, Copenhagen, Dubai, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Rio de Janeiro, São Paulo, Seoul, Singapore, Sydney, Tokyo, Toronto, Washington, D.C. and Zurich. The Company expects to have additional offices as it integrates the Grubb & Ellis business. The Company is completing the process of transitioning hundreds of brokers from the Grubb & Ellis bankruptcy estate to entities that it owns. While the Company has executed employment/service and partnership arrangements with a large majority of the brokers, the Company is operating under a transition services agreement with the estate to assist with the process and expects to complete the transfer to its partnership and employment/service arrangements with respect to the remaining brokers shortly. In the interim, the Company is entitled to the revenues and is responsible for the expenses of these brokers under the transition services agreement. No assurance can be given that the Company will be able to successfully hire all of the remaining brokers.

The financial intermediary sector has been a competitive area that has had strong revenue growth over the past decade due to several factors. One factor is the increasing use of derivatives to manage risk or to take advantage of the anticipated direction of a market by allowing users to protect gains and/or guard against losses in the price of underlying assets without having to buy or sell the underlying assets. Derivatives are often used to mitigate the risks associated with interest rate movements, equity ownership, changes in the value of foreign currency, credit defaults by corporate and sovereign debtors and changes in the prices of commodity products. Over the past decade, demand from financial institutions, financial services intermediaries and large corporations has increased volumes in the wholesale derivatives market, thereby increasing the business opportunity for financial intermediaries.

Another key factor in the growth of the financial intermediary sector over the past decade has been the increase in the number of new products. As market participants and their customers strive to mitigate risk, new types of equity and fixed income securities, futures, options and other financial instruments are developed. These new securities and derivatives are not immediately ready for more liquid and standardized electronic markets, and generally increase the need for trading and require broker-assisted execution.

Financial Services:

Growth Drivers

As a wholesale intermediary, our business is driven by several key drivers in addition to those listed above. These include: overall industry volumes in the markets in which we broker, the size and productivity of our front-office headcount (sales people and brokers alike), regulatory issues, overall economic growth and employment trends in the U.S., and the percentage of our revenues related to fully electronic brokerage.

 

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Some of these main drivers had a positive impact, on our results in the second quarter of 2012 compared to the year earlier period, while others had a negative impact.

Overall Market Volumes and Volatility

Volume is driven by a number of items, including the level of issuance for financial instruments, the price volatility of financial instruments, overall macro-economic conditions, the creation and adoption of new products, the regulatory environment, and the introduction and adoption of new trading technologies. In general, increased price volatility increases the demand for hedging instruments, including many of the cash and derivative products which we broker.

During the second quarter of 2012, industry volumes generally declined year-over-year for many of the OTC and listed products we broker in Rates, Credit, Foreign Exchange and Equities. This was due in large part to volatility being lower than the 10-year average in these asset classes during the quarter. For example, a broader measure of volatility across rates, credit, FX, equities, and other markets is Bank of America Merrill Lynch’s Global Financial Stress Index (“GFSI”). It averaged approximately 0.67 over the last five years, and has been as high as 3.01 during the second half of 2008, but averaged only 0.42 during the second quarter of 2012. In Real Estate Services, the overall industry volumes were more favorable for our business in the first quarter. These industry volumes are generally good proxies for the volumes across our five asset class categories. Below is a discussion of the volume and growth drivers of our various brokerage product categories.

Rates Volumes and Volatility

BGC’s Rates business is particularly influenced by the level of sovereign debt issuance globally, and over the past year this issuance has generally continued to grow, though with some pullback in 2011. For example, according to the Securities Industry and Financial Markets Association (“SIFMA”), gross U.S. Treasury issuance, increased by approximately 33.8% for the first six months of 2012 versus the same period last year, although it was down by approximately 16% for all of 2011.

Rates volumes are also influenced by market volatility, and such volatility has been dampened in recent months due to quantitative easing undertaken by the U.S. Federal Reserve and other central banks. Quantitative easing entails the central banks buying government securities or other securities in the open market – particularly longer-dated instruments – in an effort to promote increased lending and liquidity and bring down long-term interest rates. When central banks hold these instruments, they tend not to trade and are not hedged – thus lowering Rates volumes across cash and derivatives markets industry-wide. As of July 12, 2012, the U.S. Federal Reserve had over $2.2 trillion worth of long-dated U.S. Treasury and Federal Agency securities, compared with $1.7 trillion at the beginning of 2011, $1.4 trillion at the beginning of 2010, and less than $20 billion at the beginning of 2009. Other major central banks have also greatly increased the amount of longer-dated debt on their balance sheets over the past three years.

