UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the quarterly period ended March 31, 2010
- or -
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the transition period from to
Commission file number 014140
BROADPOINT GLEACHER SECURITIES GROUP, I N C.
(Exact name of registrant as specified in its charter)
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New York
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22-2655804
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1290 Avenue of the Americas, New York, New York
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10104
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code
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(212) 273-7100
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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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
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Accelerated Filer
þ
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Non-accelerated Filer
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(Do not check if a smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
128,846,979 shares of Common Stock were outstanding as of the close of business on April 30, 2010.
BROADPOINT GLEACHER SECURITIES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
2
BROADPOINT GLEACHER SECURITIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Part I Financial Information
Item 1. Financial Statements
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Three Months Ended
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March 31
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(In thousands of dollars except for per share amounts)
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2010
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2009
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Revenues:
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Principal transactions
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$
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46,306
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$
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52,041
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Commissions
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4,165
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4,902
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Investment banking
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14,798
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4,260
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Investment banking revenue from related party
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300
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930
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Investment gains/(losses), net
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150
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(9
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Interest
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16,161
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10,648
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Fees and others
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910
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1,490
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Total revenues
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82,790
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74,262
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Interest expense
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3,487
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3,702
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Net revenues
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79,303
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70,560
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Expenses (excluding interest):
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Compensation and benefits
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68,201
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52,407
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Clearing, settlement and brokerage
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1,375
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812
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Communications and data processing
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3,207
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2,287
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Occupancy, depreciation and amortization
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2,246
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1,788
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Amortization of intangible assets
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1,078
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257
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Selling
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1,195
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925
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Other
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4,052
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2,748
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Total expenses (excluding interest)
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81,354
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61,224
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(Loss)/income before income taxes and discontinued operations
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(2,051
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)
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9,336
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Income tax (benefit)/expense
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(1,843
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4,357
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(Loss)/income from continuing operations
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(208
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4,979
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(Loss)/income from discontinued operations, net of
taxes (see Note 20)
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(3
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42
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Net (loss)/income
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$
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(211
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$
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5,021
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Per share data:
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Basic (loss)/earnings per share:
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Continuing operations
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$
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(0.00
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$
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0.07
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Discontinued operations
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Net (loss)/income per share
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$
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(0.00
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$
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0.07
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Diluted (loss)/earnings per share:
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Continuing operations
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$
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(0.00
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$
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0.06
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Discontinued operations
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0.00
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Net (loss)/income per share
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$
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(0.00
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$
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0.06
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Weighted average common and common equivalent shares
outstanding:
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Basic
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119,301,312
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75,526,477
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Dilutive
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119,301,312
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79,797,672
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The accompanying notes are an integral part
of these consolidated financial statements.
3
BROADPOINT GLEACHER SECURITIES GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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March 31
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December 31
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(In thousands of dollars, except share amounts)
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2010
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2009
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Assets
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Cash and cash equivalents
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$
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33,288
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$
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24,997
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Cash and securities segregated for regulatory purposes
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100
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100
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Receivables from:
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Brokers, dealers and clearing agencies
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13,671
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19,797
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Related parties
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2,714
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2,971
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Others
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11,873
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14,134
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Securities owned, at fair value (includes assets
pledged of $831,590 and $978,967 at March 31, 2010
and December 31, 2009, respectively)
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832,360
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979,701
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Investments
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19,756
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19,326
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Office equipment and leasehold improvements, net
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4,554
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3,069
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Goodwill
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106,141
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105,694
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Intangible assets
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18,185
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19,263
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Deferred tax assets, net
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21,974
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16,137
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Other assets
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11,109
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10,974
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Total Assets
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$
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1,075,725
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$
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1,216,163
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Liabilities and Shareholders Equity
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Liabilities
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Payables to:
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Brokers, dealers and clearing agencies
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$
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555,592
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$
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691,495
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Related parties
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11,776
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12,678
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Others
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1,435
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1,502
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Securities sold, but not yet purchased, at fair value
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96,175
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72,988
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Accrued compensation
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23,205
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70,728
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Accounts payable
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1,696
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2,203
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Accrued expenses
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5,326
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4,754
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Income taxes payable
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1,836
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2,397
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Deferred tax liabilities
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2,751
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2,817
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Mandatorily redeemable preferred stock
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24,477
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24,419
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Total Liabilities
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724,269
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885,981
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Commitments and Contingencies
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Subordinated debt
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1,197
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1,197
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Shareholders Equity
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Common stock; $.01 par value; authorized 200,000,000
shares; issued 128,901,290 and 125,056,247 shares,
respectively; and outstanding 128,294,480 and
124,357,163 shares, respectively
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1,290
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1,251
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Additional paid-in capital
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432,970
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411,633
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Deferred compensation
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534
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534
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Accumulated deficit
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(83,353
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(83,142
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Treasury stock, at cost (606,810 shares and 699,084
shares, respectively)
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(1,182
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(1,291
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Total Shareholders Equity
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350,259
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328,985
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Total Liabilities and Shareholders Equity
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$
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1,075,725
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$
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1,216,163
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The accompanying notes are an integral part
of these consolidated financial statements.
.
4
BROADPOINT GLEACHER SECURITIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
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March 31
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(In thousands of dollars)
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2010
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2009
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Cash flows from operating activities:
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Net (loss)/income
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$
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(211
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$
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5,021
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Adjustments to reconcile net (loss)/income to net cash
provided by (used in) operating activities:
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Depreciation and amortization
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386
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187
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Deferred income taxes
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(5,903
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Amortization of debt issuance costs
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42
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42
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Amortization of intangible assets
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1,078
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257
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Amortization of discount of mandatorily redeemable
preferred stock
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58
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58
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Unrealized investment (gains)/losses, net
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(189
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(2
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Realized losses (gains) on sale of investments
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39
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11
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Amortization of share-based compensation
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18,569
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2,718
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Disposal of office equipment and leasehold improvements
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15
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Changes in operating assets and liabilities:
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Cash and securities segregated for regulatory purposes
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370
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Net receivable/payable from customers
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(350
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Net receivable/payable from related party
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290
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(857
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)
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Securities owned, at fair value
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147,341
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8,092
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Other assets
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(177
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(976
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Net payable to brokers, dealers and clearing agencies
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(129,777
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(46,000
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Net receivable/payable from others
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199
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(1,642
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)
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Securities sold, but not yet purchased, at fair value
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23,187
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31,979
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Accrued compensation
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(46,616
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(4,151
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Accounts payable and accrued expenses
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394
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(55
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)
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Net increase (decrease) in drafts payable
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(329
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)
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116
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Income taxes payable
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(561
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)
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4,338
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Net cash provided by (used in) operating activities
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7,820
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(829
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Cash flows from investing activities:
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Purchases of office equipment and leasehold improvements
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(1,871
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(266
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Capital contribution investments
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(280
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Return of capital investments
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1,995
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Payment to sellers of American Technology Holdings, Inc.
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(1,382
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(410
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Net cash (used in) investing activities
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(1,538
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(676
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Cash flows from financing activities
:
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Excess tax benefits related to share-based compensation
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2,009
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Net cash provided by financing activities
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2,009
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Increase (decrease) in cash and cash equivalents
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8,291
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(1,505
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Cash and cash equivalents at beginning of the period
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24,997
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7,377
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Cash and cash equivalents at the end of the period
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$
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33,288
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$
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5,872
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Non Cash Investing and Financing Activities
During the three months ended March 31, 2010 and 2009, the Company issued approximately 0.40
million and 0.38 million shares out of treasury for share-based compensation exercises and vesting.
During the three months ended March 31, 2010 and 2009, Goodwill increased by $0.4 million and $0.9
million associated with earn-out payments related to the acquisition of American Technology
Research Holdings, Inc.
The accompanying notes are an integral part
of these consolidated financial statements.
5
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Organization and Nature of Business
Broadpoint Gleacher Securities Group, Inc. (and including its subsidiaries, the Company) is an
independent investment bank that provides corporations and institutional investors with strategic,
research-based investment opportunities, capital raising, and financial advisory services,
including merger and acquisition, restructuring, recapitalization and strategic alternative
analysis, as well as securities brokerage for institutional customers primarily in the United
States. The Company offers a diverse range of products through the Debt Capital Markets,
Investment Banking and Broadpoint Descap divisions of Broadpoint Capital, Inc. (Broadpoint
Capital), its Equity Capital Markets subsidiary, Broadpoint AmTech Inc. (Broadpoint AmTech), and
its venture capital subsidiary, FA Technology Ventures Inc. The Company is a New York corporation,
incorporated in 1985, and is traded on The NASDAQ Global Market (NASDAQ) under the symbol BPSG.
The accounting and financial reporting policies of the Company conform to accounting principles
generally accepted in the United States of America (GAAP). The consolidated financial statements
prepared in conformity with GAAP require management to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues and expense, and the disclosure of contingent
assets and liabilities. Actual results could be different from these estimates. In the opinion of
management, all normal, recurring adjustments are contained in the accompanying consolidated
financial statements necessary for a fair statement of this interim financial information. The
results for any interim period are not necessarily indicative of those for the full year.
The accompanying consolidated financial statements are presented in accordance with the U.S.
Securities and Exchange Commission (SEC) requirements of Quarterly Reports on Form 10-Q and are
unaudited. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted. Reference should be made to the Companys
audited consolidated financial statements filed on Form 10-K and notes for the year ended
December 31, 2009 for additional disclosures, including a summary of the Companys significant
accounting policies.
Reclassification
Certain amounts in prior periods have been reclassified to conform to the current year
presentation.
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) launched the FASB Accounting
Standards Codification (ASC) as the single authoritative source of GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative GAAP for SEC registrants. On its
effective date, the ASC superseded all then-existing non-SEC accounting and reporting standards.
All other non-grandfathered non-SEC accounting literature not included in the ASC became
non-authoritative. The Company adopted the ASC as it became effective for financial statements
issued for interim and annual periods ending after September 15, 2009. All such references to GAAP
throughout the notes to the consolidated financial statements are references to the applicable
ASCs.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amended
disclosure requirements related to fair value measurements including details of significant
transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, and a
gross presentation of activity within the Level 3 rollforward, presenting separately information
about purchases, sales, issuances and settlements. ASU 2010-06 is effective for financial
statements issued for reporting periods beginning after December 15, 2009 for certain disclosures
and for reporting periods after December 15, 2010 for other disclosures. The Company adopted these
amended accounting principles on January 1, 2010. Since these amended principles require only
additional disclosures concerning fair value measurements, this adoption did not affect the
Companys financial condition, results of operations or cash
6
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
flows. Refer to Note 6 Financial Instruments which includes the additional disclosures as
required by this statement.
In June 2009, the FASB issued amendments to accounting principles which change the accounting for
transfers of financial assets which were codified as Accounting Standards Update (ASU) No.
2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets. ASU
No. 2009-16 improves financial reporting by eliminating the exceptions for qualifying
special-purpose entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has
not surrendered control over the transferred financial assets. ASU No. 2009-16 modifies the financial-components approach and
limits the circumstances in which a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire original financial asset to an
entity that is not consolidated with the transferor in the financial statements being presented
and/or when the transferor has continuing involvement with the transferred financial asset. ASU
No. 2009-16 also requires that a transferor recognize and initially measure at fair value all
assets obtained and liabilities incurred as a result of a transfer of financial assets accounted
for as a sale. ASU No. 2009-16 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods within the first
annual reporting period, and for interim and annual reporting periods thereafter. The Company
adopted these amended accounting principles on January 1, 2010. This adoption did not have a
material effect on the Companys consolidated financial statements.
In June 2009, the FASB issued amendments to accounting principles which change the accounting for
Variable Interest Entities (VIE), which were codified as ASU 2009-17, which amends ASC 810
Consolidation. ASU 2009-17 significantly changes the criteria by which an enterprise determines
whether it must consolidate a VIE. A VIE is an entity which has insufficient equity at risk or
which is not controlled through voting rights held by equity investors. Currently, a VIE is
consolidated by the enterprise that will absorb a majority of the expected losses or expected
residual returns created by the assets of the VIE. ASU 2009-17 requires that a VIE be consolidated
by the enterprise that has both the power to direct the activities that most significantly impact
the VIEs economic performance and the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE. ASU 2009-17 also requires that an enterprise
continually reassess, based upon current facts and circumstances, whether it should consolidate the
VIEs with which it is involved. However, in January 2010, the FASB deferred ASU 2009-17 for
certain investment entities which allows asset managers that have no obligations to fund
potentially significant losses of an investment entity to continue to apply the previous accounting
guidance to investment entities that have attributes subject to ASC 946 The Investment Company
Guide. The deferral qualifies for many mutual funds, hedge funds, private equity funds, venture
capital funds and certain mortgage REITs. The Company adopted these amended accounting principles
on January 1, 2010. This adoption did not have a material effect on the Companys consolidated
financial statements, including our relationship as investment advisor to FA Technology Ventures
L.P., which qualified for the deferral. Refer to Note 8 Investments for additional information
related to FA Technology Ventures L.P.
In April 2009, the FASB issued amended accounting principles now codified within ASC Topic 820
Fair Value Measurements and Disclosures (ASC 820), related to determining fair value when the
volume and level of activity for an asset or liability has significantly decreased and identifying
transactions that are not orderly. This guidance lists factors which should be evaluated to
determine whether a transaction is orderly, clarifies that adjustments to transactions or quoted
prices may be necessary when the volume and level of activity for an asset or liability have
decreased significantly, and provides guidance for determining the concurrent weighting of the
transaction price relative to fair value indications from other valuation techniques when
estimating fair value. The Company adopted these amended accounting principles as of June 30,
2009. This adoption did not have a material impact on the Companys consolidated financial
statements.
In
September 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, which
supplements and amends the guidance in ASC 820, that provides additional guidance on how companies
should measure liabilities at fair value and confirmed practices that have evolved when measuring
fair value such as the use of quoted prices for a liability when traded as an asset. Under the new
guidance, the fair value of a liability is not adjusted to reflect the impact of contractual
restrictions that prevent its transfer. A quoted price, if available, in an active market for an
identical liability must be used. If such information is not available, an entity may use either
the quoted price of the identical liability when traded as an asset; quoted prices for similar
liabilities; similar liabilities traded as assets or another technique such as the income approach
or a market approach. The Company adopted these amended
7
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accounting
principles on October 1, 2009. This adoption did not have a material impact on the
Companys consolidated financial statements.
2. (Loss)/Earnings Per Common Share
The Company calculates its basic and diluted (loss)/earnings per share in accordance with ASC
260 Earnings Per Share. Basic (loss)/earnings per share is computed based upon weighted-average
shares outstanding during the period. Dilutive (loss)/earnings per share is computed consistently
with the basic computation while giving effect to all potentially dilutive common shares and common
share equivalents that were outstanding during the period. The Company uses the treasury stock
method to reflect the potential dilutive effect of unvested stock awards, warrants, and unexercised
options. The weighted-average shares outstanding were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31
|
|
|
2010
|
|
2009
|
|
Weighted average shares for basic
(loss)/earnings per share
|
|
|
119,301,312
|
|
|
|
75,526,477
|
|
|
Effect of dilutive common share equivalents
|
|
|
|
|
|
|
4,271,195
|
|
|
Weighted average shares and dilutive common
share equivalents for dilutive
(loss)/earnings per share
|
|
|
119,301,312
|
|
|
|
79,797,672
|
|
|
The Company excluded approximately 1.0 million options, 3.0 million restricted stock awards,
and 3.6 million restricted stock units from its computation of dilutive (loss)/earnings per share
for the three months ended March 31, 2010, because they were anti-dilutive. No options, restricted
stock awards or restricted stock units were excluded for the three months ended March 31, 2009.
3. Cash and Cash Equivalents
The Company has defined cash equivalents as highly liquid investments, with original
maturities of less than 90 days that are not segregated for regulatory purposes or held for sale in
the ordinary course of business. At March 31, 2010 and December 31, 2009, cash equivalents were
approximately $7.7 million and $8.9 million, respectively. Cash and cash equivalents of
approximately $30.6 million and $7.8 million, respectively, were held at one financial institution.
