Form 10-Q
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 September 30, 2013

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 October 31, 2013, the registrant had 179,452,142 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)

     6   
 

Condensed Consolidated Statements of Financial Condition—At September 30, 2013 and December  31, 2012

     6   
 

Condensed Consolidated Statements of Operations—For the Three and Nine Months Ended September 30, 2013 and September 30, 2012

     7   
 

Condensed Consolidated Statements of Comprehensive Income—For the Three and Nine Months Ended September 30, 2013 and September 30, 2012

     8   
 

Condensed Consolidated Statements of Cash Flows—For the Nine Months Ended September 30, 2013 and September 30, 2012

     9   
 

Condensed Consolidated Statements of Changes in Equity—For the Year Ended December 31, 2012

     11   
 

Condensed Consolidated Statements of Changes in Equity—For the Nine Months Ended September 30, 2013

     12   
 

Notes to Condensed Consolidated Financial Statements

     13   

ITEM 2

 

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

     45   

ITEM 3

 

Quantitative and Qualitative Disclosures About Market Risk

     82   

ITEM 4

 

Controls and Procedures

     83   
PART II—OTHER INFORMATION   

ITEM 1

 

Legal Proceedings

     84   

ITEM 1A

 

Risk Factors

     84   

ITEM 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

     84   

ITEM 3

 

Defaults Upon Senior Securities

     84   

ITEM 4

 

Mine Safety Disclosures

     84   

ITEM 5

 

Other Information

     84   

ITEM 6

 

Exhibits

     84   

SIGNATURES

     86   


Table of Contents

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 or in documents incorporated by reference 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, the factors set forth below and may impact either or both of our operating segments:

 

   

market conditions, including trading volume and volatility, potential deterioration of the equity and debt capital markets and the condition of the markets for commercial and other real estate, and our ability to access the capital markets;

 

   

pricing and commissions and market position with respect to 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;

 

   

our relationships with Cantor Fitzgerald, L.P. (“Cantor”) and its affiliates, including Cantor Fitzgerald & Co. (“CF&Co”), any related conflicts of interest, any impact of Cantor’s results on our credit ratings and/or the associated outlooks, CF&Co’s acting as our sales agent under our controlled equity or other offerings, CF&Co’s acting as our financial advisor in connection with potential business combinations or other transactions, and our participation in various investments or cash management vehicles placed by or recommended by CF&Co.

 

   

economic or geopolitical conditions or uncertainties, the actions of governments or central banks or the impact of natural disasters or weather-related or similar events, including power failures, communication and transportation disruptions, and other interruptions of utilities or other essential services;

 

   

the effect on our business, our clients, the markets in which we operate, and the economy in general of possible shutdowns of the U.S. government, sequestrations, uncertainties regarding the debt ceiling and the federal budget, and other potential future political or regulatory impasses;

 

   

the effect on our business of reductions in overall industry volumes in certain of the products that we trade as a result of the Federal Reserve Board quantitative easing, the tapering of quantitative easing and other factors;

 

   

the effect on our businesses of worldwide governmental deficits, austerity programs, increases or decreases in deficits, and potential political or regulatory impasses;

 

   

extensive regulation of our businesses, changes in regulations relating to the financial services, real estate 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 businesses, products, or services;

 

   

factors related to specific transactions or series of transactions, including credit, performance and unmatched principal risk, trade failures, 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, a possible need for 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, impairments of any loan balances and increased borrowing costs, as well as interest and currency rate fluctuations;

 

   

risks associated with the temporary or longer-term investment of our available cash, including defaults or impairments on our investments, or other cash management vehicles;

 

   

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, the anticipated benefits of any such transactions or the future impact of any such transactions on our financial results for current or future periods, the integration of any completed acquisitions and the use of proceeds of any completed dispositions and any hedging entered into in connection with cash or stock consideration received or to be received in connection with such dispositions;

 

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our estimates or determinations of potential value with respect to various assets or portions of our business, including with respect to the accuracy of the assumptions or the valuation models or multiples used (as to which no representation is made);

 

   

our ability to hire and retain personnel, including brokers, managers and other key employees;

 

   

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

 

   

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

 

   

our ability to maintain or develop relationships with independently owned partner offices in our real estate services businesses;

 

   

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; IT implementation issues, failures, or disruptions in our systems or those of the clients, counterparties, exchanges, clearing facilities, or other parties with which we interact;

 

   

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 or redemptions of limited partnership interests of BGC Holdings, L.P., 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 or exchangeable debt 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, any exchanges or redemptions of limited partnership units and issuances of shares of Class A common stock in connection therewith, including in partnership restructurings, 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, unit exchanges and redemptions and partnership restructurings, conversion of our convertible notes, conversion or exchange of our convertible or exchangeable debt securities, and distributions from Cantor pursuant to Cantor’s distribution rights obligations and other distributions to Cantor partners, including deferred distribution rights shares; 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 discussed under the headings “Part II, Item 1A—Risk Factors,” “Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 3—Quantitative and Qualitative Disclosures about Market Risk,” and elsewhere in this Form 10-Q may cause actual results to differ materially from the forward-looking statements. The information included herein is given as of the filing date of this Form 10-Q with the SEC, and future events or circumstances could differ significantly from these forward-looking statements. The Company does not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s Public Reference Room located at One Station Place, 100 F Street, N.E., Washington, D.C. 20549. You can also request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. These filings are also available to the public from the SEC’s website at www.sec.gov.

 

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Our website address is www.bgcpartners.com. Through our 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, CF Group Management, Inc. (“CFGM”), Cantor’s managing general partner, our directors and our executive officers; and amendments to those documents. Our website also contains additional information with respect to our industry and business. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this Quarterly Report on Form 10-Q.

 

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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)

 

     September 30,
2013
    December 31,
2012
 

Assets

    

Cash and cash equivalents

   $ 757,949      $ 388,409   

Cash segregated under regulatory requirements

     8,562        3,392   

Securities owned

     32,153        32,003   

Securities borrowed

     70,440        —     

Marketable securities

     36,935        —     

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

     1,192,754        297,688   

Accrued commissions receivable, net

     268,634        222,299   

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

     127,390        220,098   

Fixed assets, net

     131,263        141,109   

Investments

     19,436        25,556   

Goodwill

     163,702        164,874   

Other intangible assets, net

     19,379        20,320   

Receivables from related parties

     1,255        21,655   

Other assets

     118,195        101,536   
  

 

 

   

 

 

 

Total assets

   $ 2,948,047      $ 1,638,939   
  

 

 

   

 

 

 

Liabilities, Redeemable Partnership Interest, and Equity

    

Accrued compensation

   $ 182,546      $ 125,793   

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

     1,189,500        254,289   

Payables to related parties

     31,958        40,700   

Accounts payable, accrued and other liabilities

     312,557        260,462   

Notes payable and collateralized borrowings

     272,990        301,444   

Notes payable to related parties

     150,000        150,000   
  

 

 

   

 

 

 

Total liabilities

     2,139,551        1,132,688   

Commitments and contingencies (Note 18)

    

Redeemable partnership interest

     77,835        78,839   

Equity

    

Stockholders’ equity:

    

Class A common stock, par value $0.01 per share; 500,000 shares authorized; 197,924 and 141,955 shares issued at September 30, 2013 and December 31, 2012, respectively; and 178,883 and 123,914 shares outstanding at September 30, 2013 and December 31, 2012, respectively

     1,980        1,419   

Class B common stock, par value $0.01 per share; 100,000 shares authorized; 34,848 shares issued and outstanding at September 30, 2013 and December 31, 2012, convertible into Class A common stock

     348        348   

Additional paid-in capital

     729,184        575,381   

Contingent Class A common stock

     15,791        18,868   

Treasury stock, at cost: 19,041 and 18,041 shares of Class A common stock at September 30, 2013 and December 31, 2012, respectively

     (114,397     (110,090

Retained deficit

     (146,218     (147,452

Accumulated other comprehensive loss

     (5,462     (4,182
  

 

 

   

 

 

 

Total stockholders’ equity

     481,226        334,292   
  

 

 

   

 

 

 

Noncontrolling interest in subsidiaries

     249,435        93,120   
  

 

 

   

 

 

 

Total equity

     730,661        427,412   
  

 

 

   

 

 

 

Total liabilities, redeemable partnership interest, and equity

   $ 2,948,047      $ 1,638,939   
  

 

 

   

 

 

 

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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Revenues:

        

Commissions

   $ 283,293      $ 302,874      $ 906,829      $ 882,659   

Principal transactions

     67,785        76,417        241,131        259,848   

Real estate management services

     40,447        39,672        119,608        81,563   

Fees from related parties

     8,071        13,102        33,461        39,143   

Market data

     1,178        4,166        8,946        13,120   

Software solutions

     444        2,485        5,540        7,421   

Interest income

     1,563        1,397        4,762        5,135   

Other revenues

     33,269        3,199        35,274        4,030   

Gain on divestiture

     —          —          723,147        —     

Losses on equity investments

     (2,705     (2,995     (7,217     (8,103
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     433,345        440,317        2,071,481        1,284,816   

Expenses:

        

Compensation and employee benefits

     264,018        288,669        1,319,089        843,567   

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

     4,989        56        58,511        7,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total compensation and employee benefits

     269,007        288,725        1,377,600        851,512   

Occupancy and equipment

     37,908        40,010        114,475        115,331   

Fees to related parties

     2,022        2,837        7,151        9,525   

Professional and consulting fees

     11,772        18,062        38,080        56,896   

Communications

     22,451        22,863        69,547        66,223   

Selling and promotion

     19,839        22,153        63,393        65,112   

Commissions and floor brokerage

     5,075        5,675        17,243        17,188   

Interest expense

     9,164        9,758        28,853        24,894   

Other expenses

     13,444        26,622        90,528        51,161   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     390,682        436,705        1,806,870        1,257,842   

Income from operations before income taxes

     42,663        3,612        264,611        26,974   

Provision for income taxes

     10,675        2,623        92,481        9,895   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 31,988      $ 989      $ 172,130      $ 17,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interest in subsidiaries

     6,662        1,440        105,340        7,383   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 25,326      $ (451   $ 66,790      $ 9,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Basic earnings per share

        

Net income (loss) available to common stockholders

   $ 25,326      $ (451   $ 66,790      $ 9,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.12      $ 0.00      $ 0.36      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted-average shares of common stock outstanding

     219,174        146,703        184,924        141,104   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted earnings per share

        

Net income (loss) for fully diluted shares

   $ 40,600      $ (451   $ 128,916      $ 18,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted earnings per share

   $ 0.11      $ 0.00      $ 0.35      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     355,167        146,703        363,148        275,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 0.12      $ 0.17      $ 0.36      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared and paid per share of common stock

