Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2016

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.    ☒  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).    ☒  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  
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    ☒  No

On November 2, 2016, the registrant had 244,048,926 shares of Class A common stock, $0.01 par value, and 34,848,107 shares of Class B common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

BGC PARTNERS, INC.

TABLE OF CONTENTS

 

         Page  
PART I—FINANCIAL INFORMATION   
ITEM 1  

Financial Statements (unaudited)

     5   
 

Condensed Consolidated Statements of Financial Condition—At September 30, 2016 and December 31, 2015

     5   
 

Condensed Consolidated Statements of Operations—For the Three and Nine Months Ended September 30, 2016 and September 30, 2015

     6   
 

Condensed Consolidated Statements of Comprehensive Income (Loss)—For the Three and Nine Months Ended September 30, 2016 and September 30, 2015

     7   
 

Condensed Consolidated Statements of Cash Flows—For the Nine Months Ended September 30, 2016 and September 30, 2015

     8   
 

Condensed Consolidated Statements of Changes in Equity—For the Year Ended December 31, 2015

     10   
 

Condensed Consolidated Statements of Changes in Equity—For the Nine Months Ended September 30, 2016

     11   
 

Notes to Condensed Consolidated Financial Statements

     12   
ITEM 2  

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

     50   
ITEM 3  

Quantitative and Qualitative Disclosures About Market Risk

     94   
ITEM 4  

Controls and Procedures

     96   
PART II—OTHER INFORMATION   
ITEM 1  

Legal Proceedings

     97   
ITEM 1A  

Risk Factors

     97   
ITEM 2  

Unregistered Sales of Equity Securities and Use of Proceeds

     97   
ITEM 3  

Defaults Upon Senior Securities

     97   
ITEM 4  

Mine Safety Disclosures

     97   
ITEM 5  

Other Information

     97   
ITEM 6  

Exhibits

     98   
SIGNATURES   


Table of Contents

SPECIAL NOTE ON FORWARD-LOOKING INFORMATION

This Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “possible,” “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 equity and debt capital markets and markets for commercial real estate and related services, and our ability to access the capital markets;

 

    pricing, commissions and fees, 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. and its affiliates, which we refer to as “Cantor,” including Cantor Fitzgerald & Co., which we refer to as “CF&Co,” and Cantor Commercial Real Estate Company, L.P., which we refer to as “CCRE,” any related conflicts of interest, any impact of Cantor’s results on our credit ratings and/or the associated outlooks, any loans to or from us or Cantor, CF&Co’s acting as our sales agent or underwriter under our controlled equity or other offerings, Cantor’s holdings of our debt securities, CF&Co’s acting as a market maker in our debt securities, CF&Co’s acting as our financial advisor in connection with potential business combinations, dispositions, or other transactions, our participation in various investments, stock loans or cash management vehicles placed by or recommended by CF&Co, and any services provided by or transactions with CCRE;

 

    economic or geopolitical conditions or uncertainties, the actions of governments or central banks, including uncertainty regarding a U.K. exit from the European Union following the recent referendum and related rulings, and the impact of terrorist acts, acts of war or other violence or political unrest, as well as 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 businesses, 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 political impasses, as well as the economic and market response to the U.S. presidential campaign and election;

 

    the effect on our businesses of reductions in overall industry volumes in certain of our products as a result of central bank quantitative easing, interest rate changes, market volatility, and other factors;

 

    the effect on our businesses of worldwide governmental debt issuances, austerity programs, increases or decreases in deficits, and other changes to monetary policy, and potential political impasses or regulatory requirements, including increased capital requirements for banks and other institutions;

 

    extensive regulation of our businesses and customers, changes in regulations relating to financial services companies, commercial real estate and other industries, and risks relating to compliance matters, including regulatory examinations, inspections, investigations and enforcement actions, and any resulting costs, increased financial and capital requirements, enhanced oversight, fines, penalties, sanctions, 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 principal risk, trade failures, counterparty failures, 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 and the impact thereof on our financial results and cash flows in any given period;

 

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    certain financial risks, including the possibility of future losses, reduced cash flows from operations, increased leverage and the need for short- or long-term borrowings, including from Cantor, or other sources of cash relating to acquisitions, dispositions, 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 and increased borrowing costs, as well as interest rate and foreign currency exchange rate fluctuations;

 

    risks associated with the temporary or longer-term investment of our available cash, including defaults or impairments on our investments, stock loans or cash management vehicles and collectability of loan balances owed to us by partners, employees, or others;

 

    our ability to enter new markets or develop new products, trading desks, marketplaces, or services for existing or new customers and to induce such 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 combinations or other transactions in the financial services, real estate, and other industries, including acquisitions, tender offers, dispositions, offerings, reorganizations, partnering opportunities and joint ventures, and our ability to maintain or develop relationships with independently owned offices in our real estate services business and our ability to grow in other geographic regions, the anticipated benefits of any such transactions, relationships or growth and the future impact of any such transactions, relationships or growth on our financial results for current or future periods, the integration of any completed acquisitions and the use of proceeds of any completed dispositions or offerings, and the value of and any hedging entered into in connection with consideration received or to be received in connection with such dispositions;

 

    our estimates or determinations of potential value with respect to various assets or portions of our businesses, including with respect to the accuracy of the assumptions or the valuation models or multiples used;

 

    our ability to hire and retain personnel, including brokers, salespeople, managers, and other professionals;

 

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

 

    our ability to effectively manage any growth that may be achieved, while ensuring compliance with all applicable financial reporting, internal control, legal compliance, and regulatory requirements;

 

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

 

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

 

    information technology risks, including capacity constraints, failures, or disruptions in our systems or those of the clients, counterparties, exchanges, clearing facilities, or other parties with which we interact, including cybersecurity risks and incidents and regulatory focus;

 

    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., which we refer to as “BGC Holdings,” or other equity interests in our subsidiaries, including from Cantor, our executive officers, other employees, partners, and others, and the net proceeds to be realized by us from offerings of shares of our Class A common stock; and

 

    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 securities, our repurchases of shares of our Class A common stock and purchases of BGC Holdings limited partnership interests or other equity interests in our subsidiaries, any exchanges by Cantor of shares of our Class A common stock for shares of our Class B common stock, 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 outstanding debt or other securities, share sales and stock pledge, stock loan, and other financing transactions by holders of our shares (including by Cantor or others), including of shares acquired pursuant to our employee benefit plans, unit exchanges and redemptions, partnership restructurings, acquisitions, conversions of our Class B common stock and our other convertible securities, stock pledge, stock loan, or other financing transactions, and distributions from Cantor pursuant to Cantor’s distribution rights obligations and other distributions to Cantor partners, including deferred distribution rights shares.

 

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The foregoing risks and uncertainties, as well as those risks and uncertainties set forth in this Form 10-Q, may cause actual results and events to differ materially from the forward-looking statements. The information included herein is given as of the filing date of this Form 10-Q with the Securities and Exchange Commission (the “SEC”), and future results or events 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.

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”), our directors and our executive officers; and amendments to those documents. Our website also contains additional information with respect to our industries and businesses. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this 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,
2016
    December 31,
2015
 

Assets

    

Cash and cash equivalents

   $ 448,515      $ 461,207   

Cash segregated under regulatory requirements

     6,911        3,199   

Securities owned

     212,056        32,361   

Marketable securities

     179,904        650,400   

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

     1,763,834        812,240   

Accrued commissions receivable, net

     377,750        342,299   

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

     254,000        158,176   

Fixed assets, net

     155,340        145,873   

Investments

     42,709        33,813   

Goodwill

     830,246        811,766   

Other intangible assets, net

     219,059        233,967   

Receivables from related parties

     2,663        15,466   

Other assets

     318,922        290,687   
  

 

 

   

 

 

 

Total assets

   $ 4,811,909      $ 3,991,454   
  

 

 

   

 

 

 

Liabilities, Redeemable Partnership Interest, and Equity

    

Securities loaned

   $ —        $ 117,890   

Accrued compensation

     332,976        303,959   

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

     1,613,337        714,823   

Payables to related parties

     16,831        21,551   

Accounts payable, accrued and other liabilities

     636,188        692,639   

Notes payable and collateralized borrowings

     969,111        840,877   
  

 

 

   

 

 

 

Total liabilities

     3,568,443        2,691,739   

Commitments and contingencies (Note 19)

    

Redeemable partnership interest

     56,441        57,145   

Equity

    

Stockholders’ equity:

    

Class A common stock, par value $0.01 per share; 750,000 and 500,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 289,493 and 255,859 shares issued at September 30, 2016 and December 31, 2015, respectively; and 243,312 and 219,063 shares outstanding at September 30, 2016 and December 31, 2015, respectively

     2,895        2,559   

Class B common stock, par value $0.01 per share; 150,000 and 100,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 34,848 shares issued and outstanding at September 30, 2016 and December 31, 2015, convertible into Class A common stock

     348        348   

Additional paid-in capital

     1,448,601        1,109,000   

Contingent Class A common stock

     44,673        50,095   

Treasury stock, at cost: 46,181 and 36,796 shares of Class A common stock at September 30, 2016 and December 31, 2015, respectively

     (277,443     (212,331

Retained deficit

     (309,544     (273,492

Accumulated other comprehensive income (loss)

     (19,976     (25,056
  

 

 

   

 

 

 

Total stockholders’ equity

     889,554        651,123   

Noncontrolling interest in subsidiaries

     297,471        591,447   
  

 

 

   

 

 

 

Total equity

     1,187,025        1,242,570   
  

 

 

   

 

 

 

Total liabilities, redeemable partnership interest, and equity

   $ 4,811,909      $ 3,991,454   
  

 

 

   

 

 

 

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,
 
     2016      2015      2016      2015  

Revenues:

           

Commissions

   $ 496,265       $ 521,264       $ 1,469,940       $ 1,424,357   

Principal transactions

     76,332         73,841         255,219         238,958   

Real estate management services

     49,373         48,867         140,960         135,997   

Fees from related parties

     6,126         6,609         18,061         19,310   

Data, software and post-trade

     11,834         29,124         36,599         68,344   

Interest income

     2,792         1,387         8,952         6,253   

Other revenues

     783         4,203         4,770         8,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     643,505         685,295         1,934,501         1,901,993   

Expenses:

           

Compensation and employee benefits

     415,697         435,932         1,243,501         1,213,803   

Allocations of net income and grant of exchangeability to limited partnership units and FPUs

     58,771         50,667         132,670         113,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation and employee benefits

     474,468         486,599         1,376,171         1,327,724   

Occupancy and equipment

     46,513         51,300         146,026         157,373   

Fees to related parties

     5,060         4,876         14,803         13,564   

Professional and consulting fees

     15,549         15,201         45,160         53,702   

Communications

     30,568         31,503         92,076         88,550   

Selling and promotion

     22,613         23,370         73,725         70,609   

Commissions and floor brokerage

     8,493         8,865         27,633         25,616   

Interest expense

     15,383         16,944         43,465         51,285   

Other expenses

     19,709         26,802         66,204         75,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     638,356         665,460         1,885,263         1,863,445   

Other income (losses) , net:

           

Gain (loss) on divestiture and sale of investments

     7,044         2,717         7,044         3,396   

Gains (losses) on equity method investments

     683         1,042         1,741         2,678   

Other income (loss)

     91,653         59,728         98,748         92,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (losses), net

     99,380         63,487         107,533         98,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations before income taxes

     104,529         83,322         156,771         136,881   

Provision (benefit) for income taxes

     30,263         28,737         45,651         41,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated net income (loss)

   $ 74,266       $ 54,585       $ 111,120       $ 95,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: Net income (loss) attributable to noncontrolling interest in subsidiaries

     13,384         16,214         20,854         34,053   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common stockholders

   $ 60,882       $ 38,371       $ 90,266       $ 61,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Basic earnings per share

           

Net income (loss) available to common stockholders

   $ 60,882       $ 38,371       $ 90,266       $ 61,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.22       $ 0.15       $ 0.33       $ 0.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted-average shares of common stock outstanding

     278,601         252,354         276,144         239,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted earnings per share

           

Net income (loss) for fully diluted shares

   $ 92,121       $ 58,538       $ 139,683       $ 93,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted earnings per share

   $ 0.21       $ 0.15       $ 0.32       $ 0.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     429,761         394,026         434,713         370,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share of common stock

   $ 0.16       $ 0.14       $ 0.46       $ 0.40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared and paid per share of common stock

   $ 0.16       $ 0.14       $ 0.46       $ 0.40   
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying Notes to the unaudited Condensed Consolidated Financial Statement

are an integral part of these financial statements.

 

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BGC PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016      2015     2016      2015  

Consolidated net income (loss)

   $ 74,266       $ 54,585      $ 111,120       $ 95,826   

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

     417         (8,101     4,534         (15,033

Available for sale securities

     511         (2,607     543         (18,958
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     928         (10,708     5,077         (33,991
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

     75,194         43,877        116,197         61,835   

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

     13,545         15,196        20,851         30,307   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss) attributable to common stockholders

   $ 61,649       $ 28,681      $ 95,346       $ 31,528   
  

 

 

    

 

 

   

 

 

    

 

 

 

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,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Consolidated net income (loss)

   $ 111,120      $ 95,826   

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

    

Fixed asset depreciation and intangible asset amortization

     56,865        62,428   

Employee loan amortization and reserves on employee loans

     44,656        30,861   

Equity-based compensation and allocations of net income to limited partnership units and FPUs

     150,023        128,827   

Deferred compensation expense

     13,287        17,615   

Losses (gains) on equity method investments

     (1,741     (2,678

Amortization of discount (premium) on notes payable

     (2,414     4,427   

Unrealized loss (gain) on marketable securities

     (973     (5,286

Impairment of fixed assets

     3,737        18,800   

Deferred tax provision (benefit)

     (57,915     7,518   

Sublease provision adjustment

     (807     (1,385

Recognition of earn-out and related hedges

     (67,016     (52,917

Realized losses (gains) on marketable securities (see Note 9– “Marketable Securities”)

     (11,792     (31,757

Change in the fair value of contingent consideration

     (18,347     —     

Loss (gain) on sale of cost method investment

     (7,051     —     

Loss (gain) on divestitures

     —          (537

Forfeitures of Class A common stock

     (374     (1,376

Other

     (391     (1,750
  

 

 

   

 

 

 

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

     210,867        268,616   

Decrease (increase) in operating assets:

    

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

     (948,476     153,851   

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

     (140,201     (56,142

Accrued commissions receivable, net

     (19,632     25,229   

Securities borrowed

     —          62,736   

Securities owned

     (179,695     2,106   

Receivables from related parties

     13,544        (3,752

Cash segregated under regulatory requirements

     (3,704     6,995   

Other assets

     9,166        24,963   

Increase (decrease) in operating liabilities:

    

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

     897,494        (211,459

Payables to related parties

     (4,795     9,897   

Securities sold, not yet purchased

     —          (1,526

Securities loaned

     (117,967     54,731   

Accounts payable, accrued and other liabilities

     67,093        (108,178

Accrued compensation

     (31,685     (101,507
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $ (247,991   $ 126,560   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of fixed assets

   $ (36,844   $ (26,816

Capitalization of software development costs

     (17,595     (12,470

Purchase of equity method investments

     (7,612     (981

Payments for acquisitions, net of cash acquired

     (119,212     (170,792

Purchase of marketable securities

     (68,396     —     

Proceeds from sale of marketable securities

     618,090        1,922   

Proceeds from sale of cost method investments

     7,106        —     

Disposal of assets and liabilities held for sale, net

     —          (5,633

Capitalization of trademarks, patent defense and registration costs

     (420     (744
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   $ 375,117      $ (215,514

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—(Continued)

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2016     2015  

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayments of collateralized borrowings

   $ (5,121   $ (3,302

Repayments of convertible notes

     (159,932     —     

Issuance of senior notes, net of deferred issuance costs

     295,768        —     

Issuance of collateralized borrowings, net of deferred issuance costs

     —          27,918   

Earnings distributions

     (60,629     (51,314

Redemption and repurchase of limited partnership interests

     (27,664     (25,182

Dividends to stockholders

     (126,318     (96,087

Repurchase of Class A common stock

     (72,700     (6,786

Cancellation of restricted stock units in satisfaction of withholding tax requirements

     (1,542     (520

Proceeds from issuance of Class A common stock, net of costs

     15,280        —     

Proceeds from exercise of stock options

     86        627   

Repayments of short-term borrowings

     —          5,000   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (142,772     (149,646

Cash and cash equivalents classified as assets held for sale

     —          23,228   

Effect of exchange rate changes on cash and cash equivalents

     2,954        (8,515
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (12,692     (223,887

Cash and cash equivalents at beginning of period

     461,207        648,277   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 448,515      $ 424,390   
  

 

 

   

 

 

 

Supplemental cash information:

    

Cash paid during the period for taxes

   $ 55,196      $ 19,438   

Cash paid during the period for interest

     45,169        45,956   

Supplemental non-cash information:

    

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

   $ 53,754      $ 52,521   

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

     5,857        35,062   

Issuance of Class A common stock upon conversion of convertible notes

     68        150,000   

Shares received for Nasdaq earn-out

     67,016        52,917   

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, 2015

(in thousands, except share amounts)

 

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

Balance, January 1, 2015

  $ 2,202      $ 348      $ 817,158      $ 47,383      $ (200,958   $ (268,920   $ 4,303      $ 180,406      $ 581,922   

Consolidated net income (loss)

    —          —          —          —          —          126,788        —          141,530        268,318   

Other comprehensive gain, net of tax

    —          —          —          —          —          —          (29,359     (3,876     (33,235

Equity-based compensation, 825,996 shares

    8        —          2,909        —          —          —          —          1,454        4,371   

Dividends to common stockholders

    —          —          —          —          —          (131,360     —          —          (131,360

Earnings distributions to limited partnership interests and other noncontrolling interests

    —          —          —          —          —          —          —          (70,538     (70,538

Grant of exchangeability and redemption of limited partnership interests, issuance of 9,445,664 shares

    94        —          141,262        —          —          —          —          75,684        217,040   