4. Receivables from and Payables to Brokers, Dealers, and Clearing Agencies
Amounts receivable from and payable to brokers, dealers and clearing agencies consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Commissions receivable
|
|
$
|
790
|
|
|
$
|
1,285
|
|
Underwriting and syndicate fees receivable
|
|
|
2,429
|
|
|
|
618
|
|
Good faith deposits
|
|
|
751
|
|
|
|
751
|
|
Receivable from clearing organizations
|
|
|
9,701
|
|
|
|
17,143
|
|
|
Total receivables
|
|
$
|
13,671
|
|
|
$
|
19,797
|
|
|
|
|
|
|
|
|
|
|
|
Payable to clearing organizations
|
|
|
555,592
|
|
|
|
691,495
|
|
|
Total payables
|
|
$
|
555,592
|
|
|
$
|
691,495
|
|
|
8
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Securities transactions are recorded on a trade date, as if they had settled. The related
amounts receivable and payable for unsettled securities transactions are recorded net in
Receivables from or Payables to brokers, dealers and clearing agencies on the Consolidated
Statements of Financial Condition.
Securities transactions by customers of the Companys broker-dealer subsidiaries, Broadpoint
Capital and Broadpoint AmTech, are cleared through third parties under clearing agreements on a
fully disclosed basis. Under these agreements, the clearing agents execute and settle customer
securities transactions, collect margin receivables related to these transactions, monitor the
credit standing and required margin levels related to these customers and, pursuant to margin
guidelines, require the customer to deposit additional collateral with them or to reduce positions,
if necessary.
The clearing agencies may re-hypothecate all securities held on behalf of the Company.
5. Receivables from and Payables to Others
Amounts Receivable from or Payable to Others consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Interest receivable
|
|
$
|
5,058
|
|
|
$
|
5,388
|
|
Investment banking fees receivable
|
|
|
3,541
|
|
|
|
3,865
|
|
Advisory fees receivable
|
|
|
2,172
|
|
|
|
2,345
|
|
Management fees receivable
|
|
|
288
|
|
|
|
78
|
|
Investment distributions receivable
|
|
|
|
|
|
|
1,995
|
|
Others
|
|
|
814
|
|
|
|
463
|
|
|
Total receivables
|
|
$
|
11,873
|
|
|
$
|
14,134
|
|
|
Draft payables
|
|
|
263
|
|
|
|
592
|
|
Payable to employees for the Employee Investment Funds (see Note 8)
|
|
|
960
|
|
|
|
697
|
|
Others
|
|
|
212
|
|
|
|
213
|
|
|
Total payables
|
|
$
|
1,435
|
|
|
$
|
1,502
|
|
|
The Company maintains a group of zero balance bank accounts which are included in Payable to
others on the Consolidated Statements of Financial Condition. Drafts payable represent the balance
in these accounts related to outstanding checks that have not yet been presented for payment at the
bank. The Company has sufficient funds on deposit to clear these checks, and these funds will be
transferred to the zero-balance accounts upon presentment.
6. Financial Instruments
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of accounting policies related to the Companys securities transactions and derivative financial
instruments.
ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid
upon the transfer of a liability (i.e., the exit price) in an orderly transaction between market
participants at the measurement date and establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect the Companys
assumptions about the assumptions market participants would use in pricing the asset or liability
based on the best information available in the circumstances. The hierarchy is broken down into
three levels based on the reliability of inputs as follows:
9
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 1: Quoted prices in active markets that the Company has the ability to access at the
reporting date, for identical assets or liabilities. Prices are not adjusted for the
effects, if any, of the Company holding a large block relative to the overall trading
volume (referred to as a blockage factor).
Level 2: Directly or indirectly observable prices in active markets for similar assets or
liabilities; quoted prices for identical or similar items in markets that are not active;
inputs other than quoted prices (e.g., interest rates, yield curves, credit risks,
volatilities); or market corroborated inputs.
Level 3: Unobservable inputs that reflect managements own assumptions about the
assumptions market participants would make.
The availability of observable inputs can vary from product to product and is affected by a wide
variety of factors, including, for example, the type of product, whether the product is new and not
yet established in the marketplace, and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires more judgment. Accordingly, the degree of judgment
exercised by management in determining fair value is greatest for instruments categorized in Level
3. In certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy
within which the fair value measurement in its entirety falls is determined based on the lowest
level input that is significant to the fair value measurement in its entirety.
ASC 820 also provides (i) general guidance on determining fair value when markets are inactive
including the use of judgment in determining whether a transaction in a dislocated market
represents fair value, the inclusion of market participant risk adjustments when an entity
significantly adjusts observable market data based on unobservable inputs, and the degree of
reliance to be placed on broker quotes or pricing services as well as (ii) additional guidance for
estimating fair value when the volume and level of activity for the asset or liability have
significantly declined and guidance on identifying circumstances that indicate a transaction is not
orderly. These provisions have not historically had a material effect on the Companys
consolidated financial statements.
Fair Valuation Methodology
Cash Instruments
- These financial assets represent cash in banks or cash invested in highly liquid
investments with original maturities less than 90 days that are not segregated for regulatory
purposes or held for sale in the ordinary course of business. These investments are valued at par,
which represent fair value, and are reported as Level 1.
Securities Owned/Securities Sold But Not Yet Purchased
- These financial assets represent
investments in fixed income and equity securities.
Fixed income securities, which are traded in active markets, include on-the-run treasuries, federal
agency obligations, asset and mortgage-backed securities including to-be-announced securities
(TBAs). A TBA is a forward mortgage-backed securities whose collateral remains to be announced
until just prior to the trade settlement, corporate debt and preferred stock. The on-the-run
treasuries and TBAs are generally traded in active, quoted and highly liquid markets. These assets
are generally classified as Level 1. TBAs, which are not issued within the next earliest date for
issuance, are treated as derivatives and are generally classified as Level 1. As there is no
quoted market for corporate debt, asset and mortgage-backed securities, and preferred stock, the
Company utilizes observable market factors in determining fair value. These financial instruments
are reported as Level 2. In certain circumstances, the Company may utilize unobservable inputs
that reflect managements own assumptions about the assumptions market participants would make.
These financial assets are reported as Level 3.
In determining fair value for Level 2 financial instruments, management utilizes benchmark yields,
reported trades for comparable trade sizes, issuer spreads, benchmark securities, bids and offers.
These inputs relate either directly to the financial asset being evaluated or indirectly to a
similar security (for example, another bond of the same issuer or a bond of a different issuer in
the same industry with similar maturity, terms and conditions). Additionally, for certain
mortgage-backed securities, management also considers various characteristics such as issuer,
underlying collateral, prepayment speeds, cash flows and credit ratings.
10
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In determining fair value for Level 3 financial instruments, management maximizes the use of market
observable inputs when available. Management utilizes factors such as bids that were received,
spreads to the yield curve on similar offered financial assets, or comparing spreads to similar
financial assets that traded and had been priced through an independent pricing source. Management
considers these pricing methodologies consistent with assumptions in how other market participants
value certain financial assets. These pricing methodologies involve management judgment and lead to
a Level 3 classification.
Management then evaluates the fair value against other factors it deems relevant. These factors may
be a recent purchase or sale of the financial asset at a price that differs from the fair value
based upon observable inputs or economic events that impact the value of the asset such as
liquidity in the market, political events or observations of equity curves related to the issuer.
These same factors are utilized to value Level 3 financial assets where no observable inputs are
available.
Equity securities are valued at quoted market prices. These financial assets are reported as Level
1 when traded in active markets. Equity securities that are subject to legal restrictions on
transfer are classified as Level 2. When quoted prices are not available, valuation models are
applied to these financial assets. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price transparency for the
instruments or market and the instruments complexity. Accordingly, these financial assets are
recorded as Level 3.
Derivatives
- In connection with mortgage-backed and U.S. government securities trading, the
Company economically hedges certain exposure through the use of TBAs and exchange traded treasury
futures contracts. TBAs, which are not due to settle within the next earliest date for settlement,
are accounted for as derivatives. These derivatives are traded in an active quoted market and
therefore generally classified as Level 1.
Investments
- These financial assets primarily represent the Companys investment in FA Technology
Ventures L.P. (the Partnership), which was formed for purposes of investing in early and
expansion stage companies in the information and new energy technology sectors. Valuation
techniques predominantly include consideration of comparable market transactions and the use of
valuation models to determine the discounted value of estimated future cash flows, adjusted as
appropriate for market and/or other risk factors. These valuation techniques involve some level of
management estimation and judgment, the degree of which is dependent on the price transparency for
the instruments or market and the instruments complexity and are accordingly, classified as Level
3.
11
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the categorization of the financial instruments within the fair
value hierarchy at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
(In thousands of dollars)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash instruments (1)
|
|
$
|
33,388
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,388
|
|
Securities owned (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
|
|
|
|
715,029
|
|
|
|
4,759
|
|
|
|
719,788
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
48,859
|
|
|
|
48,859
|
|
Debt securities issued by U.S.
Government and federal agency
obligations
|
|
|
6,337
|
|
|
|
18,515
|
|
|
|
|
|
|
|
24,852
|
|
Preferred stock
|
|
|
|
|
|
|
17,380
|
|
|
|
|
|
|
|
17,380
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
9,081
|
|
|
|
9,081
|
|
Other debt obligations
|
|
|
|
|
|
|
|
|
|
|
5,612
|
|
|
|
5,612
|
|
Corporate debt securities
|
|
|
|
|
|
|
4,195
|
|
|
|
1
|
|
|
|
4,196
|
|
Collateralized debt obligations
|
|
|
|
|
|
|
|
|
|
|
1,604
|
|
|
|
1,604
|
|
Equity securities
|
|
|
|
|
|
|
663
|
|
|
|
60
|
|
|
|
723
|
|
Derivatives (2)
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
19,756
|
|
|
|
19,756
|
|
|
Total financial assets at fair value
|
|
$
|
39,990
|
|
|
$
|
755,782
|
|
|
$
|
89,732
|
|
|
$
|
885,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value
|
|
(In thousands of dollars)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Securities sold but not yet purchased (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
obligations
|
|
$
|
93,185
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
93,185
|
|
Equity securities
|
|
|
|
|
|
|
2,150
|
|
|
|
|
|
|
|
2,150
|
|
Corporate debt securities
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
634
|
|
Preferred stock
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
99
|
|
Derivatives (2)
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
Total financial liabilities at fair value
|
|
$
|
93,292
|
|
|
$
|
2,883
|
|
|
$
|
|
|
|
$
|
96,175
|
|
|
|
|
|
(1)
|
|
Cash instruments include Cash segregated for regulatory purposes of $0.1 million in the
Consolidated Statements of Financial Condition.
|
|
(2)
|
|
Unrealized gains/(losses) relating to derivatives are reported in Securities owned and
Securities sold, but not yet purchased, at fair value in the Consolidated Statements of
Financial Condition.
|
Included below is a discussion of the characteristics of the Companys Level 2 and Level 3
holdings. Unless otherwise stated, fair value of Level 2 assets are determined based upon
observable third party information including recent trading activity, broker quotes and other
relevant market data as noted above. Fair value for level 3 assets are based predominantly on
managements own assumptions about the assumptions market participants would make. The Company
generally does not utilize internally developed valuation models to determine fair value during the
relevant reporting periods for any holdings other than its investments in partnerships.
The Companys agency mortgage-backed securities positions classified as Level 2, of approximately
$715.0 million, have an average loan size of approximately $175,000 paying interest of 6.6%, with a
weighted average FICO score of 710. This portfolio has an average coupon remitting payment of 6.2%
and has an average annualized constant prepayment rate of approximately 30%. This prepayment rate
reflects Freddie Macs buybacks of aged delinquent loans at par during the quarter, which impacted
this rate by approximately 8 percentage points. Fair value is determined through a combination of
matrix pricing as well as the information noted in the preceding paragraph.
12
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Companys Level 2 debt securities issued by U.S. Government and federal agency obligations of
approximately $18.5 million have an average coupon of 4.4% and average maturity of 2023.
The Companys preferred stock holdings of approximately $17.4 million has an average coupon of 8.2%
and average credit rating of BBB.
The Companys holdings of corporate debt securities classified as Level 2 of approximately $4.2
million have an average credit rating of BB-, have an average issuance year of 2008 and an average
maturity of 2022.
The Companys Level 3 agency mortgage-backed securities positions of approximately $4.8 million
have an average loan size of $134,000 paying interest of 6.4%, with an average coupon of 1.9% and
an average vintage of 2004.
The Companys portfolio of Level 3 commercial mortgage backed securities of approximately $48.9
million are primarily mezzanine, have an average credit rating of BB- and issuance year of 2005.
The Companys portfolio of Level 3 non-agency residential mortgage backed securities of
approximately $9.1 million are primarily mezzanine, have an average credit rating of CCC- and have
experienced on average, a default rate of 9.4% and 56% severity.
The Companys portfolio of Level 3 other debt obligations include a portfolio of approximately $5.6
million asset backed securities, paying floating interest rates currently at less than 1%, with an
average credit rating of AA+, an average vintage of 2006 and average annualized constant prepayment
rate of 24.7%.
The Companys investments of approximately $19.8 million classified as Level 3, includes the
Companys investment in the Partnership of approximately $18.5 million. The Partnership invests
primarily in equity securities of closely held private companies, and also invests in equity
securities in public companies which are generally subject to legal restrictions on transfer. The
Partnership is comprised of approximately 25 holdings and fair value is determined based upon the
nature of the underlying holdings. The Company has classified its entire investment as Level 3, as
the Partnership is predominantly comprised of private companies.
-
|
|
Investments in privately held companies: Valuation techniques include consideration of
comparable market transactions (market approach) and utilizing the discounted value of
estimated future cash flows, as adjusted for market and/or other risk factors. Relevant
inputs include the current financial position and current and projected operating results of
the issuer, sales prices of recent public or private transactions in the same or similar
securities, significant recent events affecting the issuer, the price paid by the Partnership
to acquire the asset, subsequent rounds of financing, completed or pending third-party
transactions in the underlying investment or comparable issuers, recapitalizations and other
transactions across the capital structure.
|
|
-
|
|
Investments in public companies: Valuation is based on quoted market prices in active
markets and adjusted as a result of legal restrictions on transfer.
|
The Companys Level 3 investments also include approximately $1.2 million as a result of the
consolidation of the Employee Investment Funds and other miscellaneous investments of approximately
$0.4 million. For additional information regarding the Companys investments, refer to Note 8.
13
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the categorization of the financial instruments within the fair
value hierarchy at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
(In thousands of dollars)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash instruments (1)
|
|
$
|
25,097
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,097
|
|
Securities owned (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
|
|
|
|
870,529
|
|
|
|
5,082
|
|
|
|
875,611
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
80
|
|
|
|
32,585
|
|
|
|
32,665
|
|
Debt securities issued by U.S.
Government and federal agency
obligations
|
|
|
29,718
|
|
|
|
|
|
|
|
|
|
|
|
29,718
|
|
Preferred stock
|
|
|
|
|
|
|
10,701
|
|
|
|
|
|
|
|
10,701
|
|
Other debt obligations
|
|
|
|
|
|
|
|
|
|
|
9,775
|
|
|
|
9,775
|
|
Collateralized debt obligations
|
|
|
|
|
|
|
|
|
|
|
7,371
|
|
|
|
7,371
|
|
Corporate debt securities
|
|
|
|
|
|
|
5,877
|
|
|
|
1
|
|
|
|
5,878
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
69
|
|
|
|
5,177
|
|
|
|
5,246
|
|
Equities
|
|
|
|
|
|
|
643
|
|
|
|
60
|
|
|
|
703
|
|
Derivatives (2)
|
|
|
2,033
|
|
|
|
|
|
|
|
|
|
|
|
2,033
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
19,326
|
|
|
|
19,326
|
|
|
Total financial assets at fair value
|
|
$
|
56,848
|
|
|
$
|
887,899
|
|
|
$
|
79,377
|
|
|
$
|
1,024,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value
|
|
(In thousands of dollars)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Securities sold but not yet purchased (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
obligations
|
|
$
|
66,946
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
66,946
|
|
Corporate debt securities
|
|
|
|
|
|
|
6,029
|
|
|
|
|
|
|
|
6,029
|
|
Derivatives (2)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
Total financial liabilities at fair value
|
|
$
|
66,959
|
|
|
$
|
6,029
|
|
|
$
|
|
|
|
$
|
72,988
|
|
|
|
|
|
(1)
|
|
Cash instruments include Cash segregated for regulatory purposes of $0.1 million in the
Consolidated Statements of Financial Condition.
|
|
(2)
|
|
Unrealized gains/(losses) relating to Derivatives are reported in Securities owned and
Securities sold, but not yet purchased, at fair value in the Consolidated Statements of
Financial Condition.
|
The Company reviews which level financial instruments are classified on a quarterly basis. As the
observability and strength of valuation attributes changes, reclassifications of certain financial
assets or liabilities may occur between levels. The Companys policy is to utilize an end of
period convention for determining transfers in or out of Levels 1, 2 and 3. During the three month
period ended March 31, 2010, there were no transfers between Level 1 and 2.