   $ 0.12      $ 0.17      $ 0.36      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013     2012  

Consolidated net income

   $ 31,988       $ 989       $ 172,130      $ 17,079   

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

     1,569         635         (1,554     (1,275

Unrealized gain on securities available-for-sale

     60         —           60        —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     1,629         635         (1,494     (1,275
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     33,617         1,624         170,636        15,804   

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

     6,908         1,551         105,126        7,165   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to common stockholders

   $ 26,709       $ 73       $ 65,510      $ 8,639   
  

 

 

    

 

 

    

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Consolidated net income

   $ 172,130      $ 17,079   

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

    

Gain on divestiture, net

     (550,759     —     

Fixed asset depreciation and intangible asset amortization

     35,519        38,254   

Employee loan amortization and reserve on employee loans

     187,927        24,087   

Equity-based compensation

     341,897        89,427   

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

     58,511        7,945   

Losses on equity investments

     7,217        8,103   

Accretion of discount on convertible notes

     3,892        3,271   

Recognition of earn-out

     (31,861     —     

Impairment of fixed assets

     1,174        1,084   

Impairment of marketable securities

     —          291   

Deferred tax benefit

     (71,466     (5,139

Sublease provision adjustment

     —          (2,438

Other

     (316     103   
  

 

 

   

 

 

 

Consolidated net income, adjusted for non-cash and non-operating items

     153,865        182,067   

Decrease (increase) in operating assets:

    

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

     (893,898     (569,979

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

     (32,950     (52,090

Accrued commissions receivable, net

     (51,874     13,791   

Securities owned

     (246     (16,485

Securities borrowed

     (70,440     —     

Receivables from related parties

     7,997        99   

Cash segregated under regulatory requirements

     (5,170     (3,318

Other assets

     (17,573     (8,587

Increase (decrease) in operating liabilities:

    

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

     934,917        541,429   

Payables to related parties

     (8,513     24,145   

Accounts payable, accrued and other liabilities

     64,795        (2,121

Accrued compensation

     21,649        (13,296
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 102,559      $ 95,655   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of fixed assets

   $ (13,464   $ (29,417

Capitalization of software development costs

     (11,533     (8,886

Investment in equity method investments

     (1,171     (17,205

Payments for acquisitions, net of cash acquired

     (322     (25,679

Proceeds from divestiture, net

     575,287        —     

Purchase of marketable securities

     (4,867     —     

Sale of marketable securities

     —          906   

Purchase of notes receivable

     —          (22,000

Capitalization of trademarks, patent defense and registration costs

     (801     (1,180
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   $ 543,129      $ (103,461

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2013     2012  

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from collateralized borrowings

   $ —        $ 21,945   

Repayments of collateral borrowings

     (32,347     (19,316

Issuance of senior notes, net of deferred issuance costs

     —          108,716   

Earnings distributions to noncontrolling interests

     (80,505     (68,002

Redemption of limited partnership interests

     (95,905     (14,074

Dividends to stockholders

     (65,556     (72,284

Proceeds from offering of Class A common stock, net

     1,340        10,869   

Repurchase of Class A common stock

     (5,766     (337

Proceeds from short-term borrowings

     —          90,000   

Repayments of short-term borrowings

     —          (103,600

Tax impact on delivery of equity awards

     4,700        —     

Cancellation of restricted stock units in satisfaction of withholding tax requirements

     (940     (2,251

Other

     32        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (274,947     (48,334

Effect of exchange rate changes on cash and cash equivalents

     (1,201     (266

Net increase (decrease) in cash and cash equivalents

     369,540        (56,406

Cash and cash equivalents at beginning of period

     388,409        369,713   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 757,949      $ 313,307   
  

 

 

   

 

 

 

Supplemental cash information:

    

Cash paid during the period for taxes

   $ 147,552      $ 10,086   
  

 

 

   

 

 

 

Cash paid during the period for interest

   $ 23,480      $ 19,186   
  

 

 

   

 

 

 

Supplemental non-cash information:

    

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

   $ 46,079      $ 69,451   

Donations with respect to Charity Day

     5,720        7,446   

Issuance of Class A common stock upon purchase of notes receivable

     —          3,055   

Use of notes receivable in business acquisition

     —          25,492   

Issuance of Class A and contingent Class A common stock for acquisitions

     1,042        725   

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, 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

    —          —          —          —          —          23,864        —          11,649        35,513   

Other comprehensive loss, net of tax

                 

Change in cumulative translation adjustment

    —          —          —          —          —          —          (430     (103     (533
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —          —          —          23,864        (430     11,546        34,980   

Equity-based compensation, 1,343,894 shares

    13        —          2,798        —          —          —          —          2,595        5,406   

Dividends to common stockholders

    —          —          —          —          —          (90,590     —          —          (90,590

Earnings distributions to limited partnership interests and other noncontrolling interests

    —          —          —          —          —          —          —          (89,963     (89,963

Grant of exchangeability and redemption of limited partnership interests, issuance of 18,024,094 shares

    180        —          65,593        —          —          —          —          65,836        131,609   

Issuance of Class A common stock (net of costs), 4,797,177 shares

    48        —          17,123        —          —          —          —          8,897        26,068   

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, 1,928,069 units

    —          —          (6,903     —          —          —          —          (3,705     (10,608

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

    —          —          —          —          —          —          —          (1,378     (1,378

Issuance of contingent and Class A common stock for acquisitions, 2,119,393 shares

    21        —          7,477        (1,651     —          —          —          3,179        9,026   

Newmark noncontrolling interest

    —          —          (2,112     386        —          —          —          (5,517     (7,243

Other

    —          —          45        —          —          —          —          (88     (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

  $ 1,419      $ 348      $ 575,381      $ 18,868      $ (110,090   $ (147,452   $ (4,182   $ 93,120      $ 427,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months Ended September 30, 2013

(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, 2013

  $ 1,419      $ 348      $ 575,381      $ 18,868      $ (110,090   $ (147,452   $ (4,182   $ 93,120      $ 427,412   

Comprehensive income:

                 

Consolidated net income

    —          —          —          —          —          66,790        —          105,340        172,130   

Other comprehensive loss, net of tax

                 

Change in cumulative translation adjustment

    —          —          —          —          —          —          (1,340     (214     (1,554

Unrealized gain on securities available-for-sale

    —          —          —          —          —          —          60        —          60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —          —          —          66,790        (1,280     105,126        170,636   

Equity-based compensation, 745,188 shares

    7        —          2,036        —          —          —          —          1,468        3,511   

Dividends to common stockholders

    —          —          —          —          —          (65,556     —          —          (65,556

Earnings distributions to limited partnership interests and other noncontrolling interests

    —          —          —          —          —          —          —          (76,350     (76,350

Grant of exchangeability and redemption of limited partnership interests, issuance of 51,683,294 shares

    517        —          137,586        —          —          —          —          130,846        268,949   

Issuance of Class A common stock (net of costs), 2,453,473 shares

    25        —          8,063        —          —          —          —          3,353        11,441   

Redemption of founding/working partner units, 929,053 units

    —          —          —          —          —          —          —          (996     (996

Repurchase of Class A common stock, 999,722 shares

    —          —          —          —          (4,307     —          —          (1,459     (5,766

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

    —          —          —          —          —          —          —          (938     (938

Issuance of contingent and Class A common stock for acquisitions, 1,086,975 shares

    11        —          3,783        (3,077     —          —          —          325        1,042   

Newmark noncontrolling interest

    —          —          (2,570     —          —          —          —          (6,393     (8,963

Other

    1        —          4,905        —          —          —          —          1,333        6,239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

  $ 1,980      $ 348      $ 729,184      $ 15,791      $ (114,397   $ (146,218   $ (5,462   $ 249,435      $ 730,661   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Business Overview

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 through its two segments, Financial Services and Real Estate Services. The Company’s Financial Services segment specializes in the brokerage of a broad range of products, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commodities, futures and structured products. It 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 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 fourth quarter of 2011, BGC Partners acquired Newmark & Company Real Estate, Inc., the real estate advisory firm which operates as Newmark Knight Frank (“Newmark”) in the United States (“U.S.”) and which is associated with London-based Knight Frank. In the second quarter of 2012, BGC Partners completed the acquisition of substantially all of the assets of Grubb & Ellis Company and its direct and indirect subsidiaries, which the Company refers to as “Grubb & Ellis.” The Company has largely completed the integration of the Grubb & Ellis assets with Newmark Knight Frank to form the resulting brand, Newmark Grubb Knight Frank (“NGKF”). NGKF is a full-service commercial real estate platform that comprises the Company’s Real Estate Services segment, offering commercial real estate tenants, owners, investors and developers a wide range of services, including leasing; capital markets services, including investment sales, debt placement, appraisal and valuation services; commercial mortgage brokerage services; as well as consulting, project and development management, leasing and corporate advisory services and property and corporate facilities management services.

In connection with the Company’s acquisition of substantially all of the assets of Grubb & Ellis, the Company changed its reportable segments beginning with the second quarter of 2012, to consist of two reportable segments, Financial Services and Real Estate Services. Prior to the second quarter of 2012, BGC Partners had only one reportable segment.

The Company’s 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, Dallas, Denver, Dubai, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Philadelphia, Rio de Janeiro, São Paulo, Seoul, Singapore, Sydney, Tokyo, Toronto, Washington, D.C. and Zurich.

NASDAQ OMX Transaction

On June 28, 2013, the Company sold (the “NASDAQ OMX Transaction”) its on-the-run, electronic benchmark U.S. Treasury platform (the “Purchased Assets”) to The NASDAQ OMX Group, Inc. (“NASDAQ OMX”). The total consideration consisted of $750 million in cash, plus an earn-out of up to 14,883,705 shares of NASDAQ OMX common stock to be paid ratably over 15 years, provided that NASDAQ OMX, as a whole, produces at least $25 million in gross revenues each year. The Purchased Assets were part of a larger cash flow-generating product group that includes other fully electronic trading, market data, and software businesses, including electronic brokerage of off-the-run U.S. Treasuries, as well as Treasury Bills, Treasury Swaps, Treasury Repos, Treasury Spreads, and Treasury Rolls. The gain is included in “Gain on divestiture” in the Company’s unaudited condensed consolidated statements of operations. The earn-out was excluded from the gain on the divestiture and will be recognized in income as and when it is realized and earned, consistent with the accounting guidance for gain contingencies. During the three months ended September 30, 2013, the Company recognized revenues of $31.9 million related to this earn-out, which is included in “Other Revenues” in the Company’s unaudited condensed consolidated statements of operations. The $31.9 million in NASDAQ OMX shares related to this earn-out is included in “Marketable Securities” in the Company’s unaudited condensed consolidated statements of financial condition.

