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BGC PARTNERS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of BGC Partners, Inc.'s financial condition and results of operations should be read together with BGC Partners, Inc.'s unaudited condensed consolidated financial statements and notes to those statements, as well as the cautionary statements relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), included elsewhere in this report. When used herein, the terms "BGC Partners," "BGC," the "Company," "we," "us" and "our" refer to BGC Partners, Inc., including consolidated subsidiaries. This discussion summarizes the significant factors affecting our results of operations and financial condition during the three and nine months ended September 30, 2014 and 2013. This discussion is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Report. OVERVIEW AND BUSINESS ENVIRONMENT We are a leading global brokerage company servicing the financial and real estate markets through our Financial Services and Real Estate Services businesses. Our Financial Services business specializes in the brokerage of a broad range of products, including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commodities, futures and structured products. Our Financial Services business also provides a wide range of services, including trade execution, broker-dealer services, clearing, processing, information, and other back-office services to a broad range of financial and non-financial institutions. Our integrated platform is designed to provide flexibility to customers with regard to price discovery, execution and processing of transactions, and enables them to use voice, hybrid, or in many markets, fully electronic brokerage services in connection with transactions executed either over-the-counter ("OTC") or through an exchange. Through our BGC Trader™ and BGC Market Data brands, we offer financial technology solutions, market data, and analytics related to select financial instruments and markets. We entered into the commercial real estate business in October 2011 with the acquisition of Newmark & Company Real Estate, Inc. ("Newmark"), a leading U.S. commercial real estate brokerage and advisory firm primarily serving corporate and institutional clients. Newmark was founded in 1929 in New York City. In 2000, Newmark embarked upon a national expansion and in 2006 entered into an agreement with London-based Knight Frank to operate jointly in the Americas as "Newmark Knight Frank." In the second quarter of 2012, we completed the acquisition of substantially all of the assets of Grubb & Ellis Company and its direct and indirect subsidiaries, which we refer to as "Grubb & Ellis." Grubb & Ellis was formed in 1958 and built a full-service national commercial real estate platform of property management, facilities management and brokerage services. We have completed the integration of Grubb & Ellis with Newmark Knight Frank to form the resulting brand, Newmark Grubb Knight Frank ("NGKF"). NGKF is a full-service commercial real estate platform that comprises our Real Estate Services segment, offering commercial real estate tenants, owners, investors and developers a wide range of services, including leasing and corporate advisory, investment sales and financial services, consulting, project and development management, and property and facilities management. Our customers include many of the world's largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers and investment firms. We have offices in dozens of major markets, including New York and London, as well as in Atlanta, Beijing, Boston, Charlotte, Chicago, Copenhagen, Dallas, Denver, Dubai, Hong Kong, Houston, Istanbul, Johannesburg, Los Angeles, Mexico City, Miami, Moscow, Nyon, Paris, Philadelphia, Rio de Janeiro, San Francisco, Santa Clara, São Paulo, Seoul, Singapore, Sydney, Tokyo, Toronto, Washington, D.C. and Zurich. We remain confident in our future growth prospects as we continue to increase the scale and depth of our real estate platform and continue to seek market driven opportunities to expand our business in numerous financial asset classes. NGKF showed solid growth during the quarter ended September 30, 2014 by continuing to build the NGKF brand by accretively acquiring businesses and hiring talent around the country. In our Real Estate Services business, we acquired Cornish & Carey Commercial ("Cornish & Carey" or "Cornish") on August 13, 2014. By adding the leading commercial real estate services company in the Bay Area and Silicon Valley, we have greatly broadened the scope and depth of services we can provide to clients in Northern California and across the U.S. In our Financial Services business, in May 2014 we acquired Remate Lince, a leading Mexican inter-dealer broker focusing on interest rate derivatives and fixed income, and in February 2014 we purchased the assets of HEAT Energy Group, which specializes in East Coast U.S. power brokerage. We also continued to make key hires around the world. We expect these additions to increase our earnings per share going forward. These investments underscore BGC's ongoing commitment to make accretive acquisitions and profitably hire. As of September 30, 2014, our liquidity, which we define as cash and cash equivalents, marketable securities and securities owned was approximately $624.7 million, the majority of which we are free to deploy to increase stockholder and bondholder value. We also expect to receive over $500 million in NASDAQ OMX stock. This gives us over a billion dollars of dry powder to grow our profits. We expect to use these funds to make accretive acquisitions across Real Estate and Financial Services, repay debt, repurchase common shares and units, and maintain our regular common dividend for the foreseeable future. 43-------------------------------------------------------------------------------- Table of Contents Announcement of Commencement of Tender Offer to Acquire GFI Group, Inc. On October 22, 2014, we announced our commencement of a tender offer to acquire all of the outstanding shares of GFI Group Inc. (NYSE: GFIG) ("GFI") for $5.25 per share in cash in a transaction valued at approximately $675 million. As of September 30, 2014, BGC owned approximately 13.5 % of GFI Group's common stock. (See "Tender Offer to Acquire GFI Group, Inc" later in the MD&A for more details). BGC'S offer of $5.25 per share in cash represents more than a 15% premium to the $4.55 per share all-stock transaction announced by CME Group and GFI Group on July 30, 2014 and more than a 68% premium to the price of GFI Group shares on July 29, 2014, the last day prior to the announcement of the CME transaction. Our tender offer is subject to certain conditions, including the tender of a sufficient number of shares of GFI Group's common stock such that, when added to GFI Group's common stock owned by BGC, BGC would own a majority of the outstanding shares of GFI Group common stock on a fully diluted basis. The tender offer is not be subject to any financing condition. As an owner of approximately 13.5% of GFI's common stock, we continue to believe that GFI's customers and brokers would benefit from GFI being part of a larger, better capitalized and more diversified company. We are confident that we will produce increased productivity per broker, meaningful synergies, substantial earnings accretion and stronger cash flow, shareholder value and superior service to our customers. NASDAQ OMX Transaction On June 28, 2013, we completed the sale (the "NASDAQ OMX Transaction") of certain assets to The NASDAQ OMX Group, Inc. ("NASDAQ OMX"). The transaction occurred pursuant to a Purchase Agreement, dated as of April 1, 2013 (the "Purchase Agreement"). At the closing, NASDAQ OMX purchased certain assets and assumed certain liabilities from us and our affiliates, including the eSpeed brand name and various assets comprising the fully electronic portion of our benchmark on-the-run U.S. Treasury brokerage, market data and co-location service businesses (the "Purchased Assets" or "eSpeed"), for cash consideration of $750 million paid at closing, plus an earn-out of up to 14,883,705 shares of NASDAQ OMX common stock to be paid ratably in each of the fifteen years following the closing. The $750 million in cash paid at closing was subject to adjustment for certain pre-paid amounts and accrued costs and expenses, and the 14,883,705 shares of NASDAQ OMX common stock will be paid ratably in each of the fifteen years following the closing in which the consolidated gross revenue of NASDAQ OMX is equal to or greater than $25 million. On November 12, 2013, we received 992,247 shares of NASDAQ OMX common stock in accordance with the agreement. The contingent future issuances of NASDAQ OMX common stock are also subject to acceleration upon the occurrence of certain events, including the acquisition by any person of 50% or more of NASDAQ OMX's stock (including by merger), NASDAQ OMX ceasing to hold Purchased Assets representing 50% or more of the aggregate revenue attributable to the Purchased Assets as of the closing, and the sale of all or substantially all of NASDAQ OMX's assets, as well as to certain anti-dilution provisions. As a result of the sale of eSpeed, we only sold our on-the-run; benchmark 2-, 3-, 5-, 7-, 10-, and 30-year fully electronic trading platform for U.S. Treasury Notes and Bonds. Over time, we had built these six instruments into some of the deepest and most liquid markets in the world. For the nine months ended September 30, 2013, eSpeed generated approximately $48.8 million in revenues-all of which was earned during the first two quarters -, of which $46.5 million was recorded in our Financial Services segment and the remainder in Corporate items. We retained all of our other voice, hybrid, and fully electronic trading, market data, and software businesses, including voice, hybrid and electronic brokerage of off-the-run U.S. Treasuries, as well as Treasury Bills, Treasury Swaps, Treasury Repos, Treasury Spreads, and Treasury Rolls. We also continue to offer voice brokerage for on-the-run U.S. Treasuries. FINRA Arbitration On July 9, 2014, the FINRA Arbitration panel issued its award in our dispute with the Tullett Subsidiaries. The Tullett Subsidiaries' claims for punitive damages, as well as their claims against executives of the Company and its subsidiaries, were denied in their entirety. Tullett Subsidiaries were found to have breached their contract with the people who sold them Chapdelaine Corporate Securities & Co. (many of whom now work for BGC) and were ordered to pay those individuals over $6 million in damages. The Tullett Subsidiaries were also found to have wrongly refused to pay compensation and expenses to one of their former employees who now works for BGC, and whom was awarded over $222 thousand. BGC Financial and BGC Capital Markets (described together in the award and in this paragraph as "BGC") were found solely liable for approximately $13 million in damages. Certain desk heads that moved to BGC were found liable for a total of approximately $20 million. BGC has paid the awards against these desk heads. The FINRA award will not have a material financial effect on BGC. We are pleased to put this arbitration behind us and remain focused on delivering outstanding services to our valued customers. Financial Services: The financial intermediary sector has been a competitive area that has grown over the past decade due to several factors. One factor is the increasing use of derivatives to manage risk or to take advantage of the anticipated direction of a market by allowing users 44 -------------------------------------------------------------------------------- Table of Contents to protect gains and/or guard against losses in the price of underlying assets without having to buy or sell the underlying assets. Derivatives are often used to mitigate the risks associated with interest rates, equity ownership, changes in the value of foreign currency, credit defaults by corporate and sovereign debtors and changes in the prices of commodity products. Over the past decade, demand from financial institutions, financial services intermediaries and large corporations has increased volumes in the wholesale derivatives market, thereby increasing the business opportunity for financial intermediaries. Another key factor in the growth of the financial intermediary sector over the past decade has been the increase in the number of new financial products. As market participants and their customers strive to mitigate risk, new types of equity and fixed income securities, futures, options and other financial instruments have been developed. Most of these new securities and derivatives are not immediately ready for more liquid and standardized electronic markets, and generally increase the need for trading and require broker-assisted execution. Our Financial Services business continued to face challenging market conditions during the quarter. While our Foreign Exchange ("FX") and Equities and other businesses operated in improving macro environments, our Rates and Credit businesses continued to face a challenging macro backdrop. The continued low volume environment facing our Rates and Credit businesses has been part of a greater industry trend that has been attributed to a number of cyclical factors, including extreme monetary policies by several major central banks including the Federal Reserve and more recently, the European Central Bank. These accommodative monetary policies have resulted in historically low levels of volatility and interest rates across most financial markets. The credit global markets have also faced structural issues such as the higher bank capital requirements under Basel III. Consequently, these factors contributed to lower trading volumes across our Rates and Credit asset classes across most geographies. Regulators in the U.S. have finalized most of the new rules across a range of financial marketplaces, including OTC derivatives as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Many of these rules became effective during 2013 with ongoing phase-ins anticipated over the course of 2014. Legislators and regulators in Europe and the Asia-Pacific region have crafted similar rules, of which, some have been implemented in 2014, while others are expected to be implemented in the future. These OTC-related laws and proposed rules call for additional pre- and post-trade market transparency, heightened collateral and capital standards, the transacting of certain derivatives using authorized venues, central clearing of most standardized derivatives, specific business conduct standards and the delivery of transaction data to newly designated trade repositories for public dissemination. BGC Derivative Markets, a subsidiary of the Company, began operating as a Swap Execution Facility ("SEF") on October 2, 2013. After this date, all eligible derivatives traded by US Persons required SEF registration. Mandatory Dodd-Frank compliant execution on SEFs by Swap Dealers and