14
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the changes in the Companys Level 3 financial instruments for the
three month period ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Residential
|
|
Collateralized
|
|
Agency
|
|
Corporate
|
|
|
|
|
|
|
|
|
Other Debt
|
|
Mortgage-backed
|
|
Mortgage-backed
|
|
Debt
|
|
Mortgage-backed
|
|
Debt
|
|
|
|
|
|
|
(In thousands)
|
|
Obligations
|
|
Securities
|
|
Securities
|
|
Obligations
|
|
Securities
|
|
Securities
|
|
Equities
|
|
Investments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
9,775
|
|
|
$
|
32,585
|
|
|
$
|
5,177
|
|
|
$
|
7,371
|
|
|
$
|
5,082
|
|
|
$
|
1
|
|
|
$
|
60
|
|
|
$
|
19,326
|
|
|
$
|
79,377
|
|
Realized gains/(losses) (1)
|
|
|
1
|
|
|
|
(18
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
(280
|
)
|
Unrealized gains/(losses) (1)
|
|
|
2,234
|
|
|
|
4,671
|
|
|
|
529
|
|
|
|
125
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
7,702
|
|
Purchases
|
|
|
5,562
|
|
|
|
44,424
|
|
|
|
8,380
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
58,694
|
|
Sales
|
|
|
(11,904
|
)
|
|
|
(32,785
|
)
|
|
|
(4,730
|
)
|
|
|
(5,939
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,405
|
)
|
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(56
|
)
|
|
|
(18
|
)
|
|
|
(134
|
)
|
|
|
(1
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
Transfers in and/or out of
Level 3 (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
5,612
|
|
|
$
|
48,859
|
|
|
$
|
9,081
|
|
|
$
|
1,604
|
|
|
$
|
4,759
|
|
|
$
|
1
|
|
|
$
|
60
|
|
|
$
|
19,756
|
|
|
$
|
89,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gains/(losses) on Level 3
assets still held at the
reporting date (1)
|
|
$
|
2,234
|
|
|
$
|
4,671
|
|
|
$
|
529
|
|
|
$
|
125
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
141
|
|
|
$
|
7,702
|
|
|
|
|
|
(1)
|
|
Realized and unrealized gains/(losses) are reported in Principal transactions in the
Consolidated Statements of Operations.
|
|
(2)
|
|
During the three month period ended March 31, 2010 there were no transfers in or out of Level
3.
|
The following tables summarize the changes in the Companys Level 3 financial instruments for the
three month period ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
(In thousands of dollars)
|
|
owned
|
|
Investments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
24,381
|
|
|
$
|
15,398
|
|
|
$
|
39,779
|
|
Realized gains/(losses) (1)
|
|
|
(1,070
|
)
|
|
|
(12
|
)
|
|
|
(1,082
|
)
|
Unrealized gains/(losses) (1)
|
|
|
(1,597
|
)
|
|
|
2
|
|
|
|
(1,595
|
)
|
Purchases, sales and settlements
|
|
|
(699
|
)
|
|
|
(9
|
)
|
|
|
(708
|
)
|
Transfers in and/or out of Level 3 (2)
|
|
|
(5,042
|
)
|
|
|
|
|
|
|
(5,042
|
)
|
|
Balance, March 31, 2009
|
|
$
|
15,973
|
|
|
$
|
15,379
|
|
|
$
|
31,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses)
on Level 3 assets still held at the
reporting date (1)
|
|
$
|
(3,375
|
)
|
|
$
|
600
|
|
|
$
|
(2,775
|
)
|
|
|
|
|
(1)
|
|
Realized and unrealized gains/(losses) are reported in Principal transactions in the
Consolidated Statements of Operations.
|
|
(2)
|
|
During the three month period ended March 31, 2009 there was a net transfer out of
approximately $5.0 million from Level 3. These transfers were primarily investment grade
performing mortgage and asset backed securities.
|
15
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Companys assets measured at fair value on a nonrecurring basis solely relate to Goodwill
arising from various business combinations which would be classified as Level 3 within the fair
value hierarchy. Refer to Note 9 for additional information, including changes in balances from
prior reporting periods.
7. Securities Owned and Sold, but Not Yet Purchased
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of the accounting policies related to the Companys securities transactions and derivative
financial instruments.
Securities owned and sold, but not yet purchased consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Sold, but not yet
|
|
|
|
|
|
Sold, but not yet
|
|
(In thousands of dollars)
|
|
Owned
|
|
Purchased
|
|
Owned
|
|
Purchased
|
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
719,788
|
|
|
$
|
|
|
|
$
|
875,611
|
|
|
$
|
|
|
|
Non-agency mortgage-backed securities
|
|
|
57,940
|
|
|
|
|
|
|
|
37,911
|
|
|
|
|
|
|
U.S. Government and federal agency obligations
|
|
|
24,852
|
|
|
|
93,185
|
|
|
|
29,718
|
|
|
|
66,946
|
|
|
Preferred stock
|
|
|
17,380
|
|
|
|
99
|
|
|
|
10,701
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,196
|
|
|
|
634
|
|
|
|
5,878
|
|
|
|
6,029
|
|
|
Other debt obligations
|
|
|
7,216
|
|
|
|
|
|
|
|
17,146
|
|
|
|
|
|
|
Equities
|
|
|
723
|
|
|
|
2,150
|
|
|
|
703
|
|
|
|
|
|
|
Derivatives
|
|
|
265
|
|
|
|
107
|
|
|
|
2,033
|
|
|
|
13
|
|
|
Not Readily Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities with no publicly quoted market
|
|
|
19,756
|
|
|
|
|
|
|
|
19,326
|
|
|
|
|
|
|
|
Total
|
|
$
|
852,116
|
|
|
$
|
96,175
|
|
|
$
|
999,027
|
|
|
$
|
72,988
|
|
|
|
Securities not readily marketable are principally the Companys investments in publicly and
privately held companies and private equity securities. Refer to Note 8 for further information.
The Companys subsidiaries utilize derivatives for various economic hedging strategies to actively
manage their market and liquidity exposures. This strategy includes the purchase and sale of
securities on a when-issued basis and entering into exchange traded treasury futures contracts. At
March 31, 2010 and December 31, 2009, the Companys subsidiaries had no open futures contracts, no
outstanding underwriting commitments, had not entered into any TBA purchase agreements, and had
entered into 16 and 17 open TBA sale agreements in the notional amount of $201.7 million and $280.5
million, respectively. Total losses recognized in the Consolidated Statements of Operations
associated with these hedging strategies were $2.9 million and $2.8 million, respectively for the
three month periods ending March 31, 2010 and 2009, respectively.
8. Investments
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of the accounting policy related to the Companys investments included within the policy titled
Securities Transactions and Note 6 within this Quarterly Report on Form 10-Q for additional
information regarding valuation techniques and inputs related to the Companys investment in the
Partnership.
16
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Companys investment portfolio includes interests in publicly and privately held companies and
private equity securities. Information regarding these investments has been aggregated and is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Investment in the Partnership
|
|
$
|
18,164
|
|
|
$
|
18,012
|
|
Consolidation of Employee Investment Funds,
net of Companys ownership interest, classified
as Private Investment
|
|
|
1,233
|
|
|
|
977
|
|
Other
|
|
|
359
|
|
|
|
337
|
|
|
Total fair value
|
|
$
|
19,756
|
|
|
$
|
19,326
|
|
|
Investment gains and losses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Private (realized and unrealized gains and losses)
|
|
$
|
150
|
|
|
$
|
(9
|
)
|
|
The Company has an investment in the Partnership of approximately $18.2 million and
approximately $18.0 million at March 31, 2010 and December 31, 2009, respectively. The
Partnerships primary purpose is to provide investment returns consistent with the risk of
investing in venture capital. FA Technology Ventures Corporation (FATV), a wholly-owned
subsidiary, is the investment advisor to the Partnership. The Company is committed to invest an
additional $1.0 million to the Partnership. At March 31, 2010 and December 31, 2009, total
Partnership capital for all investors in the Partnership equaled $71.8 million and $71.2 million,
respectively. The Partnership is scheduled to terminate in July 2011, unless extended for a
maximum period of 2 additional years. This is the Companys best estimate of the timeframe to
liquidation. The Partnership is considered a variable interest entity. The Company is not the
primary beneficiary, due to other investors level of investment in the Partnership. Accordingly,
the Company has not consolidated the Partnership in these consolidated financial statements, but
has only recorded the fair value of its investment, which also represented the Companys maximum
exposure to loss in the Partnership at March 31, 2010 and December 31, 2009. Revenues derived from
the Partnership and any parallel funds for the three month periods ended March 31, 2010 and 2009
were $0.2 million and $0.2 million, respectively.
The Company has recorded the employees portion of the fair value and related unrealized
gains/(losses) associated with its Employee Investment Funds (EIF) in its consolidated financial
statements. The EIF are limited liability companies, established by the Company for the purpose of
having select employees invest in private equity securities. The EIF is managed by Broadpoint
Management Corp., a wholly-owned subsidiary, which has contracted with FATV to act as an investment
advisor with respect to funds invested in parallel with the Partnership. Income of approximately
$0.3 million and $0.0 million, recorded as Investment gains/losses, related to EIF as of March 31,
2010 and 2009, respectively, is offset in consolidation within Fees and other income and is
recorded as Payable to others in the Consolidated Statement of Financial Condition. The fair value
of the Companys investment in the EIF at March 31, 2010 and December 31, 2009 was $0.1 million and
$0.1 million, respectively. At March 31, 2010 and December 31, 2009, the Company has outstanding
loans of $0.3 million and $0.3 million, respectively, to the EIF. The effect of recording the EIF
in the Companys consolidated Statement of Financial Condition at March 31, 2010 was to increase
Investments by $1.2 million, decrease Receivable from others by $0.3 million and increase Payable
to others by $1.0 million. The amounts in Payable to others relates to the value of the EIF owned
by employees.
9. Goodwill and Intangible Assets
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of the accounting policy related to goodwill and intangible assets.
17
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Unit
|
|
Reporting Unit
|
|
Reporting Unit
|
|
|
(In thousands)
|
|
Broadpoint Descap
|
|
Equities
|
|
Investment Banking
|
|
Total
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
17,364
|
|
|
$
|
8,928
|
|
|
$
|
79,402
|
|
|
$
|
105,694
|
|
Contingent consideration
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
|
447
|
|
|
Balance at March 31, 2010
|
|
$
|
17,364
|
|
|
$
|
9,375
|
|
|
$
|
79,402
|
|
|
$
|
106,141
|
|
|
During the three month period ended March 31, 2010, goodwill allocated to the Equities
reporting unit increased by approximately $0.4 million related to contingent consideration
associated with the Companys Broadpoint AmTech acquisition. Refer to Note 12 for additional
information.
The Company has designated its annual goodwill impairment testing dates for its Broadpoint Descap,
Equities and Investment Banking reporting units to be December 31, October 1, and June 1,
respectively. The fair value of the Broadpoint Descap reporting unit was substantially in excess
of its carrying value, and consequently the Company does not believe an impairment charge to be
likely in future periods. The fair value of the Equities reporting unit exceeded its carrying
value by approximately 36% as of October 1, 2009. The annual goodwill impairment test for the
Companys Investment Banking reporting unit is scheduled for the second quarter of 2010.
The Company used a combination of the market and income approaches to determine the fair value of
the Equities reporting unit. Key assumptions utilized in the market approach included the use of
multiples of earnings before interest and taxes (EBIT) and earnings before interest, taxes,
depreciation and amortization (EBITDA) based upon available comparable company market data. The
Company also utilizes a discounted cash flow analysis, utilizing a discount rate which includes an
estimated cost of debt and cost of equity and capital structure based upon observable market data.
There is a degree of uncertainty associated with the key assumptions utilized within the annual
goodwill impairment tests. The discounted cash flow assumptions include an estimated growth rate
which may not be indicative of actual future results. In addition, a downturn in the market may
widen credit spreads resulting in a larger discount rate being utilized in the discounted cash flow
analysis and could also have an adverse effect on the market multiples of our guideline companies.
Such uncertainties may cause varying results in future periods.
18
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands)
|
|
2010
|
|
2009
|
|
Intangible assets (amortizable):
|
|
|
|
|
|
|
|
|
Broadpoint Securities, Inc. Customer relationship
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
641
|
|
|
$
|
641
|
|
Accumulated amortization
|
|
|
(316
|
)
|
|
|
(303
|
)
|
|
Net carrying amount
|
|
|
325
|
|
|
|
338
|
|
|
Broadpoint Debt Capital Markets Customer relationship
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
795
|
|
|
|
795
|
|
Accumulated amortization
|
|
|
(332
|
)
|
|
|
(293
|
)
|
|
Net carrying amount
|
|
|
463
|
|
|
|
502
|
|
|
American Technology Research Customer relationship
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
6,960
|
|
|
|
6,960
|
|
Accumulated amortization
|
|
|
(908
|
)
|
|
|
(756
|
)
|
|
Net carrying amount
|
|
|
6,052
|
|
|
|
6,204
|
|
|
American Technology Research Covenant not to compete
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
330
|
|
|
|
330
|
|
Accumulated amortization
|
|
|
(165
|
)
|
|
|
(137
|
)
|
|
Net carrying amount
|
|
|
165
|
|
|
|
193
|
|
|
American Technology Research Trademarks
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
100
|
|
|
|
100
|
|
Accumulated amortization
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
Net carrying amount
|
|
|
|
|
|
|
|
|
|
Gleacher Partners Trade name
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
7,300
|
|
|
|
7,300
|
|
Accumulated amortization
|
|
|
(299
|
)
|
|
|
(208
|
)
|
|
Net carrying amount
|
|
|
7,001
|
|
|
|
7,092
|
|
|
Gleacher Partners Backlog
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
420
|
|
|
|
420
|
|
Accumulated amortization
|
|
|
(420
|
)
|
|
|
(410
|
)
|
|
Net carrying amount
|
|
|
|
|
|
|
10
|
|
|
Gleacher Partners Non compete agreement
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
700
|
|
|
|
700
|
|
Accumulated amortization
|
|
|
(191
|
)
|
|
|
(133
|
)
|
|
Net carrying amount
|
|
|
509
|
|
|
|
567
|
|
|
Gleacher Partners Customer relationships
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
6,500
|
|
|
|
6,500
|
|
Accumulated amortization
|
|
|
(2,830
|
)
|
|
|
(2,143
|
)
|
|
Net carrying amount
|
|
|
3,670
|
|
|
|
4,357
|
|
|
Total Intangible assets
|
|
$
|
18,185
|
|
|
$
|
19,263
|
|
|
Customer related intangible assets are being amortized from 3 to 12 years; covenant not to compete
assets are being amortized over 3 years; trademark assets are being amortized from 1 to 20 years;
and backlog investment banking projects are being amortized over 0.6 years. Total amortization
expense recorded in the Consolidated Statements of Operations for the three-month period ended
March 31, 2010 and 2009 was approximately $1.1 million and $0.3 million, respectively.
19
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future amortization expense as of March 31, 2010 is estimated as follows:
|
|
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
2010 (remaining)
|
|
$
|
2,620
|
|
2011
|
|
|
3,047
|
|
2012
|
|
|
1,928
|
|
2013
|
|
|
1,050
|
|
2014
|
|
|
1,024
|
|
2015
|
|
|
1,024
|
|
Thereafter
|
|
|
7,492
|
|
|
Total
|
|
$
|
18,185
|
|
|
10. Property, Plant and Equipment
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion of
the accounting policy related to property, plant and equipment.