Share Count Reduction and Modifications/Extensions of Employment Agreements

At the end of the second quarter of 2013, the Company redeemed or exchanged approximately 77 million units from the partners of BGC (the “Global Partnership Restructuring Program”). The Company granted approximately 45 million shares of the Company’s Class A common stock, of which approximately 39 million were restricted shares. During the three months ended September 30, 2013, the Company released the restrictions with respect to 0.4 million of such shares. The Company also paid the withholding taxes

 

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owed on behalf of these partners related to this redemption/exchange and issuance. The restricted shares are generally saleable by partners in good standing after five to ten years. Transferability of the shares of restricted stock is not subject to continued employment or service with the Company or any affiliate or subsidiary of the Company; however, transferability is subject to compliance with BGC Partners’ and its affiliates’ customary noncompete obligations. Partners who agree to extend the lengths of their employment agreements and/or other contractual modifications sought by the Company are expected to be able to sell their restricted shares over a shorter time period. Taken together, these actions resulted in the Company reducing its fully diluted share count by approximately 32 million shares.

As a result of the above transactions, the Company incurred non-cash, non-dilutive compensation charges of approximately $465 million related to the redemption/exchange of partnership units, issuance of restricted shares, and the reduction of compensation-related partnership loans. These charges, along with the $723.1 million gain related to the NASDAQ OMX Transaction, were recognized in the Company’s unaudited condensed consolidated statements of operations for the three months ended June 30, 2013.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and in conformity with accounting principles generally accepted in the U.S. (“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. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

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 2013 interim periods are not necessarily indicative of results to be expected for the entire fiscal year, which will end on December 31, 2013.

Recently Adopted Accounting Pronouncements

As of and for the annual period ended December 31, 2012, the Company early adopted the FASB’s guidance on Intangibles—Goodwill and Other—Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. This guidance allows entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a more than fifty percent likelihood exists that an indefinite-lived intangible asset is impaired, then a quantitative impairment test must be performed by comparing the fair value of the asset with its carrying amount. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In December 2011, the FASB issued guidance on Disclosures about Offsetting Assets and Liabilities, which requires 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 was effective for interim and annual reporting periods beginning on or after January 1, 2013. The adoption of this FASB guidance did not 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 limited partnership interests held by Cantor Fitzgerald, L.P. (“Cantor”) (“Cantor units”), each as described 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 these units are redeemable upon termination of a partner, including a termination of employment, which can be at the option of the partner and not within the control of the issuer.

 

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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 generally redeemed, and the unit holders are no longer entitled to participate in the quarterly 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, PSIs and LPUs, 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.”

Cantor Units

Cantor units are 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. These allocations are cash distributed on a quarterly basis and are reflected as a component of “Net income attributable to noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of operations.

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 fully diluted 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 allocated to Cantor and 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 (loss) allocation process has no impact on the net income allocated to common stockholders.

 

3. Acquisitions

Newmark Noncontrolling Interests

During the year ended December 31, 2012, the Company purchased a majority interest in an affiliated company of Newmark for total consideration transferred of approximately $2.1 million. As a result of such transaction, the Company recognized goodwill of approximately $1.5 million, which was allocated to the Company’s Real Estate Services segment. During the year ended December 31, 2012, the Company purchased additional noncontrolling interests related to Newmark for approximately $8.3 million. During the nine months ended September 30, 2013, the Company purchased additional noncontrolling interests related to Newmark for approximately $9.6 million.

Grubb & Ellis

On April 13, 2012, the Company completed the acquisition of substantially all of the assets of Grubb & Ellis. The total consideration transferred for Grubb & Ellis was $47.1 million. The consideration transferred included the extinguishment of

 

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approximately $30.0 million (principal amount) pre-bankruptcy senior secured 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 $16.0 million in cash to the bankruptcy estate for the benefit of Grubb & Ellis’ unsecured creditors. The excess of the consideration transferred over the fair value of the net assets acquired has been recorded as goodwill of $5.0 million and allocated to the Company’s Real Estate Services segment. The Company had total direct costs of approximately $2.8 million related to the acquisition of Grubb & Ellis.

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. 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.

 

In millions    Nine Months  Ended
September 30,
2012
 

Pro forma revenues

   $ 1,367.7   

Pro forma consolidated net income

   $ 10.0   

Other Acquisitions

During the year ended December 31, 2012, the Company completed other acquisitions for a total consideration of $24.5 million, of which $20.0 million was attributed to goodwill. Of the $20.0 million attributed to goodwill, approximately $15.7 million was allocated to the Company’s Real Estate Services segment and approximately $4.3 million was allocated to the Company’s Financial Services segment. See Note 15— “Goodwill and Other Intangible Assets, Net” for further information with regard to the Company’s goodwill by reportable segment. The Company’s allocation of the consideration transferred to the assets acquired and liabilities assumed is preliminary. The Company expects to finalize its analysis within the first year after the acquisitions, and therefore adjustments to the preliminary allocation may occur.

In February 2013, the Company acquired certain assets of Sterling International Brokers, a money brokerage company, for nominal consideration. The Company expects to finalize its allocation of the consideration transferred to the assets acquired and liabilities assumed within the first year after the acquisition, and therefore adjustments to the preliminary allocation may occur.

In June 2013, the Company acquired a controlling interest in an entity that had previously been accounted for using the equity method. This transaction resulted in the consolidation of the entity in the Company’s unaudited condensed consolidated financial statements subsequent to the Company’s acquisition of a controlling interest. In connection with this transaction, the Company recognized goodwill of approximately $1.3 million, which was allocated to the Company’s Financial Services segment. The Company expects to finalize its analysis within the first year after the acquisition, and therefore adjustments to the preliminary allocation may occur.

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

 

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 and contingent shares for which all necessary conditions have been satisfied except for the passage of time. 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 nine months ended September 30, 2013 and 2012 were allocated as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013      2012  

Net income (loss) available to common stockholders

   $ 25,326       $ (451   $ 66,790       $ 9,696   

Allocation of income to limited partnership interests in BGC Holdings

   $ 10,686       $ 85      $ 161,712       $ 13,556   

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013      2012  

Basic earnings per share:

          

Net income (loss) available to common stockholders

   $ 25,326       $ (451   $ 66,790       $ 9,696   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic weighted-average shares of common stock outstanding

     219,174         146,703        184,924         141,104   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share

   $ 0.12       $ 0.00      $ 0.36       $ 0.07   
  

 

 

    

 

 

   

 

 

    

 

 

 

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 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
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013      2012  

Fully diluted earnings per share:

          

Net income (loss) available to common stockholders

   $ 25,326       $ (451   $ 66,790       $ 9,696   

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

     10,601         —          49,962         8,953   

Interest expense on convertible notes, net of tax

     4,673         —          12,161         —     

Dividend equivalent expense on RSUs, net of tax

     —           —          3         195   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) for fully diluted shares

   $ 40,600       $ (451   $ 128,916       $ 18,844   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares:

          

Common stock outstanding

     219,174         146,703        184,924         141,104   

Limited partnership interests in BGC Holdings

     93,954         —          137,249         132,246   

Convertible notes

     39,855         —          39,767         —     

RSUs (Treasury stock method)

     925         —          286         618   

Other

     1,259         —          922         1,191   
  

 

 

    

 

 

   

 

 

    

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     355,167         146,703        363,148         275,159   
  

 

 

    

 

 

   

 

 

    

 

 

 

Fully diluted earnings per share

   $ 0.11       $ 0.00      $ 0.35       $ 0.07   
  

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2013 and 2012, respectively, approximately 6.4 million and 188.6 million potentially dilutive securities were not included in the computation of fully diluted EPS because their effect would have been anti-dilutive.

Additionally, as of September 30, 2013 and 2012, respectively, approximately 5.1 million and 3.5 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.

 

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Table of Contents
5. Stock Transactions and Unit Redemptions

Class A Common Stock

Changes in shares of the Company’s Class A common stock outstanding for the three and nine months ended September 30, 2013 and 2012 were as follows.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013     2012  

Shares outstanding at beginning of period

     136,328,061        108,381,374         123,913,759        97,220,042   

Share issuances:

         

Redemptions and exchanges of limited partnership interests (1)

     42,845,569        6,292,281         51,683,294        12,297,169   

Vesting of restricted stock units (RSUs)

     121,795        296,257         745,188        1,172,546   

Acquisitions (2)

     —          5,406         1,086,975        924,241   

Purchase of notes receivable in connection with the Company’s acquisition of Grubb & Ellis

     —          —           —          453,172   

Other issuances of Class A common stock

     553,786        17,766         2,453,473        2,969,927   

Treasury stock repurchases

     (966,244     —           (999,722     (44,013
  

 

 

   

 

 

    

 

 

   

 

 

 

Shares outstanding at end of period

     178,882,967        114,993,084         178,882,967        114,993,084   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The issuances related to redemptions and exchanges of limited partnership interests did not impact the fully diluted number of shares and units outstanding.
(2) For the three and nine months ended September 30, 2012, respectively, 5,406 and 77,415 of these shares were issued pursuant to the exemption from registration provided by Regulation S under the Securities Act.

Class B Common Stock

The Company did not issue any shares of Class B common stock during the three and nine months ended September 30, 2013 and 2012.

Controlled Equity Offering

On December 12, 2012, the Company entered into a controlled equity offering sales agreement (the “December 2012 Sales Agreement”) with Cantor Fitzgerald & Co. (“CF&Co”), pursuant to which the Company may offer and sell up to an aggregate of 20 million shares of Class A common stock. Shares of the Company’s Class A common stock sold under its controlled equity offering sales agreements are used primarily for redemptions of limited partnership interests in BGC Holdings. CF&Co is a wholly-owned subsidiary of Cantor and an affiliate of the Company. Under the December 2012 Sales Agreement, the Company has agreed to pay CF&Co 2% of the gross proceeds from the sale of shares. As of September 30, 2013, the Company has sold 9,050,010 shares of Class A common stock under the December 2012 Sales Agreement.

Unit Redemptions and Share Repurchase Program

The Company’s Board of Directors and Audit Committee have authorized repurchases of the Company’s Class A common stock and redemptions of BGC Holdings limited partnership interests or other equity interests in the Company’s subsidiaries. On July 30, 2013, the Company’s Board of Directors and Audit Committee increased the BGC Partners share repurchase and unit redemption authorization to $250 million.

The table below represents unit redemption and share repurchase activity for the nine months ended September 30, 2013 and excludes activity with respect to the Global Partnership Restructuring Program, including the approximately 77 million units which the Company redeemed or exchanged from partners at the end of the second quarter of 2013 and the grant of approximately 45 million shares of the Company’s Class A common stock, of which approximately 39 million were restricted shares (see Note 1—“Organization and Basis of Presentation”).