Issuance of Class A common stock (net of costs), 129,151 shares

    1        —          860        —          —          —          —          247        1,108   

Redemption of FPUs, 539,275 units

    —          —          —          —          —          —          —          (835     (835

Repurchase of Class A common stock, 1,416,991 shares

    —          —          —          —          (9,371     —          —          (2,743     (12,114

Forfeitures of restricted Class A common stock, 270,422 shares

    —          —          688        —          (2,002     —          —          (387     (1,701

Cantor purchase of Cantor units from BGC Holdings upon redemption of founding/working partner units, 1,775,481 units

    —          —          —          —          —          —          —          6,573        6,573   

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

    —          —          —          —          —          —          —          (80     (80

Issuance of Class A common stock for acquisitions, 1,199,052 shares

    12        —          5,112        (4,579     —          —          —          —          545   

Issuance of contingent shares and limited partnership interests in connection with acquisitions

    —          —          23,104        7,291        —          —          —          8,695        39,090   

Conversion of 8.75% Convertible Notes to Class A common stock, 24,042,599 shares

    240        —          117,178        —          —          —          —          32,582        150,000   

Reclassification of Redeemable noncontrolling interest to noncontrolling interest for GFI Back-End Merger

    —          —          —          —          —          —          —          222,148        222,148   

Purchases of Newmark noncontrolling interest

    —          —          731        —          —          —          —          (1,219     (488

Other

    2        —          (2     —          —          —          —          1,806        1,806   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

  $ 2,559      $ 348      $ 1,109,000      $ 50,095      $ (212,331   $ (273,492   $ (25,056   $ 591,447      $ 1,242,570   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2016

(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
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest in
Subsidiaries
    Total  

Balance, January 1, 2016

  $ 2,559      $ 348      $ 1,109,000      $ 50,095      $ (212,331   $ (273,492   $ (25,056   $ 591,447      $ 1,242,570   

Consolidated net income (loss)

    —          —          —          —          —          90,266        —          20,854        111,120   

Other comprehensive gain, net of tax

    —          —          —          —          —          —          5,080        (3     5,077   

Equity-based compensation, 569,344 shares

    6        —          1,958        —          —          —          —          1,003        2,967   

Dividends to common stockholders

    —          —          —          —          —          (126,318     —          —          (126,318

Earnings distributions to limited partnership interests and other noncontrolling interests

    —          —          —          —          —          —          —          (56,562     (56,562

Grant of exchangeability and redemption of limited partnership interests, issuance of 6,269,630 shares

    63        —          43,803        —          —          —          —          25,788        69,654   

Issuance of Class A common stock (net of costs), 1,933,615 shares

    19        —          13,856        —          —          —          —          3,445        17,320   

Redemption of FPUs, 272,871 units

    —          —          —          —          —          —          —          (1,981     (1,981

Repurchase of Class A common stock, 9,326,182 shares

    —          —          —          —          (64,684     —          —          (17,137     (81,821

Forfeitures of restricted Class A common stock, 59,317 shares

    —          —          132        —          (428     —          —          (78     (374

Forfeitures of limited partnership units issued

    —          —          11,768        —          —          —          —          (11,768     —     

Issuance of Class A common stock for acquisitions, 1,372,952 shares

    13        —          7,575        (6,716     —          —          —          232        1,104   

Issuance of contingent shares and limited partnership interests in connection with acquisitions

    —          —          2,486        1,294        —          —          —          988        4,768   

Conversion of 4.50% Convertible Notes to Class A common stock, 6,909 shares

    —          —          54        —          —          —          —          14        68   

Completion of GFI Back-End Mergers and Issuance of Class A common stock, 23,481,192 shares

    235        —          258,440        —          —          —          —          (258,690     (15

Purchase of Newmark noncontrolling interest

    —          —          184        —          —          —          —          (242     (58

Other

    —          —          (655     —          —          —          —          161        (494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2016

  $ 2,895      $ 348      $ 1,448,601      $ 44,673      $ (277,443   $ (309,544   $ (19,976   $ 297,471      $ 1,187,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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 servicing the financial and real estate markets through its two segments, Financial Services and Real Estate Services. Through its brands, including BGC®, GFI® and R.P. MartinTM, among others, the Company’s Financial Services segment specializes in the brokerage of a broad range of products, including fixed income (rates and credit), foreign exchange, equities, energy and commodities, and futures. It also provides a wide range of services, including trade execution, broker-dealer services, clearing, trade compression, post trade, 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 FENICS®, BGC Trader, BGC Market Data and Capitalab® brands, BGC Partners offers fully electronic brokerage, financial technology solutions, market data, post-trade services and analytics related to select financial instruments and markets.

Newmark Grubb Knight Frank (“NGKF”) is a full-service commercial real estate platform that comprises the Company’s Real Estate Services segment. Under brand names including Newmark Grubb Knight FrankTM, Newmark Cornish & CareyTM, ARA®, Computerized Facility IntegrationTM, Landauer® Valuation & Advisory, and Excess Space Retail Services, Inc®, NGKF offers commercial real estate tenants, owners, investors and developers a wide range of services, including leasing and corporate advisory, investment sales, and real estate finance, consulting, project and development management, and property and facilities management.

On February 26, 2015, the Company successfully completed a tender offer to acquire shares of common stock, par value $0.01 per share, of GFI Group Inc. (“GFI”) for $6.10 per share in cash and accepted for purchase 54.3 million shares (the “Tendered Shares”) tendered to the Company pursuant to its offer. The Tendered Shares, together with the 17.1 million shares already owned by the Company, represented approximately 56% of GFI’s outstanding shares. On April 28, 2015, a subsidiary of BGC purchased approximately 43.0 million newly issued shares of GFI’s common stock at the price of $5.81 per share for an aggregate purchase price of $250 million, which increased the Company’s ownership in GFI to approximately 67.0%. The purchase price was paid to GFI in the form of a note due on June 19, 2018 that bore an interest rate of LIBOR plus 200 basis points.

On January 12, 2016, the Company, Jersey Partners, Inc. (“JPI”), New JP Inc. (“New JPI”), Michael A. Gooch, Colin Heffron, and certain subsidiaries of JPI and the Company closed on a previously agreed upon merger. This merger provided for the acquisition of JPI by BGC (the “JPI Merger”) as provided for by a merger agreement dated December 22, 2015. Shortly following the completion of the JPI Merger, a subsidiary of the Company merged with and into GFI pursuant to a short-form merger under Delaware law, with GFI continuing as the surviving entity (the “GFI Merger” and, together with the JPI Merger, the “Back-End Mergers”). The Back-End Mergers allowed the Company to acquire the remaining approximately 33% of the outstanding shares of GFI common stock that it did not already own. Following the closing of the Back-End Mergers, the Company and its affiliates now own 100% of the outstanding shares of GFI’s common stock.

GFI is a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets. GFI serves institutional clients in operating electronic and hybrid markets for cash and derivative products across multiple asset classes.

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, Charlotte, Chicago, Copenhagen, Dallas, Denver, Dubai, Geneva, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Philadelphia, Rio de Janeiro, San Francisco, Santa Clara, São Paulo, Seoul, Shanghai, Singapore, Sydney, Tokyo, Toronto and Washington, D.C., and over 50 other offices.

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.

 

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During the three months ended March 31, 2016, the Company changed the line item formerly known as “Market data and software solutions” to “Data, software and post-trade.” Reclassifications have been made to previously reported amounts to conform to the current presentation.

In addition, for the three and nine months ended September 30, 2015, the Company has made reclassifications to previously reported amounts related to GFI to conform to the current presentation for the line items “Compensation and employee benefits” and “Professional and consulting fees.”

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 (loss), 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.

Recently Adopted Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendment eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the consolidation analysis performed on certain types of legal entities. The guidance was effective beginning January 1, 2016 and early adoption was permitted. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest, which relates to simplifying the presentation of debt issuance costs. This ASU requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update were effective for the annual period beginning January 1, 2016 for the Company. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU requires adjustments to provisional amounts that are identified during the measurement period of a business combination to be recognized in the reporting period in which the adjustment amounts are determined. Acquirers are no longer required to revise comparative information for prior periods as if the accounting for the business combination had been completed as of the acquisition date. The guidance was effective beginning January 1, 2016. The adoption of this FASB guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. The ASU will replace certain existing revenue recognition guidance. The guidance, as stated in ASU No. 2014-09, was initially effective beginning on January 1, 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers—Deferral of Effective Date, which defers the effective date by one year, with early adoption on the original effective date permitted. The standard permits the use of either the retrospective or cumulative effect transition method. Management is currently evaluating the impact of the new guidance on the Company’s unaudited condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which relates to disclosure of uncertainties about an entity’s ability to continue as a going concern. This ASU provides additional guidance on management’s responsibility to evaluate the condition of an entity and the required disclosures based on this assessment. The amendments in this update are effective for the annual period ending after December 15, 2016, and early application is permitted. The adoption of this FASB guidance would not impact the Company’s unaudited condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income (loss) unless the investments qualify for the new practicability exception. Entities will also have to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income (loss). In addition, entities will be required to present enhanced disclosures of financial assets and financial liabilities. The guidance is effective beginning January 1, 2018, with early adoption of certain provisions of the ASU permitted. Management is currently evaluating the impact of the new guidance on the Company’s unaudited condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures.

 

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Accounting guidance for lessors is largely unchanged. The guidance is effective beginning January 1, 2019, with early adoption permitted. Management is currently evaluating the impact of the new guidance on the Company’s unaudited condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2017, and early adoption is permitted. Management is currently evaluating the impact of the new guidance on the Company’s unaudited condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments, which makes changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2018 and will require adoption on a retrospective basis. Management is currently evaluating the impact of the new guidance on the Company’s unaudited condensed consolidated financial statements.

 

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 (“FPUs”) 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.

Founding/working partner units are held by limited partners who are employees and generally receive quarterly allocations of net income. 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 component of compensation expense under “Allocations of net income and grant of exchangeability to limited partnership units and FPUs” 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, which are cash distributed and generally are 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 component of compensation expense under “Allocations of net income and grant of exchangeability to limited partnership units and FPUs” in the Company’s unaudited condensed consolidated statements of operations. From time to time, the Company issues limited partnership units as part of the consideration for acquisitions; these units are not entitled to a distribution of earnings.

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.”

The Company has also awarded certain preferred partnership units (“Preferred Units”). Each quarter, the net profits of BGC Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation (the “Preferred Distribution”). These allocations are deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units and are generally contingent upon services being provided by the unit holder. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into the Company’s Class A common stock and are only entitled to the Preferred

 

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Distribution, and accordingly they are not included in the Company’s fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under “Allocations of net income and grant of exchangeability to limited partnership units and FPUs” in the Company’s unaudited condensed consolidated statements of operations. After deduction of the Preferred Distribution, the remaining partnership units generally receive quarterly allocations of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries.

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 (loss), which are cash distributed on a quarterly basis and are reflected as a component of “Net income (loss) 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). Because they are included in the Company’s fully diluted share count, if dilutive, 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 (loss) 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 FPUs, limited partnership units and Cantor units is allocated to Cantor and reflected as a component of “Net income (loss) attributable to noncontrolling interest in subsidiaries” in the Company’s unaudited condensed consolidated statements of operations. In subsequent quarters in which the Company has net income, the initial allocation of income to the limited partnership interests is to “Net income (loss) attributable to noncontrolling interests in subsidiaries,” to recover any losses taken in earlier quarters, with the remaining income allocated to the limited partnership interests. This income (loss) allocation process has no impact on the net income (loss) allocated to common stockholders.

 

3. Acquisitions

GFI

On February 26, 2015, the Company successfully completed its tender offer to acquire shares of common stock, par value $0.01 per share, of GFI for $6.10 per share in cash and accepted for purchase 54.3 million shares tendered to the Company pursuant to the offer. The Tendered Shares, together with the 17.1 million shares already owned by the Company, represented approximately 56% of the then-outstanding shares of GFI. The Company issued payment for the Tendered Shares on March 4, 2015 in the aggregate amount of $331.1 million. On April 28, 2015, a subsidiary of the Company purchased from GFI approximately 43.0 million new shares at that date’s closing price of $5.81 per share, for an aggregate purchase price of $250 million. The purchase price was paid to GFI in the form of a note due on June 19, 2018 that bears an interest rate of LIBOR plus 200 basis points. The new shares and the note eliminate in consolidation. Following the issuance of the new shares, the Company owned approximately 67% of GFI’s outstanding common stock. On January 12, 2016, the Company completed its acquisition of JPI. Shortly following the JPI Merger, a subsidiary of the Company merged with and into GFI pursuant to a short-form merger under Delaware law, with GFI continuing as the surviving entity. The Company issued approximately 23.5 million shares of its Class A common stock and paid $111.2 million in cash in connection with the closing of the Back-End Mergers. Following the closing of the Back-End Mergers, the Company and its affiliates now own 100% of the outstanding shares of GFI common stock. The excess of total consideration over the fair value of the total net assets acquired, of approximately $450.0 million, has been recorded to goodwill and was allocated to the Company’s Financial Services segment. In addition, “Total revenues” in the Company’s unaudited condensed consolidated statements of operations for the nine months ended September 30, 2016 and September 30, 2015 included $416.2 million and $399.9 million, respectively, related to GFI.

The following tables summarize the components of the purchase consideration transferred and the allocation of the assets acquired and liabilities assumed based on the fair values as of the acquisition date (in millions, except share and per share amounts).

Calculation of purchase consideration transferred

 

     February 26,
2015
 

Cash

   $ 331.1   

Cost value of shares already owned (17,075,464 shares)

     75.1   

Redeemable noncontrolling interest (56,435,876 shares at $6.10 per share)

     344.3   
  

 

 

 

Total purchase consideration and noncontrolling interest (cost value)

     750.5   

Appreciation of shares already owned (17,075,464 shares at $6.10 per share less cost value)

     29.0   
  

 

 

 

Total purchase consideration and noncontrolling interest (fair value)

   $ 779.5   
  

 

 

 

 

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Allocation of the assets acquired and the liabilities assumed

 

     February 26,
2015
 

Cash and cash equivalents

   $ 238.8   

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

     704.8   

Accrued commissions receivable, net

     93.6   

Fixed assets, net

     58.4   

Goodwill

     450.0   

Finite-lived intangible assets:

  

Non-compete agreement

     15.4   

Technology

     39.2   

Customer relationships

     133.8   

Acquired intangibles

     6.7   

Indefinite-lived intangible assets:

  

Trade name

     92.1   

Other assets

     194.2   

Assets held for sale

     208.3   

Short-term borrowings

     (70.0

Accrued compensation

     (141.0

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

     (648.6

Accounts payable, accrued and other liabilities

     (163.3

Notes payable and collateralized borrowings

     (255.3

Liabilities held for sale

     (175.5

Pre-existing noncontrolling interest

     (2.1
  

 

 

 

Total

   $ 779.5   
  

 

 

 

The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of GFI had occurred on January 1, 2015, and as if the Company owned 100% of GFI from the date of acquisition. The unaudited pro forma results are not indicative of operations that would have been achieved, nor are they indicative of future results of operations. The unaudited pro forma results do not reflect any potential cost savings or other operations efficiencies that could result from the acquisition. In addition, the unaudited pro forma condensed combined financial information does not include any adjustments in respect of certain expenses recorded in the GFI financial statements that were associated with non-recurring events unrelated to the acquisition and does not include any adjustments in respect of any potential future sales of assets. However, the unaudited pro forma results below for the nine months ended September 30, 2015 do include non-recurring pro forma adjustments directly related to the acquisition which mainly consisted of: (a) Prior to the acquisition, GFI had entered into an agreement with the CME Group Inc. (“CME”) for CME to acquire GFI. The CME transaction was terminated, and as a result, GFI incurred breakage costs of approximately $24.7 million; (b) Severance and compensation restructuring charges of $22.2 million incurred by GFI; (c) The aggregate of BGC’s and GFI’s professional fees incurred, which totaled $24.9 million; and (d) The $29.0 million gain recorded by the Company upon acquisition of GFI on the 17.1 million shares of GFI common stock owned prior to the completion of the acquisition.

In millions (unaudited)

 

     Nine Months Ended
September 30,
2015
 

Pro forma revenues

   $ 2,065.2   

Pro forma consolidated net income (loss)

   $ 94.2   

 

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Other Acquisitions

On February 26, 2016, the Company completed the acquisition of Rudesill-Pera Multifamily, LLC (“Memphis Multifamily”). Memphis Multifamily is a multifamily brokerage firm operating in Memphis and the Mid-South Region.

On June 17, 2016, the Company completed the acquisition of The CRE Group, Inc. (“CRE Group”). CRE Group is a real estate services provider focused on project management, construction management and Leadership in Energy and Environmental Design (LEED) consulting.

On September 13, 2016, the Company acquired several management agreement contracts from the John Buck Company, LLC and Buck Management Group, LLC. On September 30, 2016, the Company completed the acquisition of Continental Realty, Ltd. (“Continental Realty”), a Columbus, Ohio-based company. Continental Realty specializes in commercial realty brokerage and property management throughout Ohio.

On September 23, 2016 the Company completed the acquisition of Perimeter Markets Inc. (“PMI”). PMI develops and operates institutional and retail alternative marketplaces to provide electronic fixed income trading services in Canada.

The total consideration for acquisitions during the nine months ended September 30, 2016, was approximately $22.6 million in total fair value, comprised of cash and BGC Holdings limited partnership units, of which $8.7 million may be issued contingent on certain targets being met through 2022. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of approximately $20.2 million.

During the three months ended September 30, 2016, an agreement with the sellers of a prior acquisition was entered into, whereby certain consideration was reduced, which resulted in the return to the Company of 1.6 million partnership units (with an acquisition date fair value of $14.9 million), the reduction of future cash earn-outs of $17.3 million and a repayment to the Company of $1.0 million in cash. As a result, the Company recognized $18.3 million (comprised of $17.3 million earn-out reduction and $1.0 million cash received) in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations. These reductions were performance-based.