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Furniture and fixtures
|
|
$
|
2,560
|
|
|
$
|
2,001
|
|
Communications and data processing equipment
|
|
|
6,772
|
|
|
|
6,583
|
|
Leasehold improvements
|
|
|
5,985
|
|
|
|
5,051
|
|
Software
|
|
|
1,146
|
|
|
|
999
|
|
|
Total
|
|
|
16,463
|
|
|
|
14,634
|
|
|
Less: accumulated depreciation and amortization
|
|
|
11,909
|
|
|
|
11,565
|
|
|
Total property, plant and equipment
|
|
$
|
4,554
|
|
|
$
|
3,069
|
|
|
Depreciation expense for the three months ended March 31, 2010 and 2009 was $0.3 million and
$0.3 million, respectively.
11. Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Prepaid expenses
|
|
$
|
6,656
|
|
|
$
|
6,580
|
|
Deposits
|
|
|
4,187
|
|
|
|
4,182
|
|
Other
|
|
|
266
|
|
|
|
212
|
|
|
Total other assets
|
|
$
|
11,109
|
|
|
$
|
10,974
|
|
|
12. Commitments and Contingencies
FA Technology Ventures
As of March 31, 2010, the Company had a commitment to invest up to an additional $1.0 million in
the Partnership. The period for new investments expired in July 2006; however, the general partner
of the Partnership, FATV GP LLC (the General Partner), may make capital calls on this commitment
up through July 2011 for additional
20
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
investments in portfolio companies and for the payment of
management fees.
The Company intends to fund this commitment from operating cash flow.
The General Partner is responsible for the management of the Partnership, including among other
things, making investments for the Partnership. The members of the General Partner are George
McNamee, a former Director of the Company, Broadpoint Enterprise Funding, Inc., a wholly owned
subsidiary of the Company, and certain other employees of FATV. Subject to the terms of the
partnership agreement, under certain conditions, the General Partner is entitled to share in the
gains received by the Partnership in respect of its investment in a portfolio company.
Broadpoint AmTech Contingent Consideration
In connection with the Companys acquisition of Broadpoint AmTech in October 2008, the sellers have
the right to receive earnout payments consisting of the profits earned by Broadpoint AmTech for
fiscal years through 2011 up to an aggregate of $15 million in such profits, and 50% of such
profits in excess of $15 million. Based on the profits earned by Broadpoint AmTech in the periods
ended March 31, 2010 and March 31, 2009, $0.4 million and $0.8 million of contingent consideration
has been recorded as additional purchase price as an increase to Goodwill in the Consolidated
Statements of Financial Condition.
Leases
The Companys headquarters and sales offices, and certain office and communication equipment, are
leased under non-cancelable operating leases, certain of which contain renewal options, free rent
periods, and escalation clauses, and which expire at various times through 2025. To the extent the
Company is provided tenant improvement allowances funded by the lessor, they are amortized over the
initial lease period and serve to reduce rent expense. The Company recognizes the rent expense
over the entire lease term on a straightline basis.
Future minimum annual lease payments, and sublease rental income as of March 31, 2010, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum
|
|
Sublease Rental
|
|
|
(In thousands of dollars)
|
|
Lease Payments
|
|
Income
|
|
Net Lease Payments
|
|
2010 (remaining)
|
|
$
|
5,863
|
|
|
$
|
1,256
|
|
|
$
|
4,607
|
|
2011
|
|
|
7,145
|
|
|
|
1,590
|
|
|
|
5,555
|
|
2012
|
|
|
7,017
|
|
|
|
1,566
|
|
|
|
5,451
|
|
2013
|
|
|
6,920
|
|
|
|
1,508
|
|
|
|
5,412
|
|
2014
|
|
|
6,041
|
|
|
|
860
|
|
|
|
5,181
|
|
Thereafter
|
|
|
49,892
|
|
|
|
502
|
|
|
|
49,390
|
|
|
Total
|
|
$
|
82,878
|
|
|
$
|
7,282
|
|
|
$
|
75,596
|
|
|
Rental expense, net of sublease rental income, for the three month periods ended March 31, 2010 and
2009 approximated $1.7 million and $1.3 million, respectively.
Litigation
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion of
the accounting policy related to contingencies.
Due to the nature of the Companys business, the Company and its subsidiaries are exposed to risks
associated with a variety of legal proceedings. These include litigations, arbitrations and other
proceedings initiated by private parties and arising from underwriting, financial advisory,
securities trading or other transactional activities, client account activities and employment
matters. Third parties who assert claims may do so for monetary damages that are substantial,
particularly relative to the Companys financial position. In addition, the securities industry is
highly regulated. The Company and its subsidiaries are subject to both routine and unscheduled
regulatory
21
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
examinations of their respective businesses and investigations of securities industry
practices by governmental agencies and self-regulatory organizations. In recent years securities
firms have been subject to increased scrutiny and regulatory enforcement activity. Regulatory
investigations can result in substantial fines being imposed on the Company and/or its
subsidiaries. Periodically the Company and its subsidiaries receive inquiries and subpoenas
from the SEC, state securities regulators and self-regulatory organizations. The Company does not
always know the purpose behind these communications or the status or target of any related
investigation. The responses to these communications have in the past resulted in the Company
and/or its subsidiaries being cited for regulatory deficiencies, although to date these
communications have not had a material adverse effect on the Companys business.
From time to time, the Company may take reserves in its financial statements with respect to legal
proceedings to the extent it believes appropriate. However, accurately predicting the timing and
outcome of legal proceedings, including the amounts of any settlements, judgments or fines, is
inherently difficult insofar as it depends on obtaining all of the relevant facts (which is
sometimes not feasible) and applying to them often-complex legal principles. Based on currently
available information, the Company does not believe that any current litigation, proceeding or
other matter to which it is a party or otherwise involved will have a material adverse effect on
its financial position, results of operations and cash flows, although an adverse development, or
an increase in associated legal fees, could be material in a particular period, depending in part
on the Companys operating results in that period.
Letters of Credit
The Company is contingently liable under bank stand-by letter of credit agreements, executed in
connection with office leases, totaling $4.0 million at March 31, 2010. The letter of credit
agreements were collateralized by cash of $4.0 million included in Other assets at March 31, 2010.
Other
The Company, in the normal course of business, provides guarantees to third parties with respect to
the obligations of certain of its subsidiaries.
The Companys broker-dealer subsidiaries are parties to clearing agreements with clearing agents in
connection with their securities trading activities. If the clearing agent incurs a loss, it has
the right to pass the loss through to such subsidiaries, which, as a result, exposes the Company to
off-balance-sheet risk. The subsidiaries have retained the right to pursue collection or
performance from customers who do not perform under their contractual obligations. The Company
monitors customer balances on a daily basis along with the credit standing of the clearing agent.
The Company also indemnifies some clients against potential losses incurred for non-performance by
the specified third-party service providers, including subcustodians. As the potential amount of
losses during the term of this contract has no maximum, the Company believes there is no maximum
amount assignable to these indemnification obligations. However, the Company has historically made
no material payments under these arrangements and believes that it is unlikely that any material
payments will be made in the future and therefore no liability related to these indemnifications
has been recognized in the Consolidated Statements of Financial Condition as of March 31, 2010 and
December 31, 2009.
The Company provides representations and warranties to counterparties in connection with a variety
of transactions and occasionally indemnifies them against potential losses caused by the breach of
those representations and warranties and occasionally certain other liabilities. These
indemnifications cannot be estimated. However, the Company has historically made no material
payments under these agreements and believes that it is unlikely it will have to make material
payments in the future and therefore has not recorded any contingent liability in the consolidated
financial statements for these indemnifications.
22
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13 Income Taxes
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of the accounting policy related to income taxes. During interim periods, the Company calculates
and reports an estimated annual effective income tax rate pursuant to ASC 740-270 Income Taxes -
Interim Reporting.
The Companys effective income tax rate with respect to income from continuing operations for the
three month period ended March 31, 2010 of 89.9%, resulted in an income tax benefit of
approximately $1.8 million. The effective income tax rate includes the benefit of a discrete item
of 41.6% due to the reversal of prior year non-deductible share-based compensation previously granted to the Companys former Chief Executive
Officer. In 2009, the compensation was not deductible due to the application of IRC Section
162(m), but became deductible as a result of the officers separation from the Company in the first
quarter. The effective rate also differs from the statutory rate of 35% primarily due to state and
local income taxes, preferred stock dividends, non-deductible compensation and meals and
entertainment expenses.
The Companys effective income tax rate from continuing operations for the three month period ended
March 31, 2009 of 46.7% differs from the statutory rate of 35% primarily due to the Companys
valuation allowance, the impact of internal Revenue Code §382, state and local income taxes and
non-deductible preferred stock dividends and a portion of meals and entertainment.
The Companys deferred tax assets increased approximately $5.8 million during the three month
period ended March 31, 2010, primarily due to share-based compensation expense recognized during
the quarter. Refer to Note 14 for additional details.
14. Share-Based Compensation Plans
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K for a detailed discussion
of the accounting policy related to share-based compensation.
The Company recognized share-based compensation expense related to its various employee and
non-employee director share-based incentive plans of approximately $18.6 million and $2.7 million
for the three month periods ended March 31, 2010 and 2009, respectively. Share-based compensation
expense recognized for the three month period ended March 31, 2010 included approximately $12.7
million of share-based compensation expense due to the acceleration of expense recognition related
to the Companys former Chief Executive Officers and former Chief Financial Officers separation from the Company during
the quarter.
During the three month period ended March 31, 2010, the Company granted approximately 1.9 million
restricted stock awards with an average grant date fair value of $3.59 per award and approximately
1.4 million restricted stock units (RSUs), with an average grant date fair value of $3.90 per
RSU in connection with its annual incentive awards. At March 31, 2010, the Company has
approximately 22.5 million shares available for future awards.
During the three month period ended March 31, 2010, participants exercised 1.3 million shares of
options with a weighted average exercise price of $2.31.
Windfall tax benefits of approximately $2.0 million were recorded as an increase to Additional
paid-in capital during the three month period ended March 31, 2010.
15. Net Capital Requirements
Broadpoint Capital is subject to the net capital requirements of Rule 15c3-1 of the Securities
and Exchange Act of 1934, as amended (the Net Capital Rule), as well as the Commodity Futures
Trading Commissions net capital requirements (Regulation 1.16), which require the maintenance of
a minimum net capital. Broadpoint Capital has elected to use the alternative method permitted by
the Net Capital Rule, which requires it to maintain a minimum net capital amount of 2 percent of
aggregate debit balances arising from customer transactions (as defined) or
23
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$0.25 million,
whichever is greater. As an introducing broker-dealer, Broadpoint Capitals minimum requirement
under Regulation 1.16 is also $0.25 million. As of March 31, 2010, Broadpoint Capital had net
capital, as defined, of $63.1 million, which was $62.8 million in excess of the $0.25 million
required minimum net capital.
Broadpoint AmTech is also subject to the net capital rule, which requires the maintenance of
minimum net capital of $0.10 million or 6 2/3 percent of aggregate indebtedness, whichever is
greater. Aggregate indebtedness to net capital must also not exceed 15:1. At March 31, 2010,
Broadpoint AmTech had net capital, as defined, of
$3.6 million, which was $3.4 million in excess of its required minimum net capital of $0.24
million. Broadpoint AmTech ratio of aggregate indebtedness to net capital was 99:1.
Gleacher Partners, LLC (Gleacher Partners) is also subject to the net capital rule, which
requires the maintenance of minimum net capital. Gleacher Partners has elected to use the
alternative method permitted by the rule, which requires it to maintain a minimum net capital
amount of 2 percent of aggregate debit balances arising from customer transactions as defined or
$0.25 million, whichever is greater. As of March 31, 2010, Gleacher Partners had net capital, as
defined, of $0.7 million, which was $0.5 million in excess of the $0.25 million required minimum
net capital.
16. Trading Activities
As part of its trading activities, the Company provides brokerage and underwriting services to its
institutional clients. Trading activities are primarily generated by client order flow resulting
in the Company taking positions in order to facilitate institutional client transactions. Interest
revenue and expense are integral components of trading activities. In assessing the profitability
of trading activities, the Company views net interest and principal transactions revenues in the
aggregate. Certain trading activities expose the Company to market, credit and liquidity risks.
Market Risk
As of March 31, 2010, the Company had approximately $29.4 million of securities owned which were
considered non-investment grade. Non-investment grade securities are defined as debt and preferred
equity securities rated as BB+ or lower or equivalent ratings by recognized credit rating agencies.
These securities have different risks than investment grade rated investments because the companies
are typically more highly leveraged and therefore more sensitive to adverse economic conditions and
the securities may be more thinly traded or not traded at all.
Market risk represents the risk of loss that may result from the potential change in the value of
our trading or investment positions as a result of fluctuations in interest rates, credit spreads
and equity prices, as well as changes in the implied volatility of interest rates and equity
prices. Market risk is inherent to both derivative and non-derivative financial instruments, and
accordingly, the scope of the Companys market risk management procedures cover both non-derivative
and derivatives instruments to include all market-risk-sensitive financial instruments. The
Companys exposure to market risk is primarily related to principal transactions executed in order
to facilitate customer trading activities. The following discussion describes the types of market
risk faced by the Company:
Interest Rate Risk
: Interest rate risk exposure is a consequence of maintaining
inventory positions and trading in interest-rate-sensitive financial instruments. In
connection with this trading activity, the Company exposes itself to interest rate
risk, arising from changes in the level or volatility of interest rates or the shape
and slope of the yield curve.
Prepayment Risk
: Prepayment risk, which is related to the interest rate risk, arises from the
possibility that the rate of principal repayment on mortgages will fluctuate, affecting the
value of mortgage-backed securities. Prepayments are the full or partial repayment of
principal prior to the original term to maturity of a mortgage loan and typically occur due to
refinancing of mortgage loans and turnover of housing ownership.
24
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Spread and Credit Rating Risk:
Credit spread and credit rating risk results from
changes in the level or volatility of credit spreads, either as a result of macro market
conditions (e.g. risk aversion sentiment) or from idiosyncratic development of certain debt
issuers or their sectors.
Liquidity Risk:
Liquidity risk is the risk that it takes longer or it is more costly than
anticipated to sell inventory to raise cash due to adverse market conditions.
Equity Price Risk
: Equity price risk results from changes in the level or volatility of equity
prices, which affect the value of equity securities or instruments that derive their value from
a particular stock.
The Company manages its exposure to interest rate and prepayment risk by shorting TBAs, exchange
traded treasury futures contracts and government securities. Hedging using government securities
and exchange traded treasury futures contracts protects the Company from movements in the yield
curve and changes in general levels of interest rates. Hedging using TBAs minimizes the basis risk
between the mortgage-backed securities market and government securities market.
Our best strategy to manage credit spread and credit rating risk is high inventory turnover, where
we minimize the amount of and time window during which we hold these securities, in some cases by
arranging the sale before committing to the purchase. Given this strategy, we maintain low
inventory levels in these securities.
The Companys primary sources of funding are through its clearing broker and through the repurchase
markets. While the Company currently has no additional sources of borrowing, the Company continues
to explore other channels to build a network of funding sources in order to reduce
funding/liquidity risk. The Company has various strategies, policies and processes in place to
monitor and mitigate liquidity risk, including maintaining excess liquidity, maintaining
conservative leverage ratios, diversifying our funding sources and actively managing the
asset/liability terms of our trading business should additional or alternative funding sources be
required.
The Company does not currently make markets in equity securities or maintain significant equity
security positions in inventory and is therefore not significantly exposed to equity price risk.
The Company also has sold securities that it does not currently own and is therefore obligated to
purchase such securities at a future date. The Company has recorded these obligations in the
consolidated financial statements at March 31, 2010 and December 31, 2009 at market values of the
related securities and will incur a loss if the market value of the securities increases subsequent
to March 31, 2010 and December 31, 2009.
Concentrations of Credit and Liquidity Risk
The Companys exposure to credit risk associated with its trading and other activities is measured
on an individual counterparty basis, as well as by groups of counterparties that share similar
attributes. Concentrations of credit risk can be affected by changes in political, industry, or
economic factors. The Companys most significant industry credit concentration is with financial
institutions. Financial institutions include other brokers and dealers, commercial banks, finance
companies, insurance companies and investment companies. This concentration arises in the normal
course of the Companys brokerage, trading, financing, and underwriting activities. To reduce the
potential for concentration of risk, credit limits are established and monitored in light of
changing counter party and market conditions.