Major Swap Participants commenced in February 2014 for a small number of products, with more products requiring SEF execution as 2014 progresses. The full Dodd-Frank rule set regarding execution, clearing and reporting requirements has been finalized more slowly than anticipated and has been effected by No Action letters, temporary relief, guidance and multiple interpretations. As a result, many of our largest customers have reduced their trading exposures until the rule consequences are completely known. Although SEF activity has steadily increased over the course of 2014, we do not believe volumes to date are not indicative of what this business will look like a year from now. We anticipate improved derivatives volumes once the regulatory landscape becomes clearer for our clients. In addition, BGC maintains its ownership stake in ELX, a CFTC approved designated contract market ("DCM"), which also includes several of the world's largest banks as equity holders. ELX began Dodd-Frank compliant swap trading in the fourth quarter of 2013, and we expect growing volumes as market participants explore the use of ELX as an alternative means to comply with Dodd-Frank regulations. We believe that our relative competitive position is strong in this new environment, and that we will gain market share in the U.S. This is because the new rules not only require OTC market execution venues to maintain robust front-end and back-office IT capabilities and to make large and ongoing technology investments, but also because recent revisions to the execution methodology rules will allow elements of voice brokerage to flourish. We are a leader in both the breadth and scale of our hybrid and fully electronic trading capability, and we expect to outperform our competitors in such an environment. Growth Drivers As a wholesale intermediary, our business is driven primarily by overall industry volumes in the markets in which we broker, the size and productivity of our front-office headcount (including salespeople, brokers and other front-office professionals), regulatory issues and the percentage of our revenues related to fully electronic brokerage. Below is a brief analysis of the market and industry volumes for some of our financial services products including our overall hybrid and fully electronic trading activities. 45 -------------------------------------------------------------------------------- Table of Contents Overall Market Volumes and Volatility Volume is driven by a number of items, including the level of issuance for financial instruments, the price volatility of financial instruments, macro-economic conditions, the creation and adoption of new products, the regulatory environment, and the introduction and adoption of new trading technologies. In general, increased price volatility increases the demand for hedging instruments, including many of the cash and derivative products that we broker. For example, hedge funds are increasingly making use of derivatives to protect positions and preserve the capital of their more risk-averse institutional clients, which now account for almost two-thirds of assets managed by the industry, according to a report from J.P. Morgan. Rates volumes in particular are influenced by market volatility, which has been dampened due to continued quantitative easing undertaken by the U.S. Federal Reserve, the European Central Bank, as well as at other major central banks. Quantitative easing entails the central banks buying government securities or other securities in the open market-particularly longer-dated instruments-in an effort to promote increased lending and liquidity and bring down long-term interest rates. When central banks hold these instruments, they tend not to trade or hedge-thus lowering rates volumes across cash and derivatives markets industry-wide. As of October 8th, 2014, the U.S. Federal Reserve had approximately $3.8 trillion worth of long-dated U.S. Treasury and Federal Agency securities, compared with $1.7 trillion at the beginning of 2011 and zero prior to September 2008. Other major central banks have also greatly increased the amount of longer-dated debt on their balance sheets over the past three years or signaled a willingness to do so. In addition, the G-20 central banks have agreed to implement the Basel III accord. Basel III was drafted with the intention of making banks more stable in the wake of the financial crisis. The accord, which will be phased in over the next few years, will force most large banks in G-20 nations to hold approximately three times as much Tier 1 capital as is required under the previous set of rules. The new capital rules make it more expensive for banks to hold non-sovereign debt assets on their balance sheets, and as a result, analysts say banks have reduced or will reduce their trading activity in corporate and asset-backed fixed income securities as well as in various other OTC cash and derivative instruments. We believe that this has reduced overall industry volumes in many of the products we trade, particularly in Credit. During the three months ended September 30, 2014, industry volumes were mixed year-over-year for most of the OTC and listed products we broker in Rates, Credit, FX and Equities and other. For example, while FX volumes and equity and other volumes were generally up, Rates and Credit volumes were generally down. According to the Securities Industry and Financial Markets Association ("SIFMA"), overall U.S. bond trading volumes decreased by over 7% year-over-year in the third quarter of 2014. This negatively impacted revenues industry-wide and in our Financial Services segment. Below is a discussion of the volume and growth drivers of our various financial services brokerage product categories. Rates Volumes and Volatility Our Rates business is influenced by a number of factors, including; global sovereign issuances, secondary trading and the hedging of these sovereign debt instruments. While the amount of global sovereign debt outstanding remains high by historical standards, the level of secondary trading and related hedging activity remains muted. For example, according to the Federal Reserve, the average daily volume of U.S. Treasuries amongst primary dealers was down by over approximately 12% as compared with a year earlier. Additionally, interest rate volumes were down by approximately 30% and 5% at ICE and Eurex, respectively. Our revenues from Rates products were down by 14.3% during the quarter to $93.5 million Our Rates revenues are not totally dependent on market volumes and therefore do not always fluctuate consistently with industry metrics. This is largely because our voice, hybrid, and fully electronic desks in rates often have volume discounts built into their price structure, which results in our rates revenues being less volatile than the overall industry volumes. Overall, analysts and economists expect the absolute level of sovereign debt outstanding to remain at elevated levels for the foreseeable future as governments finance their future deficits and roll over their sizable existing debt. For example, the Organization for Economic Cooperation and Development ("OECD")-which includes almost all of the advanced and developed economies of the world-reported that general government debt as a percentage of GDP will be 73.1% for the entire OECD by 2015. This would represent a slight increase from 68.3% in 2012, but is nearly double the 39.1% figure in 2007. Meanwhile, economists expect that the effects of various forms of quantitative easing will continue to negatively impact financial markets, as economic growth remains weak in most OECD countries. As a result, we expect long-term tailwinds in our Rates business from continuing high levels of government debt, but near-term headwinds due to the continued accommodative monetary policy of many major central banks. Credit Volumes The cash portion of our credit business is impacted by the level of global corporate bond issuance, while both the cash and credit derivatives sides of this business are impacted by sovereign and corporate issuance. Global credit derivative market turnover has declined due to uncertainty surrounding recently enacted rules for the clearing of credit derivatives in the U.S. In addition, corporate and asset-backed bond trading has continued to decline for many of our large bank customers as they reduce their inventory of bonds in order to comply with Basel III and other international financial regulations. The net impact of these trends was reflected in primary dealer average daily volumes for corporate and mortgaged-backed bonds-a reflection of the cash market-being down by approximately 10% and 2% year-over-year according to the Federal Reserve. Total dealer gross notional credit derivatives 46-------------------------------------------------------------------------------- Table of Contents outstanding as reported by SIFMA-a reflection of the inter-dealer derivatives market-was down by over 27% year-over-year. Our overall credit revenues declined by 1.6% to $53.5 million, which was reflective of difficult volume trends in the credit markets globally. Foreign Exchange Volumes and Volatility Global FX volumes increased in the third quarter of 2014, largely as a result of a return of volatility due to diverting monetary policy across many central banks, along with dampened regulatory concern across the asset class. Our fully electronic FX revenues increased 39.8%, while our overall FX revenues increased 18.7% to $56.2 million. In comparison, FX volumes increased by approximately 10% at EBS and 1% at the CME. Equity-Related, Energy, and Commodities Volumes Global equity markets were mixed during the quarter. For example, European cash equity products and global equity derivatives were up year-over-year, while U.S. cash equity products were generally down. According to the OCC, equity derivative volumes were up over 8% as compared to the third quarter 2013. Energy volumes were down 9% and 4% at ICE and CME, while and commodities volumes were down 4% and flat year-over-year according to the ICE and CME. In comparison, our overall revenues from Equities and other asset classes increased by 24.6% to $43.4 million: of this energy and commodities revenues were up over 78%. We believe we continued to gain market share during the quarter. Hybrid and Fully Electronic Trading Historically, technology-based product growth has led to higher margins and greater profits over time for exchanges and wholesale financial intermediaries alike, even if overall company revenues remain consistent. This is largely because fewer employees are needed to process the same volume of trades as trading becomes more automated. Over time, electronification of exchange-traded and OTC markets has also generally led to volumes increasing faster than commissions decline, and thus often to an overall increase in revenues. We have been a pioneer in creating and encouraging hybrid and fully electronic trading, and continually work with our customers to expand such trading across more asset classes and geographies. Outside of U.S. Treasuries and spot FX, the banks and broker-dealers that dominate the OTC markets had generally been hesitant in adopting electronically traded products. However, in recent years, hybrid and fully electronic inter-dealer OTC markets for products, including CDS indices, FX options, and most recently interest rate swaps, have been created as banks and dealers have become more open to electronically traded products and as firms like us have invested in the kinds of technology favored by our customers. Recently enacted and pending regulation in Asia, Europe and the U.S. regarding banking, capital markets, and OTC derivatives is likely to accelerate the spread of fully electronic trading and we expect to benefit from the new rules regarding OTC derivatives once they are finalized globally. Our understanding is that the rules that have been promulgated or are being discussed will continue to allow for trading through a variety of means, including voice, and we believe the net impact of these rules and the new bank capital requirements will encourage the growth of fully electronic trading for a number of products we broker. The combination of more market acceptance of hybrid and fully electronic trading and our competitive advantage in terms of technology and experience has contributed to our strong gains in electronically traded products. During the quarter, we continued to invest in hybrid and fully electronic technology broadly across our financial services product categories. Our Financial Services electronic trading, market data and software solutions revenue increased by 40.5% to $25.1 million or 10% of segment revenue for the quarter, compared with $17.8 million or 7.2% for the quarter ended September 30, 2013. The increase in these retained technology-based revenues for the quarter was due in part to growth from the brokerage of fully electronic Credit, Rates and Spot FX as well as higher market data revenues. We now offer electronically traded products on a significant portion of our Financial Services segment's more than 200 Financial Services desks. We expect the proportion of desks offering electronically traded products to continue to increase as we invest in technology to drive electronic trading over our platform. Over time, we expect the growth of our technology-based businesses to further improve this segment's profitability. Real Estate Services: On October 14, 2011, we completed the acquisition of Newmark. On April 13, 2012, we acquired substantially all of the assets of Grubb & Ellis Company and its direct and indirect subsidiaries (collectively "Grubb & Ellis"). Newmark, Grubb & Ellis and certain independently-owned partner offices of the two, operate as "Newmark Grubb Knight Frank" in the Americas, and are associated with London-based Knight Frank. Our discussion of financial results for "Newmark Grubb Knight Frank," "NGKF," or "Real Estate Services" reflects only those businesses owned by us and does not include the results for Knight Frank or for the independently-owned offices that use some variation of the NGKF name in their branding or marketing. NGKF is a full-service commercial real estate services platform, offering commercial real estate tenants, owners, investors and developers a wide range of services, including leasing and corporate advisory, investment sales and financial services ("real estate capital markets"), consulting, project and development management, and property and facilities management. Our Real Estate Services segment continued to show solid growth and generated approximately 40% of our revenues in the quarter ended September 30, 2014. Real Estate brokerage revenues grew by 29.2% year-over-year. NGKF's growth was primarily driven by the addition of Cornish & Carey, by double-digit organic growth in our capital markets and leasing brokerage revenues and by our Global Corporate Services business. While we benefited from positive industry trends, we believe that NGKF