The results of operations of the Company’s acquisitions have been included in the Company’s unaudited condensed consolidated financial statements subsequent to their respective dates of acquisition. The Company has made a preliminary allocation of the consideration to the assets acquired and liabilities assumed as of the acquisition date, and expects to finalize its analysis with respect to acquisitions within the first year after the completion of the transaction. Therefore, adjustments to preliminary allocations may occur.

 

4. Divestitures

Sales of KGL and KBL

In connection with the successful completion of the tender offer to acquire GFI on February 26, 2015, the Company acquired Kyte Group Limited (“KGL”) which primarily included GFI’s clearing business, and Kyte Broking Limited (“KBL”).

On January 24, 2015, GFI entered into an agreement to sell its 100% equity ownership of KGL, and the transaction was completed in March 2015. The total cash consideration received by the Company was approximately $10.6 million. The loss incurred from the sale of KGL of $0.2 million is included within “Gain (loss) on divestiture and sale of investments” in the Company’s unaudited condensed consolidated statements of operations.

On February 3, 2015, GFI entered into an agreement to sell 100% equity ownership of KBL. In May 2015, the Company completed the sale of KBL. The transaction included total cash consideration of $6.1 million and the Company recorded a gain on the sale of $0.8 million, which is included within “Gain (loss) on divestiture and sale of investments” in the Company’s unaudited condensed consolidated statements of operations. KBL’s operations prior to the completion of the transaction were included in the Company’s unaudited condensed consolidated statements of operations.

Sale of Trayport

In connection with the successful completion of the tender offer to acquire GFI, the Company also acquired GFI’s Trayport business. The Trayport business was GFI’s European electronic energy software business. On December 11, 2015, the Company completed the sale of its Trayport business to Intercontinental Exchange, Inc. (“Intercontinental Exchange” or “ICE”). Under the terms of the purchase agreement, Intercontinental Exchange acquired the Trayport business from the Company in exchange for 2,527,658 ICE common shares issued with respect to the $650.0 million purchase price, which was adjusted at closing. The Company recorded a pre-tax gain on the sale of $391.0 million, net of $10.4 million in fees, which was included within “Gain (loss) on divestiture and sale of investments” in the Company’s consolidated statements of operations for the year ended December 31, 2015. Trayport’s operations prior to the completion of the transaction were included in the Company’s unaudited condensed consolidated statements of operations within the Financial Services segment.

 

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5. 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 (loss) 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 (loss) is allocated to the Company’s outstanding common stock, FPUs, limited partnership units and Cantor units (see Note 2—“Limited Partnership Interests in BGC Holdings”).

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,
 
     2016      2015      2016      2015  

Basic earnings per share:

           

Net income (loss) available to common stockholders

   $ 60,882       $ 38,371       $ 90,266       $ 61,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted-average shares of common stock outstanding

     278,601         252,354         276,144         239,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.22       $ 0.15       $ 0.33       $ 0.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted EPS is calculated utilizing net income (loss) available to 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 17—“Notes Payable, Collateralized and Short-Term Borrowings”), 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 and RSUs. The limited partnership interests generally are potentially exchangeable into shares of Class A common stock and are entitled to remaining earnings after the deduction for the Preferred Distribution; 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,
 
     2016      2015      2016      2015  

Fully diluted earnings per share

           

Net income (loss) available to common stockholders

   $ 60,882       $ 38,371       $ 90,266       $ 61,773   

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

     30,986         17,846         46,119         28,441   

Interest expense on convertible notes, net of tax

     253         2,321         3,298         2,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) for fully diluted shares

   $ 92,121       $ 58,538       $ 139,683       $ 93,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares:

           

Common stock outstanding

     278,601         252,354         276,144         239,856   

Limited partnership interests in BGC Holdings

     147,222         123,221         144,341         119,334   

Convertible notes

     2,121         —           11,495         —     

RSUs (Treasury stock method)

     423         666         425         770   

Other

     1,394         17,785         2,308         10,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted weighted-average shares of common stock outstanding

     429,761         394,026         434,713         370,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully diluted earnings per share

   $ 0.21       $ 0.15       $ 0.32       $ 0.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2016 and 2015, respectively, approximately 1.0 million and 10.1 million potentially dilutive securities were not included in the computation of fully diluted EPS because their effect would have been anti-dilutive. Anti-dilutive securities for the three months ended September 30, 2016 included, on a weighted-average basis, 1.0 million other securities or other contracts to issue shares of common stock. Anti-dilutive securities for the three months ended September 30, 2015 included, on a weighted-average basis, 10.1 million other securities or other contracts to issue shares of common stock. These 10.1 million shares represented the weighted average of the 24.5 million shares that were to be issued for the completion of the Company’s acquisition of GFI.

 

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Additionally, as of September 30, 2016 and 2015, respectively, approximately 3.9 million and 7.0 million shares of contingent Class A common stock and limited partnership units were excluded from the fully diluted EPS computations because the conditions for issuance had not been met by the end of the respective periods.

 

6. Stock Transactions and Unit Redemptions

Class A Common Stock

On June 22, 2016, at the Company’s 2016 Annual Meeting of Stockholders, the stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to increase the number of authorized shares of Class A common stock from 500 million shares to 750 million shares. The Company filed the certificate of amendment on June 23, 2016, and the amendment was effective on that date.

Changes in shares of the Company’s Class A common stock outstanding for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Shares outstanding at beginning of period

     241,292,033         213,656,458         219,063,365         185,108,316   

Share issuances:

           

Exchanges of limited partnership interests1

     2,947,876         2,393,879         6,269,630         6,356,624   

Issuance of Class A common stock for general corporate purposes

     —           —           1,648,000         —     

Vesting of restricted stock units (RSUs)

     81,873         85,698         569,344         734,445   

Acquisitions

     125,111         —           24,854,144         757,287   

Conversion of 8.75% Convertible Notes to Class A common stock

     —           —           —           24,042,599   

Other issuances of Class A common stock

     250,219         56,637         292,524         109,605   

Treasury stock repurchases

     (1,341,947      (100,000      (9,326,182      (841,081

Forfeitures of restricted Class A common stock

     (43,657      (43,624      (59,317      (218,747
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares outstanding at end of period

     243,311,508         216,049,048         243,311,508         216,049,048   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 The issuances related to exchanges of limited partnership interests did not impact the fully diluted number of shares and units outstanding.

Class B Common Stock

On June 22, 2016, at the Company’s 2016 Annual Meeting of Stockholders, the stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to increase the number of authorized shares of Class B common stock from 100 million shares to 150 million shares and to provide that Class B common stock shall be issued only to certain affiliated entities or related persons. The Company filed the certificate of amendment on June 23, 2016, and the amendment was effective on that date.

The Company did not issue any shares of Class B common stock during the three and nine months ended September 30, 2016 and 2015. As of September 30, 2016 and 2015, there were 34,848,107 shares of the Company’s Class B common stock outstanding.

Controlled Equity Offering

The Company has entered into a controlled equity offering (“CEO”) sales agreement with CF&Co (“November 2014 Sales Agreement”), 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 CEO sales agreements are used primarily for redemptions and exchanges of limited partnership interests in BGC Holdings. CF&Co is a wholly owned subsidiary of Cantor and an affiliate of the Company. Under this agreement, the Company has agreed to pay CF&Co 2% of the gross proceeds from the sale of shares. As of September 30, 2016, the Company has sold 12,419,806 shares of Class A common stock under this agreement. For additional information, see Note 13—“Related Party Transactions.”

 

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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. In February 2014, the Company’s Audit Committee authorized such repurchases of stock or units from Cantor, employees and partners. On October 27, 2015, the Company’s Board of Directors and Audit Committee increased the BGC Partners share repurchase and unit redemption authorization to $300 million, which may include purchases from Cantor, its partners or employees or other affiliated persons or entities. As of September 30, 2016, the Company had approximately $168.1 million remaining from its share repurchase and unit redemption authorization. From time to time, the Company may actively continue to repurchase shares and/or redeem units. The table below represents unit redemption and share repurchase activity for the three and nine months ended September 30, 2016:

 

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
 

Redemptions1,2

        

January 1, 2016—March 31, 2016

     775,791       $ 8.59      

April 1, 2016—June 30, 2016

     1,804,365         8.91      

July 1, 2016—September 30, 2016

     2,444,069         8.90      
  

 

 

    

 

 

    

Total Redemptions

     5,024,225       $ 8.85      
  

 

 

    

 

 

    

Repurchases3,4

        

January 1, 2016—March 31, 2016

     7,187,046       $ 8.72      

April 1, 2016—June 30, 2016

     797,189         9.04      

July 1, 2016—July 31, 2016

     52,877         8.78      

August 1, 2016—August 31, 2016

     94,003         8.81      

September 1, 2016—September 30, 2016

     1,195,067         8.91      
  

 

 

    

 

 

    

Total Repurchases

     9,326,182       $ 8.77      
  

 

 

    

 

 

    

 

 

 

Total Redemptions and Repurchases

     14,350,407       $ 8.80       $ 168,103,646   
  

 

 

    

 

 

    

 

 

 

 

1 During the three months ended September 30, 2016, the Company redeemed approximately 2.3 million limited partnership units at an aggregate redemption price of approximately $20.6 million for an average price of $8.90 per unit and approximately 132.7 thousand FPUs at an aggregate redemption price of approximately $1.2 million for an average price of $8.81 per unit. During the three months ended September 30, 2015, the Company redeemed approximately 1.5 million limited partnership units at an aggregate redemption price of approximately $13.6 million for an average price of $9.03 per unit and approximately 54.9 thousand FPUs at an aggregate redemption price of approximately $294.4 thousand for an average price of $5.36 per unit.
2 During the nine months ended September 30, 2016, the Company redeemed approximately 4.8 million limited partnership units at an aggregate redemption price of approximately $42.2 million for an average price of $8.87 per unit and approximately 272.9 thousand FPUs at an aggregate redemption price of approximately $2.3 million for an average price of $8.48 per unit. During the nine months ended September 30, 2015, the Company redeemed approximately 4.8 million limited partnership units at an aggregate redemption price of approximately $42.0 million for an average price of $8.82 per unit and approximately 82.5 thousand FPUs at an aggregate redemption price of approximately $510.2 thousand for an average price of $6.18 per unit.
3 During the three months ended September 30, 2016, the Company repurchased approximately 1.3 million shares of its Class A common stock at an aggregate purchase price of approximately $11.9 million for an average price of $8.90 per share. During the three months ended September 30, 2015, the Company repurchased approximately 100 thousand shares of its Class A common stock at an aggregate purchase price of approximately $900.9 thousand for an average price of $9.01 per share
4 During the nine months ended September 30, 2016, the Company repurchased approximately 9.3 million shares of its Class A common stock at an aggregate purchase price of approximately $81.7 million for an average price of $8.77 per share. During the nine months ended September 30, 2015, the Company repurchased approximately 0.8 million shares of its Class A common stock at an aggregate purchase price of approximately $6.8 million for an average price of $8.07 per share.

The table above represents the gross unit redemptions and share repurchases of the Company’s Class A common stock during the nine months ended September 30, 2016. Approximately 4.3 million of the 5.0 million units above were redeemed using cash from the Company’s CEO program, and therefore did not impact the fully diluted number of shares and units outstanding. The remaining redemptions along with the Class A common stock repurchases resulted in a 10.0 million reduction in the fully diluted share count. This net reduction cost the Company approximately $87.8 million (or $8.76 per share/unit) during the nine months ended September 30, 2016. This reduction partially offset the overall growth in the fully diluted share count which resulted from shares issued for general corporate purposes, acquisitions, equity-based compensation and front office hires.

 

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Redeemable Partnership Interest

The changes in the carrying amount of redeemable partnership interest for the nine months ended September 30, 2016 and 2015 were as follows (in thousands):

 

     Nine Months Ended
September 30,
 
     2016      2015  

Balance at beginning of period

   $ 57,145       $ 59,501   

Consolidated net income allocated to FPUs

     5,588         3,227   

Earnings distributions

     (4,067      —     

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

     —           80   

FPUs exchanged

     (1,890      (842

FPUs redeemed

     (334      (243

Other

     (1      3   
  

 

 

    

 

 

 

Balance at end of period

   $ 56,441       $ 61,726   
  

 

 

    

 

 

 

 

7. Securities Owned and Securities Sold, Not Yet Purchased

Securities owned primarily consist of unencumbered U.S. Treasury bills held for liquidity purposes. Total Securities owned were $212.1 million as of September 30, 2016 and $32.4 million as of December 31, 2015. There were no Securities sold, not yet purchased as of September 30, 2016 and December 31, 2015. For additional information, see Note 12—“Fair Value of Financial Assets and Liabilities.”

 

8. Collateralized Transactions

Securities loaned

As of September 30, 2016, the Company had no Securities loaned transactions. As of December 31, 2015, the Company had Securities loaned transactions of $117.9 million with CF&Co. The market value of the securities lent was $116.3 million. As of December 31, 2015, the cash collateral received from CF&Co bore interest rates ranging from 0.80% to 1.00%. Securities loaned transactions are included in “Securities loaned” in the Company’s unaudited condensed consolidated statements of financial condition.

 

9. Marketable Securities

Marketable securities consist of the Company’s ownership of various investments. The investments had a fair value of $179.9 million and $650.4 million as of September 30, 2016 and December 31, 2015, respectively.

As of September 30, 2016 and December 31, 2015, the Company held Marketable securities classified as trading securities with a market value of $168.1 million and $644.9 million, respectively. These securities are measured at fair value, with any changes in fair value recognized currently in earnings and included in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations. During the three months ended September 30, 2016 and 2015, the Company recognized a net gain (realized and unrealized) of $6.1 million and $4.4 million, respectively, related to the mark-to-market on these shares and any related hedging transactions when applicable. During the nine months ended September 30, 2016 and 2015, the Company recognized a net gain (realized and unrealized) of $12.8 million and $5.3 million, respectively, related to the mark-to-market on these shares and any related hedging transactions when applicable.

In connection with the Company’s sale of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq, Inc. (“Nasdaq,” formerly known as “NASDAQ OMX Group, Inc.”) on June 28, 2013, the Company will receive a remaining earn-out of up to 10,914,717 shares of Nasdaq common stock ratably over the next approximately 11 years, provided that Nasdaq, as a whole, produces at least $25 million in gross revenues each year. During the three months ended September 30, 2016 and 2015, in connection with the Nasdaq earn-out, the Company recognized gains of $67.0 million and $52.9 million, respectively, in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

        As of September 30, 2016 and December 31, 2015, the Company held marketable securities classified as available-for-sale with a market value of $11.8 million and $5.5 million, respectively. These securities are measured at fair value, with unrealized gains or losses included as part of “Other comprehensive income (loss)” in the Company’s unaudited condensed consolidated statements of comprehensive income (loss). During the three months ended September 30, 2016 and 2015, the Company recognized a gain of $0.5 million and $0.1 million, respectively, related to these Marketable securities classified as available-for-sale. During the nine months ended September 30, 2016 and 2015, the Company recognized a loss of $0.7 million and a gain of $12.8 million respectively, related to these Marketable securities classified as available-for-sale. In addition, for the nine months ended September 30, 2015, the Company recorded a $29.0 million gain upon acquisition of GFI on the 17.1 million shares of GFI common stock owned prior to the completion of the acquisition, which were previously classified as available-for-sale marketable securities. The $29.0 million gain previously recorded in “Accumulated other comprehensive income (loss)” was recorded as a gain in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

 

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During the nine months ended September 30, 2016, the Company purchased Marketable securities with a market value of $68.4 million at the time of purchase and sold Marketable securities with a market value of $618.1 million at the time of sale. The majority (or $561.6 million) of the Marketable securities sold during the nine months ended September 30, 2016 was related to the shares of ICE that the Company received for the sale of Trayport in December 2015.

 

10. 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, including derivative contracts into which the Company may enter to minimize the effect of price changes of the Company’s Nasdaq shares and/or ICE shares (see Note 11—“Derivatives”). As of September 30, 2016 and December 31, 2015, Receivables from and payables to broker-dealers, clearing organizations, customers and related broker-dealers consisted of the following (in thousands):

 

     September 30,
2016
     December 31,
2015
 

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

     

Contract values of fails to deliver

   $ 1,603,087       $ 692,530   

Receivables from clearing organizations

     134,079         92,915   

Other receivables from broker-dealers and customers

     14,554         18,252   

Net pending trades

     11,048         6,544   

Open derivative contracts

     1,066         1,999   
  

 

 

    

 

 

 

Total

   $ 1,763,834       $ 812,240   
  

 

 

    

 

 

 

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

     

Contract values of fails to receive

   $ 1,551,527       $ 660,365   

Payables to clearing organizations

     40,096         30,037   

Other payables to broker-dealers and customers

     20,939         23,287   

Open derivative contracts

     775         1,134   
  

 

 

    

 

 

 

Total

   $ 1,613,337       $ 714,823   
  

 

 

    

 

 

 

A portion of these receivables and payables are with Cantor. See Note 13—“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, 2016 have subsequently settled at the contracted amounts.

 

11. Derivatives

In the normal course of operations, the Company enters into derivative contracts. These derivative contracts primarily consist of interest rate swaps, futures, forwards, foreign exchange/commodities options, 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 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

 

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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, 2016      December 31, 2015  

Derivative contract

   Assets      Liabilities      Assets      Liabilities  

Futures

   $ 67       $ 336       $ 39       $ 44   

Interest rate swaps

     338         —           256         —     

Foreign exchange swaps

     607         439         883         375   

Foreign exchange/commodities options

     54         —           —           537   

Forwards

     —           —           821         178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,066       $ 775       $ 1,999       $ 1,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

The notional amounts of these derivative contracts at September 30, 2016 and December 31, 2015 were $11.8 billion and $10.9 billion, respectively. At September 30, 2016, the notional amounts primarily consisted of long futures and short futures of $5.7 billion each. As of September 30, 2016, these notional values of long and short futures contracts were primarily related to fixed income futures in a consolidated VIE acquired in the acquisition of GFI, of which the Company’s exposure to economic loss is approximately $4.3 million.