The Company may also purchase securities that are individually significant positions within its
inventory. Should the Company find it necessary to sell such a security, it may not be able to
realize the full carrying value of the security due to the significance of the position sold.
Securities transactions by customers of the Companys broker-dealer subsidiaries, Broadpoint
Capital and Broadpoint AmTech, are cleared through third parties under clearing agreements. Under
these agreements, the clearing agents execute and settle customer securities transactions, collect
margin receivables related to these transactions, monitor the credit standing and required margin
levels related to these customers and, pursuant to margin guidelines, require the customer to
deposit additional collateral with them or to reduce positions, if necessary.
25
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the normal course of business, Broadpoint Capital guarantees certain service providers, such as
clearing and custody agents, trustees, and administrators, against specified potential losses in
connection with their acting as an agent of, or providing services to, the Company or its
affiliates. The Company also indemnifies some clients against potential losses incurred in the
event specified third-party service providers, including subcustodians and third-party
transactions. The maximum potential amount of future payments that the Company could be required
to make under these indemnifications cannot be estimated. However, the Company has historically
made no material payments under these arrangements and believes that it is unlikely it will have to
make material payments in the future. Therefore, the Company has not recorded any contingent
liability in the consolidated financial statements for these indemnifications.
17. Fair Value of Financial Instruments
Substantially all of the financial instruments of the Company are reported on the Consolidated
Statements of Financial Condition at market or fair value, or at carrying amounts that approximate
fair value, because of their short-term nature, with the exception of mandatorily redeemable
preferred stock and subordinated debt. Financial instruments recorded at carrying amounts
approximating fair value consist largely of Receivables from and Payables to brokers, dealer and
clearing organizations, related parties and others. The fair value of the mandatorily redeemable
preferred stock at March 31, 2010 and December 31, 2009 was approximately $28.0 million, based upon
an estimate for the Companys current borrowing rate. The fair value of the subordinated debt at
March 31, 2010 and December 31, 2009 approximated fair value based on current rates available.
18. Segment Analysis
Currently, our business model operates through the following five business segments:
|
|
|
Broadpoint Descap
The Broadpoint Descap segment
provides sales and trading services on a wide range of
mortgage and asset-backed securities, U.S. Treasury and
government agency securities, structured products such
as collateralized loan obligations (CLOs) and
collateralized debt obligations (CDOs), whole loans,
swaps and other securities and generates revenues from
spreads and fees on trades executed on behalf of
clients and from principal transactions executed to
facilitate trades for clients. The Broadpoint Descap
team has developed relationships with institutional
investors, including mutual funds, pension funds,
insurance companies, hedge funds, investment managers
and investment advisors, by providing value-added
investment ideas and access to execution services and
inventory capital. Broadpoint Descap also provides
execution services for institutional investor customer
trades where it seeks to match buy side demand with
sell side supply to achieve best execution and
liquidity for participating parties.
|
|
|
|
|
Debt Capital Markets
The Companys Debt Capital
Markets segment provides sales and trading on corporate
debt securities including bank debt and loans,
investment grade and high-yield debt, convertibles,
distressed debt, preferred stock and reorganization
equities to corporate and institutional investor
clients. The segment generates revenues from spreads
and fees on trades executed and on intraday principal
and riskless principal transactions on behalf of
clients. The Debt Capital Markets team has developed
relationships with institutional investors, including
mutual funds, pension funds, insurance companies, hedge
funds, investment managers and investment advisors, by
providing value-added investment ideas and access to
execution services.
|
|
|
|
|
Investment Banking
The Companys Investment Banking
segment provides a broad range of financial advisory
services with regard to mergers and acquisitions,
restructurings and corporate finance-related matters.
In addition, it raises capital for corporate clients
through underwritings and private placements of debt
and equity securities.
|
26
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
Equities
The Companys Equities segment, which
operates through its Broadpoint AmTech broker-dealer
subsidiary, provides sales, trading and research on
equity securities and generates revenues through cash
commissions on customer trades and hard-dollar fees for
services and corporate repurchase activities. The
Equities team consists of research and other
professionals that seek to provide quantitative,
value-added, differentiated insight on stocks primarily
in the technology, aerospace and defense and clean tech
sectors. Institutional sales professionals deliver
investment ideas generated by our research to
institutional investor clients, including mutual funds,
hedge funds, investment managers and investment
advisors.
|
|
|
|
|
Other
The Companys Other segment includes the
results from its venture capital business, amortization
of intangible assets arising from business acquisitions
and costs related to corporate overhead and support,
including various fees associated with legal and
settlement expenses. This segment generates venture
capital business revenue through the management and
investment of venture capital funds.
|
The Companys business segments generate two types of revenues. Sales and trading net revenues
consist of revenues derived from commissions, principal transactions, net interest, and other fee
related revenues. Investment banking net revenues consist of revenues derived from a broad range
of capital raising and financial advisory services. Certain expenses not directly associated with
specific reportable business segments were not allocated to each reportable business segments net
profits. These expenses are reflected in the Other segment.
Information concerning operations in these segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Net revenue (including net interest income)
|
|
|
|
|
|
|
|
|
Broadpoint Descap
|
|
|
|
|
|
|
|
|
Sales and trading
|
|
$
|
36,183
|
|
|
$
|
27,491
|
|
Investment banking
|
|
|
35
|
|
|
|
380
|
|
|
Total Broadpoint Descap
|
|
|
36,218
|
|
|
|
27,871
|
|
|
Debt Capital Markets
|
|
|
|
|
|
|
|
|
Sales and trading
|
|
|
21,902
|
|
|
|
30,829
|
|
Investment banking
|
|
|
4,092
|
|
|
|
1,870
|
|
|
Total Debt Capital Markets
|
|
|
25,994
|
|
|
|
32,699
|
|
|
Investment Banking
|
|
|
11,041
|
|
|
|
2,940
|
|
|
Equities
|
|
|
|
|
|
|
|
|
Sales and trading
|
|
|
4,686
|
|
|
|
6,107
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
Total Equities
|
|
|
4,686
|
|
|
|
6,107
|
|
|
Other
|
|
|
1,364
|
|
|
|
943
|
|
|
Total net revenue
|
|
$
|
79,303
|
|
|
$
|
70,560
|
|
|
(Loss)/income before income taxes and discontinued operations
|
|
|
|
|
|
|
|
|
Descap
|
|
$
|
14,900
|
|
|
$
|
12,990
|
|
Debt Capital Markets
|
|
|
3,846
|
|
|
|
4,164
|
|
Investment Banking
|
|
|
2,893
|
|
|
|
(24
|
)
|
Equities
|
|
|
171
|
|
|
|
318
|
|
Other
|
|
|
(23,861
|
)
|
|
|
(8,112
|
)
|
|
(Loss)/income before income taxes and discontinued operations
|
|
$
|
(2,051
|
)
|
|
$
|
9,336
|
|
|
The Companys segments financial policies are the same as those described in Note 1 in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009. Assets have not been
reported by segment, as such information is not utilized by the chief operating decision maker.
All assets and operations are located in the United States.
27
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
19. Related Party Transactions
From time to time, the Company provides investment banking services and brokerage services to
MatlinPatterson FA Acquisition LLC (MatlinPatterson) or its affiliated persons or entities, which
services are provided by Broadpoint Capital, Inc. in the ordinary course of its business. As of
February 28, 2010, MatlinPatterson controlled approximately 28% of our common stock and was
therefore deemed to be a related party.
Investment banking revenue from related parties reported in the Consolidated Statements of
Operations represents $0.3 million and $0.9 million of fees earned for the three month periods
ended March 31, 2010 and 2009, respectively, for advisory engagements performed for MatlinPatterson
or its affiliated persons or entities.
For the three month periods ended March 31, 2010 and 2009, MatlinPatterson paid $0.01 million and
$0.2 million, respectively to Broadpoint Capital for brokerage services provided to MatlinPatterson
or its affiliated persons or entities. This revenue is included in Principal transactions in the
Consolidated Statements of Operations.
During the third quarter of 2009, the Company received a Notice of Proposed Tax Adjustments from
the New York City Department of Finance for underpayment by Gleacher Partners of Unincorporated
Business Tax. The Company believes that it has an off-setting claim against former Gleacher
shareholders for any pre-acquisition tax liabilities, which is collateralized by shares of its
common stock held in an escrow fund that was established at the closing of the Companys
acquisition of Gleacher to satisfy any indemnification obligations. The Company does not believe,
in any event, that this or other pre-acquisition tax matters will have a material adverse effect on
its financial position or results of operations. The Company has a receivable of approximately
$2.5 million recorded as of March 31, 2010 and December 31, 2009 in the Consolidated Statements of
Financial Condition.
In connection with the acquisition of Gleacher Partners Inc. (the Gleacher acquisition), the
Company has agreed to pay $10 million to the selling parties five years after closing the
Transaction, subject to acceleration under certain circumstances. Such amount is recorded as of
March 31, 2010 and December 31, 2009 within the Companys Consolidated Statements of Financial
Condition.
As further discussed in Note 12, in connection with the Companys acquisition of Broadpoint AmTech,
the Company has accrued contingent consideration of $2.0 million and $2.9 million, as of March 31,
2010 and December 31, 2009, respectively within the Consolidated Statements of Financial Condition.
Details on the amounts receivable from or payable to these various related parties are below:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
(In thousands)
|
|
2010
|
|
2009
|
|
Receivables from related parties
|
|
|
|
|
|
|
|
|
Former owners of Gleacher Partners
|
|
$
|
2,549
|
|
|
$
|
2,549
|
|
MatlinPatterson Investment Banking
|
|
|
165
|
|
|
|
378
|
|
MatlinPatterson Other
|
|
|
|
|
|
|
44
|
|
|
Total Receivables from related parties
|
|
$
|
2,714
|
|
|
$
|
2,971
|
|
|
|
|
|
|
|
|
|
|
|
Payables to related parties
|
|
|
|
|
|
|
|
|
Former shareholders of Gleacher Partners
|
|
$
|
9,811
|
|
|
$
|
9,778
|
|
Former shareholders of Broadpoint AmTech
|
|
|
1,965
|
|
|
|
2,900
|
|
|
Total Payables to related parties
|
|
$
|
11,776
|
|
|
$
|
12,678
|
|
|
20. Discontinued Operations
The Company continues to report the receipt and settlement of pending contractual obligations
related to previously reported discontinued operations. Any such activity in the three month
periods ending March 31, 2010 and March 31, 2009 is not material and relates to transactions
consummated prior to the year beginning January 1, 2008.
28
BROADPOINT GLEACHER SECURITIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
21. Restructuring
In 2007, the Company implemented a restructuring plan to properly size the Companys
infrastructure with its then current level of activity. The Company completed its restructuring
plan to properly size its infrastructure in the third quarter of 2008.
In connection with the plan, the Company has a liability remaining of approximately $0.9 million at
March 31, 2010, most of which relates to real estate exit/impairment costs. These real estate
leases will expire in 2013.
The following tables summarize the changes in the Companys liability relating to the plan for the
three month period ended March 31, 2010:
|
|
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
889
|
|
Net Payments for sublease real estate impaired
|
|
|
(75
|
)
|
Payment of exit expenses
|
|
|
(5
|
)
|
Real Estate revaluation
|
|
|
100
|
|
|
Balance, March 31, 2010
|
|
$
|
909
|
|
|
22. Subsequent Events
The Company evaluated subsequent events through the date of issuance of the accompanying
consolidated financial statements.
Leases
On April 12, 2010, the Company entered into a Lease Termination and Surrender Agreement (the Lease
Termination) with Kato International LLC, (Landlord) with respect to the Companys lease of the
entire 31st floor (the Premises) of 12 East 49th Street, New York, New York 10017. Pursuant to
the Lease Termination, the Company surrendered the Premises on April 30, 2010 and paid a
termination fee and related commissions of approximately $3.4 million which has been recorded
during the second quarter of 2010. In connection with the Lease Termination, the Letter of Credit
securing the lease of approximately $1.3 million has also been terminated.
The Company entered into the Lease Termination in connection with the Company entering into a new
lease agreement for its new headquarters at 1290 Avenue of the Americas, New York, New York 10104,
which will be secured by a Letter of Credit of approximately $3.7 million.
29
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
There are included or incorporated by reference in this document statements that may constitute
forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). These forward-looking statements are usually preceded by words such
as may, will, expect, anticipate, believe, estimate, and continue or similar words.
All statements other than historical information or current facts should be considered
forward-looking statements. Forward-looking statements may contain projections or stated targets
regarding revenues, earnings, operations, and other financial projections, and may include
statements of future performance, strategies and objectives. However, there may be events in the
future, which the Company is not able to accurately predict or control which may cause actual
results to differ, possibly materially, from the expectations set forth in the Companys
forward-looking statements. All forward-looking statements involve risks and uncertainties, and
actual results may differ materially from those discussed as a result of various factors. Such
factors include, among others, market risk, credit risk and operating risk. These and other risks
are set forth in greater detail throughout this document. The Company does not intend or assume
any obligation to update any forward-looking information it makes.
Any forward-looking statement should be read and interpreted together with these documents,
including the following:
|
|
|
the description of our business contained under Item 1 Business, in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009;
|
|
|
|
|
the risk factors contained under Item 1A Risk Factors, in the Companys Annual Report on
Form 10-K for the year ended December 31, 2009;
|
|
|
|
|
the discussion of our legal proceedings contained in this report under Part II, Item 1
Legal Proceedings;
|
|
|
|
|
the discussion of our analysis of financial condition and results of operations contained
in this report under Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations;
|
|
|
|
|
the discussion of market, credit, operational and other risks impacting our business
contained in this report under Item 3 Quantitative and Qualitative Disclosures about Market
Risk;
|
|
|
|
|
the notes to the consolidated financial statements contained in this report contained in
Item 1 Financial Statements; and
|
|
|
|
|
cautionary statements we make in our public documents, reports and announcements.
|
Any forward-looking statement speaks only as of the date on which that statement is made. The
Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances that occur after the date on which the statement is made.
Business Overview
The Company is an independent, full-service investment bank that provides corporate and
institutional clients with strategic, research-based investment opportunities, capital raising, and
financial advisory services, including merger and acquisition, restructuring, recapitalization and
strategic alternative analysis services, as well as securities brokerage services for institutional
customers primarily in the United States. We are focused on growth through strategic acquisitions
and hiring professionals that will contribute to our intellectual capital. Our
30
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
acquisitions generally include some form of contingent consideration or earnout which provides
the opportunity for employees to participate in a share of the profits of their individual business
unit. This model aligns those employees with both the short and long-term strategy of the Company.
Our strategy also includes continued diversification of our earnings stream and balanced growth in
investment banking in order to capitalize on the recent return of liquidity to the markets.
Currently, we operate through the following five business segments:
|
|
|
Broadpoint Descap
The Broadpoint Descap segment
provides sales and trading services on a wide range of
mortgage and asset-backed securities, U.S. Treasury and
government agency securities, structured products such
as CLOs and CDOs, whole loans, swaps and other
securities and generates revenues from spreads and fees
on trades executed on behalf of clients and from
principal transactions executed to facilitate trades
for clients. The Broadpoint Descap team has developed
relationships with institutional investors, including
mutual funds, pension funds, insurance companies, hedge
funds, investment managers and investment advisors, by
providing value-added investment ideas and access to
execution services and inventory capital. Broadpoint
Descap also provides execution services for
institutional investor customer trades where it seeks
to match buy side demand with sell side supply to
achieve best execution and liquidity for participating
parties.
|
|
|
|
|
Debt Capital Markets
The Companys Debt Capital
Markets provides sales and trading on corporate debt
securities including bank debt and loans, investment
grade and high-yield debt, convertibles, distressed
debt, preferred stock and reorganization equities to
corporate and institutional investor clients. The
segment generates revenues from spreads and fees on
trades executed and on intraday principal and riskless
principal transactions on behalf of clients. The Debt
Capital Markets team has developed relationships with
institutional investors, including mutual funds,
pension funds, insurance companies, hedge funds,
investment managers and investment advisors, by
providing value-added investment ideas and access to
execution services.
|
|
|
|
|
Investment Banking
The Companys Investment Banking
segment provides a broad range of financial advisory
services with regard to mergers and acquisitions,
restructurings and corporate finance-related matters.