 

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Table of Contents

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 (1), (2)

        

January 1, 2013—March 31, 2013

     5,193,534       $ 4.16      

April 1, 2013—June 30, 2013

     2,658,463         5.49      

July 1, 2013—July 31, 2013

     —           —        

August 1, 2013—August 31, 2013

     —           —        

September 1, 2013—September 30, 2013

     452,115         5.70      
  

 

 

    

 

 

    

Total Redemptions

     8,304,112       $ 4.67      

Repurchases (3), (4)

        

January 1, 2013—March 31, 2013

     —         $ —        

April 1, 2013—June 30, 2013

     33,478         5.61      

July 1, 2013—July 31, 2013

     —           —        

August 1, 2013—August 31, 2013

     —           —        

September 1, 2013—September 30, 2013

     966,244         5.77      
  

 

 

    

 

 

    

Total Repurchases

     999,722       $ 5.77      
  

 

 

    

 

 

    

 

 

 

Total Redemptions and Repurchases

     9,303,834       $ 4.79       $ 241,844,953   

 

(1) During the three months ended September 30, 2013, the Company redeemed approximately 0.4 million limited partnership units at an average price of $5.70 per unit and approximately 0.1 million founding/working partner units at an average price of $5.73 per unit. During the three months ended September 30, 2012, the Company redeemed approximately 4.7 million limited partnership units at an average price of $5.06 per unit and approximately 0.1 million founding/working partner units at an average price of $5.68 per unit.
(2) During the nine months ended September 30, 2013, the Company redeemed approximately 7.4 million limited partnership units at an average price of $4.77 per unit and approximately 0.9 million founding/working partner units at an average price of $3.87 per unit. During the nine months ended September 30, 2012, the Company redeemed approximately 10.2 million limited partnership units at an average price of $5.89 per unit and approximately 1.4 million founding/working partner units at an average price of $6.47 per unit.
(3) During the three months ended September 30, 2013, the Company repurchased 966,244 shares of its Class A common stock at an aggregate purchase price of approximately $5.6 million for an average price of $5.77 per share. The Company did not repurchase any shares of its Class A common stock during the three months ended September 30, 2012.
(4) During the nine months ended September 30, 2013, the Company repurchased 999,722 shares of its Class A common stock at an aggregate purchase price of approximately $5.8 million for an average price of $5.77 per share. During the nine months ended September 30, 2012, the Company repurchased 44,013 shares of its Class A common stock at an aggregate purchase price of approximately $337 thousand for an average price of $7.66 per share.

Redeemable Partnership Interest

The changes in the carrying amount of redeemable partnership interest for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

 

     Nine Months Ended September 30,  
     2013     2012  

Balance at beginning of period

   $ 78,839      $ 86,269   

Consolidated net income allocated to founding/working partner units

     7,839        2,381   

Earnings distributions

     (4,155     (1,834

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

     938        144   

Founding/working partner units exchanged

     (2,187     (4,035

Founding/working partner units redeemed

     (2,741     (3,228

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

     —          (2,732

Other

     (698     (3
  

 

 

   

 

 

 

Balance at end of period

   $ 77,835      $ 76,962   
  

 

 

   

 

 

 

 

 

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Table of Contents
6. Securities Owned

Securities owned primarily consist of unencumbered U.S. Treasury bills held for liquidity purposes. Total securities owned were $32.2 million and $32.0 million as of September 30, 2013 and December 31, 2012, respectively.

Securities owned consisted of the following (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Government debt

   $ 32,029       $ 32,003   

Equities

     124         —     
  

 

 

    

 

 

 

Total

   $ 32,153       $ 32,003   
  

 

 

    

 

 

 

As of September 30, 2013, the Company had not pledged any of the securities owned to satisfy deposit requirements at exchanges or clearing organizations.

 

7. Collateralized Transactions

Securities Borrowed

Securities borrowed transactions are recorded at the contractual amount for which the securities will be returned plus accrued interest. As of September 30, 2013, the Company entered into securities borrowed transactions of $70.4 million to cover failed trades. All securities borrowed transactions as of September 30, 2013 have subsequently settled at the contracted amounts. As of December 31, 2012, the Company had not entered into any securities borrowed transactions.

 

8. Marketable Securities

Marketable securities consist of the Company’s ownership of various investments. The investments had a fair value of $36.9 million as of September 30, 2013, of which $5.0 million relates to securities classified as available-for-sale and accordingly recorded at fair value. Unrealized gains or losses on marketable securities classified as available-for-sale are included as part of “Accumulated other comprehensive loss” in the Company’s unaudited condensed consolidated statements of financial condition.

Marketable securities also includes $31.9 million of NASDAQ OMX common stock to be received in connection with the earn-out portion of the NASDAQ OMX Transaction consideration (see Note 1—“Organization and Basis of Presentation”). These shares of NASDAQ OMX common stock are classified as trading securities and accordingly measured at fair value, with any changes in fair value recognized currently in earnings.

The Company had no marketable securities as of December 31, 2012.

 

9. 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):

 

     September 30,
2013
     December 31,
2012
 

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

     

Contract values of fails to deliver

   $ 964,608       $ 186,799   

Customer receivables

     149,418         51,991   

Cash and cash equivalents held at clearing organizations

     55,813         45,563   

Other receivables from broker-dealers and customers

     16,762         11,587   

Net pending trades

     5,552         966   

Open derivative contracts

     601         782   
  

 

 

    

 

 

 

Total

   $ 1,192,754       $ 297,688   
  

 

 

    

 

 

 

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

     

Contract values of fails to receive

   $ 1,023,305       $ 209,321   

Customer payables

     123,311         19,716   

Payables to clearing organizations

     6,324         1,632   

Other payables to broker-dealers and customers

     35,088         23,282   

Open derivative contracts

     1,472         338   
  

 

 

    

 

 

 

Total

   $ 1,189,500       $ 254,289   
  

 

 

    

 

 

 

 

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Table of Contents

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 September 30, 2013 have subsequently settled at the contracted amounts.

 

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, hedge principal positions and 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 their closing prices. 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 broker-dealers, clearing organizations, customers and related broker-dealers” and “Payables to broker-dealers, clearing organizations, customers and related broker-dealers” in the Company’s unaudited condensed consolidated statements of financial condition.

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

 

     September 30, 2013    December 31, 2012
     Assets    Liabilities    Assets    Liabilities

Interest rate swaps

     $ 467        $ —          $ 782        $ —    

Foreign exchange swaps

       134          1,472          —            338  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $   601        $   1,472        $   782        $   338  
    

 

 

      

 

 

      

 

 

      

 

 

 

The notional amounts of the interest rate swap transactions at September 30, 2013 and December 31, 2012 were $92.3 million and $361.8 million, 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 September 30, 2013 and December 31, 2012 were $181.3 million and $233.5 million, respectively.

The replacement cost of contracts in a gain position at September 30, 2013 was $601 thousand.

 

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Table of Contents

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 table below summarizes gains and losses on derivative contracts for the three and nine months ended September 30, 2013 and 2012, respectively (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Derivative contract

   2013     2012     2013     2012  

Interest rate swaps

   $ 9     $ 15     $ 22     $ 107   

Foreign exchange swaps

     (61     (31     (60     94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss)

   $ (52   $ (16   $ (38   $ 201   
  

 

 

   

 

 

   

 

 

   

 

 

 

As described in Note 16—“Notes Payable, Collateralized and Short-Term Borrowings,” 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”) 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. At the issuance of the 4.50% Convertible Notes, the embedded conversion feature was measured at approximately $19.0 million on a pre-tax basis ($16.1 million net of taxes and issuance costs) 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 accounted for at fair value under FASB guidance at September 30, 2013 and December 31, 2012 (in thousands). 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.

 

     Assets at Fair Value at September 30, 2013  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Government debt

   $ 32,029       $ —        $ —        $ —        $ 32,029   

Marketable securities

     36,935         —          —          —          36,935   

Interest rate swaps

     —          467         —          —          467   

Foreign exchange swaps

     —          134         —          —          134   

Securities owned – Equities

     124         —          —          —          124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,088       $   601       $ —        $ —        $ 69,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Liabilities at Fair Value at September 30, 2013  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Foreign exchange swaps

   $ —        $ 1,472       $ —        $ —        $   1,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 1,472       $ —        $ —        $ 1,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Assets at Fair Value at December 31, 2012  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Government debt

   $ 32,003       $ —        $ —        $ —        $ 32,003   

Interest rate swaps

     —          782         —          —          782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,003       $ 782       $ —        $ —        $ 32,785   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Liabilities at Fair Value at December 31, 2012  
     Level 1      Level 2      Level 3      Netting
and
Collateral
     Total  

Foreign exchange swaps

   $ —        $ 338       $ —        $ —        $ 338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 338       $ —        $ —        $ 338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents information about the offsetting of derivative instruments and collateralized transactions as of September 30, 2013 and December 31, 2012 (in thousands):

 

     September 30, 2013  

Assets

   Gross
Amounts
     Gross Amounts
Offset
     Net Amounts
Presented in the
Statements  of
Financial
Condition
    

 

Gross Amounts Not Offset

        
            Financial
Instruments
     Cash
Collateral
Received
     Net Amount  

Securities borrowed

   $ 70,440       $ —         $ 70,440       $ —         $ —         $ 70,440   

Interest rate swaps

     671         204         467         —           —           467   

Foreign exchange swaps

     171         37         134         —           —           134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,282       $ 241       $ 71,041       $ —         $ —         $ 71,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                                         

Interest rate swaps

   $ 204       $ 204       $ —         $ —         $ —         $ —     

Foreign exchange swaps

     1,509         37         1,472         —           —           1,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,713       $ 241       $ 1,472       $ —         $ —         $ 1,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  

Assets

   Gross
Amounts
     Gross Amounts
Offset
     Net Amounts
Presented in the
Statements  of
Financial
Condition
    

 

Gross Amounts Not Offset

        
            Financial
Instruments
     Cash
Collateral
Received
     Net Amount  

Interest rate swaps

   $ 990       $ 208       $      782       $ —         $ —         $      782   

Foreign exchange swaps

     791         791         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,781       $ 999       $ 782       $ —         $ —         $ 782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                                         

Interest rate swaps

   $ 208       $ 208       $ —         $ —         $ —         $ —     

Foreign exchange swaps

     1,129         791         338         —           —           338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   1,337       $ 999       $ 338       $ —         $ —         $ 338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 United Kingdom (“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 administrative services agreement provides that direct costs incurred are charged back to the service recipient. Additionally, the service recipient generally indemnifies the service provider for liabilities that it incurs arising from the provision of services other than liabilities arising from fraud or willful misconduct of the service provider. In accordance with the administrative service agreement, the Company has not recognized any liabilities related to services provided to affiliates.