The interest rate swaps represent matched customer transactions settled through and guaranteed by a central clearing organization. Certain of the Company’s foreign exchange swaps are with Cantor. See Note 13—“Related Party Transactions,” for additional information related to these transactions.

The replacement cost of contracts in a gain position at September 30, 2016 was $1.1 million.

The change in fair value of interest rate swaps, futures, foreign exchange/commodities options and foreign exchange swaps is reported as part of “Principal transactions” in the Company’s unaudited condensed consolidated statements of operations, and the change in fair value of equity options related to the Nasdaq and ICE hedges are included as part of “Other income (loss)” 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, 2016 and 2015 (in thousands):

 

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

Derivative contract

   2016      2015      2016      2015  

Futures

   $ 2,356       $ 2,058       $ 6,824       $ 7,845   

Interest rate swaps

     15         18         28         (57

Foreign exchange swaps

     306         (148      563         (182

Foreign exchange/commodities options

     2,735         1,100         9,292         7,511   

Forwards

     —           (378      152         527   

Equity options

     722         —           4,551         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gain (loss)

   $ 6,134       $ 2,650       $ 21,410       $ 15,644   
  

 

 

    

 

 

    

 

 

    

 

 

 

As described in Note 17—“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”) that contained an embedded conversion feature. The conversion feature met the requirements to be accounted for as an equity instrument, and the Company classified 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 was not subsequently remeasured.

On July 13, 2016, certain holders of the 4.50% Convertible Notes converted $68.0 thousand in principal amount of notes, and upon conversion, the Company delivered 6,909 shares of its Class A common stock to such holders. On July 15, 2016, the Company, upon maturity, repaid the remaining approximately $159.9 million principal amount of its 4.50% Convertible Notes.

Also in connection with the issuance of the 4.50% Convertible Notes, the Company entered into capped call transactions. The capped call transactions met the requirements to be accounted for as equity instruments, and the Company classified 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 were not subsequently remeasured. The capped call transactions expired unexercised on July 13, 2016.

 

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12. Fair Value of Financial Assets and Liabilities

FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

As required by FASB guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under FASB guidance at September 30, 2016 and December 31, 2015 (in thousands):

 

                                                                                                        
     Assets at Fair Value at September 30, 2016  
     Level 1      Level 2      Level 3      Netting and
Collateral
    Total  

Marketable securities

   $ 179,904       $ —         $ —         $ —        $ 179,904   

Government debt

     211,857         —           —           —          211,857   

Securities owned—Equities

     199         —           —           —          199   

Foreign exchange swaps

     —           763         —           (156     607   

Interest rate swaps

     —           340         —           (2     338   

Futures

     —           67         —           —          67   

Foreign exchange/commodities options

     54         —           —           —          54   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 392,014       $ 1,170       $ —         $ (158   $ 393,026   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                                                  
     Liabilities at Fair Value at September 30, 2016  
     Level 1      Level 2      Level 3      Netting and
Collateral
    Total  

Futures

   $ —         $ 336       $ —         $ —        $ 336   

Foreign exchange swaps

     —           595         —           (156     439   

Interest rate swaps

     —           2         —           (2     —     

Contingent consideration

     —           —           49,981         —          49,981   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ —         $ 933       $ 49,981       $ (158   $ 50,756   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                                                  
     Assets at Fair Value at December 31, 2015  
     Level 1      Level 2      Level 3      Netting and
Collateral
    Total  

Marketable securities

   $ 650,315       $ 85       $ —         $ —        $ 650,400   

Government debt

     32,352         —           —           —          32,352   

Securities owned—Equities

     9         —           —           —          9   

Forwards

     —           869         —           (48     821   

Foreign exchange swaps

     —           1,256         —           (373     883   

Interest rate swaps

     —           283         —           (27     256   

Futures

     —           39         —           —          39   

Foreign exchange/commodities options

     309         —           —           (309     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 682,985       $ 2,532       $ —         $ (757   $ 684,760   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
                                                                                                                  
     Liabilities at Fair Value at December 31, 2015  
     Level 1      Level 2      Level 3      Netting and
Collateral
    Total  

Forwards

   $ —         $ 226       $ —         $ (48   $ 178   

Futures

     —           44         —           —          44   

Government debt

     12         —           —           —          12   

Foreign exchange/commodities options

     846         —           —           (309     537   

Foreign exchange swaps

     —           748         —           (373     375   

Interest rate swaps

     —           27         —           (27     —     

Contingent consideration

     —           —           65,043         —          65,043   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 858       $ 1,045       $ 65,043       $ (757   $ 66,189   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Changes in Level 3 contingent consideration measured at fair value on a recurring basis for the three months ended September 30, 2016 are as follows (in thousands):

 

     Opening
Balance
     Total realized
and unrealized
gains (losses)
included in
Net income (loss) (1)
     Unrealized gains
(losses) included
in Other
comprehensive
income (loss)
    Issuances      Settlements     Closing
Balance at
September 30,
2016
     Unrealized gains
(losses) for Level 3
Assets /
Liabilities
Outstanding  at
September 30,
2016
 

Liabilities

                  

Accounts payable, accrued and other liabilities:

                  

Contingent consideration

   $ 62,272       $ 16,570       $ (14   $ 5,631       $ (1,366   $ 49,981       $ (711

 

(1)  Realized and unrealized gains (losses) are reported in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

Changes in Level 3 contingent consideration measured at fair value on a recurring basis for the three months ended September 30, 2015 are as follows (in thousands):

 

     Opening
Balance
     Total realized
and unrealized
gains (losses)
included in
Net income (loss) (1)
    Unrealized gains
(losses) included
in Other
comprehensive
income (loss)
     Issuances      Settlements     Closing
Balance at
September 30,
2015
     Unrealized
gains (losses) for
Level 3

Assets /
Liabilities
Outstanding  at
September 30,
2015
 

Liabilities

                  

Accounts payable, accrued and other liabilities:

                  

Contingent consideration

   $ 77,693       $ (307   $ 184       $ 1,031       $ (2,554   $ 76,293       $ (123

 

(1)  Realized and unrealized gains (losses) are reported in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

Changes in Level 3 contingent consideration measured at fair value on a recurring basis for the nine months ended September 30, 2016 are as follows (in thousands):

 

     Opening
Balance
     Total realized
and unrealized
gains (losses)
included in
Net income (loss) (1)
     Unrealized gains
(losses) included
in Other

comprehensive
income (loss)
     Issuances      Settlements     Closing
Balance at
September 30,
2016
     Unrealized gains
(losses) for Level 3
Assets /
Liabilities
Outstanding  at
September 30,
2016
 

Liabilities

                   

Accounts payable, accrued and other liabilities:

                   

Contingent consideration

   $ 65,043       $ 15,822       $ 131       $ 7,042       $ (6,151   $ 49,981       $ (1,314

 

(1)  Realized and unrealized gains (losses) are reported in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

 

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Table of Contents

Changes in Level 3 contingent consideration measured at fair value on a recurring basis for the nine months ended September 30, 2015 are as follows (in thousands):

 

     Opening
Balance
     Total realized
and unrealized
gains (losses)
included in
Net income (loss) (1)
    Unrealized gains
(losses) included
in Other
comprehensive
income (loss)
     Issuances      Settlements     Closing
Balance at
September 30,
2015
     Unrealized
gains (losses) for
Level 3

Assets /
Liabilities
Outstanding  at
September 30,
2015
 

Liabilities

                  

Accounts payable, accrued and other liabilities:

                  

Contingent consideration

   $ 56,299       $ (1,772   $ 383       $ 25,250       $ (6,645   $ 76,293       $ (1,389

 

(1)  Realized and unrealized gains (losses) are reported in “Other income (loss)” in the Company’s unaudited condensed consolidated statements of operations.

The following tables present information about the offsetting of derivative instruments and collateralized transactions as of September 30, 2016 and December 31, 2015 (in thousands):

 

     September 30, 2016  
     Gross
Amounts
     Gross
Amounts
Offset
     Net Amounts
Presented in
the
Statements of
Financial
Condition
            Net Amount  
            Gross Amounts Not Offset     
            Financial
Instruments
     Cash
Collateral
Received
    

Assets

                 

Foreign exchange swaps

   $ 763       $ 156       $ 607       $ —         $ —         $ 607   

Interest rate swaps

     340         2         338         —           —           338   

Futures

     67         —           67         —           —           67   

Foreign exchange /commodities options

     54         —           54         —           —           54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,224       $ 158       $ 1,066       $ —         $ —         $ 1,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Foreign exchange swaps

   $ 595       $ 156       $ 439       $ —         $ —         $ 439   

Interest rate swaps

     2         2         —           —           —           —     

Futures

     336         —           336         —           —           336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 933       $ 158       $ 775       $ —         $ —         $ 775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
     Gross
Amounts
     Gross
Amounts
Offset
     Net Amounts
Presented in
the
Statements of
Financial
Condition
            Net Amount  
            Gross Amounts Not Offset     
            Financial
Instruments
     Cash
Collateral
Received
    

Assets

                 

Forwards

   $ 869       $ 48       $ 821       $ —         $ —         $ 821   

Foreign exchange swaps

     1,256         373         883         —           —           883   

Interest rate swaps

     283         27         256         —           —           256   

Futures

     39         —           39         —           —           39   

Foreign exchange /commodities options

     309         309         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,756       $ 757       $ 1,999       $ —         $ —         $ 1,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Forwards

   $ 226       $ 48       $ 178       $ —         $ —         $ 178   

Foreign exchange swaps

     748         373         375         —           —           375   

Interest rate swaps

     27         27         —           —           —           —     

Futures

     44         —           44         —           —           44   

Foreign exchange /commodities options

     846         309         537         —           —           537   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,891       $ 757       $ 1,134       $ —         $ —         $ 1,134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Certain of the Company’s foreign exchange swaps are with Cantor. See Note 13—“Related Party Transactions,” for additional information related to these transactions.

Quantitative Information About Level 3 Fair Value Measurements

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):

 

     Fair Value as of
September 30,
2016
     Valuation Technique      Unobservable Inputs      Weighted Average  

Liabilities

           

Accounts payable, accrued and other liabilities:

           

Contingent consideration

   $ 49,981         Present value of expected payments        
 
 
Discount rate
Forecasted financial
information
  
  
  
     6.0 %(a) 

 

(a) The Company’s estimate of contingent consideration as of September 30, 2016 was based on the acquired businesses’ projected future financial performance, including revenues.

 

     Fair Value as of
December 31,
2015
     Valuation Technique      Unobservable Inputs      Weighted Average  

Liabilities

           

Accounts payable, accrued and other liabilities:

           

Contingent consideration

   $ 65,043         Present value of expected payments        
 
 
Discount rate
Forecasted financial
information
  
  
  
     5.6 %(a) 

 

(a) The Company’s estimate of contingent consideration as of December 31, 2015 was based on the acquired businesses’ projected future financial performance, including revenues.

Valuation Processes – Level 3 Measurements

Valuations for contingent consideration are conducted by the Company. Each reporting period, the Company updates unobservable inputs. The Company has a formal process to review changes in fair value for satisfactory explanation.

Sensitivity Analysis – Level 3 Measurements

The significant unobservable inputs used in the fair value of the Company’s contingent consideration are the discount rate and forecasted financial information. Significant increases (decreases) in the discount rate would have resulted in a lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a higher (lower) fair value measurement. As of September 30, 2016 and December 31, 2015, the present value of expected payments related to the Company’s contingent consideration was $50.0 million and $65.0 million, respectively. The undiscounted value of the payments, assuming that all contingencies are met, would be $51.7 million and $76.1 million, respectively.

 

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13. Related Party Transactions

Service Agreements

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

For the three months ended September 30, 2016 and 2015, the Company recognized related party revenues of $6.1 million and $6.6 million, respectively, for the services provided to Cantor. For the nine months ended September 30, 2016 and 2015, the Company recognized related party revenues of $18.1 million and $19.3 million, respectively, for the services provided to Cantor. 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, 2016 and 2015, the Company was charged $12.5 million and $10.9 million, respectively, for the services provided by Cantor and its affiliates, of which $7.5 million and $6.0 million, respectively, were to cover compensation to leased employees for the three months ended September 30, 2016 and 2015. For the nine months ended September 30, 2016 and 2015, the Company was charged $35.2 million and $32.3 million, respectively, for the services provided by Cantor and its affiliates, of which $20.4 million and $18.7 million, respectively, were to cover compensation to leased employees for the nine months ended September 30, 2016 and 2015. 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, 2016, Cantor’s share of the net loss in Tower Bridge was $1.4 million, and for the three months ended September 30, 2015, Cantor’s share of net profit was $0.8 million. For the nine months ended September 30, 2016 and 2015, Cantor’s share of the net profit in Tower Bridge was $1.9 million and $1.7 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.

Equity Method Investment

On June 3, 2014, the Company’s Board of Directors and Audit Committee authorized the purchase of 1,000 Class B Units of LFI Holdings, LLC (“LFI”), a subsidiary of Cantor, representing 10% of the issued and outstanding Class B Units of LFI after giving effect to the transaction. On the same day, the Company completed the acquisition for $6.5 million and was granted an option to purchase an additional 1,000 Class B Units of LFI for an additional $6.5 million. On January 15, 2016, the Company closed on the exercise of its option to acquire additional Class B Units of LFI Holdings, LLC. At the closing, the Company made a payment of $6.5 million to LFI. As a result of the option exercise, the Company has a 20% ownership interest in LFI. LFI is a limited liability corporation headquartered in New York which is a technology infrastructure provider tailored to the financial sector. The Company accounts for the investment using the equity method.

Clearing Agreement with Cantor

The Company receives certain 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.

 

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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, 2016 and December 31, 2015, 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 have agreed to jointly manage the exposure. As a result, the Company is authorized to divide the quarterly allocation of any profit or loss relating to foreign exchange currency hedging between Cantor and the Company. The amount allocated to each party is based on the total net exposure for the Company and Cantor. The ratio of gross exposures of Cantor and the Company is utilized to determine the shares of profit or loss allocated to each for the period. During the three months ended September 30, 2016 and 2015, the Company recognized its share of foreign exchange gains of $684 thousand and $64 thousand, respectively. During the nine months ended September 30, 2016 and 2015, the Company recognized its share of foreign exchange losses of $106 thousand and $19 thousand, respectively. These gains and losses are included as part of “Other expenses” in the Company’s unaudited condensed consolidated statements of operations.

Pursuant to the separation agreement relating to the Company’s acquisition of certain BGC businesses from Cantor in 2008, Cantor has a right, subject to certain conditions, to be the Company’s customer and to pay the lowest commissions paid by any other customer, whether by volume, dollar or other applicable measure. In addition, Cantor has an unlimited right to internally use market data from the Company without any cost. Any future related-party transactions or arrangements between the Company and Cantor are subject to the prior approval by the Company’s Audit Committee. During the three months ended September 30, 2016 and 2015, the Company recorded revenues from Cantor entities of $36.0 thousand and $62.0 thousand, respectively, related to commissions paid to the Company by Cantor. During the nine months ended September 30, 2016 and 2015, the Company recorded revenues from Cantor entities of $116.0 thousand and $266.0 thousand, respectively, related to commissions paid to the Company by Cantor.

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

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 by the Company 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 policies related 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, 2016 and December 31, 2015, the Company did not have any investments in the program.

On June 5, 2015, the Company entered into an agreement with Cantor providing Cantor, CF Group Management, Inc. (“CFGM”) and other Cantor affiliates entitled to hold Class B common stock the right to exchange from time to time, on a one-to-one basis, subject to adjustment, up to an aggregate of 34,649,693 shares of Class A common stock now owned or subsequently acquired by such Cantor entities for up to an aggregate of 34,649,693 shares of Class B common stock. Such shares of Class B common stock, which currently can be acquired upon the exchange of exchangeable limited partnership units owned in BGC Holdings, are already included in the Company’s fully diluted share count and will not increase Cantor’s current maximum potential voting power in the common equity. The exchange agreement will enable the Cantor entities to acquire the same number of shares of Class B common stock that they are already entitled to acquire without having to exchange its exchangeable limited partnership units in BGC Holdings. The Company’s Audit Committee and full Board of Directors determined that it was in the best interests of the Company and its stockholders to approve the exchange agreement because it will help ensure that Cantor retains its exchangeable limited partnership units in BGC Holdings, which is the same partnership in which the Company’s partner employees participate, thus continuing to align the interests of Cantor with those of the partner employees.

Under the exchange agreement, Cantor and CFGM have the right to exchange 14,850,946 shares of Class A common stock owned by them as of September 30, 2016 (including the remaining shares of Class A common stock held by Cantor from the exchange of convertible notes for 24,042,599 shares of Class A common stock on April 13, 2015) for the same number of shares of Class B common stock. Cantor would also have the right to exchange any shares of Class A common stock subsequently acquired by it for shares of Class B common stock, up to 34,649,693 shares of Class B common stock.

The Company and Cantor have agreed that any shares of Class B common stock issued in connection with the exchange agreement would be deducted from the aggregate number of shares of Class B common stock that may be issued to the Cantor entities upon exchange of exchangeable limited partnership units in BGC Holdings. Accordingly, the Cantor entities will not be entitled to receive any more shares of Class B common stock under this agreement than they were previously eligible to receive upon exchange of exchangeable limited partnership units.

 

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On June 23, 2015, the Audit Committee of the Company authorized management to enter into a revolving credit facility with Cantor of up to $150 million in aggregate principal amount pursuant to which Cantor or BGC would be entitled to borrow funds from each other from time to time. The outstanding balances would bear interest at the higher of the borrower’s or the lender’s short-term borrowing rate then in effect, plus 1%. On October 1, 2015, the Company borrowed $100.0 million under this facility (the “Cantor Loan”). The Company did not have any interest expense related to the Cantor Loan for the three and nine months ended September 30, 2016 or 2015. The Cantor Loan was repaid on December 31, 2015. As of September 30, 2016, there were no borrowings outstanding under this facility.