once again made 47-------------------------------------------------------------------------------- Table of Contents strong market share gains. Our Real Estate management services and other revenues were up by 0.2%; and overall revenues improved by 21.1%. Our acquisition of Cornish & Carey Commercial closed during the quarter on August 13, 2014. Cornish is the leading commercial real estate services company in the important Bay Area and Silicon Valley markets. Cornish had over 275 brokers and generated approximately $135 million in revenues in 2013. The Bay Area is a top region for new business generation in the U.S. This acquisition will solidify our West Coast presence and further reinforce NGKF's position as a dominant industry force that offers clients the full range of commercial real estate services provided by best-in class brokers in multiple disciplines and geographies. Results from Cornish were included within our Real Estate business only for the period under which Cornish was controlled by BGC. We expect the overall profitability of our Real Estate Services business to increase as we increase its size and scale. However, the pre-tax margins in the segment are also impacted by the mix of revenues generated by NGKF. For example, real estate capital markets, which includes sales, commercial mortgage broking, and other financial services, generally has larger transactions that occur with less frequency when compared with leasing advisory. However, real estate capital markets brokerage tends to have significantly higher pre-tax margins earnings than NGKF as a whole. Leasing advisory revenues are generally more predictable than revenues from real estate capital markets, while pre-tax earnings margins tend to be more similar to those of the segment as a whole. Property and facilities management, which together are called "real estate management services," generally have the most predictable and steady revenues, but pre-tax earnings margins below those for NGKF as a whole. When management services clients agree to give us exclusive rights to provide real estate services for their facilities or properties, it is for an extended period of time, which provides us with stable and foreseeable sources of brokerage revenues. Growth Drivers The key drivers of revenue growth for U.S. commercial real estate brokerage services companies include the overall health of the U.S. economy, including gross domestic product and employment trends in the U.S., which drives demand for various types of commercial leases and purchases; the institutional ownership of commercial real estate as an investible asset class; and the ability to attract and retain talent to our real estate services platform. In addition, in real estate sales, also known as real estate capital markets, growth is driven by the availability of credit to purchasers of and investors in commercial real estate. Economic Growth in the U.S. The U.S. economy is believed to have expanded by an annualized rate of 3.5% in the third quarter according to the U.S. Bureau of Economic Analysis's preliminary estimate, above the post-recession average of 2.3%. The Bureau of Labor Statistics reported that employers added a monthly average of 200,000 net new payroll jobs during the third quarter, which is slightly lower than the monthly average of 212,000 during the first six months of 2014. Despite the return to pre-recession unemployment rates (5.9% as of September 2014), the long-term unemployment and the declining labor force participation rate (near a 35-year low) remain disappointing for many economists, but these indicators are less important to commercial real estate than job creation. The 10-year Treasury yield ended the third quarter at 2.49% after rising from its low of 1.66% on May 1, 2013. Treasury yields have remained low by historical standards, despite the Federal Reserve's continued tapering of its quantitative easing program. This has been in large part due to tempered expectations surrounding the Federal Open Market Committee ("FOMC") willingness to raise the federal funds rate in the near-term. In December 2013, the "FOMC" announced that it is expected to reduce its monthly purchases by $10 billion at each of its 2014 FOMC meetings and has since reaffirmed its plans to wind down its quantitative easing program by October 2014. The FOMC has also affirmed that it would keep interest rates low "well past" the point when unemployment reaches the threshold rate of 6.5%, which it crossed during the second quarter of this year. The combination of moderate economic growth and low interest rates that has been in place since the recession ended has been a powerful stimulus for commercial real estate, delivering steady absorption of excess space and strong investor demand for the yields available through both direct ownership of assets and publicly traded funds. Steady economic growth and low interest rates helped push vacancy rates down for the office, apartment, retail and industrial markets. The low level of new construction over the past few years has meant that tenants have been funneled into existing vacant space with the exception of apartments, where construction has propelled the market into a new expansion cycle. Asking rental rates posted moderate gains across all property types in 2014, propelled by demand for Class A assets in the top submarkets. The following trends drove the commercial real estate market thus far in 2014: • Strong U.S. employment growth and rising home values have fueled consumer spending and generated increased demand forcommercial real estate space across all major sectors: • Technology, energy, professional and business services and healthcare continued to power demand for office space: • Global trade, business capital spending and supply-chain optimization created tenant and owner-user demand for warehouses and distribution centers; • Apartment rents benefited from strong job growth, and underlying demographic trends towards urban living amongst youngeradults; and • Strong corporate earnings combined with increased leisure travel generated demand for hotel room-nights. Market Statistics Following the financial crisis of 2007/2008, the U.S. commercial property market saw steep declines in activity in 2009. In 2010, the market began to recover, and by the end of 2011 there were signs that the recovery was gaining momentum-although still not at levels seen prior to the crisis. If the U.S. economy expands at the moderate pace envisioned by many economists in 2014, we would expect this to fuel the continued recovery in commercial real estate. Although overall industry metrics are not necessarily as correlated to our revenues in Real Estate Services as they are in Financial Services, they do provide some indication of the general direction of the business. According to Newmark Grubb Knight Frank Research, the overall vacancy rate for office properties in the nation's key markets ended the third quarter of 2014 at 14.5%, down from 15.0% a year earlier, marking the fourteenth consecutive quarter of tightening and the lowest level since the fourth quarter 48-------------------------------------------------------------------------------- Table of Contents of 2008. Employment growth-the primary driver of demand for office leasing activity-accelerated during the quarter, which should provide continued momentum for the office market recovery. Rents for all property types in the U.S. continued to improve modestly. CoStar Group (a leading provider of information and analytic services) reported similar improvements in net absorption for all three major commercial property types-office, retail, and industrial-which increased by 11.6% to approximately 439 million square feet for the trailing twelve months ended September 30, 2014. In terms of commercial real estate sales metrics, according to CoStar's Value-Weighted U.S. Composite Index, average prices were up 8.7% year-over-year through August 2014. In the third quarter, the dollar volume of significant property sales rose by 11% above the same period in 2013 according to Real Capital Analytics. In comparison, our Real Estate Services brokerage revenue increased by 29.8% year-over-year, primarily due to growth resulting from the acquisition of Grubb & Ellis in the second quarter of 2012 as well as our other recent acquisitions (Cornish & Carey, Frederick Ross and Smith Mack) and organic growth. REGULATORY ENVIRONMENT See "Regulation" in Part I, Item 1 of our Annual Report on Form 10-K for information related to our regulatory environment. LIQUIDITY See "Liquidity and Capital Resources" herein for information related to our liquidity and capital resources. HIRING AND ACQUISITIONS A key driver of our revenue is front-office headcount. We believe that our strong technology platform and unique partnership structure have enabled us to use both acquisitions and recruiting to profitably increase our front-office staff at a faster rate than our largest competitors since our formation in 2004. We have invested significantly to capitalize on the current business environment through acquisitions, technology spending and the hiring of new brokers, salespeople and other front-office professionals. The business climate for these acquisitions has been competitive, and it is expected that these conditions will persist for the foreseeable future. We have been able to attract businesses and brokers, salespeople and other front-office professionals to our platform as we believe they recognize that we have the scale, technology, experience and expertise to succeed in the current business environment. As of September 30, 2014, our front-office headcount was up by approximately 13% year-over-year to 2,755 brokers, salespeople and other front-office professionals. This increase was primarily due in part to the acquisition of Cornish & Carey as well as organic growth. For the quarter ended September 30, 2014, average revenue generated per front-office employee increased 6% from a year ago to approximately $152,000. The increase in overall company revenue per front-office employee was primarily driven by an increase in revenue per front-office employee in Real Estate Services, which increased over 19% year-over-year. The laws and regulations passed or proposed on both sides of the Atlantic concerning OTC trading seem likely to favor increased use of technology by all market participants, and are likely to accelerate the adoption of both hybrid and fully electronic trading. We believe these developments will favor the larger inter-dealer brokers over smaller, non-public inter-dealer brokers, as the smaller ones generally do not have the financial resources to invest the necessary amounts in technology. We believe this will lead to further consolidation in our industry, and thus further allow us to profitably grow our front-office headcount. Since 2012, our acquisitions have included Grubb & Ellis, Wolfe & Hurst, Smith Mack, Frederick Ross Company, Ginalfi Finance, Sterling International Brokers Limited, HEAT Energy Group, Remate Lince and Cornish & Carey Commercial. On April 13, 2012, we completed the acquisition of substantially all of the assets of Grubb & Ellis. The total consideration transferred for Grubb & Ellis was approximately $47.1 million. CF&Co acted as an advisor to us in connection with this transaction and received a fee of $1.0 million. We executed employment/service and partnership arrangements with hundreds of real estate professionals from the Grubb & Ellis bankruptcy estate and completed their transfer into entities that we own. During the year ended December 31, 2012, we completed other acquisitions for a total consideration of $24.2 million, including Wolfe & Hurst, Smith Mack, Frederick Ross Company and Ginalfi Finance. Wolfe & Hurst Bond Brokers, Inc. is a municipal bonds inter-dealer broker in North America. Smith Mack is an independent full service commercial real estate services firm operating in Philadelphia and surrounding regions. Frederick Ross Company is the oldest full-service commercial real estate firm in Denver, and partner of Newmark Grubb Knight Frank since 2010. Ginalfi Finance is an inter-dealer broker based in Paris specializing in the intermediation of money markets products, credit bonds, government bonds and swaps. During the year ended December 31, 2013, we acquired the business and certain assets of Sterling International Brokers Limited, a London-based financial brokerage firm specializing in Pound Sterling and other major currency transactions. In our Financial Services business, in May 2014 we completed the acquisition of Remate Lince, the leading Mexican inter-dealer broker focusing on interest rate derivatives and fixed income, and in February 2014 we purchased the assets of HEAT Energy Group, which specializes in East Coast U.S. power brokerage. We also continued to make key hires around the world. We expect these additions to increase to earnings per share going forward. These investments underscore BGC's ongoing commitment to make accretive acquisitions and profitably hire, and we are confident in our ability to utilize our capital to achieve strong revenue and earnings growth going forward. 