 

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The Company, together with other leading financial institutions, formed ELX, a limited partnership that has established a fully-electronic futures exchange. The Company accounts for ELX under the equity method of accounting (see Note 13—“Investments” for more details). During the three and nine months ended September 30, 2013, the Company made no capital contributions to ELX. During the year ended December 31, 2012, the Company made a $16.0 million capital contribution to ELX. On March 28, 2012, the Company entered into a credit agreement with ELX, whereby the Company has agreed to lend ELX up to $16.0 million. As of September 30, 2013, the Company had not loaned ELX any amounts under this agreement. The commitment period for this credit facility extends through March 28, 2015. The Company has entered into a technology services agreement with ELX pursuant to which the Company provided software technology licenses, monthly maintenance support and other technology services as requested by ELX. As part of the NASDAQ OMX Transaction (see Note 1—“Organization and Basis of Presentation”), the Company sold the technology services agreement with ELX to NASDAQ OMX.

For the three months ended September 30, 2013 and 2012, the Company recognized related party revenues of $8.1 million and $13.1 million, respectively, for the services provided to Cantor and ELX. For the nine months ended September 30, 2013 and 2012, the Company recognized related party revenues pursuant to these agreements of $33.5 million and $39.1 million, respectively. 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 September 30, 2013 and 2012, the Company was charged $8.2 million and $9.4 million, respectively, for the services provided by Cantor and its affiliates, of which $6.1 million and $6.6 million, respectively, were to cover compensation to leased employees for the three months ended September 30, 2013 and 2012. For the nine months ended September 30, 2013 and 2012, the Company was charged $24.9 million and $26.5 million, respectively, for the services provided by Cantor and its affiliates, of which $17.7 million and $17.0 million, respectively, were to cover compensation to leased employees for the nine months ended September 30, 2013 and 2012. 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.

For the three months ended September 30, 2013 and 2012, Cantor’s share of the net profit in Tower Bridge was $0.6 million and $1.0 million, respectively. For the nine months ended September 30, 2013 and 2012, Cantor’s share of the net profit in Tower Bridge was $0.7 million and $1.4 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.

Reverse Repurchase Agreements with Cantor

From time to time, the Company has entered into Reverse Repurchase Agreements with Cantor, whereby the Company has received agency mortgage-backed securities and similar quality securities as collateral. The Company did not have any Reverse Repurchase Agreements with Cantor as of either September 30, 2013 or December 31, 2012. During the three and nine months ended September 30, 2013, the Company recognized $68 thousand in interest income related to Reverse Repurchase Agreements with Cantor. During the three and nine months ended September 30, 2012, the Company did not recognize any interest income related to Reverse Repurchase Agreements with Cantor.

Clearing Agreement with Cantor

The Company receives certain clearing services (“Clearing Services”) from Cantor pursuant to its 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.

Other Agreements with Cantor

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 September 30, 2013, 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

 

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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 is utilized to determine the shares of profit or loss allocated to each for the period.

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 than favorable to the receiving party than such services are provided to typical third-party customers.

In August 2013, the Audit Committee authorized the Company to invest up to $350 million in an asset-backed commercial paper program for which certain Cantor entities serve as placement agent and referral agent. The program issues short-term notes to money market investors and is expected to be used from time to time as a liquidity management vehicle. The notes are backed by assets of highly rated banks. The Company is entitled to invest in the program so long as the program meets investment policy guidelines, including relating to ratings. Cantor will earn a spread between the rate it receives from the short-term note issuer and the rate it pays to the Company on any investments in this program. This spread will be no greater than the spread earned by Cantor for placement of any other commercial paper note in the program. As of September 30, 2013, the Company had $200 million invested in the program, which is recorded in “Cash and cash equivalents” in the Company’s unaudited condensed consolidated statements of financial condition.

Receivables from and Payables to Related Broker-Dealers

Amounts due to or from 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 September 30, 2013 and December 31, 2012, the Company had receivables from Cantor and Freedom International Brokerage of $4.2 million and $2.9 million, respectively.

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 individuals receive 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.

At the end of the second quarter of 2013, the Company commenced the Global Partnership Restructuring Program to provide retention incentives and to allow the Company to take advantage of certain tax efficiencies (see Note 1—“Organization and Basis of Presentation”). Under the program, certain BGC Holdings limited partnership units were redeemed or exchanged for restricted stock. Due to the net redemption/exchange of the limited partnership units in the program, the Company determined that the collectability of a portion of the employee loan balances was not expected and, therefore, the Company recognized a reserve for the three months ended June 30, 2013 in the amount of approximately $160.5 million. The compensation expense related to this reserve was included as part of “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations for the three months ended June 30, 2013.

As of September 30, 2013 and December 31, 2012, the aggregate balance of employee loans was $127.4 million and $220.1 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. Compensation expense for the above mentioned employee loans for the three months ended September 30, 2013 and 2012 was $7.7 million and $9.0 million, respectively. Compensation expense for the above mentioned employee loans for the nine months ended September 30, 2013 and 2012 was $187.9 million and $24.1 million, respectively.

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 September 30, 2013 and the three months ended September 30, 2012. The Company recorded interest expense related to the 8.75% Convertible Notes in the amount of $9.8 million for both the nine months ended September 30, 2013 and the nine months ended September 30, 2012. See Note 16—“Notes Payable, Collateralized and Short-Term Borrowings,” for more information.

 

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Table of Contents

Controlled Equity Offerings and Other Transactions with CF&Co

As discussed in Note 5—“Stock Transactions and Unit Redemptions,” the Company has entered into controlled equity offering sales agreements with CF&Co, as the Company’s sales agent. For the three months ended September 30, 2013 and 2012, the Company was charged approximately $0.1 million and $0.5 million, respectively, for services provided by CF&Co related to the Company’s controlled equity offering sales agreements. For the nine months ended September 30, 2013 and 2012, the Company was charged approximately $0.7 million and $1.4 million, respectively, for services provided by CF&Co related to the Company’s controlled equity offering sales agreements. These expenses are included as part of “Professional and consulting fees” in the Company’s unaudited condensed consolidated statements of operations.

The Company has engaged CF&Co and its affiliates to act as financial advisor in connection with one or more third-party business combination transactions with or involving one or more targets as requested by the Company on behalf of its affiliates from time to time on specified terms, conditions and fees. The Company may pay finders’, investment banking or financial advisory fees to broker-dealers, including, but not limited to, CF&Co and its affiliates, from time to time in connection with certain business combination transactions, and, in some cases, the Company may issue shares of the Company’s Class A common stock in full or partial payment of such fees.

On April 13, 2012, the Company completed the acquisition of Grubb & Ellis (see Note 3—“Acquisitions”). In connection with this acquisition, the Company paid an advisory fee of $1.0 million to CF&Co during the year ended December 31, 2012. This fee was recorded 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 paid underwriting fees of approximately $0.2 million to CF&Co. This fee was recorded as a debt issuance cost, which is amortized as interest expense over the term of the notes.

On June 28, 2013, the Company sold its on-the-run, electronic benchmark U.S. Treasury platform to NASDAQ OMX (see Note 1—“Organization and Basis of Presentation”). In connection with the NASDAQ OMX Transaction, the Company paid fees of approximately $7.4 million to CF&Co. These expenses are included as a reduction of “Gain on divestiture” in the Company’s unaudited condensed consolidated statements of operations.

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

Cantor Rights to Purchase Limited Partnership Interests from BGC Holdings

Cantor has the right to purchase limited partnership interests (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 year ended December 31, 2012, in connection with the redemption by BGC Holdings of an aggregate of 431,985 non-exchangeable founding/working partner units from founding partners of BGC Holdings for an aggregate consideration of $1,282,045, Cantor purchased 431,985 exchangeable limited partnership interests from BGC Holdings for an aggregate consideration of $1,282,045. The redemption of the non-exchangeable founding/working partner units and issuance of an equal number of exchangeable limited partnership interests 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 year ended December 31, 2012, Cantor purchased 488,744 exchangeable limited partnership interests from BGC Holdings for an aggregate consideration of $1,449,663 in connection with the grant of exchangeability and exchange of 488,744 founding/working partner units. Such exchangeable limited partnership interests are exchangeable by Cantor at any time on a one-for-one basis (subject to adjustment) for shares of the Company’s Class A common stock.

As of September 30, 2013, there were 2,448,301 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.

 

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Transactions with Executive Officers and Directors

On May 4, 2012, the Company restructured the partnership and compensation arrangement of Mr. Lutnick by (i) the issuance to Mr. Lutnick of 2,449,312 PSUs and the cancellation of the equivalent number of outstanding REUs that had been previously issued to Mr. Lutnick and (ii) the grant of a right of exchange with respect to such 2,449,312 PSUs. The restructuring was approved by the Compensation Committee.

During the nine months ended September 30, 2013, the Company repurchased 999,722 shares of Class A common stock at an average price of $5.77 per share. An aggregate of 33,478 of such shares were purchased from Stephen M. Merkel, the Company’s Executive Vice President, General Counsel and Secretary. An aggregate of 533,406 of such shares were purchased from Shaun D. Lynn, the Company’s President.

During the year ended December 31, 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 Mr. Merkel and certain family trusts.

In connection with the Company’s Global Partnership Restructuring Program during the second quarter of 2013 (see Note 1–“Organization and Basis of Presentation”), the Company redeemed/exchanged a total of 9,930,675 previously issued limited partnership units for 3,553,345 shares of Class A common stock and 3,561,392 shares of restricted stock from the Company’s named executive officers. The number of shares delivered to the named executive officers was net of 1,917,094 shares withheld to pay withholding taxes. These shares were awarded to the named executive officers on July 30, 2013. In connection with the Global Restructuring Program, Mr. Lutnick elected to exercise certain cumulative rights previously granted to him with respect to an aggregate of 1,802,608 of his non-exchangeable partnership units, which resulted in the receipt of shares of Class A common stock for such units.

In addition, in connection with the foregoing, Messrs. Lynn, Windeatt and Sadler received newly-issued BGC Holdings limited partnership units that are equivalent to 9.75% of their non-exchangeable units that were redeemed in the above transactions. Upon any sale or other transfer by such executive officers of shares of restricted stock, a proportional number of these units will be redeemed for zero by BGC Holdings. These units are not expected to be made exchangeable into shares of Class A common stock.

Transactions with Relief Fund

During the nine months ended September 30, 2013, the Company issued and donated an aggregate of 1,000,000 shares of Class A common stock to The Cantor Fitzgerald Relief Fund (the “Relief Fund”) in connection with the Company’s annual Charity Day.

During the nine months ended September 30, 2013, the Company also committed to make charitable contributions to the Relief Fund in the amount of $25.0 million, which the Company recorded in “Other expenses” in the Company’s unaudited condensed consolidated statements of operations for the three months ended June 30, 2013.