In addition, it raises capital for corporate clients
through underwritings and private placements of debt
and equity securities.
|
|
|
|
|
Equities
The Companys Equities segment, which
operates through its Broadpoint AmTech broker-dealer
subsidiary, provides sales, trading and research on
equity securities and generates revenues through cash
commissions on customer trades, corporate repurchase
activities and hard-dollar fees for research and other
services. The Equities team consists of research and
other professionals that seek to provide quantitative,
value-added, differentiated insight on stocks primarily
in the technology, aerospace and defense and clean tech
sectors. Institutional sales professionals deliver
investment ideas generated by our research to
institutional investor clients, including mutual funds,
hedge funds, investment managers and investment
advisors.
|
|
|
|
|
Other
The Companys Other segment includes the
results from its venture capital business, amortization
of intangible assets arising from business acquisitions
and costs related to corporate overhead and support,
including various fees associated with legal and
settlement expenses. This segment generates venture
capital business revenue through the management and
investment of venture capital funds.
|
We continue to evaluate market opportunities, and we believe there is significant opportunity to
expand our revenue base. This includes continued growth through acquisition and/or hiring of sales
and trading professionals with extensive client relationships.
Refer to Item 7 in the Companys 2009 Annual Report on Form 10-K for additional information
regarding material opportunities, challenges and risks related to our business.
31
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Business Environment in the First Quarter 2010
The financial markets remained volatile during the first quarter of 2010, as international markets
took their first steps in unwinding fiscal stimulus programs, coupled with uncertainties related to
the European markets stemming from the Greek debt crisis. However, continued improvement in the
U.S. economy and stronger than expected corporate earnings ultimately led to improvements in the
stock markets with the Dow Jones and S&P rising approximately 4%-5% in the quarter. In addition,
M&A markets have begun to rebound, although the extent and timing of a significant rise in
transactions is uncertain.
While the financial markets remained strong during the first quarter of 2010, instability in the
financial markets remain due to uncertainties related to bank regulation, the Federal Reserves
plans to end its various economic stimulus programs and risks of inflation which may lead to higher
interest rates. The potential tightening of credit and proposed reforms to regulation of banks and
other financial institutions will have an unknown impact on the markets.
The results of our operations during the first quarter of 2010 have benefitted as a result of the
continued rally in the financial markets. As these results are highly dependent on the environment
in which our businesses operate, our first quarter results may not necessarily be indicative of
what may be recognized in the future.
32
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
FINANCIAL OVERVIEW
The Company prepares its consolidated financial statements using accounting principals generally
accepted in the United States of America (GAAP). These consolidated financial statements are
contained within Item 1 of this Quarterly Report on Form 10-Q.
Three Months Ended March 31, 2010 and 2009
For the first quarter of 2010, net revenues from continuing operations were $79.3 million, compared
to $70.6 million for the first quarter of 2009. The 12 percent increase in net revenues was due to
an increase in the Broadpoint Descap and Investment Banking segments partially offset by decreased
revenues in the Debt Capital Markets and Equities segments. Non-interest expenses for the first
quarter of 2010 of $81.4 million increased $20.1 million, or 33 percent, compared to $61.2 million
in the first quarter of 2009 primarily due to compensation expense of $13.3 million associated with
our former Chief Executive Officer (CEO) and the former Chief Financial Officers (CFO) separations from
the Company. Net loss per diluted share from continuing operations for the first quarter of 2010
was $0.00, compared to net income per diluted share of $0.06 for the first quarter of 2009. The
Company reported a consolidated net loss of $0.2 million for the first quarter of 2010, compared to
net income of $5.0 million for the first quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
46,306
|
|
|
$
|
52,041
|
|
Commissions
|
|
|
4,165
|
|
|
|
4,902
|
|
Investment banking
|
|
|
14,798
|
|
|
|
4,260
|
|
Investment banking revenue from related
party
|
|
|
300
|
|
|
|
930
|
|
Investment gains/(losses), net
|
|
|
150
|
|
|
|
(9
|
)
|
Interest
|
|
|
16,161
|
|
|
|
10,648
|
|
Fees and other
|
|
|
910
|
|
|
|
1,490
|
|
|
Total revenues
|
|
|
82,790
|
|
|
|
74,262
|
|
Interest expense
|
|
|
3,487
|
|
|
|
3,702
|
|
|
Net revenues
|
|
|
79,303
|
|
|
|
70,560
|
|
|
Expenses (excluding interest):
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
68,201
|
|
|
|
52,407
|
|
Clearing, settlement and brokerage
|
|
|
1,375
|
|
|
|
812
|
|
Communications and data processing
|
|
|
3,207
|
|
|
|
2,287
|
|
Occupancy, depreciation and amortization
|
|
|
2,246
|
|
|
|
1,788
|
|
Amortization of intangible assets
|
|
|
1,078
|
|
|
|
257
|
|
Selling
|
|
|
1,195
|
|
|
|
925
|
|
Other
|
|
|
4,052
|
|
|
|
2,748
|
|
|
Total expenses (excluding interest)
|
|
|
81,354
|
|
|
|
61,224
|
|
|
(Loss)/income before income taxes and
discontinued operations
|
|
|
(2,051
|
)
|
|
|
9,336
|
|
|
Income tax (benefit)/expense
|
|
|
(1,843
|
)
|
|
|
4,357
|
|
|
(Loss)/income from continuing operations
|
|
|
(208
|
)
|
|
|
4,979
|
|
(Loss)/income from discontinued operations,
(net of taxes) (see Note 20, contained in
Item 1 of this Form 10-Q)
|
|
|
(3
|
)
|
|
|
42
|
|
|
Net (loss)/income
|
|
$
|
(211
|
)
|
|
$
|
5,021
|
|
|
33
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Net Revenue
For the three month period ended March 31, 2010, net revenues from continuing operations were $79.3
million compared to $70.6 million for the three month period ended March 31, 2009. Commissions and
principal transactions revenue decreased $6.4 million, or 11 percent, to $50.5 million from $56.9
million due to a decrease of $8.9 million in the Debt Capital Markets segment and $1.0 million in
the Equities segment, which were partially offset by an increase in the Broadpoint Descap segment
of $3.5 million. Investment Banking revenues increased $9.9 million, or 191 percent, to $15.1
million due to an increase in capital markets activity and advisory activity. Investment gains of
$0.2 million remained relatively unchanged compared to investment losses of $0.01 million in the
three month period ended March 31, 2009. Net interest income of $12.7 million increased $5.7
million, or 82 percent, compared to the three month period ended March 31, 2009, primarily due to
coupon interest generated on higher inventory levels at Broadpoint Descap. Fees and other revenues
of $0.9 million decreased $0.6 million, or 39 percent, primarily due to a decrease in payments
received for equity research in our Equities segment.
Non-Interest Expense
Non-interest expenses for the first quarter of 2010 of $81.4 million increased $20.1 million, or 33
percent, compared to $61.2 million in the first quarter of 2009. The increase was primarily due to
compensation expense associated with the separations of the former CEO and CFO from the Company.
Compensation and benefits expense increased $15.8 million, or 30 percent, to $68.2 million in the
three month period ended March 31, 2010, primarily due to compensation expense associated with the
separation of the former CEO and the former CFO from the Company. The Company recorded approximately $13.3
million of compensation related to the remaining amortization of the Companys former CEO and the former CFOs
outstanding equity awards since the dates of their separations from the Company and additional
severance expense and related employee benefits in connection with their departure during the
quarter. Compensation expense also increased as a result of an increase in revenues of 12 percent.
As is standard in the industry, the Company compensates many of its professional personnel with a
percentage of, or otherwise based on, the net revenues generated by that professional or his or her
business unit. Consequently, as net revenue increases, associated compensation expense increases.
The increase in compensation and benefits expense was also due to an increase in support personnel
that are necessary to manage the Companys growth.
Clearing, settlement and brokerage costs of $1.4 million increased by $0.6 million, or 69 percent,
compared to the prior year quarter. The quarter-over-quarter increase was due to greater trading
volumes, and therefore an increase in the costs, as well as costs associated with the addition of
the Rates group in February 2009 in our Broadpoint Descap segment.
Communications and data processing expense of $3.2 million increased by $0.9 million over the prior
year quarter. The year-over-year increase was due to increased activity across all of our
segments.
Occupancy and depreciation expense increased by $0.5 million, or 26 percent, to $2.2 million due to
the leasing of additional office space.
Amortization of intangible assets increased by $0.8 million over the prior year quarter to $1.1
million due to the amortization of intangible assets relating to the Gleacher acquisition, which
occurred in June of 2009.
Selling expense increased by $0.3 million, or 29 percent, over the prior year quarter to $1.2
million, primarily due to a Company-wide increase in sales activity.
Other expenses of $4.1 million increased $1.3 million, or 47 percent over the prior year quarter
primarily due to higher professional service fees and the implementation of a new SIPC assessment
fee.
34
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Income Taxes
The Companys effective income tax rate with respect to income from continuing operations for the
three month period ended March 31, 2010 of 89.9%, resulted in an income tax benefit of
approximately $1.8 million. The effective income tax rate includes the benefit of a discrete item
of 41.6% due to the reversal of prior year non-deductible share-based compensation previously
granted to the Companys former CEO. In 2009, the compensation was not deductible due to the
application of IRC Section 162(m), but became deductible as a result of the officers separation
from the Company in the first quarter. The effective rate also differs from the statutory rate of
35% primarily due to state and local income taxes, preferred stock dividends, non-deductible
compensation and meals and entertainment expenses.
The Companys effective income tax rate from continuing operations for the three-month period ended
March 31, 2009 of 46.7% differs from the statutory rate of 35% primarily due to the Companys
valuation allowance, the impact of Internal Revenue Code §382, state and local income taxes and
non-deductible preferred stock dividends and a portion of meals and entertainment expenses.
Explanation and Reconciliation of the Companys Use of Non-GAAP Financial Measures
During the first quarter of 2010, the Company recorded approximately $13.3 million of additional
compensation expense as a result of the separation of the former CEO and the former CFO from the Company. Our
income before income taxes and discontinued operations during the three month period ended March 31,
2010, adjusted to eliminate these additional compensation expenses, was approximately $11.3 million, compared
to approximately $9.3 million in the prior year quarter. (Loss)/income before
income taxes and discontinued operations adjusted for the elimination of such compensation is a
non-GAAP financial measure. The Company has presented this non-GAAP financial measure to enhance
an investors evaluation of the Companys operating results. The presentation of non-GAAP
financial measures should not be considered in isolation or as a substitute for the Companys
related financial results prepared in accordance with GAAP.
The following table sets forth a reconciliation of GAAP (loss)/income before income taxes and
discontinued operations to non-GAAP income before income taxes and discontinued operations as
adjusted for the elimination of compensation related to the separations of the Companys former CEO
and the former CFO from the Company, during the three month period ended March 31, 2010. The presentation of
non-GAAP financial measures should not be considered in isolation or as a substitute for the
Companys related financial results prepared in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
GAAP (loss)/income before income taxes and
discontinued operations
|
|
$
|
(2,051
|
)
|
|
$
|
9,336
|
|
|
Addback: Compensation expense (1)
|
|
|
13,306
|
|
|
|
|
|
|
Non-GAAP income before income taxes and
discontinued operations
|
|
$
|
11,255
|
|
|
$
|
9,336
|
|
|
|
|
|
(1)
|
|
Represents (i) non-cash compensation related to the remaining amortization of the
former CEOs and the former CFOs outstanding equity awards since the dates of their separations of
approximately $12.7 million and (ii) additional severance expense and related employee
benefits of approximately $0.6 million.
|
Segment Highlights
Three Months Ended March 31, 2010 and 2009
For presentation purposes, net revenue within each of the businesses is classified into commissions
and principal transactions, investment banking, investment gains/(losses), net interest, and
other. Commissions and principal
35
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
transactions include commissions on agency trades and gains and losses from sales and trading
activities. Investment banking includes revenue generated from capital raising through
underwritings and private placements of equity and debt securities, and financial advisory service
fees in regards to mergers and acquisitions, restructuring and corporate finance related matters.
Investment gains/(losses) reflect gains and losses on the Companys investment portfolio. Other
revenue reflects management fees received from the partnerships the Company manages and research
fees. Net interest includes interest income net of interest expense and reflects the effect of
funding rates on the Companys inventory levels. Net revenue presented within each category may
differ from that presented in the financial statements as a result of differences in categorizing
revenue within each of the revenue line items listed below for purposes of reviewing key business
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadpoint Descap
|
|
Three Months Ended March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
2010 vs. 2009
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and Principal transactions
|
|
$
|
24,857
|
|
|
$
|
21,388
|
|
|
|
16
|
%
|
Investment banking
|
|
|
35
|
|
|
|
380
|
|
|
|
(91
|
%)
|
Net interest
|
|
|
11,309
|
|
|
|
6,098
|
|
|
|
85
|
%
|
Other
|
|
|
17
|
|
|
|
5
|
|
|
|
240
|
%
|
|
Total net revenue
|
|
$
|
36,218
|
|
|
$
|
27,871
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax contribution
|
|
$
|
14,900
|
|
|
$
|
12,990
|
|
|
|
15
|
%
|
|
Broadpoint Descap Q1 2010 vs. Q1 2009
Broadpoint Descap net revenues increased 30 percent to $36.2 million in the first quarter of 2010.
Commissions and principal transactions revenue increased by $3.5 million, or 16 percent, compared
to the prior year quarter. This was due to increased trading volumes, which included a full
quarter of activity in 2010 associated with the Rates group that began trading in February 2009 and
an overall increase in the number of sales professionals. The addition of the Rates group in
February 2009 and the increase in the number of sales professionals was partially offset by a
tightening of spreads which tends to reduce revenue per transaction. Net interest income increased
$5.2 million due to coupon interest received on increased inventory levels, which increase was
partially offset by higher funding costs as a result of these increased inventory levels. Pre-tax
contribution increased $1.9 million, or 15 percent, as a result of the increase in revenues,
partially offset by higher compensation costs resulting from higher revenues and increases in
headcount, as well as higher expenses attributable to the addition of the Rates group in February
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Capital Markets
|
|
Three Months Ended March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
2010 vs. 2009
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and Principal transactions
|
|
$
|
21,803
|
|
|
$
|
30,657
|
|
|
|
(29
|
%)
|
Investment banking
|
|
|
4,092
|
|
|
|
1,870
|
|
|
|
119
|
%
|
Net interest
|
|
|
94
|
|
|
|
172
|
|
|
|
(45
|
%)
|
Other
|
|
|
5
|
|
|
|
|
|
|
|
N/A
|
|
|
Total net revenue
|
|
$
|
25,994
|
|
|
$
|
32,699
|
|
|
|
(21
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax contribution
|
|
$
|
3,846
|
|
|
$
|
4,164
|
|
|
|
(8
|
%)
|
|
Debt Capital Markets Q1 2010 vs. Q1 2009
Debt Capital Markets net revenue decreased $6.7 million, or 21 percent, to $26.0 million in the
first quarter of 2010. Commissions and principal transactions revenue decreased $8.9 million, or
29 percent, primarily due to a decrease in volumes and spreads. Investment banking revenues
increased $2.2 million or 119 percent to $4.1 million due to an increase in capital markets
activity. The Company served as joint book-running manager on two note offerings totaling $605
million and as sole deal manager on a $150 million debt exchange transaction. The revenue
allocated to Debt Capital Markets for these transactions offset a decrease in placement fee
revenues of $1.6 million. While net revenues declined $8.9 million, pre-tax contribution decreased
$0.3 million, or 8 percent, primarily due to lower compensation costs as a result of the reduction
in revenues.
36
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Banking
|
|
Three Months Ended March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
2010 vs. 2009
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and Principal transactions
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
Investment banking
|
|
|
10,971
|
|
|
|
2,940
|
|
|
|
273
|
%
|
Net interest
|
|
|
1
|
|
|
|
|
|
|
|
N/A
|
|
Other
|
|
|
69
|
|
|
|
|
|
|
|
N/A
|
|
|
Total net revenue
|
|
$
|
11,041
|
|
|
$
|
2,940
|
|
|
|
276
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax contribution/(loss)
|
|
$
|
2,893
|
|
|
$
|
(24
|
)
|
|
|
N/A
|
|
|
Investment Banking Q1 2010 vs. Q1 2009
Investment Banking net revenue increased $8.1 million, or 276 percent, to $11.0 million. Advisory
revenues increased to $7.0 million in the first quarter of 2010 from $2.9 million in first quarter
of 2009 primarily due to $3.1 million in success fees recorded in the first quarter of 2010.