49-------------------------------------------------------------------------------- Table of Contents In our Real Estate Services business, on August 13, 2014, we completed our acquisition of Cornish & Carey Commercial. By adding the leading commercial real estate services company in the Bay Area and Silicon Valley, we have greatly broadened the scope and depth of services we can provide to our clients in Northern California and across the U.S. FINANCIAL HIGHLIGHTS For the three months ended September 30, 2014, we had income from operations before income taxes of $29.9 million compared to $42.7 million, a decrease of $12.8 million from the year earlier period. Total revenues increased approximately $32.0 million, or 7.9%, total expenses increased approximately $58.8 million, or 15.1% and other income (losses), net increased $14.1 or 48.3%. For the nine months ended September 30, 2014, we had income from operations before income taxes of $56.1 million compared to $264.6 million, a decrease of $208.5 million from the year earlier period. Total revenues for the nine months ended September 30, 2014 decreased approximately $25.5 million, or 1.9%, total expenses decreased approximately $525.6 million, or 29.1% and Other income (losses), net decreased $708.7 million or 94.8%. For the nine months ended September 30, 2013, Other income (losses), net included $723.1 million for the gain on divestiture of our eSpeed business. Total revenues were $436.2 million and $404.2 million for the three months ended September 30, 2014 and 2013, respectively. Total revenues were $1,298.2 million and $1,323.7 million for the nine months ended September 30, 2014 and 2013, respectively. Our results for the nine months ended September 30, 2013 included a $723.1 million gain on divestiture related to the sale of eSpeed to NASDAQ OMX in June 2013. In addition, the first half of 2013 included $48.8 million of revenues from eSpeed. Total compensation and employee benefits increased by $54.2 million for the three months ended September 30, 2014 as compared to the year earlier period. This increase was primarily driven by increased compensation charges related to grants of exchangeability to limited partnership units in the three months ended September 30, 2014, as compared to the year earlier period. Non-compensation expenses were up by $4.7 million or 3.9% for the three months ended September 30, 2014 as compared to the year earlier period. This increase in non-compensation expenses was primarily due to additional costs associated with the hiring of brokers. Our Real Estate Services business had another strong quarter in the three months ended September 30, 2014. NGKF's performance was driven by a combination of the addition of Cornish & Carey, double-digit organic growth in brokerage revenues, increased revenues from its Global Corporate Services business, and better operating efficiencies resulting from the successful integration of previous acquisitions. While conditions in financial markets were challenging, we achieved our overall strong results due to the continuing success of our Real Estate Services business, substantial growth from our higher margin fully electronic businesses, and our ongoing focus on expense reduction. We see this positive momentum continuing in the fourth quarter of 2014. With liquidity in excess of $600 million, and more than $500 million still expected to be received in NASDAQ OMX stock, we expect to have more than a billion dollars available to fuel the growth of the Company. We anticipate using these funds to repay debt, repurchase common shares and units, and/or to maintain our regular common dividend for the foreseeable future. We also expect to continue making accretive acquisitions across both Real Estate Services and Financial Services. An excellent example is our proposed acquisition of GFI Group Inc. ("GFI"). On October 22, 2014, we commenced a fully financed tender offer to acquire all outstanding common shares of GFI that we do not currently own for $5.25 per share in cash. We are confident that a combination of GFI and BGC will deliver significant benefits to GFI's customers and brokers as part of a larger, better capitalized and more diversified company. We expect the combination will also produce increased productivity per broker, meaningful synergies, substantial earnings accretion and stronger cash flow, enabling us to drive shareholder value and deliver superior service for our customers. 50-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table sets forth our unaudited condensed consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Percentage Percentage Percentage Percentage Actual of Total Actual of Total Actual of Total Actual of Total Results Revenues Results Revenues Results Revenues Results Revenues Revenues: Commissions $ 331,466 76.0 % $ 283,293 70.1 % $ 926,730 71.4 % $ 906,829 68.5 % Principal transactions 51,327 11.8 67,785 16.8 203,585 15.7 241,131 18.2 Total brokerage revenues 382,793 87.8 351,078 86.9 1,130,315 87.1 1,147,960 86.7 Real estate management services 40,452 9.3 40,447 10.0 119,298 9.2 119,608 9.0 Fees from related parties 6,749 1.5 8,071 2.0 21,748 1.7 33,461 2.5 Market data 1,660 0.4 1,178 0.3 4,786 0.4 8,946 0.7 Software solutions 709 0.1 444 0.1 2,113 0.1 5,540 0.4 Interest income 1,642 0.4 1,563 0.4 5,639 0.4 4,762 0.4 Other revenues 2,211 0.5 1,408 0.3 14,308 1.1 3,413 0.3 Total revenues 436,216 100.0 404,189 100.0 1,298,207 100.0 1,323,690 100.0 Expenses: Compensation and employee benefits 270,642 62.1 258,642 64.0 810,259 62.4 986,136 74.5 Allocation of net income and grant of exchangeability to limited partnership units and FPUs 52,516 12.0 10,365 2.6 106,241 8.2 391,464 29.6 Total compensation and employee benefits 323,158 74.1 269,007 66.6 916,500 70.6 1,377,600 104.1 Occupancy and equipment 35,575 8.2 37,908 9.4 112,197 8.6 114,475 8.6 Fees to related parties 2,681 0.6 2,022 0.5 6,621 0.5 7,151 0.5 Professional and consulting fees 10,565 2.4 11,772 2.9 31,810 2.5 38,080 2.9 Communications 20,087 4.6 22,451 5.5 61,857 4.8 69,547 5.3 Selling and promotion 16,730 3.8 19,839 4.9 53,010 4.1 63,393 4.8 Commissions and floor brokerage 4,806 1.1 5,075 1.3 14,587 1.1 17,243 1.3 Interest expense 9,197 2.1 9,164 2.2 27,762 2.1 28,853 2.2 Other expenses 26,732 6.1 13,444 3.3 56,898 4.4 90,528 6.8 Total expenses 449,531 103.0 390,682 96.6 1,281,242 98.7 1,806,870 136.5 Other income (losses), net: Gain on divestiture and sale of investments - 0.0 - 0.0 - 0.0 723,147 54.6 Losses on equity method investments (2,640 ) (0.6 ) (2,705 ) (0.7 ) (6,203 ) (0.5 ) (7,217 ) (0.5 ) Other Income 45,892 10.5 31,861 7.9 45,336 3.5 31,861 2.4 Total other income (losses), net 43,252 9.9 29,156 7.2 39,133 3.0 747,791 56.5 Income from operations before income taxes 29,937 6.9 42,663 10.6 56,098 4.3 264,611 20.0 Provision for income taxes 18,808 4.3 10,675 2.7 23,152 1.8 92,481 7.0 Consolidated net income 11,129 2.6 31,988 7.9 32,946 2.5 172,130 13.0 Less: Net income attributable to noncontrolling interest in subsidiaries 3,918 0.9 6,662 1.6 10,126 0.8 105,340 8.0 Net income available to common stockholders $ 7,211 1.7 % $ 25,326 6.3 % $ 22,820 1.7 % $ 66,790 5.0 % 51 -------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Revenues Brokerage Revenues Total brokerage revenues increased $31.7 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Commission revenues increased by $48.2 million, or 17.0%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Principal transactions revenues decreased by $16.5 million, or 24.3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Increases in FX, equities and other asset classes, and real estate brokerage revenues were partially offset by decreases in rates and credit products. Our overall FX revenues were up by 18.7% to $56.2 million for the three months ended September 30, 2014. Our FX results reflected strong revenue growth across the Company's voice, hybrid, fully electronic desks, most notably a more than 75 percent increase generated by BGC's spot FX e-business. Our brokerage revenues from equities and other asset classes increased $8.6 million, or 24.6%, to $43.4 million for the three months ended September 30, 2014. This increase was led by strong gains from BGC's energy and commodities desks. Organic growth, as well as the purchase of HEAT Energy Group in the first quarter of 2014 and higher industry-wide equity derivatives volumes in Europe and the U.S. drove these results. The decrease in rates revenues of $15.6 million, or 14.3%, was primarily due to generally lower global interest rate derivative and government bond activity, partially offset by approximately 15% growth from our fully electronic rates products. Our overall credit revenues decreased by 1.6% to $53.5 million in the three months ended September 30, 2014. This decrease was mainly due to lower overall industry-wide inter-dealer activity in credit derivatives, investment-grade corporate bonds, and non-agency mortgage bonds, partially offset by an over 80% improvement in revenues from BGC's fully electronic credit desks. Real Estate Management Services Real estate management services revenues were relatively flat at $40.5 million for the three months ended September 30, 2014. Fees from Related Parties Fees from related parties decreased by $1.3 million, or 16.4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was primarily due to lower technology and back office service fees. Market Data Market data revenues increased by $0.5 million, or 40.9%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. This increase was primarily due to an increase in new contracts. Software Solutions Software solutions revenues increased by $0.3 million to $0.7 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. 52 -------------------------------------------------------------------------------- Table of Contents Interest Income Interest income increased by $0.1 million or, 5.1%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Other Revenues Other revenues increased by $0.8 million to $2.2 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Expenses Compensation and Employee Benefits Compensation and employee benefits expense increased by $12.0 million, or 4.6%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increase in brokerage revenues over the prior year period resulted in higher related compensation expense. This increase was partially offset by lower compensation expense due to our ongoing cost reduction program. Allocations of net income and grant of exchangeability to limited partnership units and FPUs Allocations of net income and grant of exchangeability to limited partnership units and FPUs increased by $42.2 million, or 406.7%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. This increase was primarily driven by a $47.3 million charge related to the grant of exchangeability on limited partnership units in the three months ended September 30, 2014 which represented an increase of $41.9 million as compared to the three months ended September 30, 2013. Occupancy and Equipment Occupancy and equipment expense decreased by $2.3 million, or 6.2%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. This decrease was primarily due to lower rent, occupancy and maintenance costs, partially due to a provision related to a subleasing arrangement recorded in the three months ended September 30, 2013. Lower office equipment costs also contributed to the decrease. Fees to Related Parties Fees to related parties increased by $0.7 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Fees to related parties are allocations paid to Cantor for administrative and support services. Professional and Consulting Fees Professional and consulting fees decreased by $1.2 million, or 10.3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was primarily due to lower costs associated with tax matters as well as lower consulting costs. Communications Communications expense decreased by $2.4 million, or 10.5%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The main driver of this decrease was the result of our ongoing cost reduction program that rationalized and lowered the costs of certain market data terminals. Selling and Promotion Selling and promotion expense decreased by $3.1 million, or 15.7%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was partially due to lower client entertainment expenses and partially due to our ongoing cost reduction program. Commissions and Floor Brokerage Commissions and floor brokerage expense decreased by $0.3 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was primarily driven by lower exchange clearing fees driven by lower volumes. Interest Expense Interest expense increased by $33 thousand, or 0.4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. 53 -------------------------------------------------------------------------------- Table of Contents Other Expenses Other expenses increased by $13.3 million, or 98.8%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. This increase was primarily due to additional costs associated with hiring brokers. Other income (losses), net Losses on Equity Method Investments Losses on equity method investments decreased by $0.1 million, or 2.4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Losses on equity method investments represent our pro rata share of the net losses on investments over which we have significant influence but which we do not control. Other Income Other income increased $14.0 million, or 44.0%, to $45.9 million for the three months ended September 30, 2014. This increase was due to $45.9 million recognized on the earn-out related to the sale of eSpeed, including the associated mark to market movements and/or hedging. During the year earlier period, we recognized $31.9 million on the earn-out related to the sale of eSpeed. In both periods we received 992,247 shares of NASDAQ OMX stock. The increased income was driven by the year over year increased share price. Provision for Income Taxes Provision for income taxes increased to $18.8 million for the three months ended September 30, 2014 as compared to $10.7 million for the three months ended September 30, 2013. This increase was primarily driven by an increase in U.S. taxable income in the three months ended September 30, 2014 as compared to the year earlier period. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. Net Income Attributable to Noncontrolling Interest in Subsidiaries Net income attributable to noncontrolling interest in subsidiaries decreased by $2.7 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease in net income attributable to noncontrolling interest in subsidiaries related to the decreased income in the three months ended September 30, 2014. Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 Revenues Brokerage Revenues Total brokerage revenues decreased by $17.6 million, or 1.5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Commission revenues increased by $19.9 million, or 2.2%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Principal transactions revenues decreased by $37.5 million, or 15.6%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease in brokerage revenues was primarily driven by decreases in the revenues for rates, FX and credit products, partially offset by higher revenues in Real Estate and equities and other asset classes. The decrease in rates revenues of $80.5 million was primarily due to the sale of the eSpeed business in June 2013 and lower global interest rate activity during the nine months ended September 30, 2014. Our fully electronic credit revenues increased by $7.5 million as compared to the nine months ended September 30, 2013, however our overall credit revenues declined by 6.8% to $177.9 million in the nine months ended September 30, 2014. This decrease was mainly due to lower overall industry-wide inter-dealer activity in credit derivatives, investment-grade corporate bonds, and non-agency mortgage bonds. Our FX revenues were down by 5.9% to $157.6 million for the nine months ended September 30, 2014. This decrease was primarily driven by low global volatility and regulatory issues affecting many of our bank customers. Real Estate brokerage revenues increased by $71.4 million for the nine months ended September 30, 2014. This increase was primarily driven by growth in the leasing and consulting businesses, increased operating efficiencies resulting from the successful integration of acquisitions and continued improvements in broker productivity. Our brokerage revenues from equities and other asset classes increased $14.3 million, or 12.4%, to $129.8 million for the nine months ended September 30, 2014. This increase was primarily driven by strong gains in our energy and commodities businesses, partially offset by lower industry-wide equity derivative volumes. 