During the year ended December 31, 2012, the Company issued and donated an aggregate of 2,860,000 shares of Class A common stock to the Relief Fund in connection with the Company’s annual Charity Day.

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 that offers new pools of block liquidity to the global equities markets, of up to $10.0 million in the aggregate; such arrangements are proportionally and on the same terms as similar arrangements between Aqua and Cantor. A $1.6 million increase to this amount was authorized on August 5, 2013. The Company has been further authorized to provide counterparty or similar guarantees on behalf of Aqua from time to time, provided that liability for any such guarantees, as well as similar guarantees provided by Cantor, would be shared proportionally with Cantor. Aqua is 51% owned by Cantor and 49% owned by the Company. Aqua is accounted for under the equity method of accounting. During both the nine months ended September 30, 2013 and the nine months ended September 30, 2012, the Company made $1.2 million in cash contributions to Aqua. These contributions are recorded as part of “Investments” in the Company’s unaudited condensed consolidated statements of financial condition.

The Company has also entered into a Subordinated Loan Agreement with Aqua, whereby the Company agreed to lend Aqua the principal sum of $980 thousand. The scheduled maturity date on the subordinated loan is September 1, 2015, and the current rate of interest on the loan is three month LIBOR plus 600 basis points. The loan to Aqua is recorded as part of “Receivables from related parties” in the Company’s unaudited condensed consolidated statements of financial condition.

 

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13. Investments

Equity Method Investments

 

     September 30,
2013
     December 31,
2012
 

Equity method investments (in thousands)

   $ 19,436       $ 25,556   
  

 

 

    

 

 

 

The Company’s share of losses related to its equity method investments was $2.7 million and $3.0 million for the three months ended September 30, 2013 and 2012, respectively. The Company’s share of losses related to its equity method investments was $7.2 million and $8.1 million for the nine months ended September 30, 2013 and 2012, 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.

On March 28, 2012, the Company made a capital contribution of $16.0 million to ELX.

In June 2013, the Company acquired a controlling interest in an entity that had previously been accounted for using the equity method. This transaction resulted in the consolidation of the entity in the Company’s unaudited condensed consolidated financial statements (see Note 3—“Acquisitions”).

Summarized condensed financial information for the Company’s equity method investments is as follows (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Statements of operations:

        

Total revenues

   $ 12,623      $ 10,480      $ 39,169      $ 30,339   

Total expenses

     16,522        15,713        51,336        47,406   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,899   $ (5,233   $ (12,167   $ (17,067
  

 

 

   

 

 

   

 

 

   

 

 

 

See Note 12—“Related Party Transactions,” for information regarding related party transactions with unconsolidated entities included in the Company’s unaudited condensed consolidated financial statements.

Investments in Variable Interest Entities

Certain of the Company’s equity method investments included in the tables above are considered variable interest entities (“VIEs”), 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 VIEs 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 VIEs is its investment in such entities as well as a credit facility and a subordinated loan.

The following table sets forth the Company’s investment in its unconsolidated VIEs and the maximum exposure to loss with respect to such entities as of September 30, 2013 and December 31, 2012. The amounts presented in the “Investment” column below are included in, and not in addition to, the equity method investment table above (in thousands):

 

     September 30, 2013      December 31, 2012  
     Investment      Maximum
Exposure to Loss
     Investment      Maximum
Exposure to Loss
 

Variable interest entities (1)

   $ 8,682       $ 25,662       $ 15,199       $ 44,441   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In addition to its equity investments, the Company has entered into a credit agreement to lend one of its VIEs (ELX) up to $16.0 million. The commitment period for such credit facility extends through March 28, 2015. Additionally, the Company has entered into a subordinated loan agreement with another of its VIEs (Aqua), whereby the Company agreed to lend the principal sum of $980 thousand. As of September 30, 2013, the Company’s maximum exposure to loss with respect to its VIEs is the sum of its equity investment in such variable interest entities plus the $16.0 million credit facility and the $980 thousand subordinated loan.

 

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14. Fixed Assets, Net

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

 

     September 30,
2013
     December 31,
2012
 

Computer and communications equipment

   $ 158,565       $ 176,845   

Software, including software development costs

     108,617         146,676   

Leasehold improvements and other fixed assets

     111,428         111,575   
  

 

 

    

 

 

 
     378,610         435,096   

Less: accumulated depreciation and amortization

     247,347         293,987   
  

 

 

    

 

 

 

Fixed assets, net

   $ 131,263       $ 141,109   
  

 

 

    

 

 

 

Depreciation expense was $7.5 million and $9.5 million for the three months ended September 30, 2013 and 2012, respectively. Depreciation expense was $24.5 million and $27.7 million for the nine months ended September 30, 2013 and 2012, 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 September 30, 2013 and 2012, software development costs totaling $3.8 million and $2.2 million, respectively, were capitalized. For the nine months ended September 30, 2013 and 2012, software development costs totaling $11.5 million and $8.9 million, respectively, were capitalized. Amortization of software development costs totaled $1.9 million and $3.2 million for the three months ended September 30, 2013 and 2012, respectively. Amortization of software development costs totaled $6.9 million and $7.9 million for the nine months ended September 30, 2013 and 2012, 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 $0.4 million and $0.1 million were recorded for the three months ended September 30, 2013 and 2012, respectively, related to the evaluation of capitalized software projects for future benefit and for fixed assets no longer in service. Impairment charges of $1.2 million and $1.1 million were recorded for the nine months ended September 30, 2013 and 2012, respectively, 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.

As a result of the NASDAQ OMX Transaction, the Company sold fixed assets with a carrying value of approximately $13.5 million (see Note 22—“Divestiture”).

 

15. Goodwill and Other Intangible Assets, Net

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2013 were as follows (in thousands):

 

     Financial
Services
    Real
Estate
Services
    Total  

Balance at December 31, 2012

   $ 85,005     $ 79,869      $ 164,874  

Acquisitions

     1,296       —            1,296  

Measurement period adjustments

     (83     (1,693     (1,776

Cumulative translation adjustment

     (692     —          (692
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 85,526     $ 78,176      $ 163,702  
  

 

 

   

 

 

   

 

 

 

During the nine months ended September 30, 2013, the Company recognized measurement period adjustments of approximately $1.7 million and $0.1 million relating to Real Estate Services and Financial Services, respectively. The Company considers the adjustments insignificant to its unaudited condensed consolidated financial statements and accordingly the Company’s unaudited condensed consolidated statements of financial position at December 31, 2012 were not retrospectively adjusted.

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.

 

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

 

     September 30, 2013  
     Gross Amount      Accumulated
Amortization
     Net Carrying Amount      Weighted-Average
Remaining Life (Years)
 

Definite life intangible assets:

           

Patents

   $ 6,905       $ 5,342       $ 1,563         2.5   

Acquired intangibles

     22,592         19,292         3,300         2.7   

Noncompete agreements

     1,790         876         914         2.0   

All other

     2,457         1,040         1,417         5.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total definite life intangible assets

     33,744         26,550         7,194         3.0   

Indefinite life intangible assets:

           

Trade names

     10,685         —           10,685         N/A   

Horizon license

     1,500         —           1,500         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total indefinite life intangible assets

     12,185         —           12,185         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,929       $ 26,550       $ 19,379         3.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Gross Amount      Accumulated
Amortization
     Net Carrying Amount      Weighted-Average
Remaining Life (Years)
 

Definite life intangible assets:

           

Patents

   $ 36,347       $ 35,047       $ 1,300         4.9   

Acquired intangibles

     20,770         16,778         3,992         3.6   

Noncompete agreements

     3,418         2,169         1,249         2.8   

All other

     3,832         2,238         1,594         7.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total definite life intangible assets

     64,367         56,232         8,135         4.4   

Indefinite life intangible assets:

           

Trade names

     10,685         —          10,685         N/A   

Horizon license

     1,500         —          1,500         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total indefinite life intangible assets

     12,185         —          12,185         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 76,552       $ 56,232       $ 20,320         4.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intangible amortization expense was $1.2 million and $0.9 million for the three months ended September 30, 2013 and 2012, respectively. Intangible amortization expense was $4.1 million and $2.7 million for the nine months ended September 30, 2013 and 2012, respectively. Intangible amortization is included as part of “Other expenses” in the Company’s unaudited condensed consolidated statements of operations.

The estimated future amortization expense of definite life intangible assets as of September 30, 2013 is as follows (in millions):

 

2013 (1)

   $ 1.3   

2014

     2.6   

2015

     1.5   

2016

     0.8   

2017

     0.7   

2018 and thereafter

     0.3   
  

 

 

 

Total

   $ 7.2   
  

 

 

 

 

(1) Represents the estimated amortization to be recognized for the remaining three months of 2013.

 

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16. Notes Payable, Collateralized and Short-Term Borrowings

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

 

     September 30,
2013
     December 31,
2012
 

8.75% Convertible Notes

   $ 150,000       $ 150,000   

4.50% Convertible Notes

     146,728         143,354   

8.125% Senior Notes

     108,873         108,780   

Collateralized borrowings

     17,389         49,310   
  

 

 

    

 

 

 

Total

   $ 422,990       $ 451,444   
  

 

 

    

 

 

 

The Company’s Convertible Notes and 8.125% Senior Notes are recorded at amortized cost. The carrying amounts and estimated fair values of the Company’s Convertible Notes and 8.125% Senior Notes were as follows (in thousands):

 

     September 30, 2013      December 31, 2012  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value  

8.75% Convertible Notes

   $ 150,000       $   177,342       $ 150,000       $   155,718   

4.50% Convertible Notes

     146,728         165,000         143,354         147,200   

8.125% Senior Notes

     108,873         115,110         108,780         116,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 405,601       $ 457,452       $ 402,134       $ 419,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the 8.75% Convertible Notes was estimated based on a jump-diffusion convertible pricing model, which among other inputs incorporates the scheduled coupon and principal payments, the conversion feature inherent in the 8.75% Convertible Notes, the Company’s Class A common stock price and a stock price volatility assumption. The stock price volatility assumptions are based on the historic volatility of the Company’s Class A common stock. The fair value measurements of the 8.75% Convertible Notes are based on significant inputs observable in the market and are considered Level 2 within the fair value hierarchy. The fair values of the 8.125% Senior Notes and 4.50% Convertible Notes were determined using observable market prices as these securities are traded and are considered Level 1 and Level 2, respectively, within the fair value hierarchy, based on whether they are deemed to be actively traded.

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 were convertible into 23.7 million shares of Class A common stock as of September 30, 2013. 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 for both the three months ended September 30, 2013 and the three months ended September 30, 2012. The Company recorded interest expense related to the 8.75% Convertible Notes of $9.8 million for both the nine months ended September 30, 2013 and the nine months ended September 30, 2012.