Capital markets activity generated $4.0 million in the first quarter of 2010 compared to no
revenues associated with capital markets activity in the first quarter of 2009. The overall
increase includes revenues allocated to Investment Banking related to the previously mentioned note
offerings totaling $605 million for which the Company served as joint book-running manager and the
$150 million debt exchange transaction for which the Company served as sole deal manager. In June
of 2009, the Company acquired Gleacher Partners, Inc., expanding the Companys investment banking
services offering to include mergers and acquisitions expertise. Pre-tax contribution increased
$2.9 million primarily due to the increase in revenues which were partially offset by higher
compensation costs attributable to the higher revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
Three Months Ended March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
2010 vs. 2009
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and Principal transactions
|
|
$
|
3,818
|
|
|
$
|
4,840
|
|
|
|
(21
|
%)
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Net interest
|
|
|
4
|
|
|
|
9
|
|
|
|
(56
|
%)
|
Other
|
|
|
864
|
|
|
|
1,258
|
|
|
|
(31
|
%)
|
|
Total net revenue
|
|
$
|
4,686
|
|
|
$
|
6,107
|
|
|
|
(23
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax contribution
|
|
$
|
171
|
|
|
$
|
318
|
|
|
|
(46
|
%)
|
|
Equities Q1 2010 vs. Q1 2009
Equities net revenues decreased $1.4 million, or 23 percent, in the first quarter of 2010 compared
to the first quarter of 2009. Commissions and principal transactions revenues decreased $1.0
million due to a decrease in volume. Other revenues decreased $0.4 million as a result of a
decrease in payments received related to fee based research. Pre-tax contribution for the first
quarter of 2010 and 2009 were relatively unchanged primarily due to the compensation structure of
this segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Three Months Ended March 31,
|
(In thousands of dollars)
|
|
2010
|
|
2009
|
|
2010 vs. 2009
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and Principal transactions
|
|
$
|
(7
|
)
|
|
$
|
58
|
|
|
|
N/A
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Investment gains/(losses)
|
|
|
150
|
|
|
|
(9
|
)
|
|
|
N/A
|
|
Net interest
|
|
|
1,266
|
|
|
|
667
|
|
|
|
90
|
%
|
Other
|
|
|
(45
|
)
|
|
|
227
|
|
|
|
N/A
|
|
|
Total net revenue
|
|
$
|
1,364
|
|
|
$
|
943
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)
|
|
$
|
(23,861
|
)
|
|
$
|
(8,112
|
)
|
|
|
(194
|
%)
|
|
37
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Other Q1 2010 vs. Q1 2009
Other net revenues of $1.4 million in the first quarter of 2010 increased $0.4 million compared to
$0.9 million in the prior year quarter. Investment gains of $0.2 million remained relatively
unchanged compared to investment losses of $0.01 million in the three month period ended March 31,
2009. Net interest income was $1.3 million compared to $0.7 million in the prior year quarter.
The change in net interest was due to an increase in inter-company financing of the activities of
other business segments, primarily related to the higher inventory levels of Broadpoint Descap.
Pre-tax contribution decreased $15.7 million, or 194 percent compared to a pre-tax loss of
approximately $8.1 million in the prior year quarter, primarily due to approximately $13.3 million
of compensation expense related to the separation of our former CEO and the former CFO from the Company.
Pre-tax loss was also impacted by an increase in expenses for the amortization of intangible assets
related to the Gleacher acquisition, an increase in professional service fees and the implementation
of a new SIPC assessment fee.
Financial Condition
The Companys securities owned and investments comprised approximately 79% and 82% of total assets
at March 31, 2010 and December 31, 2009, respectively. The Company primarily maintains these
positions in order to facilitate its customer trading activities. The majority of these assets are
financed by the Companys clearing agents and periodically, through repurchase agreements, although
no such agreements were open at March 31, 2010 and December 31, 2009. Payables to brokers, dealers
and clearing agencies comprised approximately 77% and 86% of the Companys total liabilities at
March 31, 2010 and December 31, 2009, respectively.
Securities owned (including investments) and sold, but not yet purchased consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
Sold, but
|
|
|
|
|
|
Sold, but
|
|
|
|
|
|
|
not yet
|
|
|
|
|
|
not yet
|
(In thousands of dollars)
|
|
Owned
|
|
Purchased
|
|
Owned
|
|
Purchased
|
|
Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
719,788
|
|
|
$
|
|
|
|
$
|
875,610
|
|
|
$
|
|
|
Non-agency mortgage-backed securities
|
|
|
57,940
|
|
|
|
|
|
|
|
37,911
|
|
|
|
|
|
U.S. Government and federal agency obligations
|
|
|
24,852
|
|
|
|
93,185
|
|
|
|
29,718
|
|
|
|
66,946
|
|
Preferred stock
|
|
|
17,380
|
|
|
|
99
|
|
|
|
10,702
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,196
|
|
|
|
634
|
|
|
|
5,878
|
|
|
|
6,028
|
|
Other debt obligations
|
|
|
7,216
|
|
|
|
|
|
|
|
17,146
|
|
|
|
|
|
Equities
|
|
|
723
|
|
|
|
2,150
|
|
|
|
703
|
|
|
|
1
|
|
Derivatives
|
|
|
265
|
|
|
|
107
|
|
|
|
2,033
|
|
|
|
13
|
|
Not Readily Marketable Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities with no publicly quoted market
|
|
|
19,756
|
|
|
|
|
|
|
|
19,326
|
|
|
|
|
|
|
Total
|
|
$
|
852,116
|
|
|
$
|
96,175
|
|
|
$
|
999,027
|
|
|
$
|
72,988
|
|
|
Refer to the Note 1 in the Companys 2009 Annual Report on Form 10-K and Note 6 in the footnotes to
the consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for
further information regarding the Companys accounting policy over valuation of these financial
instruments and classification of such financial instruments in accordance with Accounting
Standards Codification 820 Fair Value Measurements and Disclosures (ASC 820).
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of the Companys liquidity and capital resources highlights developments
since December 31, 2009 and should be read in conjunction with the Companys discussion on
liquidity and capital resources within the Companys 2009 Annual Report on Form 10-K.
38
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Liquidity is of paramount importance to our success and operations. The Company manages its
liquidity by monitoring our funding and cash flow needs daily and measuring them against available
cash levels in order to maintain available cash at our clearing agents so we have liquidity for
operations and for meeting financing obligations even under stressful market conditions. The
Company also maintains conservative leverage ratios and generally holds inventory that is readily
convertible to cash. The majority of the Companys assets are financed by our clearing agents and
periodically through the repurchase agreements. While the Company has no additional current
sources of borrowing, we continue to explore other channels to build a network of funding sources
in order to reduce funding/liquidity risk.
The Companys liquidity arises primarily from assets that are readily convertible into cash, as
well as capital and/or debt raising activities, such as the underwritten public offering of our
common stock in August 2009 which resulted in $93.3 million of net proceeds.
The Company had Cash and cash equivalents of approximately $33.3 million and $25.0 million,
respectively, at March 31, 2010 and December 31, 2009. In addition, the Companys securities
positions in trading accounts that are readily marketable and actively traded are approximately
$762.4 million at March 31, 2010 compared to approximately $919.6 million at December 31, 2009.
The level of assets and liabilities will fluctuate due to changing market conditions and customer
demand.
Regulatory
As of March 31, 2010, each of the Companys three registered broker-dealer subsidiaries, Broadpoint
Capital, Inc., Broadpoint AmTech, and Gleacher Partners LLC, were in compliance with the net
capital requirements of the Financial Industry Regulatory Authority (FINRA), and, in the case of
Broadpoint Capital, the National Futures Association (NFA). The net capital rules restrict the
amount of a broker-dealers net assets that may be distributed. Also, a significant operating loss
or extraordinary charge against net capital could compel the Company to make additional
contributions to one or more of these subsidiaries or adversely affect the ability of the Companys
broker-dealer subsidiaries to expand or maintain their present levels of business and the ability
to support the obligations or requirements of the Company. As of March 31, 2010, Broadpoint Capital
had net capital of $63.1 million, which exceeded minimum net capital requirements by $62.8 million,
Broadpoint AmTech had net capital of $3.6 million, which exceeded minimum net capital requirements
by $3.4 million, and Gleacher Partners LLC had net capital of $0.7 million, which exceeded net
capital requirements by $0.5 million.
Derivatives
The Companys subsidiaries utilize derivatives for various economic hedging strategies to actively
manage their market and liquidity exposures. This strategy includes the purchase and sale of
securities on a when-issued basis and entering into exchange traded treasury futures contracts. At
March 31, 2010 and December 31, 2009, the Companys subsidiaries had no open futures contracts, no
outstanding underwriting commitments, had not entered into any TBA purchase agreements, and had
entered into 16 and 17 open TBA sale agreements in the notional amount of $201.7 million and $280.5
million, respectively.
Contingent Consideration
On October 2, 2008, the Company acquired 100 percent of the outstanding common shares of Broadpoint
AmTech. Per the stock purchase agreement, the sellers are entitled to receive future contingent
consideration consisting of the profits earned by Broadpoint AmTech in the fourth quarter of fiscal
year 2008 and all of fiscal years 2009, 2010 and 2011, up to an aggregate of $15 million in
profits. The sellers are also entitled to receive earn-out payments consisting of 50 percent of
such profits in excess of $15 million. All such earn-out payments will be paid 50 percent in cash
and, depending on the recipient thereof, either 50 percent in Company common stock, subject to
transfer restrictions lapsing ratably over the three years following issuance, or 50 percent in
restricted stock from the Incentive Plan, subject to vesting based on continued employment with
Broadpoint AmTech. The Company had accrued contingent consideration of approximately $2.0 million
and $2.9 million, as of March 31, 2010 and March 31, 2009, respectively, as set forth on the
Consolidated Statements of Financial Condition contained within Item 1 of this Quarterly Report on
Form 10-Q.
39
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Legal Proceedings
From time to time the Company and its subsidiaries are involved in legal proceedings or disputes.
(See Part II Item 1 Legal Proceedings) Based on currently available information, the Company
does not believe that any current litigation, proceeding or other matter to which it is a party or
otherwise involved will have a material adverse effect on its financial position, results of
operations, and cash flows, although an adverse development, or an increase in associated legal
fees, could be material in a particular period, depending in part on the Companys operating
results in that period.
In addition, the securities industry is highly regulated. The Company and its subsidiaries are
subject to both routine and unscheduled regulatory examinations of their respective businesses and
investigations of securities industry practices by governmental agencies and self-regulatory
organizations. In recent years, securities firms have been subject to increased scrutiny and
regulatory enforcement activity. Regulatory investigations can result in substantial fines being
imposed on the Company and/or its subsidiaries. Periodically the Company and its subsidiaries
receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory
organizations. The Company does not always know the purpose behind these communications or the
status or target of any related investigation. The responses to these communications have, in the
past, resulted in the Company and/or its subsidiaries being cited for regulatory deficiencies,
although to date these communications have not had a material adverse effect on the Companys
business.
OFF-BALANCE
SHEET ARRANGEMENTS
Information concerning the Companys off balance sheet arrangements is included in Note 6 and Note
19 within the unaudited consolidated financial statements contained in Item 1 of this Quarterly
Report on Form 10-Q.
CONTRACTUAL OBLIGATIONS
There were no significant changes to the Companys contractual obligations at March 31, 2010 since
what was previously reported within Item 7 within the Companys 2009 Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
During interim periods, the Company calculated and reported an estimated annual effective income
tax rate pursuant to ASC 740-270 Income Taxes Interim Reporting. The Companys projected
effective income tax rate and tax expense/(benefit) for each quarterly period requires considerable
estimation and substantial judgment by management, including, but not restricted to, the results of
its business and estimates of permanent book to tax differences. Such judgments and estimates are
subject to change as tax laws and rules, as well as the information used in determining such
estimates and judgments, evolve.
There are no material changes to the Companys critical accounting policies since what was
previously reported as of December 31, 2009. For a full description of the Companys critical
accounting policies, refer to Critical Accounting Policies included within Item 7 within the
Companys 2009 Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amended
disclosure requirements related to fair value measurements including details of significant
transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, and a
gross presentation of activity within the Level 3 rollforward, presenting separately information
about purchases, sales, issuances and settlements. ASU 2010-06 is
40
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
effective for financial statements issued for reporting periods beginning after December 15, 2009
for certain disclosures and for reporting periods after December 15, 2010 for other disclosures.
The Company adopted these amended accounting principles on January 1, 2010. Since these amended
principles require only additional disclosures concerning fair value measurements, this adoption
did not affect the Companys financial condition, results of operations or cash flows. Refer to
Note 6 within the consolidated financial statements, contained within Item 1 of this Form 10-Q,
which includes the additional disclosures as required by this statement.
In June 2009, the FASB issued amendments to accounting principles which change the accounting for
transfers of financial assets which were codified as Accounting Standards Update (ASU) No.
2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets. ASU
No. 2009-16 improves financial reporting by eliminating the exceptions for qualifying
special-purpose entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not surrendered control over
the transferred financial assets. ASU No. 2009-16 modifies the financial-components approach and
limits the circumstances in which a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire original financial asset to an
entity that is not consolidated with the transferor in the financial statements being presented
and/or when the transferor has continuing involvement with the transferred financial asset. ASU
No. 2009-16 also requires that a transferor recognize and initially measure at fair value all
assets obtained and liabilities incurred as a result of a transfer of financial assets accounted
for as a sale. ASU No. 2009-16 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods within the first
annual reporting period, and for interim and annual reporting periods thereafter. The Company
adopted these amended accounting principles on January 1, 2010. This adoption did not have a
material effect on the Companys consolidated financial statements, contained within Item 1 of this
Quarterly Report on Form 10-Q.
In June 2009, the FASB issued amendments to accounting principles which change the accounting for
Variable Interest Entities (VIE), which were codified as ASU 2009-17, which amends ASC 810
Consolidation. ASU 2009-17 significantly changes the criteria by which an enterprise determines
whether it must consolidate a VIE. A VIE is an entity which has insufficient equity at risk or
which is not controlled through voting rights held by equity investors. Currently, a VIE is
consolidated by the enterprise that will absorb a majority of the expected losses or expected
residual returns created by the assets of the VIE. ASU 2009-17 requires that a VIE be consolidated
by the enterprise that has both the power to direct the activities that most significantly impact
the VIEs economic performance and the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE. ASU 2009-17 also requires that an enterprise
continually reassess, based upon current facts and circumstances, whether it should consolidate the
VIEs with which it is involved. However, in January 2010, the FASB deferred ASU 2009-17 for
certain investment entities which allows asset managers that have no obligations to fund
potentially significant losses of an investment entity to continue to apply the previous accounting
guidance to investment entities that have attributes subject to ASC 946 The Investment Company
Guide. The deferral qualifies for many mutual funds, hedge funds, private equity funds, venture
capital funds and certain mortgage REITs. The Company adopted these amended accounting principles
on January 1, 2010. This adoption did not have a material effect on the Companys consolidated
financial statements contained within Item 1 of this Quarterly Report on Form 10-Q, including our
relationship as investment advisor to FA Technology Ventures L.P., which qualified for the
deferral. Refer to Note 8 within the consolidated financial statements, contained within Item 1 of
this Quarterly Report on Form 10-Q, for additional information related to FA Technology Ventures
L.P.
In April 2009, the FASB issued amended accounting principles now codified within ASC Topic 820
Fair Value Measurements and Disclosures, related to determining fair value when the volume and
level of activity for an asset or liability have significantly decreased and identifying
transactions that are not orderly. This guidance lists factors which should be evaluated to
determine whether a transaction is orderly, clarifies that adjustments to transactions or quoted
prices may be necessary when the volume and level of activity for an asset or liability have
decreased significantly, and provides guidance for determining the concurrent weighting of the
transaction price relative to fair value indications from other valuation techniques when
estimating fair value. The Company adopted these amended accounting principles as of June 30,
2009. This adoption did not have a material impact on the Companys consolidated financial
statements, contained within Item 1 of this Quarterly Report on Form 10-Q.