54 -------------------------------------------------------------------------------- Table of Contents Real Estate Management Services Real estate management services revenues decreased by $0.3 million, or 0.3% for the nine months ended September 30, 2014. Fees from Related Parties Fees from related parties decreased by $11.7 million, or 35.0%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was primarily due to decreased revenues related to ELX (as a result of the sale of the eSpeed business) and lower technology service fees. Market Data Market data revenues decreased by $4.2 million, or 46.5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was primarily due to the sale of the eSpeed business in June 2013. Software Solutions Software solutions revenues decreased by $3.4 million, or 61.9%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to the sale of our Kleos Managed Services, Dedicated Network Access and Disaster Recovery business to NASDAQ OMX in June 2013. Interest Income Interest income increased by $0.9 million, or 18.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Other Revenues Other revenues increased by $10.9 million to $14.3 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase was primarily due to a settlement related to litigation received during the nine months ended September 30, 2014. Expenses Compensation and Employee Benefits Compensation and employee benefits expense decreased by $175.9 million, or 17.8%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The main driver of this decrease was a charge of $160.5 million taken during the nine months ended September 30, 2013 related to the reduction of compensation-related partnership loans in connection with our Global Partnership Restructuring Program. In addition, a component of the decrease was the result of lower revenues during the nine months ended September 30, 2014. Allocations of Net Income and Grant of Exchangeability to Limited Partnership Units and FPUs The Allocations of net income and grant of exchangeability to limited partnership units and FPUs decreased by $285.2 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. This decrease was primarily driven by $304.1 million charge taken in the nine months ended September 30, 2013 related to the redemption/exchange of limited partnership units in connection with our Global Partnership Restructuring Program. Occupancy and Equipment Occupancy and equipment expense decreased $2.3 million to $112.2 million for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. This decrease was primarily driven by lower depreciation and amortization costs as well as lower hardware maintenance costs following the sale of our eSpeed business in June 2013. Fees to Related Parties Fees to related parties decreased by $0.5 million, or 7.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Fees to related parties are allocations paid to Cantor for administrative and support services. 55 -------------------------------------------------------------------------------- Table of Contents Professional and Consulting Fees Professional and consulting fees decreased by $6.3 million, or 16.5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was primarily due to decreased costs associated with legal matters, as well as reduced costs for consulting as compared to the nine months ended September 30, 2013. Communications Communications expense decreased by $7.7 million, or 11.1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. This decrease was primarily driven by our ongoing cost reduction program which rationalized and lowered the costs of certain market data terminals. Selling and Promotion Selling and promotion expense decreased by $10.4 million, or 16.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was primarily driven by the reduction in brokerage revenues as compared to the prior year period. Commissions and Floor Brokerage Commissions and floor brokerage expense decreased by $2.7 million, or 15.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to reduced clearing and transfer costs due to the sale of the eSpeed business to NASDAQ OMX in June 2013. Interest Expense Interest expense decreased by $1.1 million, or 3.8%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was primarily related to our prepayment of collateralized debt during 2013. Other Expenses Other expenses decreased by $33.6 million, or 37.1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. This decrease was primarily driven by charges taken during the nine months ended September 30, 2013 related to a commitment to make charitable contributions and an increase in the cost of hiring additional brokers. Other Income (losses), net Gain on Divestiture The gain on divestiture related to the NASDAQ OMX transaction was $723.1 million recorded in the nine months ended September 30, 2013. Losses on Equity Method Investments Losses on equity method investments decreased by $1.0 million, or 14.1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Losses on equity method investments represent our pro rata share of the net losses on investments over which we have significant influence but do not control. Other Income Other income increased $13.5 million, or 42.3%, for the nine months ended September 30, 2014 as compared to the year earlier period. This increase was due to the $45.3 million recognized on the earn-out related to the NASDAQ OMX Transaction and the associated mark to market movements and/or hedging in the nine months ended September 30, 2014. In September 2013, we recognized $31.9 million on the earn-out related to the NASDAQ OMX Transaction. In both periods we received 992,247 shares of NASDAQ OMX stock. The increased income was driven by the year over year increased share price. Provision for Income Taxes Provision for income taxes decreased to $23.2 million for the nine months ended September 30, 2014 as compared to $92.5 million for the nine months ended September 30, 2013. This decrease was primarily driven by a decrease in taxable income in the nine months ended September 30, 2014 as compared to the year earlier period as the 2013 period included the gain or divestiture related to sale of eSpeed. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. 56 -------------------------------------------------------------------------------- Table of Contents Net Income Attributable to Noncontrolling Interest in Subsidiaries Net income attributable to noncontrolling interest in subsidiaries decreased by $95.2 million, or 90.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. This decrease was due to lower income during the nine months ended September 30, 2014 as the year earlier period included the gain on divestiture related to the sale of eSpeed. Business Segment Financial Results The business segments are determined based on the products and services provided and reflect the manner in which financial information is evaluated by management. We evaluate the performance and review the results of the segments based on each segment's "Income (loss) from operations before income taxes." Certain financial information for our segments is presented below. The amounts shown below for the Financial Services and Real Estate Services segments reflect the amounts that are used by management to allocate resources and assess performance, which is based on each segment's "Income (loss) from operations before income taxes." In addition to the two business segments, the tables below include a "Corporate Items" category. Corporate revenues include fees from related parties and interest income as well as gains that are not considered part of the Company's ordinary, ongoing business. Corporate expenses include non-cash compensation expenses (such as the grant of exchangeability to limited partnership units; redemption/exchange of partnership units, issuance of restricted shares and allocations of net income to founding/working partner units and limited partnership units) as well as unallocated expenses such as certain professional and consulting fees, executive compensation and interest expense, which are managed separately at the corporate level. Three months ended September 30, 2014 (in thousands): Financial Real Estate Corporate Services* Services* Items Total Total revenues $ 250,189 $ 176,652 $ 9,375 $ 436,216 Total expenses 206,170 159,919 83,442 449,531 Total other income (losses), net 45,892 - (2,640 ) 43,252 Income (loss) from operations before income taxes $ 89,911 $ 16,733 $ (76,707 ) $ 29,937 * For the three months ended September 30, 2014, the Financial Services segment income (loss) from operations before income taxes includes $45.9 million related to the earn-out portion of the NASDAQ OMX Transaction consideration and the associated mark to market movements and/or hedging. For the three months ended September 30, 2014 the Real Estate Services segment income (loss) from operations before income taxes include $1.5 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting. Three months ended September 30, 2013 (in thousands): Financial Real Estate Corporate Services* Services* Items Total Total revenues $ 248,746 $ 145,837 $ 9,606 $ 404,189 Total expenses 227,023 132,238 31,421 390,682 Total other income (losses), net 31,861 - (2,705 ) 29,156 Income (loss) from operations before income taxes $ 53,584 $ 13,599 $ (24,520 ) $ 42,663 * For the three months ended September 30, 2013, the Financial Services segment income (loss) from operations before income taxes includes $31.9 million related to the earn-out portion of the NASDAQ OMX Transaction consideration. For the three months ended September 30, 2013 the Real Estate Services segment income (loss) from operations before income taxes excludes $1.9 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting. 57 -------------------------------------------------------------------------------- Table of Contents Segment Results for the Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013 Revenues • Revenues for Financial Services increased approximately $1.5 million, or 0.6%, to $250.2 million for the three months ended September 30, 2014 from $248.7 million for the three months ended September 30, 2013. The increase in revenues for our Financial Services segment was primarily due to an increase in brokerage revenues in FX and Equities and other asset classes, partially offset by a decrease in Rates and Credit. Additionally, there was an increase in Market data primarily due to new contracts during the quarter ended September 30, 2014. • Revenues for Real Estate Services increased approximately $30.8 million, or 21.1%, to $176.7 million for the three months ended September 30, 2014 from $145.8 million for the three months ended September 30, 2013. The increase in revenues for our Real Estate Services segment was primarily due to the acquisition of Cornish & Carey and a significant increase in broker productivity along with favorable industry trends in sales and leasing for the U.S. commercial real estate market. Expenses • Total expenses for Financial Services decreased approximately $20.9 million, or 9.2%, to $206.2 million for the three months ended September 30, 2014 from $227.0 million for the three months ended September 30, 2013. The decrease in expenses in our Financial Services segment was primarily due to our ongoing cost reduction program. • Total expenses for Real Estate Services increased approximately $27.7 million, or 20.9%, to $159.9 million for the three months ended September 30, 2014 from $132.2 million for the three months ended September 30, 2013. The increase in expenses for our Real Estate Services segment was primarily due to increased compensation associated with higher revenues. Other income (losses), net • Other income (losses), net, for Financial Services increased approximately $14.0 million, or 44.0%, to $45.9 million for the three months ended September 30, 2014 from $31.9 million for the three months ended September 30, 2013. The increase in other income (losses), net, for our Financial Services segment was primarily due to the earn-out portion of the NASDAQ OMX Transaction consideration. • Other income (losses), net, for the Corporate Items category decreased approximately $65.0 thousand, or 2.4%, to $(2.6) million for the three months ended September 30, 2014 from $(2.7) million for the three months ended September 30, 2013. The decrease was primarily due to the results of the Company's equity method investments. Income (loss) from operations before income taxes • Income (loss) from operations before income taxes for Financial Services increased approximately $36.3 million, or 67.8%, to $89.9 million for the three months ended September 30, 2014 from $53.6 million for the three months ended September 30, 2013. The increase in income (loss) from operations before income taxes for our Financial Services segment was primarily due to higher revenues, as described above, partially offset by lower expenses. • Income (loss) from operations before income taxes for Real Estate Services increased $3.1 million, to $16.7 million for the three months ended September 30, 2014 from $13.6 million for the three months ended September 30, 2013. The increase in income (loss) from operations before income taxes for our Real Estate Services segment was due to increased revenues, as described above, partially offset by an increase in expenses. Nine months ended September 30, 2014 (in thousands): Financial Real Estate Corporate Services* Services* Items Total Total revenues $ 797,364 $ 472,803 $ 28,040 $ 1,298,207 Total expenses 655,865 436,931 188,446 1,281,242 Total other income (losses), net 45,336 - (6,203 ) 39,133 Income (loss) from operations before income taxes $ 186,835 $ 35,872 $ (166,609 ) $ 56,098 * For the nine months ended September 30, 2014, the Financial Services segment income (loss) from operations before income taxes includes $45.3 million related to the earn-out portion of the NASDAQ OMX Transaction consideration and the associated mark-to-market movements and/or hedging. For the nine months ended September 30, 2014, the Real Estate Services segment income (loss) from operations before income taxes excludes $4.4 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting. 58 -------------------------------------------------------------------------------- Table of Contents Nine months ended September 30, 2013 (in thousands): Financial Real Estate Corporate Services* Services* Items Total Total revenues $ 888,929 $ 401,587 $ 33,174 $ 1,323,690 Total expenses 746,789 381,845 678,236 1,806,870 Total other income (losses), net 31,861 - 715,930 747,791 Income (loss) from operations before income taxes $ 174,001 $ 19,742 $ 70,868 $ 264,611 * For the nine months ended September 30, 2013, the Financial Services segment income (loss) from operations before income taxes includes $31.9 million related to the earn-out portion of the NASDAQ OMX Transaction consideration. For the nine months ended September 30, 2013, the Real Estate segment income (loss) from operations before income taxes excludes $9.2 million related to the collection of receivables and associated expenses that were recognized at fair