On February 9, 2016, the Audit Committee of the Board of Directors authorized the Company to enter into an arrangement with Cantor in which the Company would provide dedicated development services to Cantor at a cost to the Company not to exceed $1.4 million per year for the purpose of Cantor developing the capacity to provide quotations in certain securities from time to time. The services are terminable by either party at any time and will be provided on the terms and conditions set forth in the existing Administrative Services Agreement. The Company did not provide any development services to Cantor in the three or nine months ended September 30, 2016.

In July 2016, the Audit Committee of the Company authorized the Company to provide real estate and related services, including real estate advice, brokerage, property or facilities management, appraisals and valuations and other services, to Cantor on rates and terms no less favorable to the Company than those charged to third-party customers. The Company and Cantor expect to enter into these arrangements from time to time. The Company did not provide any such real estate and related services in the three and nine months ended September 30, 2016.

Receivables from and Payables to Related Broker-Dealers

Amounts due to or from Cantor and Freedom International Brokerage, one of the Company’s equity method investments, 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, 2016 and December 31, 2015, the Company had receivables from Freedom International Brokerage of $1.8 million and $4.1 million, respectively. As of September 30, 2016 and December 31, 2015, the Company had $0.6 million and $0.9 million, respectively, in receivables from Cantor related to open derivative contracts. As of September 30, 2016 and December 31, 2015, the Company had $0.4 million and $0.4 million, respectively, in payables to Cantor related to open derivative contracts. Additionally, as of December 31, 2015, the Company had $4.6 million in payables to Cantor related to fails and equity trades pending settlement. As of September 30, 2016, the Company did not have any payables to Cantor related to fails and pending trades.

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

The Company has entered into various agreements with certain 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.

As of September 30, 2016 and December 31, 2015, the aggregate balance of employee loans, net of reserve, was $254.0 million and $158.2 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, 2016 and 2015 was $23.7 million and $11.1 million, respectively. Compensation expense for the above-mentioned employee loans for the nine months ended September 30, 2016 and 2015 was $44.7 million and $30.9 million, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations.

8.75% Convertible Notes

On April 1, 2010, BGC Holdings issued an aggregate of $150.0 million principal amount of 8.75% Convertible Senior Notes due 2015 (the “8.75% Convertible Notes”) to Cantor in a private placement transaction. The Company used the proceeds of the 8.75%

 

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Convertible Notes to repay at maturity $150.0 million aggregate principal amount of Senior Notes due April 1, 2010. On April 13, 2015, the Company’s 8.75% Convertible Notes, due April 15, 2015, were fully converted into 24,042,599 shares of the Company’s Class A common stock, par value $0.01 per share, and the shares were issued to Cantor as settlement of the notes. The Company did not record any interest expense related to the 8.75% Convertible Notes for the three months ended September 30, 2015. The Company recorded interest expense related to the 8.75% Convertible Notes of $3.8 million for the nine months ended September 30, 2015. See Note 17—“Notes Payable, Collateralized and Short-Term Borrowings,” for more information. On June 15, 2015, the Company filed a resale registration statement on Form S-3 pursuant to which 24,042,599 shares of Class A common stock may be sold from time to time by Cantor or by certain of its pledgees, donees, distributees, counterparties, transferees or other successors in interest of the shares, including banks or other financial institutions which may enter into stock pledge, stock loan or other financing transactions with Cantor or its affiliates, as well as by their respective pledgees, donees, distributees, counterparties, transferees or other successors in interest.

Repurchases from Cantor

On February 23, 2016, the Company purchased from Cantor 5,000,000 shares of the Company’s Class A common stock at a price of $8.72 per share, the closing price on the date of the transaction. This transaction was included in the Company’s stock repurchase authorization and was approved by the Audit Committee of the Board of Directors.

Controlled Equity Offerings and Other Transactions with CF&Co

As discussed in Note 6—“Stock Transactions and Unit Redemptions,” the Company has entered into the November 2014 Sales Agreements with CF&Co, as the Company’s sales agent. During the three months ended September 30, 2016, the Company sold 2.3 million shares under the November 2014 Sales Agreement for aggregate proceeds of $20.7 million, at a weighted-average price of $9.05 per share. For the three months ended September 30, 2016 and 2015, the Company was charged approximately $0.4 million and $0.3 million, respectively, for services provided by CF&Co related to the Company’s November 2014 Sales Agreement. During the nine months ended September 30, 2016, the Company sold 6.0 million shares under the November 2014 Sales Agreement for aggregate proceeds of $54.4 million, at a weighted-average price of $9.12 per share. For the nine months ended September 30, 2016 and 2015, the Company was charged approximately $1.1 million and $0.8 million, respectively, for services provided by CF&Co related to the Company’s November 2014 Sales Agreement. 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 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 October 3, 2014, management was granted approval by our Board of Directors and Audit Committee to enter into stock loan transactions with CF&Co utilizing shares of Nasdaq stock or other equities. Such stock loan transactions will bear market terms and rates. As of September 30, 2016, the Company had no Securities loaned transactions with CF&Co.

On February 26, 2015, the Company completed the tender offer for GFI shares. In connection with the acquisition of GFI, during the three months ended March 31, 2015, the Company recorded advisory fees of $7.1 million payable to CF&Co. These fees were included in “Professional and Consulting Fees” in the Company’s unaudited condensed consolidated statements of operations.

On May 7, 2015, GFI retained CF&Co to assist it in the sale of Trayport. During the year ended December 31, 2015, the Company recorded advisory fees of $5.1 million payable to CF&Co in connection with the sale of Trayport. These fees were netted against the gain on sale in “Gain (loss) on divestures and sale of investments” in the Company’s consolidated statements of operations.

On May 27, 2016, the Company issued an aggregate of $300.0 million principal amount of 5.125% Senior Notes due 2021 (the “5.125% Senior Notes”). In connection with this issuance of 5.125% Senior Notes, the Company recorded approximately $0.5 million in underwriting fees payable to CF&Co and $18 thousand to CastleOak Securities, L.P. These fees were recorded as a deduction from the carrying amount of the debt liability, which is amortized as interest expense over the term of the notes. Cantor Fitzgerald Securities, an affiliate of the Company, purchased $15 million of such senior notes.

Under rules adopted by the Commodity Futures Trading Commission (the “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 foreign-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. There have been no payments made pursuant to this arrangement.

 

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Transactions with Cantor Commercial Real Estate Company, L.P.

On October 29, 2013, the Audit Committee of the Board of Directors authorized the Company to enter into agreements from time to time with Cantor and/or its affiliates, including Cantor Commercial Real Estate Company, L.P. (“CCRE”), to provide services, including finding and reviewing suitable acquisition or partner candidates, structuring transactions, negotiating and due diligence services, in connection with the Company’s acquisition and other business strategies in commercial real estate and other businesses. Such services are provided at fees not to exceed the fully-allocated cost of such services, plus 10%. In connection with this agreement, the Company did not recognize any expense for the three and nine months ended September 30, 2016 and 2015.

The Company also has a referral agreement in place with CCRE, in which the Company’s brokers are incentivized to refer business to CCRE through a revenue-share agreement. In connection with this revenue-share agreement, the Company recognized revenues of $3.8 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively. The Company recognized revenues of $5.6 million and $0.7 million for the nine months ended September 30, 2016 and 2015, respectively. This revenue was recorded as part of “Commissions” in the Company’s unaudited condensed consolidated statements of operations.

The Company also has a revenue-share agreement with CCRE, in which the Company pays CCRE for referrals for leasing or other services. In connection with this agreement, the Company paid $0.1 million and $0.1 million to CCRE for the three months ended September 30, 2016 and 2015, respectively. The Company paid $0.4 million and $0.3 million to CCRE for the nine months ended September 30, 2016 and 2015, respectively.

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 FPUs redeemed by BGC Holdings upon termination or bankruptcy of the founding/working partner. In addition, pursuant to the Sixth Amendment to the BGC Holdings Limited Partnership Agreement (the “Sixth Amendment”), where either current, terminating, or terminated partners are permitted by the Company to exchange any portion of their FPUs and Cantor consents to such exchangeability, the Company shall offer to Cantor the opportunity for Cantor to purchase the same number of new exchangeable limited partnership interests (Cantor units) in BGC Holdings at the price that Cantor would have paid for the FPUs had the Company redeemed them. Any such Cantor units purchased by Cantor are currently exchangeable for up to 34,649,693 shares of Class B common stock or, at Cantor’s election or if there are no such additional 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).

On November 4, 2015, the Company issued exchange rights with respect to, and Cantor purchased, in transactions exempt from registration pursuant to Section 4(a)(2) of the Securities Act, an aggregate of 1,775,481 exchangeable limited partnership units in BGC Holdings, as follows: In connection with the redemption by BGC Holdings of an aggregate of 588,356 non-exchangeable founding partner units from founding partners of BGC Holdings for an aggregate consideration of $2,296,801, Cantor purchased 554,196 exchangeable limited partnership units from BGC Holdings for an aggregate of $2,115,306 (after offset of a founding partner’s $46,289 debt due to Cantor). In addition, pursuant to the Sixth Amendment, on November 4, 2015, Cantor purchased 1,221,285 exchangeable limited partnership units from BGC Holdings for an aggregate consideration of $4,457,436 in connection with the grant of exchangeability and exchange of 1,221,285 founding partner units. Exchangeable limited partnership units held by Cantor are exchangeable by Cantor at any time on a one-for-one basis (subject to adjustment) for shares of Class A common stock of the Company.

As of September 30, 2016, there were 1,166,503 FPUs remaining in which BGC Holdings had the right to redeem or exchange and Cantor had the right to purchase an equivalent number of Cantor units.

Transactions with Executive Officers and Directors

On May 9, 2014, partners of BGC Holdings approved the Tenth Amendment to the Agreement of Limited Partnership of BGC Holdings (the “Tenth Amendment”) effective as of May 9, 2014. In order to facilitate partner compensation and for other corporate purposes, the Tenth Amendment creates a new class of partnership units (“NPSUs”).

NPSUs granted to Executive Officers are not entitled to participate in partnership distributions, will not be allocated any items of profit or loss, may not be made exchangeable into shares of the Company’s Class A common stock and will not be included in the fully diluted share count. Subject to the approval of the Compensation Committee or its designee, such N Units may be converted into the underlying unit type (i.e. an NREU will be converted into an REU) and will then participate in partnership distributions, subject to terms and conditions determined by the general partner of BGC Holdings in its sole discretion, including that the recipient continue to provide substantial services to the Company and comply with his or her partnership obligations. The Tenth Amendment was approved by the Audit Committee of the Board of Directors and by the full Board of Directors.

 

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On January 1, 2015, (i) 1,000,000 of Mr. Lutnick’s (the Company’s Chief Executive Officer) NPSUs converted into 550,000 PSUs and 450,000 PPSUs, with respect to which Mr. Lutnick was offered the right to exchange 239,739 PSUs and 196,150 PPSUs for shares and cash, which he waived at that time under the Company’s policy, and (ii) 142,857 of Mr. Merkel’s (the Company’s Executive Vice President, General Counsel and Secretary) NPSUs converted into 78,571 PSUs and 64,286 PPSUs, of which 5,607 PSUs and 4,588 PPSUs were made exchangeable and repurchased by the Company at the average price of shares of Class A common stock sold under the Company’s controlled equity offering less 2%, or $91,558.

On January 30, 2015, the Compensation Committee granted 4,000,000 NPSUs to Mr. Lutnick and 1,000,000 NPSUs to Mr. Lynn (the Company’s President). These awards convert 25% per year on January 1 of each year beginning January 1, 2016 such that 1,000,000 of Mr. Lutnick’s NPSUs and 250,000 of Mr. Lynn’s NPSUs may be converted into an equivalent number of non-exchangeable PSUs/PPSUs for Mr. Lutnick and non-exchangeable LPUs/PLPUs for Mr. Lynn on each conversion date, subject to the approval of the Compensation Committee for all such conversions beginning in 2016. The grant of exchange rights with respect to such PSUs/PPSUs and LPUs/PLPUs will be determined in accordance with the Company’s practices when determining discretionary bonuses or awards, and any grants of exchangeability shall be subject to the approval of the Compensation Committee. Upon the signing of any agreement that would result in a “Change in Control” (as defined in the Amended and Restated Change in Control Agreement entered into by Mr. Lutnick and the applicable Deed of Adherence entered into by Mr. Lynn), (1) any unvested NPSUs held by Mr. Lutnick or Mr. Lynn shall convert in full and automatically be converted into exchangeable PSUs/PPSUs or LPUs/PLPUs (i.e., such PSUs and LPUs shall be exchangeable for shares of Class A common stock and PPSUs and PLPUs shall be exchangeable for cash), and (2) any non-exchangeable PSUs/PPSUs held by Mr. Lutnick and non-exchangeable LPUs/PLPUs held by Mr. Lynn shall become immediately exchangeable, which exchangeability may be exercised in connection with such “Change in Control,” except that, with respect to (1) and (2), 9.75% of Mr. Lynn’s LPUs/PLPUs shall be deemed to be redeemed for zero in proportion to such exchanges of LPUs/PLPUs in accordance with the customary LPU/PLPU structure.

On January 30, 2015, the Compensation Committee approved the acceleration of the lapse of restrictions on transferability with respect to an aggregate of 598,904 shares of restricted stock held by our executive officers as follows: Mr. Lynn, 455,733 shares; Mr. Merkel, 16,354 shares; Mr. Windeatt (the Company’s Chief Operating Officer), 95,148 shares; and Mr. Sadler (the Company’s former Chief Financial Officer), 31,669 shares. On January 30, 2015, these executives sold these shares to the Company at $7.83 per share. In connection with such sales, an aggregate of 87,410 of LPUs were redeemed for zero as follows: Mr. Lynn, 68,381 units; Mr. Windeatt, 14,277 units; and Mr. Sadler 4,752 units.

On July 27, 2015, the Compensation Committee granted exchange rights with respect to 8,536 PSUs and 6,983 PPSUs that were issued pursuant to converted NPSUs that were awarded to Mr. Merkel in May 2014. On October 29, 2015, the Company repurchased (i) the 8,536 PSUs at a price of $8.34 per share, the closing price of the Class A common stock on the date the Compensation Committee approved the transaction, and (ii) the 6,983 PPSUs at a price of $9.15 per share, the closing price of the Class A common stock on December 31, 2014.

On February 24, 2016, the Compensation Committee granted 1,500,000 NPSUs to Mr. Lutnick, 2,000,000 NPSUs to Mr. Lynn, 1,000,000 NPSUs to Mr. Merkel and 75,000 NPSUs to Mr. Windeatt. Conversion of NPSUs into PSUs/PPSUs for Messrs. Lutnick and Merkel and into LPUs/PLPUs for Messrs. Lynn and Windeatt may be (i) 25% per year with respect to NPSUs granted in 2016; (ii) 25% of the previously awarded NPSUs currently held by Messrs. Lutnick and Lynn based upon the original issuance date (the first 25% having already been converted); and (iii) 25% per year of the current balance of NPSUs previously awarded to Mr. Merkel, provided that, with respect to all of the foregoing, such future conversions are subject to the approval of the Compensation Committee each year. The grant of exchange rights with respect to such PSUs/PPSUs and LPUs/PLPUs will be determined in accordance with the Company’s practices when determining discretionary bonuses or awards, and any grants of exchangeability shall be subject to the approval of the Compensation Committee.

On February 24, 2016, the Compensation Committee granted 750,000 non-exchangeable PSUs and 291,667 PPSUs (which may not be made exchangeable) to Mr. Lutnick; 621,429 non-exchangeable LPUs and 241,667 PLPUs (which may not be made exchangeable) to Mr. Lynn; 114,583 non-exchangeable PSUs and 93,750 PPSUs (which may not be made exchangeable) to Mr. Merkel; 105,188 non-exchangeable LPUs and 40,906 non-exchangeable PLPUs (which may not be made exchangeable) to Mr. Windeatt; and 55,688 non-exchangeable LPUs and 21,656 non-exchangeable PLPUs (which may not be made exchangeable) to Mr. Sadler.

On February 24, 2016, the Compensation Committee approved the acceleration of the lapse of restrictions on transferability with respect to 612,958 shares of restricted stock held by our executive officers as follows: Mr. Lynn, 431,782 shares; Mr. Merkel, 150,382 shares; and Mr. Sadler, 30,794 shares. On February 24, 2016, Messrs. Lynn and Sadler sold these shares to the Company at $8.40 per share, and Mr. Merkel sold 120,000 of such shares to the Company at $8.40 per share. In connection with such transaction, 64,787 of Mr. Lynn’s and 4,621 of Mr. Sadler’s partnership units were redeemed for zero.

 

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In February 2016, the Company granted exchange rights and/or released transfer restrictions with respect to 2,127,648 rights available to Mr. Lutnick with respect to some of his non-exchangeable limited partnership units (which amount included the lapse of restrictions with respect to 235,357 shares of restricted stock held by him), which were all of such rights available to him at such time. Mr. Lutnick has not transferred or exchanged such shares or units as of the date hereof.

On March 9, 2016, Mr. Lutnick exercised an employee stock option with respect to 250,000 shares of Class A common stock at an exercise price of $8.42 per share. The net exercise of the option resulted in 17,403 shares of the Company’s Class A common stock being issued to Mr. Lutnick.

In July 2016, the Audit Committee authorized the purchase by Mr. Lutnick’s retirement plan of up to $350,000 in Class A common stock at the closing price on the date of purchase. 36,405 shares of Class A common stock were purchased by the plan on August 16, 2016, at $8.77 per share, the closing price on the date of purchase.

On September 30, 2016, Mr. Merkel elected to sell, and the Company agreed to purchase, an aggregate of 16,634 shares of the Company’s Class A common stock at a price of $8.75 per share, the closing price of the Company’s Class A common stock on such date. On September 30, 2016, certain trusts for the benefit of Mr. Merkel’s immediate family, of which Mr. Merkel’s spouse is the sole trustee of each trust and Mr. Merkel has the power to remove and replace such trustee, elected to sell, and the Company agreed to purchase, an aggregate of 4,131 shares of the Company’s Class A common stock on the same terms. These transactions were included in the Company’s stock repurchase authorization and authorized by the Audit Committee of the Board of Directors.