As of September 30, 2013, the 8.75% Convertible Notes were convertible, at the holder’s option, at a conversion rate of 157.6830 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 are general senior unsecured obligations of the Company. 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 both the three months ended September 30, 2013 and the three months ended September 30, 2012. The Company recorded interest expense related to the 4.50% Convertible Notes of $8.8 million and $8.7 million for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013, the 4.50% Convertible Notes were 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. 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. As of September 30, 2013, the 4.50% Convertible Notes were 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 $137.2 million, net of debt issuance costs of $3.8 million allocated to the debt component of the instrument. The discount is amortized as interest cost and the carrying value of the 4.50% Convertible Notes will accrete up to the face amount over the term of the 4.50% Convertible Notes.

In connection with the offering of the 4.50% Convertible Notes, the Company entered into capped call transactions, which are expected 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 ($10.26 as of September 30, 2013, subject to adjustment in certain circumstances). The capped call transactions had an initial 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), and had a cap price equal to approximately $12.82 per share as of September 30, 2013. 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 15.6 million shares of BGC’s Class A common stock as of September 30, 2013, subject to adjustment in certain circumstances.

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  
     September 30,
2013
    December 31,
2012
    September 30,
2013
    December 31,
2012
 

Principal amount of debt component

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

Unamortized discount

     (13,272     (16,646     —          —     

Carrying amount of debt component

     146,728        143,354        150,000        150,000   

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      $ 6.34      $ 6.41   

Number of shares to be delivered upon conversion

     16,260,160        16,260,160        23,652,444        23,384,070   

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  
     For the Three Months Ended      For the Three Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 

Coupon interest

   $ 1,800       $ 1,800       $ 3,281       $ 3,281   

Amortization of discount

     1,133         1,099                 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 2,933       $ 2,899       $ 3,281       $ 3,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     4.50% Convertible Notes      8.75% Convertible Notes  
     For the Nine Months Ended      For the Nine Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 

Coupon interest

   $ 5,400       $ 5,400       $ 9,844       $ 9,844   

Amortization of discount

     3,374         3,271                 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 8,774       $ 8,671       $ 9,844       $ 9,844   
  

 

 

    

 

 

    

 

 

    

 

 

 

8.125% Senior Notes

On June 26, 2012, the Company issued an aggregate of $112.5 million principal amount of 8.125% Senior Notes due 2042. The 8.125% Senior Notes are senior unsecured obligations of the Company. 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 used the proceeds to repay short-term borrowings under its unsecured revolving credit facility and for general corporate purposes, including acquisitions.

 

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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 8.125% Senior Notes will accrete up to the face amount over the term of the 8.125% Senior Notes. The Company recorded interest expense related to the 8.125% Senior Notes of $2.3 million for both the three months ended September 30, 2013 and the three months ended September 30, 2012. The Company recorded interest expense related to the 8.125% Senior Notes of $6.9 million and $2.4 million for the nine months ended September 30, 2013 and 2012, respectively.

Collateralized Borrowings

Secured loan arrangements

On various dates beginning in 2009 and most recently in December 2012, the Company entered into secured loan arrangements under which it pledged certain fixed assets as security 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 December 2016. The outstanding balance of the secured loan arrangements was $17.4 million and $37.6 million as of September 30, 2013 and December 31, 2012, respectively. The value of the fixed assets pledged was $14.9 million and $32.1 million as of September 30, 2013 and December 31, 2012, respectively. The Company recorded interest expense related to the secured loan arrangements of $0.2 million and $0.5 million for the three months ended September 30, 2013 and 2012, respectively. The Company recorded interest expense related to the secured loan arrangements of $0.9 million and $1.3 million for the nine months ended September 30, 2013 and 2012, respectively.

During the three months ended June 30, 2013, the Company prepaid $12.2 million related to the secured loan arrangements. As a result of the prepayment, the Company incurred $0.1 million of early termination fees and recognized an additional $0.1 million related to the acceleration of deferred financing costs, which are recorded in “Interest expense” in the Company’s unaudited condensed consolidated statements of operations.

Sale/leaseback transactions

On various dates during the years ended December 31, 2010 and 2011, 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 were repayable in equal monthly installments for terms of 36 months (software) and 48 months (furniture and equipment) with maturities through September 2014.

During the three months ended June 30, 2013, the Company terminated the leases and prepaid the outstanding balance of $7.4 million. As a result of the prepayment, the Company incurred $0.1 million of early termination fees and recognized $0.2 million related to of the acceleration of deferred financing costs, which are recorded in “Interest expense” in the Company’s unaudited condensed consolidated statements of operations.

Because the leases were terminated during the three months ended June 30, 2013, the Company had no outstanding balance or fixed assets related to the leases as of September 30, 2013. As of December 31, 2012, the outstanding balance of the leases and the value of the fixed assets were $11.7 million and $8.3 million, respectively. The Company recorded interest expense of $0.1 million and $0.2 million for the three months ended September 30, 2013 and 2012, respectively. The Company recorded interest expense of $0.4 million and $0.9 million for the nine months ended September 30, 2013 and 2012, respectively.

Because assets reverted back to the Company at the end of the leases, the transactions were capitalized. As a result, consideration received from the purchaser was included in the Company’s unaudited condensed consolidated statements of financial condition as a financing obligation, and payments made under the lease were recorded as interest expense (at an effective rate of approximately 6%). Depreciation on these fixed assets was 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 October 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

 

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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 affirmative and negative covenants including financial covenants, such as minimum equity, tangible equity and interest coverage, as well as maximum levels for total assets to equity capital and debt to equity. On June 20, 2013, the Company entered into the Second Amendment to Credit Agreement and Waiver, pursuant to which the parties agreed to a three-month extension of the termination date of the Credit Agreement to September 23, 2013 and a waiver of certain provisions of the Credit Agreement in connection with the NASDAQ OMX Transaction and the Company’s possible hedge of NASDAQ shares to be received in the earn-out portion of the transaction consideration. On September 12, 2013, the Company entered into the Third Amendment to the Credit Agreement, pursuant to which the parties agreed to a further one-month extension of the termination of the Credit Agreement to October 23, 2013.

As of both September 30, 2013 and December 31, 2012, there were no borrowings outstanding under the Credit Agreement. The Company recorded interest expense related to the Credit Agreement of $0.1 million for both the three months ended September 30, 2013 and the three months ended September 30, 2012. The Company recorded interest expense related to the Credit Agreement of $0.4 million and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively.

 

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, 2012

     68,480,097   

Granted

     43,443,758   

Redeemed/exchanged units

     (84,897,764

Forfeited units

     —     
  

 

 

 

Balance at September 30, 2013

     27,026,091   
  

 

 

 

During the three months ended September 30, 2013 and 2012, the Company granted exchangeability on 0.8 million and 4.4 million limited partnership units for which the Company incurred compensation expense, before associated income taxes, of $5.4 million and $24.0 million, respectively. During the nine months ended September 30, 2013 and 2012, the Company granted exchangeability on 5.8 million and 14.5 million limited partnership units for which the Company incurred compensation expense, before associated income taxes, of $28.9 million and $88.1 million, respectively. In addition, during the nine months ended September 30, 2013, the Company redeemed or exchanged approximately 77 million limited partnership units in connection with its Global Partnership Restructuring Program and incurred compensation expense, before associated income taxes, of $304.1 million (see Note 1—“Organization and Basis of Presentation”).

As of September 30, 2013 and December 31, 2012, the number of limited partnership units exchangeable into shares of Class A common stock at the discretion of the unit holder was 1.0 million and 6.4 million, respectively.

As of September 30, 2013 and December 31, 2012, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses was $25.2 million and $64.5 million, respectively. As of September 30, 2013 and December 31, 2012, the aggregate estimated fair value of these limited partnership units was $5.4 million and $12.3 million, respectively. The number of unvested limited partnership units as of September 30, 2013 and December 31, 2012, was 3.1 million and 6.6 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 between three and five years from the date of grant. The Company recognized compensation expense, before associated income taxes, related to limited partnership units that were not redeemed of $0.7 million and $1.4 million for the three months ended September 30, 2013 and 2012, respectively. The Company recognized compensation expense, before associated income taxes, related to limited partnership units that were not redeemed of $4.5 million and $2.8 million for the nine months ended September 30, 2013 and 2012, respectively.

 

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Table of Contents

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, 2012

     2,608,731      $ 5.94         1.83   

Granted

     1,321,017        2.86      

Delivered units

     (890,877     6.26      

Forfeited units

     (175,974     4.87      
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2013

     2,862,897      $ 4.48         1.99   
  

 

 

   

 

 

    

 

 

 

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 nine months ended September 30, 2013 and 2012, the Company granted 1.3 million and 1.5 million, respectively, of RSUs with aggregate estimated grant date fair values of approximately $3.8 million and $8.2 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 nine months ended September 30, 2013 and 2012, the Company withheld shares valued at $1.0 million and $2.3 million, respectively, to pay taxes due at the time of vesting.

As of September 30, 2013 and December 31, 2012, the aggregate estimated grant date fair value of outstanding RSUs was approximately $12.8 million and $15.5 million, respectively.

Compensation expense related to RSUs, before associated income taxes, was approximately $1.2 million and $2.1 million for the three months ended September 30, 2013 and 2012, respectively. Compensation expense related to RSUs, before associated income taxes, was approximately $4.5 million and $6.1 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, there was approximately $10.5 million of total unrecognized compensation expense related to unvested RSUs.

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, 2012

     6,450,931      $ 14.11         2.4       $ —    

Granted

     —         —          

Exercised options

     —         —          

Expired options

     (530,193     15.54         
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

     5,920,738      $ 13.99         1.8       $ —    
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2013

     5,920,738      $ 13.99         1.8       $ —    
  

 

 

   

 

 

    

 

 

    

 

 

 

The Company did not grant any stock options during the nine months ended September 30, 2013 and 2012. There were no options exercised during the nine months ended September 30, 2013 and 2012.

The Company did not record any compensation expense related to stock options for the three or nine months ended September 30, 2013 and 2012, as all of these options vested in prior years. As of September 30, 2013, the compensation expense related to stock options was fully recognized.

 

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, investigations and proceedings by governmental and self-regulatory agencies (both formal and informal)

 

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regarding the Company’s business, which may result in judgments, settlements, fines, penalties, injunctions 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.

On February 3, 2010, Trading Technologies International, Inc. (“TT”) filed a civil action against the Company in the Northern District of Illinois, alleging direct and indirect infringement of three 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 July 31, 2012, the Court, acting on motions for partial summary judgment, entered a final judgment of invalidity as to Patents Nos. 7,676,411, 7,685,055, 7,693,768, and 7,904,374, and certified that final judgment for immediate interlocutory appeal. An appeal of that judgment is presently pending, while the Company continues to defend against TT’s claims under other patents in the District Court.