value as part of acquisition accounting. For the nine months ended September 30, 2013, Corporate Items income (loss) from operations before income taxes includes $723.1 million gain on divestiture related to the NASDAQ OMX Transaction and approximately $465 million in compensation expense related to the Global Partnership Restructuring Program. Segment Results for the Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 Revenues • Revenues for Financial Services decreased approximately $91.6 million, or 10.3%, to $797.4 million for the nine months ended September 30, 2014 from $888.9 million for the nine months ended September 30, 2013. The decrease in revenues for our Financial Services segment was primarily due to a decline in brokerage revenues in Rates (primarily due to the sale of eSpeed in June 2013), Credit and FX, partially offset by an increase in Equities and Other Classes. • Revenues for Real Estate Services increased approximately $71.2 million, or 17.7%, to $472.8 million for the nine months ended September 30, 2014 from $401.6 million for the nine months ended September 30, 2013. The increase in revenues for our Real Estate Services segment was primarily due to the acquisition of Cornish & Carey and a significant increase in broker productivity along with favorable industry trends in sales and leasing for the U.S. commercial real estate market. Expenses • Total expenses for Financial Services decreased approximately $90.9 million, or 12.2%, to $655.9 million for the nine months ended September 30, 2014 from $746.8 million for the nine months ended September 30, 2013. • Total expenses for Real Estate Services increased approximately $55.1 million, or 14.4%, to $436.9 million for the nine months ended September 30, 2014 from $381.8 million for the nine months ended September 30, 2013. The increase in expenses for our Real Estate Services segment was primarily due to increased compensation associated with higher revenues. Other income (losses), net • Other income (losses), net, for Financial Services increased approximately $13.5 million, or 42.3%, to $45.3 million for the nine months ended September 30, 2014 from $31.9 million for the nine months ended September 30, 2013. The increase in other income (losses), net, for our Financial Services segment was primarily due to the earn-out portion and the related mark-to-market movements and/or hedging of the NASDAQ OMX Transaction consideration. • Other income (losses), net, for the Corporate Items category decreased approximately $722.1 million, or 100.9%, to $(6.2) million for the nine months ended September 30, 2014 from $715.9 million for the nine months ended September 30, 2013. The decrease was primarily due to the results of the Company's equity method investments. Income (loss) from operations before income taxes • Income (loss) from operations before income taxes for Financial Services increased approximately $12.8 million, or 7.4%, to $186.8 million for the nine months ended September 30, 2014 from $174.0 million for the nine months ended September 30, 2013. The increase in income (loss) from operations before income taxes for our Financial Services segment was primarily due to lower expenses and increased income associated with the earn-out portion and related mark-to-market movements and/or hedging of the NASDAQ OMX transaction, partially offset by a decline in brokerage revenues in Rates (primarily due to the sale of eSpeed in June 2013). • Income (loss) from operations before income taxes for Real Estate Services increased $16.1 million, or 81.7%, to $35.9 million for the nine months ended September 30, 2014 from $19.7 million for the nine months ended September 30, 2013. The increase in income (loss) from operations before income taxes for our Real Estate Services segment was due to increased revenues, as described above, partially offset by an increase in expenses, as also described above. 59 -------------------------------------------------------------------------------- Table of Contents QUARTERLY RESULTS OF OPERATIONS The following table sets forth our unaudited quarterly results of operations for the indicated periods (in thousands). Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business. Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31, 2014 (1)(3) 2014 (1) 2014 (1) 2013 (1) 2013 (1) (3) 2013 (2) 2013 2012 Revenues: Commissions $ 331,466 $ 291,666 $ 303,598 $ 295,415 $ 283,293 $ 324,832 $ 298,704 $ 293,350 Principal transactions 51,327 72,751 79,507 68,777 67,785 85,349 87,997 76,312 Real estate management services 40,452 39,020 39,826 43,745 40,447 39,823 39,338 41,141 Fees from related parties 6,749 7,967 7,032 7,667 8,071 12,242 13,148 14,016 Market data 1,660 1,492 1,634 1,191 1,178 3,643 4,125 4,182 Software solutions 709 703 701 661 444 2,530 2,566 2,541 Interest income 1,642 1,925 2,072 2,071 1,563 1,651 1,548 1,371 Other revenues 2,211 1,678 10,419 1,764 1,408 1,174 831 465 Total revenues 436,216 417,202 444,789 421,291 404,189 471,244 448,257 433,378 Expenses: Compensation and employee benefits 270,642 264,318 275,299 269,444 258,642 448,686 278,808 277,077 Allocations of net income and grants of exchangeability to limited partnership units and FPUs 52,516 22,402 31,323 32,125 10,365 363,077 18,022 44,039 Total compensation and employee benefits 323,158 286,720 306,622 301,569 269,007 811,763 296,830 321,116 Occupancy and equipment 35,575 35,701 40,921 39,633 37,908 37,340 39,227 40,018 Fees to related parties 2,681 2,133 1,807 2,292 2,022 2,286 2,843 2,267 Professional and consulting fees 10,565 10,156 11,089 13,304 11,772 11,367 14,941 15,881 Communications 20,087 21,312 20,458 22,475 22,451 22,755 24,341 24,584 Selling and promotion 16,730 18,255 18,025 17,614 19,839 23,239 20,315 20,928 Commissions and floor brokerage 4,806 5,575 4,206 5,287 5,075 6,397 5,771 5,545 Interest expense 9,197 9,230 9,335 9,479 9,164 9,989 9,700 9,991 Other expenses 26,732 13,584 16,582 13,642 13,444 59,780 17,304 13,084 Total expenses 449,531 402,666 429,045 425,295 390,682 984,916 431,272 453,414 Other Income (losses), net: Gain on divestiture and sale of investments - - - - - 723,147 - 52,471 Losses on equity method investments (2,640 ) (1,288 ) (2,275 ) (2,291 ) (2,705 ) (1,224 ) (3,288 ) (3,672 ) Other Income (losses) 45,892 1,667 (2,223 ) 7,605 31,861 - - - Total other income (losses), net 43,252 379 (4,498 ) 5,314 29,156 721,923 (3,288 ) 48,799 Income from operations before income taxes 29,937 14,915 11,246 1,310 42,663 208,251 13,697 28,763 Provision (benefit) for income taxes 18,808 3,600 744 (315 ) 10,675 78,711 3,095 10,329 Consolidated net income (loss) 11,129 11,315 10,502 1,625 31,988 129,540 10,602 18,434 Less: Net income (loss) attributable to noncontrolling interest in subsidiaries 3,918 3,714 2,494 (2,509 ) 6,662 95,074 3,604 4,266 Net income (loss) available to common stockholders $ 7,211 $ 7,601 $ 8,008 $ 4,134 $ 25,326 $ 34,466 $ 6,998 $ 14,168 (1) Periods after June 28, 2013 reflect the Company's divestiture of its on-the-run, electronic benchmark U.S. Treasury platform to NASDAQ OMX on June 28, 2013. (2) Amounts include gains related to the Company's divestiture of its on-the-run, electronic benchmark U.S. Treasury platform to NASDAQ OMX on June 28, 2013. (3) Amounts include the gain related to the earn-out associated with the NASDAQ OMX transaction. Note: Certain prior period amounts have been reclassified to conform with the current presentation. 60 -------------------------------------------------------------------------------- Table of Contents The table below details our brokerage revenues by product category for the indicated periods (in thousands): For the Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31, 2014 (1) 2014 (1) 2013 (1) 2013 (1) 2013 (1) 2013 2013 2012 Brokerage revenue by product): Rates $ 93,538 $ 104,677 $ 113,672 $ 99,339 $ 109,110 $ 138,299 $ 144,992 $ 119,791 Real Estate 136,048 107,901 109,170 131,311 105,303 103,155 73,249 104,492 Credit 53,545 58,923 65,446 53,651 54,410 67,343 69,142 62,225 Foreign Exchange 56,233 49,279 52,066 44,687 47,393 60,692 59,348 47,130 Equities and Other Asset Classes 43,429 43,637 42,751 35,204 34,862 40,692 39,970 36,024 Total brokerage revenues $ 382,793 $ 364,417 $ 383,105 $ 364,192 $ 351,078 $ 410,181 $ 386,701 $ 369,662 Brokerage revenue by product (percentage): Rates 24.4 % 28.7 % 29.7 % 27.3 % 31.1 % 33.7 % 37.5 % 32.4 % Real Estate 35.6 29.6 28.5 36.1 30.0 25.1 19.0 28.3 Credit 14.0 16.2 17.1 14.7 15.5 16.4 17.9 16.8 Foreign Exchange 14.7 13.5 13.6 12.3 13.5 14.8 15.3 12.7 Equities and Other Asset Classes 11.3 12.0 11.1 9.6 9.9 10.0 10.3 9.8 Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Brokerage revenue by voice/hybrid and fully electronic: Voice/hybrid $ 360,110 $ 344,053 $ 361,939 $ 347,889 $ 334,864 $ 374,397 $ 349,854 $ 339,155 Fully electronic 22,683 20,364 21,166 16,303 16,214 35,784 36,847 30,507 Total brokerage revenues $ 382,793 $ 364,417 $ 383,105 $ 364,192 $ 351,078 $ 410,181 $ 386,701 $ 369,662 Brokerage revenue by voice/hybrid and fully electronic (percentage): Voice/hybrid 94.1 % 94.4 % 94.5 % 95.5 % 95.4 % 91.3 % 90.5 % 91.7 % Fully electronic 5.9 5.6 5.5 4.5 4.6 8.7 9.5 8.3 Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % (1) Periods after June 28, 2013 reflect the Company's divestiture of its on-the-run, electronic benchmark U.S. Treasury platform to NASDAQ OMX on June 28, 2013. LIQUIDITY AND CAPITAL RESOURCES Balance Sheet Our balance sheet and business model are not capital intensive. Our assets consist largely of cash, collateralized and uncollateralized short-dated receivables and less liquid assets needed to support our business. Longer-term funding (equity and long-term debt) is held to support the less liquid assets and potential capital intensive opportunities. Total assets at September 30, 2014 were $2.7 billion, an increase of 29.1% as compared to December 31, 2013. The increase in total assets was driven primarily by increases in receivables from broker-dealers, clearing organizations, customers and related broker-dealers, Marketable securities and goodwill. The increase in Receivables from broker-dealers, clearing organizations, customers and related broker-dealers related to increase fails and was offset by an increase in Payables to broker-dealers, clearing organizations, customers and related broker-dealers. We maintain a significant portion of our assets in cash, with our liquidity (which we define as cash and cash equivalents, marketable securities and securities owned, at September 30, 2014 of $624.7 million. See "Liquidity Analysis" below for a further discussion of our liquidity. As part of our cash management process, we may enter into tri-party reverse repurchase agreements and other short term investments, some of which may be with Cantor. As of September 30, 2014, we had no reverse repurchase agreements outstanding with Cantor. Additionally, in August 2013, the Audit Committee authorized us to invest up to $350 million in an asset-backed commercial paper program for which certain Cantor entities serve as placement agent and referral agent. The program issues short-term notes to money market investors and is expected to be used from time to time as a liquidity management vehicle. The notes are backed by assets of highly rated banks. We are entitled to invest in the program so long as the program meets investment policy guidelines, including relating to ratings. Cantor will earn a spread between the rate it receives from the short-term note issuer and the rate it pays to us on any investments in this program. This spread will be no greater than the spread earned by Cantor for placement of any other commercial paper note in the program. As of September 30, 2014, we had no investments in the program. 61 -------------------------------------------------------------------------------- Table of Contents Funding Our funding base consists of longer-term capital (equity and notes payable), shorter-term liabilities and accruals that are a natural outgrowth of specific assets and/or our business model, such as matched fails and accrued compensation. We have limited need for short-term unsecured funding in our regulated entities for their brokerage business. Contingent liquidity needs are largely limited to potential cash collateral that may be needed to meet clearing bank, clearinghouse, and exchange margins and/or to fund fails. Capital expenditures tend to be cash neutral and approximately in line with depreciation. Current cash balances significantly exceed our unsecured letters of credit and our unsecured bank borrowings. We believe that cash in and available to our largest regulated entities, inclusive of financing provided by clearing banks, is adequate for potential cash demands of normal operations such as margin or fail financing. We expect our operating activities going forward to generate adequate cash flows to fund normal operations, including any dividends issued pursuant to our dividend policy. However, we believe that there are a significant number of capital intensive opportunities for us to maximize our growth and strategic position, including, among other things, acquisitions, strategic alliances and joint ventures potentially involving all types and combinations of equity, debt and acquisition alternatives. As a result, we may need to raise additional funds to: • increase the regulatory net capital necessary to support operations; • support continued growth in our business; • effect acquisitions; • develop new or enhanced services and markets; and • respond to competitive pressures. Acquisitions and financial reporting obligations related thereto may impact our ability to access capital markets on a timely basis and may necessitate greater short-term borrowings in the interim. This may impact our credit rating or the interest rates on our debt. We may need to access short-term capital sources to meet business needs from time to time, including, but not limited to, conducting operations, hiring or retaining brokers, financing acquisitions, and providing liquidity, including in situations where we may not be able to access the capital markets in a timely manner when desired by us. Accordingly, we cannot guarantee that we will be able to obtain additional financing when needed on terms that are acceptable to us, if at all. On June 28, 2013, upon completion of the sale of eSpeed (see "NASDAQ OMX Transaction" herein), we received cash consideration of $750 million, subject to adjustment for certain pre-paid amounts and accrued costs and expenses, plus an earn-out of up to 14,883,705 shares of NASDAQ OMX common stock to be paid ratably in each of the fifteen years following the closing. As of September 30, 2014, our liquidity, which we define as cash and cash equivalents, marketable securities and securities owned, was approximately $624.7 million, the majority of which we are free to deploy to increase stockholder and bondholder value. We also expect to receive over $500 million in NASDAQ OMX. We believe that we are in a strong position to increase our profits by making additional investments across Real Estate and Financial Services. In addition, we expect to have sufficient funds to repay debt, repurchase common shares and units, and maintain our regular common dividend for the foreseeable future. Notes Payable and Collateralized Borrowings 8.75% Convertible Notes On April 1, 2010, BGC Holdings issued an aggregate of $150.0 million principal amount of the 8.75% Convertible Notes to Cantor. We used the proceeds of the 8.75% Convertible Notes to repay at maturity $150.0 million aggregate principal amount of Senior Notes. The 8.75% Convertible Notes are senior unsecured obligations and rank equally and ratably with all of our existing and future senior unsecured obligations. The 8.75% Convertible Notes bear an annual interest rate of 8.75% currently, which is payable semi-annually in arrears on April 15 and October 15 of each year. As of September 30, 2014, the 8.75% Convertible Notes were convertible, at the holder's option, at a conversion rate of 159.5666 shares of Class A common stock per $1,000 principal amount of notes, subject to adjustment in certain circumstances. The 8.75% Convertible Notes were convertible into approximately 23.9 million shares of Class A common stock as of September 30, 2014. The 8.75% Convertible Notes will mature on April 15, 2015, unless earlier repurchased, exchanged or converted. 