Transactions with Relief Fund

During the year ended December 31, 2015, the Company made an interest-free loan to the Relief Fund for $1.0 million in connection with the Company’s annual Charity Day. As a result of the loan, the Relief Fund issued a promissory note to the Company in the aggregate principal amount of $1.0 million due on August 4, 2016. On March 2, 2016, the promissory note was canceled in connection with charitable contribution commitments related to the Company’s annual Charity Day.

During the year ended December 31, 2015, the Company committed to make charitable contributions to the Relief Fund in the amount of $40.0 million, which the Company recorded in “Other expenses” in the Company’s unaudited condensed consolidated statements of operations for the year ended December 31, 2015. As of September 30, 2016, the remaining liability associated with this commitment was $37.9 million, which is included in “Accounts payable, accrued and other liabilities” in the Company’s unaudited condensed consolidated statements of financial condition.

On February 23, 2016, the Company purchased from the Relief Fund 970,639 shares of the Company’s Class A common stock at a price of $8.72 per share, the closing price on the date of the transaction.

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; such arrangements are proportionally and on the same terms as similar arrangements between Aqua and Cantor. On October 27, 2015, the Company’s Board of Directors and Audit Committee increased the authorized amount by an additional $4.0 million, to $16.2 million. 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 the three months ended September 30, 2016, the Company did not make any cash contributions to Aqua. During the three months ended September 30, 2015, the Company made $0.3 million, in cash contributions to Aqua. During the nine months ended September 30, 2016 and 2015, the Company made $1.1 million and $1.0 million, respectively, in cash contributions to Aqua. These contributions are recorded as part of “Investments” in the Company’s unaudited condensed consolidated statements of financial condition.

The Company has also entered into a Subordinated Loan Agreement with Aqua, whereby the Company loaned Aqua the principal sum of $980 thousand. The scheduled maturity date on the subordinated loan is September 1, 2018, 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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14. Investments

Equity Method and Similar Investments

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Equity method investments

   $ 41,405       $ 32,277   

Cost method investments

     1,304         1,536   
  

 

 

    

 

 

 
   $ 42,709       $ 33,813   
  

 

 

    

 

 

 

The Company recognized gains of $0.7 million and $1.0 million related to its equity method investments for the three months ended September 30, 2016 and 2015, respectively. The Company recognized gains of $1.7 million related to its equity method investments for both the nine months ended September 30, 2016 and 2015. The Company’s share of the gains or losses is reflected in “Gains (losses) on equity method investments” in the Company’s unaudited condensed consolidated statements of operations. As a result of the GFI acquisition, the Company also had certain investments in brokerage businesses in which the Company had a contractual right to receive a percentage of revenues, less certain direct expenses. The Company accounted for these investments in a manner similar to the equity method of accounting. The sale of KBL (see Note 4–“Divestitures”) in May 2015 included these investments. Through the date of sale, the Company’s share of gain on these investments was $1.0 million. The Company’s total share of gains and losses is reflected in “Gains (losses) on equity method investments” in the Company’s unaudited condensed consolidated statement of operations.

See Note 13—“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, these VIEs. 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, 2016 and December 31, 2015. 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, 2016      December 31, 2015  
     Investment      Maximum
Exposure to Loss
     Investment      Maximum
Exposure to Loss
 

Variable interest entities1

   $ 4,886       $ 5,866       $ 3,858       $ 4,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 The Company has entered into a subordinated loan agreement with Aqua, whereby the Company agreed to lend the principal sum of $980 thousand. As of September 30, 2016, the Company’s maximum exposure to loss with respect to its unconsolidated VIEs includes the sum of its equity investments in its unconsolidated VIEs and the $980 thousand subordinated loan to Aqua.

Consolidated VIE

Through the acquisition of GFI, the Company is invested in a limited liability company that is focused on developing a proprietary trading technology. The limited liability company is a VIE and it was determined that the Company is the primary beneficiary of this VIE because the Company, through GFI, was the provider of the majority of this VIE’s start-up capital and has the power to direct the activities of this VIE that most significantly impact its economic performance, primarily through its voting percentage and consent rights on the activities that would most significantly influence the entity. The consolidated VIE had total assets of $7.7 million at September 30, 2016, which primarily consisted of clearing margin. There were no material restrictions on the consolidated VIE’s assets. The consolidated VIE had total liabilities of $1.6 million at September 30, 2016. The Company’s exposure to economic loss on this VIE is approximately $4.3 million.

Cost Method Investments

As a result of the GFI acquisition, the Company acquired investments for which it did not have the ability to exert significant influence over operating and financial policies. These investments are generally accounted for using the cost method of accounting in accordance with ASC 325-10, Investments—Other. At September 30, 2016 and December 31, 2015, the carrying value of these cost method investments was $1.3 million and $1.5 million, respectively.

 

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During the three months ended September 30, 2016, the Company sold cost method investments that had a carrying value of $0.1 million for total proceeds of $7.1 million. As a result of this sale, the Company recognized a $7.0 million gain on the sale of these investments, which is included in “Gain (loss) on divestiture and sale of investments” in the Company’s unaudited condensed consolidated statements of operations.

 

15. Fixed Assets, Net

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

 

     September 30,
2016
     December 31,
2015
 

Computer and communications equipment

   $ 148,012       $ 142,511   

Software, including software development costs

     151,176         140,416   

Leasehold improvements and other fixed assets

     162,031         137,736   
  

 

 

    

 

 

 
     461,219         420,663   

Less: accumulated depreciation and amortization

     (305,879      (274,790
  

 

 

    

 

 

 

Fixed assets, net

   $ 155,340       $ 145,873   
  

 

 

    

 

 

 

Depreciation expense was $7.3 million and $8.7 million for the three months ended September 30, 2016 and 2015, respectively. Depreciation expense was $20.9 million and $24.2 million for the nine months ended September 30, 2016 and 2015, respectively. Depreciation is included as part of “Occupancy and equipment” in the Company’s unaudited condensed consolidated statements of operations.

The Company has approximately $6.5 million of asset retirement obligations related to certain of its leasehold improvements. The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. The liability is discounted and accretion expense is recognized using the credit adjusted risk-free interest rate in effect when the liability was initially recognized.

For the three months ended September 30, 2016 and 2015, software development costs totaling $7.3 million and $5.5 million, respectively, were capitalized. For the nine months ended September 30, 2016 and 2015, software development costs totaling $17.6 million and $12.5 million, respectively, were capitalized. Amortization of software development costs totaled $6.3 million and $5.8 million for the three months ended September 30, 2016 and 2015, respectively. Amortization of software development costs totaled $20.9 million and $17.0 million for the nine months ended September 30, 2016 and 2015, 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 $0.6 million and $1.1 million were recorded for the three months ended September 30, 2016 and 2015, respectively, related to the evaluation of capitalized software projects for future benefit and for fixed assets no longer in service. Impairment charges of $3.7 million and $18.8 million were recorded for the nine months ended September 30, 2016 and 2015, 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.

 

16. Goodwill and Other Intangible Assets, Net

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2016 were as follows (in thousands):

 

     Financial Services      Real Estate Services      Total  

Balance at December 31, 2015

   $ 418,929       $ 392,837       $ 811,766   

Acquisitions

     1,785         18,445         20,230   

Measurement period adjustments

     (3,803      1,856         (1,947

Cumulative translation adjustment

     197         —           197   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

   $ 417,108       $ 413,138       $ 830,246   
  

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2016, the Company recognized additional goodwill of approximately $1.8 million which was allocated to the Company’s Financial Services segment, and $18.4 million which was allocated to the Company’s Real Estate Services segment. See Note 3—“Acquisitions” for more information.

During the nine months ended September 30, 2016, the Company recognized measurement period adjustments of approximately $(3.8) million relating to Financial Services, and $1.9 million for Real Estate Services.

 

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

Other intangible assets consisted of the following (in thousands, except weighted-average remaining life):

 

     September 30, 2016  
     Gross Amount      Accumulated
Amortization
     Net Carrying
Amount
     Weighted-Average
Remaining Life
(Years)
 

Definite life intangible assets:

           

Customer-related

   $ 118,510       $ 24,380       $ 94,130         17.7   

Technology

     23,960         5,420         18,540         5.4   

Noncompete agreements

     17,988         8,372         9,616         2.8   

Patents

     11,236         9,116         2,120         1.9   

All other

     16,437         13,539         2,898         1.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total definite life intangible assets

     188,131         60,827         127,304         14.1   

Indefinite life intangible assets:

     

Trade names

     90,255         —           90,255         N/A   

Horizon license

     1,500         —           1,500         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total indefinite life intangible assets

     91,755         —           91,755         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 279,886       $ 60,827       $ 219,059         14.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
     Gross Amount      Accumulated
Amortization
     Net Carrying
Amount
     Weighted-Average
Remaining Life
(Years)
 

Definite life intangible assets:

           

Customer-related

   $ 118,725       $ 18,020       $ 100,705         17.9   

Technology

     23,960         2,852         21,108         6.2   

Noncompete agreements

     17,989         5,238         12,751         3.4   

Patents

     13,084         10,188         2,896         2.3   

All other

     16,161         11,409         4,752         2.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total definite life intangible assets

     189,919         47,707         142,212         14.0   

Indefinite life intangible assets:

     

Trade names

     90,255         —           90,255         N/A   

Horizon license

     1,500         —           1,500         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total indefinite life intangible assets

     91,755         —           91,755         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 281,674       $ 47,707       $ 233,967         14.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intangible amortization expense was $4.8 million and $7.6 million for the three months ended September 30, 2016 and 2015, respectively. Intangible amortization expense was $15.0 million and $21.2 million for the nine months ended September 30, 2016 and 2015, 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, 2016 is as follows (in millions):

 

2016

   $ 4.4   

2017

     16.3   

2018

     12.4   

2019

     10.9   

2020

     9.3   

2021 and thereafter

     74.0   
  

 

 

 

Total

   $ 127.3   
  

 

 

 

 

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17. Notes Payable, Collateralized and Short-Term Borrowings

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

 

     September 30,
2016
     December 31,
2015
 

4.50% Convertible Notes

   $ —         $ 157,332   

8.125% Senior Notes

     109,240         109,147   

5.375% Senior Notes

     296,837         296,100   

8.375% Senior Notes

     249,078         255,300   

5.125% Senior Notes

     296,026         —     

Collateralized borrowings

     17,930         22,998   
  

 

 

    

 

 

 

Total

   $ 969,111       $ 840,877   
  

 

 

    

 

 

 

The Company’s Convertible Notes and Senior Notes are recorded at amortized cost. As of September 30, 2016 and December 31, 2015, the carrying amounts and estimated fair values of the Company’s Convertible Notes and Senior Notes were as follows (in thousands):

 

     September 30, 2016      December 31, 2015  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value  

4.50% Convertible Notes

   $ —         $ —         $ 157,332       $ 173,700   

8.125% Senior Notes

     109,240         116,820         109,147         121,095   

5.375% Senior Notes

     296,837         314,625         296,100         309,750   

8.375% Senior Notes

     249,078         259,350         255,300         263,724   

5.125% Senior Notes

     296,026         313,125         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 951,181       $ 1,003,920       $ 817,879       $ 868,269   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the 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 8.75% Convertible Notes were senior unsecured obligations and ranked equally and ratably with all existing and future senior unsecured obligations of the Company. The 8.75% Convertible Notes bore 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. On April 13, 2015, the Company’s 8.75% Convertible Notes were fully converted into 24,042,599 shares of the Company’s Class A common stock, par value $0.01 per share, issued to Cantor. The Company did not record any interest expense related to the 8.75% Convertible Notes for the three months ended September 30, 2015. The Company recorded interest expense related to the 8.75% Convertible Notes of $3.8 million for the nine months ended September 30, 2015.

On July 29, 2011, the Company issued an aggregate of $160.0 million principal amount of 4.50% Convertible Notes due July 15, 2016. The 4.50% Convertible Notes were general senior unsecured obligations of the Company. The 4.50% Convertible Notes paid interest semiannually at a rate of 4.50% per annum and were priced at par. The Company recorded interest expense related to the 4.50% Convertible Notes of $0.5 million and $3.0 million for the three months ended September 30, 2016 and 2015, respectively. The Company recorded interest expense related to the 4.50% Convertible Notes of $6.6 million and $9.0 million for the nine months ended September 30, 2016 and 2015, respectively.

On July 13, 2016, certain holders of the 4.50% Convertible Notes converted $68,000 in principal amount of notes, and, upon conversion, the Company delivered 6,909 shares of its Class A common stock to such holders. On July 15, 2016, the Company repaid the remaining approximately $159.9 million principal amount of its 4.50% Convertible Notes that matured on July 15, 2016.

In connection with the offering of the 4.50% Convertible Notes, the Company entered into capped call transactions, which were 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, was greater than the strike price of the capped call transactions. The capped call transactions expired unexercised on July 13, 2016.

 

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

 

     4.50% Convertible Notes  
     September 30,
2016
     December 31,
2015
 

Principal amount of debt component

   $ —         $ 160,000   

Unamortized discount

     —           (2,668

Carrying amount of debt component

     —           157,332   

Equity component

     —           18,972   

Effective interest rate

     —           7.61

Maturity date (period through which discount is being amortized)

     7/15/2016         7/15/2016   

Conversion price

   $ —         $ 9.84   

Number of shares to be delivered upon conversion

     —           16,260,160   

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,
2016
     September 30,
2015
     September 30,
2016
     September 30,
2015
 

Coupon interest

   $ 280       $ 1,800       $ —         $ —     

Amortization of discount

     207         1,206         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 487       $ 3,006       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     4.50% Convertible Notes      8.75% Convertible Notes  
     For the nine months ended      For the nine months ended  
     September 30,
2016
     September 30,
2015
     September 30,
2016
     September 30,
2015
 

Coupon interest

   $ 3,880       $ 5,400       $ —         $ 3,828   

Amortization of discount

     2,666         3,590         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 6,546       $ 8,990       $ —         $ 3,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

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”). 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.

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, 2016 and 2015. The Company recorded interest expense related to the 8.125% Senior Notes of $6.9 million for both the nine months ended September 30, 2016 and 2015.

5.375% Senior Notes

On December 9, 2014, the Company issued an aggregate of $300.0 million principal amount of 5.375% Senior Notes due 2019 (the “5.375% Senior Notes”). The 5.375% Senior Notes are general senior unsecured obligations of the Company. These Senior Notes bear interest at a rate of 5.375% per year, payable in cash on June 9 and December 9 of each year, commencing June 9, 2015. The interest rate payable on the notes will be subject to adjustments from time to time based on the debt rating assigned by specified rating agencies to the notes, as set forth in the Indenture. The 5.375% Senior Notes will mature on December 9, 2019. The Company may redeem some or all of the notes at any time or from time to time for cash at certain “make-whole” redemption prices (as set forth in the Indenture). If a “Change

 

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of Control Triggering Event” (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of their notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date.

The initial carrying value of the 5.375% Senior Notes was $295.1 million, net of the discount and debt issuance costs of $4.9 million. The issuance costs are amortized as interest cost, and the carrying value of the 5.375% Senior Notes will accrete up to the face amount over the term of the notes. The Company recorded interest expense related to the 5.375% Senior Notes of $4.3 million for both the three months ended September 30, 2016 and 2015. The Company recorded interest expense related to the 5.375% Senior Notes of $12.8 million for both the nine months ended September 30, 2016 and 2015.

8.375% Senior Notes

As part of the GFI acquisition, the Company assumed $240.0 million in aggregate principal amount of 8.375% Senior Notes due July 2018 (the “8.375% Senior Notes”). The carrying value of these notes as of September 30, 2016 was $249.1 million. Interest on these notes is payable, semi-annually in arrears on the 19th of January and July. Due to the cumulative effect of downgrades to the credit rating of GFI’s 8.375% Senior Notes, the 8.375% Senior Notes were subjected to 200 basis points penalty interest. On April 28, 2015, a subsidiary of the Company purchased from GFI approximately 43.0 million new shares of GFI common stock. This increased BGC’s ownership to approximately 67% of GFI’s outstanding common stock and gave the Company the ability to control the timing and process with respect to a full merger. Also on July 10, 2015, the Company guaranteed the obligations of GFI under the 8.375% Senior Notes. These actions resulted in upgrades of the credit ratings of GFI’s 8.375% Senior Notes by Moody’s Investors Service, Fitch Ratings Inc. and Standard & Poor’s, which reduced the penalty interest to 25 basis points effective July 19, 2015. In addition, on January 13, 2016, Moody’s further upgraded the credit rating on GFI’s 8.375% Senior Notes, eliminating the penalty interest. The Company recorded interest expense related to the 8.375% Senior Notes of $5.0 million and $5.4 million for the three months ended September 30, 2016 and 2015, respectively. The Company recorded interest expense related to the 8.375% Senior Notes of $15.1 million and $13.7 million for the nine months ended September 30, 2016 and 2015, respectively.

5.125% Senior Notes

On May 27, 2016, the Company issued an aggregate of $300.0 million principal amount of 5.125% Senior Notes due 2021 (the “5.125% Senior Notes”). The 5.125% Senior Notes are general senior unsecured obligations of the Company. These Senior Notes bear interest at a rate of 5.125% per year, payable in cash on May 27 and November 27 of each year, commencing November 27, 2016. The 5.125% Senior Notes will mature on May 27, 2021. The Company may redeem some or all of the notes at any time or from time to time for cash at certain “make-whole” redemption prices (as set forth in the Indenture). If a “Change of Control Triggering Event” (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of their notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date.

The initial carrying value of the 5.125% Senior Notes was $295.8 million, net of the discount and debt issuance costs of $4.2 million. The issuance costs are amortized as interest expense and the carrying value of the 5.125% Senior Notes will accrete up to the face amount over the term of the notes. The Company recorded interest expense related to the 5.125% Senior Notes of $4.0 million and $5.6 million for the three and nine months ended September 30, 2016, respectively.