Largely as a result of quantitative easing, and the short-term decline in U.S. Treasury issuance in 2011, the U.S. Federal Reserve reported that U.S. Treasury average daily volumes traded by primary dealers decreased by 12.1% year-over-year in the second quarter of 2012, while volumes for CME Treasury, Euronext and Eurex rates volumes declined by 20.4%, 8.6%, and 23.3%, respectively. BGC’s fully electronic Rates notional volumes decreased by 14.0% year-over-year in the second quarter of 2012, in-line with the overall industry, while our Rates revenues were down by 8.0%.

Analysts and economists expect sovereign debt issuance to remain at these high levels for the foreseeable future as governments finance their future deficits and roll over their sizable existing debt. For instance, according to the Congressional Budget Office (the “CBO”), U.S. federal debt will be 70% for fiscal year 2012, and approximately 61% of GDP at the end of fiscal year 2022, versus 36% at the end of fiscal year 2007. Similarly, the European Commission reports that, in the aggregate, European Union (“EU 27”) government debt as a percent of GDP will have increased from 59% in 2007 to 83% by 2011. Meanwhile, analysts expect that the effects of various forms of quantitative easing will continue to impact markets for at least the next few quarters, because economic growth remains weak in most G-20 nations. As a result, we expect long term tailwinds in our Rates business from continuing high levels of government debt, but near term headwinds due to quantitative easing.

Credit Volumes

The cash portion of BGC’s Credit business is impacted by the level of global corporate bond issuance, while both the cash and credit derivatives sides of this business are impacted by sovereign and corporate issuance. BGC’s Credit revenues decreased in the second quarter of 2012 compared to the second quarter of 2011, reflecting an industry-wide softening in corporate bond and credit derivative activity. For example, TRACE eligible corporate securities volumes were up by less than 2% year-over-year in the second quarter of 2012, while DTCC total credit derivatives notional amount outstanding was down by 12% year-over-year at quarter end. With BGC’s fully electronic credit volume-up by approximately 51% year-over-year in the second quarter of 2012, BGC’s fully electronic Credit desks did, however, continue to outperform the overall market. Our overall Credit revenues declined by 10% over the same timeframe.

 

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Foreign Exchange Volumes and Volatility

The overall FX market saw decreased volatility industry-wide. For example, CVIX (the Deutsche Bank Currency Volatility Index) has averaged approximately 12 over the past five years. It has been as high as 24 in the fourth quarter of 2008 and above 15 in more recent periods of market uncertainty. In the second quarter of 2012, it was 10.4 on average. This was partially a result of the central banks of Japan and Switzerland in the currency markets to keep the yen and franc, respectively, from appreciating. Because of these factors, most industry volumes had only modest increases or decreases in the second quarter compared to a year earlier. CLS Group (“CLS”), which settles the majority of bank-to-bank spot and forward FX transactions, reports that its average daily value traded grew by 4.5% year-over-year in the second quarter of 2012, while CME FX futures and EBS spot FX volumes were up by 1.9% and down by 27.3%, respectively. With respect to BGC’s FX business, our revenues were largely in-line with corresponding industry figures in the second quarter of 2012: our overall FX revenues were down by 4.3%, while our fully electronic FX revenues were up by approximately 49% year-over-year.

Equity-Related Volumes and Volatility

BGC’s revenues from Equities and Other Asset Classes were negatively impacted in the second quarter of 2012 due in part to lower equity cash and derivatives volumes globally. Our European businesses was particularly impacted. During the second quarter of 2012, equity derivatives volumes (including indices) as reported by the Options Clearing Corporation, Eurex, and Euronext, were down by approximately 5.4%, 12%, and 14%, respectively, all when compared to the second quarter of 2011. Total U.S. Stock dollar volume was down by 6.7% year -over -year. In addition, the following European Indices showed year-on-year price declines: Euro Stoxx 50 Price Eur, Deutsche Borse AG German Stock Index and the FTSE 100 Index. Overall, BGC’s Equities and Other Asset Classes business declined by 32.3% year-over-year.

Hybrid and Fully Electronic Trading

Historically, e-broking growth has led to higher margins and greater profits over time for exchanges and wholesale financial intermediaries alike, even if overall company revenues remain consistent. This is largely because fewer front-office employees are needed to process the same amount of volume