4.50% Convertible Notes On July 29, 2011, we issued an aggregate of $160.0 million principal amount of 4.50% Convertible Notes. In connection with the offering of the 4.50% Convertible Notes, we entered into an Indenture, dated as of July 29, 2011, with U.S. Bank National Association, as trustee. The 4.50% Convertible Notes were offered and sold solely to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 4.50% Convertible Notes are our general senior unsecured obligations. The 4.50% Convertible Notes pay interest semi-annually at a rate of 4.50% per annum and were priced at par. As of September 30, 2014, the 4.50% Convertible Notes were 62 -------------------------------------------------------------------------------- Table of Contents convertible, at the holder's option, at a conversion rate of 101.6260 shares of Class A common stock per $1,000 principal amount of notes, subject to adjustment in certain circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our Class A common stock, or a combination thereof at our election. As of September 30, 2014, the 4.50% Convertible Notes were convertible into approximately 16.3 million shares of our Class A common stock. The 4.50% Convertible Notes will mature on July 15, 2016, unless earlier repurchased, exchanged or converted. The carrying value of the 4.50% Convertible Notes was approximately $151.4 million as of September 30, 2014. In connection with the offering of the 4.50% Convertible Notes, we entered into capped call transactions, which are expected to reduce the potential dilution of our Class A common stock upon any conversion of 4.50% Convertible Notes in the event that the market value per share of our Class A common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions ($10.56 as of September 30, 2014, subject to adjustment in certain circumstances). The capped call transactions had an initial cap price equal to $12.30 per share (50% above the last reported sale price of our Class A common stock on the NASDAQ on July 25, 2011), and had a cap price equal to approximately $13.20 per share as of September 30, 2014. The net proceeds from this offering were approximately $144.2 million after deducting the initial purchasers' discounts and commissions, estimated offering expenses and the cost of the capped call transactions. We used the net proceeds from the offering for general corporate purposes, including financing acquisitions. 8.125% Senior Notes On June 26, 2012, we issued an aggregate of $112.5 million principal amount of 8.125% Senior Notes due 2042. The 8.125% Senior Notes are our senior unsecured obligations. The 8.125% Senior Notes may be redeemed for cash, in whole or in part, on or after June 26, 2017, at our option, at any time and from time to time, until maturity at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date. The 8.125% Senior Notes are listed on the New York Stock Exchange under the symbol "BGCA." We used the proceeds to repay short-term borrowings under our unsecured revolving credit facility and for general corporate purposes, including acquisitions. The initial carrying value of the 8.125% Senior Notes was $108.7 million, net of debt issuance costs of $3.8 million. CF&Co, an affiliate of us, served as one of the underwriters in this transaction and was paid an underwriting fee of approximately $0.2 million. Collateralized Borrowings On various dates beginning in 2009 and most recently in December 2012, we entered into secured loan arrangements under which we pledged certain fixed assets in exchange for loans. The secured loan arrangements had fixed rates between 2.62% and 8.09% per annum and were repayable in consecutive monthly installments with the final payments due in December 2016. During the year ended December 31, 2013, we prepaid $26.7 million related to secured loan arrangements and during the six months ended June 30, 2014, we prepaid the remaining balance. Therefore, there were no secured loan arrangement balances as of September 30, 2014. The outstanding balance of the secured loan arrangements was $1.6 million and as of December 31, 2013. The value of the fixed assets pledged was $1.5 million as of December 31, 2013. On various dates during the years ended December 31, 2010 and 2011, we sold certain furniture, equipment and software for $34.2 million, net of costs and concurrently entered into agreements to lease the property back. The principal and interest on the leases were repayable in equal monthly installments for terms of 36 months (software) and 48 months (furniture and equipment) with maturities through September 2014. During the year ended December 31, 2013, we terminated the leases and prepaid the outstanding balance of $7.2 million. Because the leases were terminated during 2013, we had no outstanding balance or fixed assets pledged related to the leases as of September 30, 2014 or December 31, 2013. We recorded interest expense of $4.0 thousand and $0.9 million for the three and nine months ended September 30, 2013, respectively. Because assets reverted back to us at the end of the leases, the transactions were capitalized. As a result, consideration received from the purchaser was included in our consolidated statements of financial condition as a financing obligation, and payments made under the lease were recorded as interest expense (at an effective rate of approximately 6%). Depreciation on these fixed assets was charged to "Occupancy and equipment" in our consolidated statements of operations. We may raise additional funds from time to time through equity or debt financing, including public and private sales of debt securities, to finance our business, operations and possible acquisitions. 63-------------------------------------------------------------------------------- Table of Contents CREDIT RATINGS Our public long-term credit ratings and associated outlook are as follows: Rating Outlook Fitch Ratings Inc. BBB- Stable Standard & Poor's BBB- Stable Credit ratings and associated outlooks are influenced by a number of factors, including but not limited to: operating environment, earnings and profitability trends, the prudence of funding and liquidity management practices, balance sheet size/composition and resulting leverage, cash flow coverage of interest, composition and size of the capital base, available liquidity, outstanding borrowing levels and the firm's competitive position in the industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our credit ratings and/or the associated outlook could adversely affect the availability of debt financing on terms acceptable to us, as well as the cost and other terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions. In connection with certain agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade. LIQUIDITY ANALYSIS We consider our liquidity to be comprised of the sum of Cash and cash equivalents plus Marketable securities and Securities owned. The discussion below describes the key components of our liquidity analysis, including earnings, dividends and distributions, net investing and funding activities including repurchases and redemptions of Class A common stock and partnership units, security settlements, changes in securities held and marketable securities, and changes in our working capital. We consider the following in analyzing changes in our liquidity. A comparison of consolidated net income adjusted for certain non-cash items (e.g., grants of exchangeability) as presented on the cash flow statement. Dividends and distributions are payments made to our holders of common shares and limited partnership interests and are related to earnings from prior periods. These timing differences will impact our cash flows in a given period. Our investing and funding activities represent a combination of our capital raising activities, including short-term borrowings and repayments, issuances of shares under our controlled equity offerings (net), Class A common stock repurchases and partnership unit redemptions, purchases and sales of securities, dispositions, and other investments (e.g. acquisitions, forgivable loans to new brokers and capital expenditures-all net of depreciation and amortization). Our securities settlement activities primarily represent deposits with clearing organizations. In addition, when advantageous, we may elect to facilitate the settlement of matched principal transactions by funding failed trades, which results in a temporary secured use of cash and is economically beneficial to us. Other changes in working capital represent changes primarily in receivables and payables and accrued liabilities that impact our liquidity, Changes in Securities owned and Marketable securities may result from additional cash investments or sales, which will be offset by a corresponding change in Cash and cash equivalents and accordingly will not result in a change in our liquidity. Conversely, changes in the market value of such securities and the receipt of the NASDAQ earn-out in the form of additional NASDAQ shares are reflected in our earnings or other comprehensive income and will result in changes in our liquidity. The following is an analysis which describes the key components of changes in our liquidity. 64 -------------------------------------------------------------------------------- Table of Contents Discussion of nine months ended September 30, 2014 The table below presents our Liquidity Analysis as of September 30, 2014 and December 31, 2013: Liquidity Analysis as of September 30, December 31, (in millions) 2014 2013 Cash and cash equivalents $ 411.1 $ 716.9 Securities owned 36.9 33.1 Marketable securities 176.7 45.0 Total $ 624.7 $ 795.0 The $170.3 million decrease in our liquidity position from $795.0 million to $624.7 million as of September 30, 2014 was primarily driven by a) $128.3 million related to repurchases and redemptions during the period and b) $45.3 in acquisitions and equity method investments. The Company's calculation for liquidity as of September 30, 2014, includes the 17.1 million shares of GFIG that BGC and its affiliates own, although the Company and its affiliates do not currently intend to sell these shares. Discussion of nine months ended September 30, 2013 The table below presents our Liquidity Analysis as of September 30, 2013 and December 31, 2012: Liquidity Analysis as of September 30, December 31, (in millions) 2013 2012 Cash and cash equivalents $ 757.9 $ 388.4 Securities owned 32.2 32.0 Marketable securities 36.9 -0- Total $ 827.0 $ 420.4 The $406.6 million increase in our liquidity from $420.4 million to $827.0 million as of September 30, 2013 was primarily driven by the cash received from the sale of eSpeed to NASDAQ OMX in June 2013. The net proceeds from the divestiture of eSpeed was approximately $747.7 million. This increase in our liquidity was partially offset by $238.3 million of dividends and distributions paid to our shareholders and limited partners for the third and fourth quarters of 2012 and the first and second quarters of 2013, including distributions in respect of the NASDAQ OMX Transaction. On October 21, 2014, we entered into a commitment letter with Morgan Stanley Senior Funding, Inc. ("Morgan Stanley") pursuant to which Morgan Stanley has committed to provide us senior unsecured bank financing of up to $350 million under a 364 day bridge facility (the "Bridge Facility"). Morgan Stanley will act as sole lead arranger, sole bookrunner and exclusive administrative agent for the Bridge Facility. We may raise additional capital through a debt offering or other sources. We may use the net proceeds of such offering to finance our proposed acquisition of GFI Group, if it is completed. If the net proceeds of this offering are insufficient to fully pay the acquisition consideration, we will fund the balance using a combination of cash on hand and/or other forms of financing. If we do not acquire GFI Group, we may use the net proceeds of such offering to finance other potential 65-------------------------------------------------------------------------------- Table of Contents acquisitions or for general corporate purposes, including the repayment of existing indebtedness. In particular, we may use the net proceeds of such offering to repurchase all or a portion of our 8.75% Convertible Senior Notes due 2015 (the "8.75% Convertible Notes") if we do not acquire GFI Group. The 8.75% Convertible Notes are held by Cantor. Pending use, the net proceeds may be invested temporarily in short term marketable securities. Our management will have broad discretion in the application of the net proceeds, and the purposes for which the net proceeds are used may change from those described above. CLEARING CAPITAL In November 2008, we entered into a clearing capital agreement with Cantor to clear U.S. Treasury and U.S. government agency securities transactions on our behalf. Pursuant to the terms of this agreement, so long as Cantor is providing clearing services to us, Cantor shall be entitled to request from us, and we shall post as soon as practicable, cash or other property acceptable to Cantor in the amount reasonably requested by Cantor under the clearing capital agreement. Cantor had not requested any cash or other property from us as collateral as of September 30, 2014. REGULATORY REQUIREMENTS Our liquidity and available cash resources are restricted by regulatory requirements of our operating subsidiaries. Many of these regulators, including U.