Collateralized Borrowings

On March 13, 2015, the Company entered into a secured loan arrangement of $28.2 million under which it pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.70% and matures on March 13, 2019. As of September 30, 2016, the Company had $17.9 million outstanding related to this secured loan arrangement, which includes $0.2 million of deferred financing costs. The value of the fixed assets pledged as of September 30, 2016 was $5.2 million. The Company recorded interest expense related to this secured loan arrangement of $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively. The Company recorded interest expense related to this secured loan arrangement of $0.6 million and $0.5 million for the nine months ended September 30, 2016 and 2015, respectively.

Credit Agreement

As part of the GFI acquisition, the Company acquired a credit agreement as amended (the “GFI Credit Agreement”) with Bank of America, N.A. and certain other lenders, which provided for maximum revolving loans of up to $75.0 million. The amount outstanding was repaid by the Company on October 2, 2015, prior to the sale of the Company’s Trayport division. For the three and nine months ended September 30, 2015, the Company recorded interest expense related to the GFI Credit Agreement of $0.8 million and $1.9 million, respectively.

On October 1, 2015, the Company entered into a previously authorized $150.0 million revolving credit facility (the “Facility”) with Cantor and borrowed $100.0 million under such facility (the “Cantor Loan”). The Cantor Loan bears interest at the rate of LIBOR plus 3.25% and may be adjusted based on Cantor’s short-term borrowing rate then in effect plus 1%. The Facility has a maturity date of August 10, 2017. The Cantor Loan was repaid on December 31, 2015.

 

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On December 24, 2015, the Company entered into a committed unsecured credit agreement with Bank of America, N.A. The credit agreement provided for maximum revolving loans of $25.0 million through March 24, 2016. The interest rate on this facility was LIBOR plus 200 basis points.

On February 25, 2016, the Company entered into a committed unsecured credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders. Several of the Company’s domestic non-regulated subsidiaries are parties to the credit agreement as guarantors. The credit agreement provides for revolving loans of $150.0 million, with the option to increase the aggregate loans to $200.0 million. The maturity date of the facility is February 25, 2018. Borrowings under this facility bear interest at either LIBOR or a defined base rate plus an additional margin which ranges from 50 basis points to 250 basis points depending on the Company’s debt rating as determined by S&P and Fitch and whether such loan is a LIBOR loan or a base rate loan. Contemporaneously with the closing of this credit agreement, the $25.0 million unsecured credit agreement entered into on December 24, 2015 with Bank of America, N.A. was terminated. As of September 30, 2016, there were no borrowings outstanding under either the $150.0 million facility or the terminated $25.0 million facility. For the three and nine months ended September 30, 2016, the Company recorded interest expense related to the credit facility of $0.2 million and $0.5 million, respectively.

 

18. Compensation

The Company’s Compensation Committee may grant various equity-based and partnership awards, including restricted stock units, restricted stock, stock options, limited partnership units and exchange rights for shares of the Company’s Class A common stock upon exchange of limited partnership units. On June 22, 2016, at the Annual Meeting of Stockholders of the Company, the stockholders approved the Seventh Amended and Restated Long Term Incentive Plan (the “Equity Plan”) to increase from 350 million to 400 million the aggregate number of shares of Class A common stock of the Company that may be delivered or cash-settled pursuant to awards granted during the life of the Equity Plan. As of September 30, 2016, the limit on the aggregate number of shares authorized to be delivered allowed for the grant of future awards relating to 217.5 million shares. Upon vesting of RSUs, issuance of restricted stock, exercise of employee stock options and exchange of limited partnership units, the Company generally issues new shares of the Company’s Class A common stock.

Limited Partnership Units

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

 

     Number of
Units
 

Balance at December 31, 2015

     76,401,775   

Granted units

     30,587,554   

Redeemed/exchanged units

     (9,301,772

Forfeited units

     (2,516,434
  

 

 

 

Balance at September 30, 2016

     95,171,123   
  

 

 

 

During the three months ended September 30, 2016 and 2015, the Company granted exchangeability on 4.6 million and 3.8 million limited partnership units for which the Company incurred non-cash compensation expense of $34.3 million and $34.4 million, respectively. During the nine months ended September 30, 2016 and 2015, the Company granted exchangeability on 11.1 million and 10.9 million limited partnership units for which the Company incurred non-cash compensation expense of $92.7 million and $96.6 million, respectively. This expense is included within “Allocations of net income and grant of exchangeability to limited partnership units and FPUs” in the Company’s unaudited condensed consolidated statements of operations.

As of September 30, 2016 and December 31, 2015, the number of limited partnership units exchangeable into shares of Class A common stock at the discretion of the unit holder was 11.0 million and 5.4 million, respectively.

As of September 30, 2016 and December 31, 2015, 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 approximately $133.2 million and $30.4 million, respectively. As of September 30, 2016 and December 31, 2015, the aggregate estimated fair value of these limited partnership units was approximately $22.1 million and $11.3 million, respectively. The number of outstanding limited partnership units with a post-termination pay-out as of September 30, 2016 and December 31, 2015 was approximately 14.6 million and 3.3 million, respectively, of which approximately 9.8 million and 1.6 million were unvested.

Certain of the limited partnership units with a post-termination pay-out have been granted in connection with the Company’s acquisitions. As of September 30, 2016 and December 31, 2015, the aggregate estimated fair value of these acquisition-related limited partnership units was $25.5 million and $26.2 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

 

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expense related to these limited partnership units of $6.7 million and $3.8 million for the three months ended September 30, 2016 and 2015, respectively. The Company recognized compensation expense, before associated income taxes, related to these limited partnership units of $13.4 million and $11.1 million for the nine months ended September 30, 2016 and 2015, respectively. These are included in “Compensation and employee benefits” in the Company’s unaudited condensed consolidated statements of operations.

Certain limited partnership units generally receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. The allocation of income to limited partnership units and FPUs was $24.4 million and $16.3 million for the three months ended September 30, 2016 and 2015, respectively. The allocation of income to limited partnership units and FPUs was $40.0 million and $17.4 million for the nine months ended September 30, 2016 and 2015, respectively.

Restricted Stock Units

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

 

     Restricted
Stock Units
     Weighted-Average
Grant

Date Fair
Value
     Weighted-Average
Remaining
Contractual
Term (Years)
 

Balance at December 31, 2015

     1,622,431       $ 5.83         1.53   

Granted units

     785,484         7.90      

Delivered units

     (810,408      5.82      

Forfeited units

     (72,136      7.02      
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

     1,525,371       $ 6.85         1.81   
  

 

 

    

 

 

    

 

 

 

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, 2016 and 2015, the Company granted 0.8 million and 0.6 million, respectively, of RSUs with aggregate estimated grant date fair values of approximately $6.2 million and $4.9 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 both the nine months ended September 30, 2016 and 2015, the Company withheld shares valued at $1.3 million to pay taxes due at the time of vesting.

As of September 30, 2016 and December 31, 2015, the aggregate estimated grant date fair value of outstanding RSUs was approximately $10.4 million and $9.5 million, respectively.

Compensation expense related to RSUs was approximately $1.2 million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively. Compensation expense related to RSUs was approximately $4.0 million and $3.8 million, respectively, for the nine months ended September 30, 2016 and 2015. As of September 30, 2016, there was approximately $10.4 million of total unrecognized compensation expense related to unvested RSUs.

Restricted Stock

The Company has granted restricted shares under its Equity Plan. Such restricted shares are generally saleable by partners in five to ten years. Partners who agree to extend the length 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. 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. During the nine months ended September 30, 2016 and 2015, approximately 59 thousand shares and 44 thousand shares, respectively, were forfeited in connection with this clause. During the nine months ended September 30, 2016 and 2015, the Company released the restrictions with respect to approximately 4.4 million and 2.4 million of such shares, respectively. As of September 30, 2016, there were 14.7 million of such restricted shares outstanding.

During the three months ended September 30, 2016, the Company granted approximately 0.2 million restricted shares of the Company’s Class A common stock. In connection with those grants, an equivalent number of limited partnership units were surrendered. Such restricted shares are saleable ratably over a period of four years. Transferability of the shares is subject to compliance with BGC Partners’ and its affiliates’ customary noncompete obligations. For the three months ended September 30, 2016, the Company recognized compensation expense of approximately $1.6 million related to the grant of these restricted shares.

 

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Deferred Cash Compensation

As part of the acquisition of GFI, the Company now maintains a Deferred Cash Award Program which was adopted by GFI on February 12, 2013, and provides for the grant of deferred cash incentive compensation to eligible employees. The Company may pay certain bonuses in the form of deferred cash compensation awards, which generally vest over a future service period. In addition, prior to the completion of the tender offer, GFI’s outstanding RSUs were converted into the right to receive an amount in cash equal to $6.10 per unit, with such cash payable on and subject to the terms and conditions of the original vesting schedule of each RSU. The total compensation expense recognized in relation to the deferred cash compensation awards for the three months ended September 30, 2016 and 2015 was $3.5 million and $6.3 million, respectively. The total compensation expense recognized in relation to the deferred cash compensation awards for the nine months ended September 30, 2016 and 2015 was $13.3 million and $17.6 million, respectively. As of September 30, 2016, the total liability for the deferred cash compensation awards was $16.7 million, which is included in “Accrued compensation” on the Company’s unaudited condensed consolidated statements of financial condition. Total unrecognized compensation cost related to deferred cash compensation, prior to the consideration of forfeitures, was approximately $18.5 million and is expected to be recognized over a weighted-average period of 0.92 years.

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, 2015

     2,079,238       $ 9.73         1.4       $ 1,169,664   

Granted options

     —           —           

Exercised options

     (250,000      8.42         

Forfeited options

     (14,619      9.53         
  

 

 

    

 

 

       

Balance at September 30, 2016

     1,814,619       $ 9.92         0.8       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2016

     1,814,619       $ 9.92         0.8       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were 250 thousand and 84 thousand stock options exercised during the nine months ended September 30, 2016 and 2015, respectively. The Company did not grant any stock options during the nine months ended September 30, 2016 and 2015.

The Company did not record any compensation expense related to stock options for the three or nine months ended September 30, 2016 or 2015, as all of these options had vested in prior years. As of September 30, 2016, all of the compensation expense related to stock options was fully recognized.

 

19. Commitments, Contingencies and Guarantees

Contingencies

In the ordinary course of business, various legal actions are brought and are pending against the Company and its subsidiaries 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) regarding the Company’s businesses, 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 subsidiaries 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.

 

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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’s unaudited condensed consolidated financial statements and disclosures 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, 2016, the Company was contingently liable for $1.4 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.

Indemnifications

In connection with the sale of eSpeed, the Company has indemnified Nasdaq for amounts over a defined threshold against damages arising from breaches of representations, warranties and covenants. In addition, in connection with the acquisition of GFI, the Company has indemnified the directors and officers of GFI. As of September 30, 2016, no contingent liability has been recorded in the Company’s unaudited condensed consolidated statements of financial condition for these indemnifications, as the potential for being required to make payments under these indemnifications is remote.

 

20. Income Taxes

The Company’s unaudited condensed consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss, except for UBT, rests with the partners (see Note 2—“Limited Partnership Interests in BGC Holdings” for discussion of partnership interests), rather than the partnership entity. Income taxes are accounted for using the asset and liability method, as prescribed in FASB guidance on Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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, 2016, the Company had $422.7 million of undistributed foreign pre-tax earnings, which excludes the cash proceeds from the sale of Trayport. Except for the cash proceeds from the sale of Trayport, it is the Company’s intention to permanently reinvest these undistributed foreign pre-tax earnings in the Company’s foreign operations. It is not practicable to determine the amount of additional tax that may be payable in the event these earnings are repatriated due to the fluctuation of the relative ownership percentages of the foreign subsidiaries between the Company and BGC Holdings, L.P. For the cash proceeds which are not permanently reinvested, the accrued tax liability is $135.5 million, net of foreign tax credits. In addition, certain GFI net operating loss carryforwards are expected to be utilized to reduce cash taxes. Taking these items together, we therefore expect to pay effective cash taxes of no more than $64 million related to the Trayport transaction.

 

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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, 2016, the Company had $1.6 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. As of December 31, 2015, the Company’s unrecognized tax benefits, excluding related interest and penalties, were $1.6 million, all of which, if recognized, would affect the effective tax rate. 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, 2016, the Company had approximately $0.2 million of accrued interest related to uncertain tax positions. As of December 31, 2015, there were $0.2 million of accrued interest and penalties related to uncertain tax positions.

 

21. 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, 2016, 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 (the “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, 2016, 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.

In addition, the Company’s Swap Execution Facilities (“SEFs”), BGC Derivative Markets and GFI Swaps Exchange, are required to maintain financial resources to cover operating costs for at least one year, keeping at least enough cash or highly liquid securities to cover six months’ operating costs.

The regulatory requirements referred to above may restrict the Company’s ability to withdraw capital from its regulated subsidiaries. As of September 30, 2016, $544.2 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 $284.3 million.

 

22. 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. The Company’s operations consist of two reportable 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 (rates and credit), foreign exchange, equities, energy and commodities, and futures. It also provides a wide range of services, including trade execution, broker-dealer services, clearing, trade compression, post trade, 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 and corporate advisory, investment sales and real estate finance, consulting, project and development management, and property and facilities management.

The Company evaluates the performance and reviews the results of the segments based on each segment’s “Income (loss) from operations before income taxes.”

        The 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. 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 a reserve on compensation-related partnership loans; and allocations of net income to limited partnership units and FPUs), 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. Corporate other income (losses), net includes gains that are not considered part of the Company’s ordinary, ongoing business, such as the realized gain related to the GFI shares owned by the Company prior to the completion of the tender offer to acquire GFI on February 26, 2015, the gain related to the disposition of the equity interests in the entities that make up the Trayport business, the mark-to-market on ICE common shares and any related hedging transactions when applicable, and the adjustment of future earn-out payments.

 

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Certain financial information for the Company’s segments is presented below. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. See Note 16—“Goodwill and Other Intangible Assets, Net,” for goodwill by reportable segment.

Three months ended September 30, 2016 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
     Total  

Brokerage revenues:

           

Rates

   $ 112,384       $ —         $ —         $ 112,384   

Credit

     67,221         —           —           67,221   

Foreign exchange

     73,191         —           —           73,191   

Energy and commodities

     47,061         —           —           47,061   

Equities and other asset classes

     39,076         —           —           39,076   

Leasing and other services

     —           139,109         —           139,109   

Real estate capital markets

     —           94,555         —           94,555   

Real estate management services

     —           49,373         —           49,373   

Fees from related parties

     —           —           6,126         6,126   

Data, software and post-trade

     11,834         —           —           11,834   

Other revenues

     632         13         138         783   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest revenues

     351,399         283,050         6,264         640,713   

Interest income

     742         932         1,118         2,792   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     352,141         283,982         7,382         643,505   

Interest expense

     —           —           15,383         15,383   

Non-interest expenses

     290,989         246,366         85,618         622,973   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     290,989         246,366         101,001         638,356   

Other income (losses), net:

           

Gain (loss) on divestiture and sale of investments

     —           —           7,044         7,044   

Gains (losses) on equity investments

     —           —           683         683   

Other income (losses)

     69,893         —           21,760         91,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (losses), net

     69,893         —           29,487         99,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations before income taxes

   $ 131,045       $ 37,616       $ (64,132    $ 104,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2015 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
     Total  

Brokerage revenues:

           

Rates

   $ 113,630       $ —         $ —         $ 113,630   

Credit

     67,515         —           —           67,515   

Foreign exchange

     87,999         —           —           87,999   

Energy and commodities

     54,879         —           —           54,879   

Equities and other asset classes

     46,314         —           —           46,314   

Leasing and other services

     —           143,680         —           143,680   

Real estate capital markets

     —           81,088         —           81,088   

Real estate management services

     —           48,867         —           48,867   

Fees from related parties

     —           —           6,609         6,609   

Data, software and post-trade

     29,124         —           —           29,124   

Other revenues

     3,812         345         46         4,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest revenues

     403,273         273,980         6,655         683,908   

Interest income

     83         —           1,304         1,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     403,356         273,980         7,959         685,295   

Interest expense

     —           —           16,944         16,944   

Non-interest expenses

     344,869         233,202         70,445         648,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     344,869         233,202         87,389         665,460   

Other income (losses), net:

           

Gain (loss) on divestiture and sale of investments

     —           —           2,717         2,717   

Gains (losses) on equity investments

     —           —           1,042         1,042   

Other income (losses)

     57,366         —           2,362         59,728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (losses), net

     57,366         —           6,121         63,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations before income taxes

   $ 115,853       $ 40,778       $ (73,309    $ 83,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Nine months ended September 30, 2016 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
     Total  

Brokerage revenues:

           

Rates

   $ 352,681       $ —         $ —         $ 352,681   

Credit

     229,466         —           —           229,466   

Foreign exchange

     232,494         —           —           232,494   

Energy and commodities

     168,765         —           —           168,765   

Equities and other asset classes

     133,035         —           —           133,035   

Leasing and other services

     —           369,291         —           369,291   

Real estate capital markets

     —           239,427         —           239,427   

Real estate management services

     —           140,960         —           140,960   

Fees from related parties

     —           —           18,061         18,061   

Data, software and post-trade

     36,599         —           —           36,599   

Other revenues

     4,128         89         553         4,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest revenues

     1,157,168         749,767         18,614         1,925,549   

Interest income

     1,892         2,457         4,603         8,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     1,159,060         752,224         23,217         1,934,501   

Interest expense

     —           —           43,465         43,465   

Non-interest expenses

     969,092         673,972         198,734         1,841,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     969,092         673,972         242,199         1,885,263   

Other income (losses), net:

           

Gain (loss) on divestiture and sale of investments

     —           —           7,044         7,044   

Gains (losses) on equity investments

     —           —           1,741         1,741   

Other income (losses)

     79,539         —           19,209         98,748   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (losses), net

     79,539         —           27,994         107,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations before income taxes