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. (“BGC Financial”), an affiliate of BGC Partners, 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 (the “FINRA Arbitration”). 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, but later 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 and are now concluded. Post-hearing briefs were filed in October 2013 and closing arguments are scheduled for mid-November 2013.

On October 22, 2009, Tullett Prebon plc (“Tullett”) filed a complaint in the U.S. 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.

After some additional pleading and motion practices, on June 18, 2010, the District Court ordered that the case be dismissed with prejudice, and the U.S. Court of Appeals for the Third Judicial Circuit affirmed.

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

 

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employment with Tullett and join a BGC Partners affiliate subsequent to the federal complaint. BGC moved to stay the New Jersey state action and 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, which was denied. On December 22, 2011, BGC Partners filed its Answer and Affirmative Defenses. Discovery in the matter is now closed and trial is presently scheduled for April 2014.

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 claims (similar to those asserted in the previously filed FINRA Arbitration) related to BGC Financial’s hiring of those nine employees in 2011. On January 11, 2013, a FINRA panel denied Tullett’s claims in their entirety and no damages were awarded against BGC. The panel granted the employees’ counterclaims, and ordered Tullett to pay the employees (collectively) approximately $367,000 in compensatory damages. On January 25, 2013, the New York Supreme Court, Commercial Division, confirmed the arbitration award, and on April 17, 2013, judgment was entered. These claims were not consolidated with the other FINRA proceedings.

On August 10, 2012, the Tullett Subsidiaries commenced a FINRA arbitration against BGC Financial, BGC USA, L.P. (“BGC USA”), another affiliate of BGC Partners, and an officer and an employee of BGC Financial who were formerly employed by the Tullett Subsidiaries. The Tullett Subsidiaries allege that BGC Financial and BGC USA aided and abetted various alleged wrongs by the individual respondents, tortiously interfered with these individuals’ employment contracts with Tullett, and violated a FINRA Rule of Conduct. The Tullett Subsidiaries also allege breaches of contract and duties of loyalty and fiduciary duties, as well as the misappropriation of trade secrets and confidential information, and the violation of a FINRA Rule of Conduct against their former employees, and seek a declaratory judgment invalidating indemnification agreements entered into between the BGC respondents and the individual respondents. The Tullett Subsidiaries seek compensatory damages of not less than $14 million in salaries, bonuses and other compensation and benefits they paid to the individual respondents, as well as consequential and punitive damages. The Tullett Subsidiaries also seek costs and a permanent injunction, in addition to the aforementioned declaratory judgment, against the respondents. In November 2012, BGC Financial and an employee of BGC Financial were dismissed as respondents, and Statements of Answer were filed on behalf of the remaining respondents. In June 2013, the parties agreed to stay this arbitration pending the resolution of the FINRA Arbitration.

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.

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. The complaint was dismissed on September 23, 2013. The 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 sought 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 (the “New York Complaint”). 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 made similar allegations to the New York Complaint, and seeks the same relief (the “Delaware Complaint”). On April 12, 2012, the Delaware 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. The two actions filed in New York were consolidated on August 27, 2012. Defendants filed a motion to dismiss the consolidated action on August 10, 2012, the motion was fully briefed and argued, and the motion to dismiss was granted September 23, 2013. Thereafter, Plaintiffs filed a motion to reargue on October 15, 2013. The Company believes that plaintiffs’ allegations are without merit and intends to continue to defend against them vigorously.

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.

 

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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. The Company is unable to estimate a possible loss or range of loss in connection with specific matters beyond its current accrual and any other amounts disclosed. 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 taken as a whole.

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 September 30, 2013, 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, securities trading and brokerage activities, and commercial real estate services 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 and real estate markets. Additionally, financing is sensitive to interest rate fluctuations, which could have an impact on the Company’s overall profitability.

Guarantees

The Company provides guarantees to securities clearinghouses and exchanges which meet the definition of a guarantee under FASB interpretations. Under these standard securities clearinghouse 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 clearinghouse 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.

In connection with the NASDAQ OMX Transaction (see Note 1—“Organization and Basis of Presentation”), the Company has guaranteed all payment obligations of ELX through December 31, 2014 under the Amended and Restated Technology Services Agreement, dated as of March 28, 2012, by and between eSpeed Technology Services L.P. and ELX Futures L.P. However, in the opinion of management, the potential of being required to make payments under this arrangement is remote. Accordingly, no contingent liability has been recorded in the Company’s unaudited condensed consolidated statements of financial condition for this agreement.

Indemnification

In connection with the NASDAQ OMX Transaction (see Note 1—“Organization and Basis of Presentation”), the Company has indemnified NASDAQ OMX for amounts over a defined threshold against damages arising from breaches of representations, warranties and covenants. As of September 30, 2013 and December 31, 2012, no contingent liability has been recorded in the Company’s unaudited condensed consolidated statements of financial condition for this indemnification, as the potential for being required to make payments under this indemnification is remote.

Gain Contingency

In connection with the NASDAQ OMX Transaction (see Note 1—“Organization and Basis of Presentation”), the Company will receive an earn-out of up to 14,883,705 shares of NASDAQ OMX common stock to be paid ratably over 15 years, provided that NASDAQ OMX, as a whole, produces at least $25 million in gross revenues each year. The earn-out was excluded from the gain on the divestiture and will be recognized in income as and when it is realized and earned, consistent with the accounting guidance for gain contingencies. During the three months ended September 30, 2013, the Company recognized revenues of $31.9 million related to this earn-out, which is included in “Other Revenues” in the Company’s unaudited condensed consolidated statements of operations. The $31.9 million asset related to this earn-out is included in “Marketable Securities” in the Company’s unaudited condensed consolidated statements of financial condition.

 

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

 

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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 unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. As of September 30, 2013, the Company had approximately $101.5 million of cumulative undistributed foreign pre-tax earnings for which no deferred U.S. federal income taxes have been provided 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 September 30, 2013, 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 September 30, 2013, the Company had approximately $0.5 million of accrued interest related to uncertain tax positions. During the three and nine months ended September 30, 2013, the Company did not have any material charges with respect to interest and penalties.

 

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 September 30, 2013, 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 Financial Conduct Authority (“FCA”) and must maintain financial resources (as defined by the FCA) in excess of the total financial resources requirement of the FCA. As of September 30, 2013, 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 September 30, 2013, $330.1 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 $154.6 million.

On September 20, 2013, BGC Derivative Markets, L.P. (“BGC Derivative Markets”), a subsidiary of the Company, received temporary registration approval from the CFTC to operate a Swap Execution Facility (“SEF”). The Company’s SEF facilitates trading of swap products and fulfills clearing and reporting requirements for both direct participants and customers of introducing brokers. Further, in accordance with CFTC rules, during 2013, certain non-U.S. subsidiaries of the Company have registered with the CFTC as swap introducing brokers and are subject to regulatory requirements of the CFTC with respect to these transactions.

 

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 changed its segment reporting structure. As a result, beginning with 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. The Company’s Financial Services segment specializes in the brokerage of a broad range of products, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commodities, futures and structured products. It 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. The Company’s Real Estate Services segment offers commercial real estate tenants, owners, investors and developers a wide range of services, including leasing;

 

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capital markets services, including investment sales, debt placement, appraisal and valuation services; commercial mortgage brokerage services; as well as consulting, project and development management, leasing and corporate advisory services and property and corporate facilities management services.

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 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. Corporate revenues include fees from related parties and interest income as well as gains that are not considered part of the Company’s ordinary, ongoing business such as the gain related to the NASDAQ OMX Transaction. Corporate expenses include non-cash compensation expenses (such as the grant of exchangeability to limited partnership units; redemption/exchange of partnership units, issuance of restricted shares and reduction of compensation-related partnership loans; and allocations of net income to founding/working partner units and limited partnership units) as well as unallocated expenses such as certain professional and consulting fees, executive compensation and interest expense, which are managed separately at the corporate level.

Certain financial information for the Company’s segments is presented below. See Note 15—“Goodwill and Other Intangible Assets, Net,” for goodwill by reportable segment.

Three months ended September 30, 2013 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
    Total  

Brokerage revenues:

          

Rates

   $ 109,110       $ —         $ —        $ 109,110   

Credit

     54,410         —           —          54,410   

Foreign Exchange

     47,393         —           —          47,393   

Equities and Other Asset Classes

     34,862         —           —          34,862   

Real Estate

     —           105,303         —          105,303   

Real estate management services

     —           40,447         —          40,447   

Fees from related parties

     13         —           8,058        8,071   

Market data

     1,178         —           —          1,178   

Software solutions

     444         —           —          444   

Other revenues

     32,935         —           334        33,269   

Losses on equity investments

     —           —           (2,705     (2,705
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     280,345         145,750         5,687        431,782   

Interest income

     262         87         1,214        1,563   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     280,607         145,837         6,901        433,345   

Interest expense

     410         —           8,754        9,164   

Non-interest expenses

     226,613         132,238         22,667        381,518   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 53,584       $ 13,599       $ (24,520   $ 42,663   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended September 30, 2013, the Financial Services segment revenues include $31.9 million related to the earn-out portion of the NASDAQ OMX Transaction consideration. For the three months ended September 30, 2013, the Real Estate Services segment income (loss) from operations before income taxes excludes $1.9 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting.

 

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Three months ended September 30, 2012 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
    Total  

Brokerage revenues:

          

Rates

   $ 131,359       $ —         $ —        $ 131,359   

Credit

     67,926         —           —          67,926   

Foreign Exchange

     48,910         —           —          48,910   

Equities and Other Asset Classes

     34,545         —           —          34,545   

Real Estate

     —           96,551         —          96,551   

Real estate management services

     —           39,672         —          39,672   

Fees from related parties

     2,774         —           10,328        13,102   

Market data

     4,166         —           —          4,166   

Software solutions

     2,485         —           —          2,485   

Other revenues

     237         55         2,907        3,199   

Losses on equity investments

     —           —           (2,995     (2,995
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest revenues

     292,402         136,278         10,240        438,920   

Interest income

     190         14         1,193        1,397   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     292,592         136,292         11,433        440,317   

Interest expense

     1,650         4         8,104        9,758   

Non-interest expenses

     246,700         126,474         53,773        426,947   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ 44,242       $ 9,814       $ (50,444   $ 3,612   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended September 30, 2012, the Real Estate Services segment income (loss) from operations before income taxes excludes $6.3 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting.

Nine months ended September 30, 2013 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
    Total  

Brokerage revenues:

          

Rates

   $ 392,401       $ —         $ —        $ 392,401   

Credit

     190,895         —           —          190,895   

Foreign Exchange

     167,433         —           —          167,433   

Equities and Other Asset Classes

     115,524         —           —          115,524   

Real Estate

     —