41
BROADPOINT GLEACHER SECURITIES GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In September 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, which
supplements and amends the guidance in ASC 820, that provides additional guidance on how companies
should measure liabilities at fair value and confirmed practices that have evolved when measuring
fair value such as the use of quoted prices for a liability when traded as an asset. Under the new
guidance, the fair value of a liability is not adjusted to reflect the impact of contractual
restrictions that prevent its transfer. A quoted price, if available, in an active market for an
identical liability must be used. If such information is not available, an entity may use either
the quoted price of the identical liability when traded as an asset; quoted prices for similar
liabilities; similar liabilities traded as assets or another technique such as the income approach
or a market approach. The Company adopted these amended accounting principles on October 1, 2009.
This adoption did not have a material impact on the Companys consolidated financial statements,
contained within Item 1 of this Quarterly Report on Form 10-Q.
42
BROADPOINT GLEACHER SECURITIES GROUP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Given the amount of capital we deploy, the financial products we trade and the large number of
counterparties we deal with in our daily transactions, management believes that comprehensive and
effective risk management is a key component for our success.
For a full discussion of the Companys market risk management processes and procedures, refer to
Item 9 of the Companys 2009 Annual Report on Form 10-K.
Market Risk
Market risk represents the risk of loss that may result from the potential change in the value of
our trading or investment positions as a result of fluctuations in interest rates, credit spreads
and equity prices, as well as changes in the implied volatility of interest rates and equity
prices. The Companys exposure to market risk is primarily related to principal transactions
executed in order to facilitate customer trading activities.
The Company trades debt securities issued by U.S. Government and federal agency obligations,
non-agency mortgage-backed securities, corporate debt, preferred stock and equity securities. In
connection with these activities, the Company may be required to maintain inventories in order to
facilitate customer transactions. In order to mitigate exposure to market risk, the Company enters
into derivatives including the purchase and sale of TBAs and exchange traded treasury futures
contracts.
The following table categorizes the Companys market risk sensitive financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Market Value (net)
|
(In thousands of dollars)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
Trading risk
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
737,431
|
|
|
$
|
905,847
|
|
Equity
|
|
|
(2,150
|
)
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
|
|
|
Total trading risk
|
|
$
|
735,281
|
|
|
$
|
905,847
|
|
|
Other than trading risk
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
182
|
|
|
$
|
182
|
|
Equity
|
|
|
20,478
|
|
|
|
20,010
|
|
Foreign exchange
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
|
|
|
Total other than trading risk
|
|
|
20,660
|
|
|
|
20,192
|
|
|
Total market value, net
|
|
$
|
755,941
|
|
|
$
|
926,039
|
|
|
Refer to Note 1 within the Companys 2009 Annual Report on Form 10-K and Note 6 within the
footnotes to the consolidated financial statements contained in Item 1 of this Quarterly Report on
Form 10-Q for further information regarding the Companys accounting policy over valuation of these
financial instruments and classification of such financial instruments in accordance with ASC 820.
The following is a discussion of the Companys primary market risk exposures as of March 31, 2010,
including a discussion of how those exposures are currently managed.
Interest Rate Risk and Related Prepayment Risk
Interest rate risk exposure is a consequence of maintaining inventory positions and trading in
interest-rate-sensitive financial instruments. These financial instruments include debt securities
issued by U.S. Government and federal agency obligations, non-agency mortgage-backed securities,
corporate debt and preferred stock. In
43
BROADPOINT GLEACHER SECURITIES GROUP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
connection with trading activities, the Company exposes itself to interest rate risk, arising from
changes in the level or volatility of interest rates or the shape and slope of the yield curve.
Prepayment risk, which is related to interest rate risk, arises from the possibility that the rate
of principal repayment on mortgages will fluctuate, affecting the value of mortgage-backed
securities. Prepayments are the full or partial repayment of principal prior to the original term
to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans and
turnover in housing ownership. Prepayment rates on mortgage-related securities vary from time to
time and may cause changes in the amount of the Companys net interest income, the valuations of
mortgage-backed securities in the inventory and the effectiveness of our interest rate hedging.
Prepayments of mortgage loans usually can be expected to increase when mortgage interest rates fall
below the then-current interest rates on such loans and decrease when mortgage interest rates
exceed the then-current interest rate on such loans, although such effects are uncertain.
Prepayment experience also may be affected by the conditions in the housing and financial markets,
general economic conditions and the relative interest rates on fixed-rate and adjustable-rate
mortgage loans underlying mortgage-backed securities. The purchase prices of mortgage-backed
securities are generally based in part upon assumptions regarding the expected rates of
prepayments.
A sensitivity analysis has been prepared to estimate the Companys exposure to interest rate risk
of its net trading inventory positions. The fair market value of these securities included in the
Companys inventory at March 31, 2010 and December 31, 2009 was $737.4 million and $905.8 million,
respectively. Interest rate risk is measured as the potential loss in fair value resulting from a
hypothetical one-half percent increase in interest rates across the yield curve. At March 31, 2010
and December 31, 2009, the potential change in fair value under this stress scenario was ($6.1)
million and ($9.1) million, respectively. Interest rates may increase more than the amount assumed
above and consequently, the actual change in fair value may exceed the change computed above.
The following table shows a breakdown of our interest rate exposure
on March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Market value change per one hundredth of one percent interest
|
|
March 31,
|
|
December 31,
|
rate increase
|
|
2010
|
|
2009
|
|
U.S. government and federal agency obligations
|
|
$
|
(94,950
|
)
|
|
$
|
(176,014
|
)
|
Non-agency mortgage-backed securities
|
|
|
(10,125
|
)
|
|
|
(7,112
|
)
|
Corporate debt securities
|
|
|
(2,957
|
)
|
|
|
(76
|
)
|
Preferred stock
|
|
|
(13,783
|
)
|
|
|
|
|
|
Total
|
|
$
|
(121,815
|
)
|
|
$
|
(183,202
|
)
|
|
Average duration (years)
|
|
|
1.78
|
|
|
|
2.91
|
|
|
Credit Spread and Credit Rating Risk
The Company actively makes markets in various credit markets, including corporate bonds (both high
yield and investment grade), emerging market debt and structured credits (MBS/ABS/CMBS/CDO/CLO). As
a consequence, the Company is exposed to credit spread and credit rating changes in these markets.
Credit spread and credit rating risk results from changes in the level or volatility of credit
spreads, either as a result of macro market conditions (e.g. risk aversion sentiment) or from
idiosyncratic development of certain debt issuers or their sectors.
The following tables show a breakdown of our exposure in these markets on March 31, 2010 and
December 31, 2009:
Credit Sensitive Holdings Market Value as of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency
|
|
|
|
|
|
|
|
|
mortgage-
|
|
Corporate
|
|
|
|
|
|
|
backed
|
|
debt
|
|
Preferred
|
|
|
(In thousands of dollars)
|
|
securities
|
|
securities
|
|
stock
|
|
Total
|
|
Investment grade
|
|
$
|
41,255
|
|
|
$
|
1,138
|
|
|
$
|
14,156
|
|
|
$
|
56,549
|
|
Non-investment grade
|
|
|
23,901
|
|
|
|
2,424
|
|
|
|
3,125
|
|
|
|
29,450
|
|
|
Total
|
|
$
|
65,156
|
|
|
$
|
3,562
|
|
|
$
|
17,281
|
|
|
$
|
85,999
|
|
|
44
BROADPOINT GLEACHER SECURITIES GROUP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
Credit Sensitive Holdings Market Value as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency
|
|
|
|
|
|
|
|
|
mortgage-
|
|
Corporate
|
|
|
|
|
|
|
backed
|
|
debt
|
|
Preferred
|
|
|
(In thousands of dollars)
|
|
securities
|
|
securities
|
|
stock
|
|
Total
|
|
Investment grade
|
|
$
|
36,749
|
|
|
$
|
(852
|
)
|
|
$
|
8,887
|
|
|
$
|
44,784
|
|
Non-investment grade
|
|
|
18,308
|
|
|
|
701
|
|
|
|
1,814
|
|
|
|
20,823
|
|
|
Total
|
|
$
|
55,057
|
|
|
$
|
(151
|
)
|
|
$
|
10,701
|
|
|
$
|
65,607
|
|
|
Equity Price Risk
The Company does not currently make markets in equity securities, but is exposed to equity price
risk to the extent it holds equity securities in inventory. Equity price risk results from changes
in the level or volatility of equity prices, which affect the value of equity securities or
instruments that derive their value from a particular stock. The Company attempts to reduce the
risk of loss inherent in its inventory of equity securities by monitoring those security positions
throughout each day.
The Company had no significant positions in marketable equity securities at March 31, 2010 and
December 31, 2009. The Companys investment portfolio, excluding the consolidation of the Employee
Investment Funds (EIF), at March 31, 2010 and December 31, 2009 had a fair market value of $18.5
million and $18.3 million, respectively. Equity price risk is estimated as the potential loss in
fair value resulting from a hypothetical 10 percent adverse change in equity security prices or
valuations. This risk measure, for the Companys investment portfolio excluding the consolidation
of the EIF, amounted to $1.9 million at March 31, 2010 and $1.8 million at December 31, 2009.
Equity prices may increase more than the amount assumed above, and consequently, the actual change
in fair value may exceed the change computed above.
Counterparty Credit Risk
Counterparty credit risk is the risk of loss due to failure of our counterparty to meet its
obligations. The Company is engaged in various trading and brokerage activities whose
counterparties primarily include broker-dealers, banks, and other financial institutions. In the
event counterparties do not fulfill their obligations, the Company may be exposed to risk. The
risk of default depends on the credit worthiness of the counterparty or issuer of the instrument.
The Company seeks to control credit risk by following an established credit approval process,
monitoring credit limits, and requiring collateral where it deems appropriate.
Agency and principal securities transactions with customers of the Companys subsidiaries are
cleared through third party clearing agreements on a fully disclosed basis. Under these
agreements, the clearing agents settle these transactions on a fully disclosed basis, collect
margin receivables related to these transactions, monitor the credit standing and required margin
levels related to these customers and, pursuant to margin guidelines, require the customer to
deposit additional collateral with them or to reduce positions, if necessary.
In the normal course of business, the Company guarantees certain service providers, such as
clearing and custody agents, trustees, and administrators, against specified potential losses in
connection with their acting as an agent of, or providing services to, the Company or its
affiliates. The maximum potential amount of future payments that the Company could be required to
make under these indemnifications cannot be estimated. However, the Company has historically made
no material payments under these arrangements and believes that it is unlikely it will have to make
material payments in the future. Therefore, the Company has not recorded any contingent liability
in the consolidated financial statements, contained in Item 1 of this Quarterly Report on Form
10-Q, for these indemnifications.
45
BROADPOINT GLEACHER SECURITIES GROUP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
Liquidity and Funding Risk
Market liquidity risk is the risk that it takes longer or it is more costly than anticipated to
sell inventory to raise cash due to adverse market conditions. Funding liquidity risk is the risk
that we are unable to meet margin calls or cash flow needs due to lack of cash or are unable to
maintain leveraged positions due to margin calls or reduction in credit lines from lending
counterparties.
Liquidity is of paramount importance to our success and operations. Lack of liquidity tends to be
the biggest contributor to the rapid failure of financial institutions.
Leverage magnifies the risks (and potential rewards) we take. To balance this risk/reward
equation, we maintain weighted average target leverage ratios well below 10x, so that the magnified
risk from leveraging would still be manageable even in the event of market crisis. The table below
shows key leverage ratios.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
Inventory to Equity
|
|
|
2.4x
|
|
|
|
3.0x
|
|
|
Refer to Liquidity and Capital Resources above for further information about our liquidity as of
March 31, 2010 and December 31, 2009.
46
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Companys
management, with the participation of the Chief Executive Officer and the Principal Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that
evaluation, the Companys management, including the Chief Executive Officer and the Principal
Financial Officer, concluded that the Companys disclosure controls and procedures were effective
as of the end of the period covered by this report. In addition, no changes in the Companys
internal control over financial reporting occurred during the quarter ended March 31, 2010 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
47
Part II-Other Information
Item 1. Legal Proceedings
Based on currently available information, the Company does not believe that any current litigation,
proceeding or other matter to which it is a party or otherwise involved will have a material
adverse effect on its financial position, results of operations and cash flows, although an adverse
development, or an increase in associated legal fees, could be material in a particular period,
depending in part on the Companys operating results in that period.
48
Item 6. Exhibits
(a)
Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation
of Broadpoint Gleacher Securities
Group, Inc. dated June 5, 2009, Inc.
(filed as Exhibit 3.2 to the Companys
Current Report on Form 8-K filed June
8, 2009 and incorporated herein by
reference thereto).
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of
Broadpoint Gleacher Securities Group,
Inc. dated June 5, 2009, Inc. (filed as
Exhibit 3.3 to the Companys Current
Report on Form 8-K filed June 8, 2009
and incorporated herein by reference
thereto).
|
|
|
|
4.1
|
|
Specimen Certificate of Common Stock,
par value $.01 per share (filed as
Exhibit 4.1 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
4.2
|
|
Registration Rights Agreement, dated as
of September 21, 2007, by and among
First Albany Companies Inc.,
MatlinPatterson FA Acquisition LLC,
Robert M. Tirschwell and Robert M.
Fine. (filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K
filed September 27, 2007 and
incorporated herein by reference
thereto).
|
|
|
|
4.3
|
|
Amendment No. 1 to Registration Rights
Agreement dated as of March 4, 2008 by
and among the Company, MatlinPatterson
FA Acquisition LLC, Robert M.
Tirschwell and Robert M. Fine (filed as
Exhibit 10.3 to the Companys Current
Report on Form 8-K filed March 6, 2008
and incorporated herein by reference
thereto).
|
|
|
|
10.1
|
|
Letter Agreement between Broadpoint
Gleacher Securities Group, Inc. and Lee
Fensterstock dated February 21, 2010
(filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed
February 22, 2010 and incorporated
herein by reference thereto).
|
|
|
|
10.2
|
|
Restricted Stock Units Agreement dated
January 1, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Peter McNierney. (filed as
Exhibit 10.57 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
10.3
|
|
Restricted Stock Units Agreement dated
January 1, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Lee Fensterstock. (filed as
Exhibit 10.58 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
10.4
|
|
Restricted Stock Units Agreement dated
February 11, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Lee Fensterstock. (filed as
Exhibit 10.59 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
10.5
|
|
Restricted Stock Units Agreement dated
February 11, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Peter McNierney. (filed as
Exhibit 10.60 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
10.6
|
|
Restricted Stock Units Agreement dated
February 11, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Robert Turner. (filed as
Exhibit 10.61 to the Companys Annual
Report on Form 10-K filed March 15,
2010 and incorporated herein by
reference thereto).
|
|
|
|
10.7
|
|
Restricted Stock Units Agreement dated
February 11, 2010 by and between
Broadpoint Gleacher Securities Group,
Inc. and Patricia Arciero-Craig. (filed
as Exhibit 10.62 to the Companys
Annual Report on Form 10-K filed March
15, 2010 and incorporated herein by
reference thereto).
|
10.8
|
|
Letter Agreement between Broadpoint
Gleacher Securities Group, Inc. and
Robert Turner dated March
|
|
|
|
49
|
|
31, 2010
(filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed March
31, 2010 and incorporated herein by
reference thereto).
|
|
|
|
31.1
|
|
Certification of Chief Executive
Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act.
|
|
|
|
31.2
|
|
Certification of Chief Executive
Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act.
|
|
|
|
32
|
|
Certification of Chief Executive
Officer and Chief Financial Officer
pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code.
|
|
|
|
|
|
Management contract or compensatory plan or arrangement
|
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Broadpoint Gleacher Securities Group, Inc.
(Registrant)
|
|
Date: May 7, 2010
|
/s/
Eric J. Gleacher
|
|
|
Eric J. Gleacher
|
|
|
Chief Executive Officer
|
|
|
|
|
|
Date: May 7, 2010
|
/s/
Jeffrey H. Kugler
|
|
|
Jeffrey H. Kugler
|
|
|
Chief Financial Officer
(Principal Accounting Officer)
|
|
|
51
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