   $ 269,507       $ 78,252       $ (190,988    $ 156,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Nine months ended September 30, 2015 (in thousands):

 

     Financial
Services
     Real
Estate
Services
     Corporate
Items
     Total  

Brokerage revenues:

           

Rates

   $ 363,179       $ —         $ —         $ 363,179   

Credit

     208,202         —           —           208,202   

Foreign exchange

     249,607         —           —           249,607   

Energy and commodities

     139,129         —           —           139,129   

Equities and other asset classes

     129,726         —           —           129,726   

Leasing and other services

     —           377,464         —           377,464   

Real estate capital markets

     —           196,008         —           196,008   

Real estate management services

     —           135,997         —           135,997   

Fees from related parties

     108         —           19,202         19,310   

Data, software and post-trade

     68,344         —           —           68,344   

Other revenues

     7,329         984         461         8,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest revenues

     1,165,624         710,453         19,663         1,895,740   

Interest income

     806         613         4,834         6,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     1,166,430         711,066         24,497         1,901,993   

Interest expense

     657         12         50,616         51,285   

Non-interest expenses

     988,302         627,005         196,853         1,812,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     988,959         627,017         247,469         1,863,445   

Other income (losses), net:

           

Gain (loss) on divestiture and sale of investments

     —           —           3,396         3,396   

Gains (losses) on equity investments

     —           —           2,678         2,678   

Other income (losses)

     58,202         —           34,057         92,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (losses), net

     58,202         —           40,131         98,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations before income taxes

   $ 235,673       $ 84,049       $ (182,841    $ 136,881   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets by reportable segment (in thousands):

 

Total Assets1

   Financial
Services
     Real Estate
Services
     Total  

At September 30, 2016

   $ 4,032,295       $ 779,614       $ 4,811,909   
  

 

 

    

 

 

    

 

 

 

At December 31, 2015

   $ 3,296,815       $ 694,639       $ 3,991,454   
  

 

 

    

 

 

    

 

 

 

 

1 Corporate assets have been fully allocated to the Company’s business segments.

Geographic Information

The Company offers products and services in the U.S., U.K., Asia (including Australia), France, Other Americas, Other Europe, and the Middle East and Africa region (defined as the “MEA” region). Information regarding revenues for the three months and nine months ended September 30, 2016 and 2015, respectively, is as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Revenues:

           

United States

   $ 396,861       $ 403,355       $ 1,125,770       $ 1,088,440   

United Kingdom

     138,090         166,817         463,361         480,591   

Asia

     51,289         58,234         160,744         165,541   

France

     19,857         22,583         70,695         66,107   

Other Americas

     12,255         14,421         41,618         41,150   

Other Europe/MEA

     25,153         19,885         72,313         60,164   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 643,505       $ 685,295       $ 1,934,501       $ 1,901,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Information regarding long-lived assets (defined as loans, forgivable loans and other receivables from employees and partners, net; fixed assets, net; certain other investments; goodwill; other intangible assets, net of accumulated amortization; and rent and other deposits) in the geographic areas as of September 30, 2016 and December 31, 2015, respectively, is as follows (in thousands):

 

     September 30,      December 31,  
     2016      2015  

Long-lived assets:

     

United States

   $ 1,243,162       $ 1,145,876   

United Kingdom

     174,624         164,970   

Asia

     28,575         28,368   

France

     6,188         6,964   

Other Americas

     18,819         16,135   

Other Europe/MEA

     5,585         6,277   
  

 

 

    

 

 

 

Total long-lived assets

   $ 1,476,953       $ 1,368,590   
  

 

 

    

 

 

 

 

23. Subsequent Events

Third Quarter 2016 Dividend

On October 25, 2016, the Company’s Board of Directors declared a quarterly cash dividend of $0.16 per share for the third quarter of 2016, payable on December 8, 2016 to Class A and Class B common stockholders of record as of November 23, 2016.

Controlled Equity Offering

Since September 30, 2016, the Company has sold, pursuant to the November 2014 Sales Agreement, 242 thousand shares of Class A common stock related to redemptions and exchanges of limited partnership interests.

Newmark Grubb Mexico City Acquisition

On October 18, 2016, the Company announced that it has completed the acquisition of Newmark Grubb Mexico City. Newmark Grubb Mexico City is a tenant advisory firm in the Mexico City area. Mexico City represents the world’s twelfth largest metropolitan area by population. The acquisition of Newmark Grubb Mexico City will be recorded in the Company’s Real Estate Services segment.

LFI Acquisition

On October 25, 2016, the Company’s Board of Directors and Audit Committee authorized the purchase of 9,000 Class B Units of LFI Holdings, LLC (“LFI”), a subsidiary of Cantor, representing all of the issued and outstanding Class B Units of LFI not already owned by the Company. On November 4, 2016, the Company completed this transaction. As a result of this transaction, the Company owns 100% of the ownership interests in LFI. LFI, a technology infrastructure provider tailored to the financial sector, is a limited liability company headquartered in New York.

In the purchase agreement, Cantor agreed, subject to certain exceptions, not to solicit certain senior executives of LFI’s business and was granted the right to be a customer of LFI’s businesses on the best terms made available to any other customer. The aggregate purchase price paid by the Company to Cantor consisted of approximately $24.2 million in cash plus a post-closing adjustment to be determined after closing based on netting LFI’s expenses paid by Cantor after May 1, 2016 against accounts receivable owed to LFI by Cantor for access to LFI’s business from May 1, 2016 through the closing date. The Company previously had a 20% ownership interest in LFI and accounted for its investment using the equity method. The transaction will be accounted for as a transaction between entities under common control.

Cantor Purchase of Limited Partnership Interests from BGC Holdings

On November 7, 2016, the Company issued exchange rights with respect to, and Cantor purchased, in transactions exempt from registration pursuant to Section 4(a)(2) of the Securities Act, an aggregate of 624,762 exchangeable limited partnership units in BGC Holdings, as follows: In connection with the redemption by BGC Holdings of an aggregate of 141,523 non-exchangeable founding partner units from founding partners of BGC Holdings for an aggregate consideration of $560,190, Cantor purchased 141,523 exchangeable limited partnership units from BGC Holdings for an aggregate of $560,190. In addition, pursuant to the Sixth Amendment, on November 7, 2016, Cantor purchased 483,239 exchangeable limited partnership units from BGC Holdings for an aggregate consideration of $1,796,367 in connection with the grant of exchangeability and exchange for 483,239 founding partner units. Subsequent to these transactions, there were 541,739 FPUs remaining which BGC Holdings had the right to redeem or exchange and with respect to which Cantor had the right to purchase an equivalent number of Cantor units.

 

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

The following discussion of BGC Partners, Inc.’s financial condition and results of operations should be read together with BGC Partners, Inc.’s unaudited condensed consolidated financial statements and notes to those statements, as well as the risk factors and cautionary statements relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), included in our Annual Report on Form 10-K for the year ended December 31, 2015, in subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and in this report. When used herein, the terms “BGC Partners,” “BGC,” the “Company,” “we,” “us” and “our” refer to BGC Partners, Inc., including consolidated subsidiaries.

This discussion summarizes the significant factors affecting our results of operations and financial condition during the three and nine months ended September 30, 2016 and 2015. This discussion is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report.

OVERVIEW AND BUSINESS ENVIRONMENT

We are a leading global brokerage company servicing the financial and real estate markets through our Financial Services and Real Estate Services businesses. Through our brands, including BGC®, GFI® and R.P. MartinTM, among others, our Financial Services business specializes in the brokerage of a broad range of products, including fixed income (rates and credit), foreign exchange, equities, energy and commodities, and futures. Our Financial Services business also provides a wide range of services, including trade execution, broker-dealer services, clearing, trade compression, post trade, information, and other back-office services to a broad range of financial and non-financial institutions. Our 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 our brands including FENICS®, BGC TraderTM, BGC Market Data and Capitalab®, we offer fully electronic brokerage, financial technology solutions, market data, post-trade services and analytics related to select financial instruments and markets.

We entered into the commercial real estate business in October 2011 with the acquisition of Newmark & Company Real Estate, Inc. (“Newmark”), a leading U.S. commercial real estate brokerage and advisory firm primarily serving corporate and institutional clients. Newmark was founded in 1929 in New York City. In 2000, Newmark embarked upon a national expansion and in 2006 entered into an agreement with London-based Knight Frank to operate jointly in the Americas as “Newmark Knight Frank.” In the second quarter of 2012, we completed the acquisition of substantially all of the assets of Grubb & Ellis Company and its direct and indirect subsidiaries (“Grubb & Ellis”). Grubb & Ellis was formed in 1958 and built a full-service national commercial real estate platform of property management, facilities management and brokerage services. Grubb & Ellis was integrated with Newmark Knight Frank to form the resulting brand, Newmark Grubb Knight Frank (“NGKFTM”). NGKF is a full-service commercial real estate platform that comprises our Real Estate Services segment. Under brand names including Newmark Grubb Knight FrankTM, Newmark Cornish & CareyTM, ARA®, Computerized Facility IntegrationTM, Landauer® Valuation & Advisory, and Excess Space Retail Services, Inc®, we offer commercial real estate tenants, owners, investors and developers a wide range of services, including leasing and corporate advisory, investment sales, and real estate finance, consulting, project and development management, and property and facilities management.

Our 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. We have offices in dozens of major markets, including New York and London, as well as in Atlanta, Beijing, Boston, Charlotte, Chicago, Copenhagen, Dallas, Denver, Dubai, Geneva, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Philadelphia, Rio de Janeiro, San Francisco, Santa Clara, São Paulo, Seoul, Shanghai, Singapore, Sydney, Tokyo, Toronto, and Washington, D.C., and over 50 other offices.

We remain confident in our future growth prospects as we continue to increase the scale and depth of our Financial Services and Real Estate Services platforms and continue to seek market-driven opportunities to expand our business in numerous financial asset classes and other products and services. This was exemplified by our acquisition of GFI Group, Inc. (“GFI”). Beginning in the first quarter of 2015, BGC began consolidating the results of GFI, which continues to operate as a separately branded division of BGC. On January 12, 2016, we completed the merger with GFI by acquiring 100% of GFI’s outstanding shares (see “Acquisition of GFI Group, Inc.”). Over the last twelve months, we also completed the purchase of Steffner Commercial Real Estate (which operates as Newmark Grubb Memphis), Cincinnati Commercial Real Estate (“CCR”), Rudesill-Pera Multifamily, The CRE Group, Inc. (“CRE Group”), Perimeter Markets, Inc., certain assets of the John Buck Company, LLC and Buck Management Group LLC, Continental Realty Ltd and Newmark Grubb Mexico City. By adding these leading companies to our platform, we have greatly broadened the scope and depth of services we can provide to our clients across our consolidated business. We have continued to make key hires around the world and integrate our recent acquisitions onto our global platform. We expect these additions to increase our revenues and earnings per share going forward. These investments underscore BGC’s ongoing commitment to make accretive acquisitions and profitable hires.

 

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Acquisition of GFI Group, Inc.

GFI is a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets. GFI serves institutional clients in operating electronic and hybrid markets for cash and derivative products across multiple asset classes. On February 26, 2015, we successfully completed our tender offer to acquire shares of common stock, par value $0.01 per share, of GFI for $6.10 per share in cash and accepted for purchase 54.3 million shares tendered to us pursuant to the offer. The tendered shares, together with the 17.1 million shares already owned by us, represented approximately 56% of the then-outstanding shares of GFI. We issued payment for the tendered shares on March 4, 2015 in the aggregate amount of $331.1 million. On April 28, 2015, we purchased from GFI approximately 43.0 million new shares at that date’s closing price of $5.81 per share, for an aggregate purchase price of $250 million. The purchase price was paid to GFI in the form of a note due on June 19, 2018 that bore an interest rate of LIBOR plus 200 basis points. The new shares and the note are eliminated in consolidation. Following the issuance of the new shares, we owned approximately 67% of GFI’s outstanding common stock, which gave us control over the timing and process for the completion of a back-end merger (the “Back-End Mergers”) pursuant to the tender offer agreement.

On January 12, 2016, we completed our acquisition (the “JPI Merger”) of Jersey Partners, Inc. (“JPI”). The JPI Merger occurred pursuant to a merger agreement, dated as of December 22, 2015. Shortly following the completion of the JPI Merger, a subsidiary of BGC merged with and into GFI pursuant to a short-form merger under Delaware law, with GFI continuing as the surviving entity. The Back-End Mergers allowed BGC to acquire the remaining approximately 33% of the outstanding shares of GFI common stock that BGC did not already own. Following the closing of the Back-End Mergers, BGC and its affiliates now own 100% of the outstanding shares of GFI’s common stock.

In total, approximately 23.5 million shares of BGC Class A common stock and $111.2 million in cash were issued or paid with respect to the closing of the Back-End Mergers, inclusive of adjustments. The total purchase consideration for all shares of GFI purchased by BGC was approximately $750 million, net of the $250.0 million note previously issued to GFI by BGC, which is eliminated in consolidation. This figure excludes the $29.0 million gain recorded in the first quarter of 2015 with respect to the appreciation of the 17.1 million shares of GFI held by BGC prior to the successful completion of the tender offer. The excess of total consideration over the fair value of the total net assets acquired, of approximately $450.0 million, has been recorded to goodwill and was allocated to our Financial Services segment.

We believe the combination of BGC and GFI creates a strong and diversified Financial Services business, well positioned to capture future growth opportunities. Through this combination, we expect to deliver substantial benefits to customers of the combined company, and we expect to become the largest and most profitable wholesale financial brokerage company. We also believe this is a highly complementary combination, which has resulted, and will continue to result, in meaningful economies of scale. While the front-office operations will remain separately branded divisions, the back office, technology, and infrastructure of these two companies are being integrated in a smart and deliberate way.

On July 10, 2015, the Company guaranteed the obligations of GFI under the 8.375% Senior Notes; as a consequence of guaranteeing GFI’s debt, we have substantially improved the credit rating of GFI’s bonds and lowered future interest payments. We have also been able to free up capital set aside for regulatory and clearing purposes, allowing us to use our balance sheet more efficiently. As the integration of BGC and GFI continues, we expect to generate increased productivity per broker and to continue converting voice and hybrid broking to more profitable fully electronic trading on our FENICS platform, all of which should lead to increased revenues, profitability and cash flows. In addition, we expect our results to further improve as we invest the net proceeds from the $650 million Trayport sale (see “Trayport Transaction”).

Trayport Transaction

On December 11, 2015, we completed the sale (the “Trayport Transaction”) of all of the equity interests in the entities that make up the Trayport business to Intercontinental Exchange, Inc. (“ICE”). The Trayport business was GFI’s electronic European energy software, trading, and market data business. The Trayport Transaction occurred pursuant to a Stock Purchase Agreement, dated as of November 15, 2015. At the closing, we received 2,527,658 shares of ICE common stock issued with respect to the $650 million purchase price, which was adjusted at closing. Through September 30, 2016, we have sold more than 95% of our shares of ICE common stock. Trayport, prior to its sale, had generated gross revenues of approximately $80 million over the twelve months ended September 30, 2015. BGC expects to pay effective cash taxes of no more than $64 million related to the Trayport sale price, or an expected rate of less than 10%.

Nasdaq Transaction

On June 28, 2013, we completed the sale (the “Nasdaq Transaction”) of certain assets to Nasdaq, Inc. (“Nasdaq,” formerly known as “NASDAQ OMX Group, Inc.”), which purchased certain assets and assumed certain liabilities from us and our affiliates, including the eSpeed brand name and various assets comprising the fully electronic portion of our benchmark on-the-run U.S. Treasury brokerage, market data and co-location service businesses (“eSpeed”), for cash consideration of $750 million paid at closing, plus an earn-out of up to

 

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14,883,705 shares of Nasdaq common stock to be paid ratably in each of the fifteen years following the closing in which the consolidated gross revenue of Nasdaq is equal to or greater than $25 million. Through September 30, 2016, we have received 3,968,988 shares of Nasdaq common stock in accordance with the agreement. The contingent future issuances of Nasdaq common stock are also subject to acceleration upon the occurrence of certain events.

As a result of the sale of eSpeed, we only sold our on-the-run benchmark 2-, 3-, 5-, 7-, 10-, and 30-year fully electronic trading platform for U.S. Treasury Notes and Bonds. We continue to offer voice brokerage for on-the-run U.S. Treasuries, as well as across various other products in rates, credit, FX, market data and software solutions. As we continue to focus our efforts on converting voice and hybrid desks to electronic execution, our e-businesses, excluding Trayport and revenues from inter-company data, software, and post-trade services, have continued to grow their revenues and generated $203.3 million of net revenues during the most recent trailing twelve-month period ended September 30, 2016, up 21.4% from a year ago. These fully electronic revenues are more than double those of eSpeed, which generated $48.6 million in revenues for the six months, ended June 30, 2013 and was sold in the second quarter of 2013 for $1.2 billion (based on the value of Nasdaq stock at the time the deal was announced).

For the purposes of this document and subsequent Securities and Exchange Commission (“SEC”) filings, all of our fully electronic businesses are referred to as “FENICS.” These offerings include Financial Services segment fully electronic brokerage products, as well as offerings in market data, software solutions, and post-trade services across both BGC and GFI. FENICS results do not include the results of Trayport, either before or after the completed sale to ICE. Going forward, we expect these businesses to become an even more valuable part of BGC as they continue to grow faster than, and be substantially larger than, eSpeed ever was for us.

Financial Services:

The financial intermediary sector has been a competitive area that grew over the first half of the past decade due to several factors. One factor was the increasing use of derivatives to manage risk or to take advantage of the anticipated direction of a market by allowing users to protect gains and/or guard against losses in the price of underlying assets without having to buy or sell the underlying assets. Derivatives are often used to mitigate the risks associated with interest rates, equity ownership, changes in the value of foreign currency, credit defaults by corporate and sovereign debtors and changes in the prices of commodity products. For the period from 1998 through 2007, demand from financial institutions, financial services intermediaries and large corporations had increased volumes in the