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in the U.S., are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer. In addition, self-regulatory organizations such as the Financial Industry Regulatory Authority ("FINRA") and the National Futures Association ("NFA") along with statutory bodies such as the Financial Conduct Authority ("FCA") and the U.S. Securities and Exchange Commission (the "SEC") require strict compliance with their rules and regulations. The requirements imposed by regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with broker-dealers and are not designed to specifically protect stockholders. These regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements. The FCA is the relevant statutory regulator in the United Kingdom. The FCA was established in 2013, and superseded the former regulatory agency, the FSA. The FCA's objectives are to protect customers, maintain the stability of the financial services industry and promote competition between financial services providers. It has broad rule-making, investigative and enforcement powers derived from the Financial Services and Markets Act 2000 and subsequent and derivative legislation and regulations. In addition, the majority of our other foreign subsidiaries are subject to similar regulation by the relevant authorities in the countries in which they do business. Additionally, certain other of our foreign subsidiaries are required to maintain non-U.S. net capital requirements. In Hong Kong, BGC Securities (Hong Kong), LLC and BGC Capital Markets (Hong Kong), Limited are regulated by the Securities and Futures Commission and The Hong Kong Monetary Authority, respectively. Both are subject to Hong Kong net capital requirements. In France, Aurel BGC, BGC France Holdings, and Ginalfi Finance; in Australia, BGC Partners (Australia) Pty Limited and BGC (Securities); in Japan, BGC Shoken Kaisha Limited's Japanese branch; in Singapore, BGC Partners (Singapore) Limited and BGC Securities (Singapore) Ltd; in Korea, BGC Capital Markets & Foreign Exchange Broker (Korea) Limited; and in Turkey, BGC Partners Menkul Degerler AS, all have net capital requirements imposed upon them by local regulators. In addition, the LCH (LIFFE/LME) clearing organization, of which BGC LP is a member, also imposes minimum capital requirements. As of September 30, 2014, $333.0 million of net assets were held by regulated subsidiaries. As of September 30, 2014, these subsidiaries had aggregate regulatory net capital, as defined, in excess of the aggregate regulatory requirements, as defined, of $165.7 million. In April 2013, our Board of Directors and Audit Committee authorized management to enter into indemnification agreements with Cantor and its affiliates with respect to the provision of any guarantees provided by Cantor and its affiliates from time to time as required by regulators. These services may be provided from time to time at a reasonable and customary fee. BGC Derivative Markets, L.P. ("BGC Derivative Markets"), a subsidiary of the Company, began operating as our Swap Execution Facility ("SEF") on October 2, 2013. Since then, mandatory Dodd-Frank compliant execution on SEFs by Swap Dealers and Major Swap Participants commenced in February 2014 for a small number of "made available to trade " products, and a wide range of other rules relating to the execution and clearing of derivative products have been finalized. BGC Derivative Markets has been active across the full range of Required and Permitted Products executed by U.S. based customers and we anticipate improved derivatives volumes once the international regulatory landscape becomes clearer for the majority of our clients who operate globally. In addition, BGC maintains its ownership stake in ELX, a CFTC approved DCM, which includes several of the world's largest banks and equity holders and offers Dodd-Frank compliant swap trading to eligible market participants Much of BGC's global derivatives volumes continues to be executed by non-U.S. based clients outside the U.S. and subject to local prudential regulations. As such, BGC also, continues to operate our Multilateral Trading facility ("MTF") in accordance with EU directives as licensed by the FCA. 66-------------------------------------------------------------------------------- Table of Contents The key regulatory event outside the U.S. in 2014 was the Markets in Financial Instruments Directive ("MiFID") Level 2 draft regulatory technical standards published by the European Securities and Markets Authority (ESMA) on May 22, 2014 which was subject to public comment ending August 1, 2014. The formal response by the European authorities is expected in December 2014 and is a fundamental step in the eventual finalization of regulatory reform within the EU currently targeted for completion in the first quarter of 2017. See "Regulation" in Part I, Item 1 of our Annual Report on Form 10-K for additional information related to our regulatory environment. EQUITY Class A Common Stock Changes in shares of our Class A common stock outstanding for the three and nine months ended September 30, 2014 and 2013 were as follows. Three Months Ended Nine Months Ended September 30, June 30, 2014 2013 2014 2013 Shares outstanding at beginning of period 184,001,427 136,328,061 181,583,001 123,913,759 Share issuances: Exchanges of limited partnership interests (1) 4,005,351 42,845,569 11,766,848 51,683,294 Vesting of restricted stock units (RSUs) 134,602 121,795 877,610 745,188 Acquisitions 901,517 - 1,658,804 1,086,975 Other issuances of Class A common stock 13,644 553,786 36,521 2,453,473 Treasury stock repurchases (3,675,696 ) (966,244 ) (10,541,939 ) (999,722 ) Shares outstanding at end of period 185,380,845 178,882,967 185,380,845 178,882,967 (1) The issuances related to redemptions and exchanges of limited partnership interests did not impact the fully diluted number of shares and units outstanding. Class B Common Stock We did not issue any shares of Class B common stock during the three and nine months ended September 30, 2014 and 2013. Unit Redemptions and Share Repurchase Program Our Board of Directors and Audit Committee have authorized repurchases of our Class A common stock and redemptions of BGC Holdings limited partnership interests or other equity interests in our subsidiaries. In February 2014, our Audit Committee authorized such repurchases of stock or units from Cantor employees and partners. On July 30, 2014, our Board of Directors and Audit Committee increased the Company's share repurchase and unit redemption authorization to $250 million. From time to time, we may actively continue to repurchase shares or redeem units. 67-------------------------------------------------------------------------------- Table of Contents The table below represents unit redemption and share repurchase activity for the nine months ended September 30, 2014. Approximate Dollar Value of Units and Average Shares That May Total Number of Price Paid Yet Be Redeemed/ Units Redeemed or per Unit Purchased Period Shares Repurchased or Share Under the Plan Redemptions (1)(2) January 1, 2014 - March 31, 2014 2,369,681 $ 6.35 April 1, 2014 - June 30, 2014 2,055,942 6.89 July 1, 2014 - September 30, 2014 7,024,702 7.58 Repurchases (3)(4) January 1, 2014 - March 31, 2014 2,883,418 $ 6.64 April 1, 2014 - June 30, 2014 3,982,825 7.17 July 1, 2014 - July 31, 2014 2,145,505 7.72 August 1, 2014 - August 31, 2014 365,904 7.54 September 1, 2014 - September 30, 2014 1,164,287 7.73 Total Repurchases 10,541,939 $ 7.21 Total Redemptions and Repurchases 21,992,264 $ 7.21 $ 192,718,087 (1) During the three months ended September 30, 2014, the Company redeemed approximately 3.7 million limited partnership units at an average price of $7.47 per unit and approximately 3.3 million FPUs at an average price of $7.71 per unit. During the three months ended September 30, 2013, the Company redeemed approximately 0.4 million limited partnership units at an average price of $5.70 per unit and approximately 0.1 million FPUs at an average price of $5.73 per unit. (2) During the nine months ended September 30, 2014, the Company redeemed approximately 7.9 million limited partnership units at an average price of $7.00 per unit and approximately 3.6 million FPUs at an average price of $7.66 per unit. During the nine months ended September 30, 2013, the Company redeemed approximately 7.4 million limited partnership units at an average price of $4.77 per unit and approximately 0.9 million FPUs at an average price of $3.87 per unit. (3) During the three months ended September 30, 2014, the Company repurchased approximately 3.7 million shares of its Class A common stock at an aggregate purchase price of approximately $28.3 million for an average price of $7.71 per share. During the three months ended September 30, 2013, the Company repurchased 966,244 shares of its Class A common stock at an aggregate purchase price of approximately $5.6 million for an average price of $5.77 per share. (4) During the nine months ended September 30, 2014, the Company repurchased approximately 10.5 million shares of its Class A common stock at an aggregate purchase price of approximately $76.0 million for an average price of $7.21 per share. During the nine months ended September 30, 2013, the Company repurchased 999,722 shares of its Class A common stock at an aggregate purchase price of approximately $5.8 million for an average price of $5.77 per share. The fully diluted weighted-average share count for the three months ended September 30, 2014 was as follows (in thousands): Three Months Ended September 30, 2014 Common stock outstanding (1) 220,388 Limited partnership interests in BGC Holdings 108,912 RSUs (Treasury stock method) 806 Other 1,103 Total (2) 331,209 (1) Common stock outstanding consisted of Class A shares, Class B shares and contingent shares for which all necessary conditions have been satisfied except for the passage of time. For the quarter ended September 30, 2014, the weighted-average share count of Class A shares was 185.6 million and Class B shares was 34.8 million. (2) For the quarter ended September 30, 2014, approximately 44.2 million potentially dilutive securities were not included in the computation of fully diluted earnings per share because their effect would have been anti-dilutive. Anti-dilutive securities for the quarter ended September 30, 2014 included, on a weighted-average basis, 40.2 million shares underlying Convertible Notes and 4.0 million other securities or other contracts to issue shares of common stock. Also, as of September 30, 2014, approximately 6.4 million shares of contingent Class A common stock were excluded because the conditions for issuance had not been met by the end of the period. At the end of the second quarter of 2013, we commenced a Global Partnership Restructuring Program, as a result of which we reduced our fully diluted share count by approximately 32 million shares. In November 2013, we entered into the Ninth Amendment to the Agreement of Limited Partnership of the Partnership (see "Ninth Amendment to Partnership Agreement" herein), which created new preferred partnership units that may not be made exchangeable into our Class A common stock and are only entitled to a distribution each quarter at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation, and accordingly they will not be included in the fully diluted share count. Going forward, we intend to continue to reduce our overall rate of share count growth by utilizing these new preferred partnership units. 68 -------------------------------------------------------------------------------- Table of Contents Similarly, in May 2014 we entered into the Tenth Amendment to the Agreement of Limited Partnership of the Partnership (see "Tenth Amendment to Partnership Agreement" herein). Pursuant to this amendment, NPSUs may not be made exchangeable into shares of the Company's Class A common stock and will not be allocated any items of profit or loss, and accordingly they will not be included in the fully diluted share count. Stock Option Exercises We did not issue any shares of our Class A common stock related to the exercise of stock options during the three and nine months ended September 30, 2014 and 2013. Equity Registration Statements We currently have in place an effective equity shelf Registration Statement on Form S-3 (the "Form S-3 Registration Statement") with respect to the issuance and sale of up to 20 million shares of our Class A common stock from time to time on a delayed or continuous basis. On December 12, 2012, we entered into a controlled equity offering sales agreement with CF&Co (the "December 2012 Sales Agreement"), pursuant to which we may offer and sell up to an aggregate of 20 million shares of our Class A common stock. Shares of our Class A common stock sold under our controlled equity offering sales agreement are used primarily for redemptions of limited partnership interests in BGC Holdings. CF&Co is a wholly-owned subsidiary of Cantor and an affiliate of us. Under the December 2012 Sales Agreement, we have agreed to pay CF&Co 2% of the gross proceeds from the sale of shares. In October 2014, management was authorized to file a new registration statement and enter into a new sales agreement with Cantor on substantially similar terms with respect to an additional 20 million shares of our Class A common stock. As of October 31, 2014, we have issued and sold an aggregate of approximately 18.0 million shares of Class A common stock under the Form S-3 Registration Statement pursuant to the December 2012 Sales Agreement, with approximately 2.0 million shares of Class A common stock remaining to be sold under this agreement. We intend to use the net proceeds of any shares of Class A common stock sold for general corporate purposes, including potential acquisitions, redemptions of limited partnership units and founding/working partner units in BGC Holdings and repurchases of shares of Class A common stock from partners, executive officers and other employees of ours or our subsidiaries and of Cantor and its affiliates. Certain of such partners will be expected to use the proceeds from such sales to repay outstanding loans issued by, or credit enhanced by, Cantor or BGC Holdings. In addition to general corporate purposes, these registrations along with our share buy-back authorization are designed as a planning device in order to facilitate the redemption process. Going forward, we may redeem units and reduce our fully diluted share count under our repurchase authorization or later sell Class A shares under the registration. Further, we have an effective registration statement on Form S-4 (the "Form S-4 Registration Statement"), with respect to the offer and sale of up to 20 million shares of Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As of September 30, 2014, we have issued an aggregate of 6.3 million shares of Class A common stock under the Form S-4 Registration Statement, all in connection with acquisitions in the real estate brokerage industry. We also have an effective shelf Registration Statement on Form S-3 pursuant to which we can offer and sell up to 10 million shares of our Class A common stock under the BGC Partners, Inc. Dividend Reinvestment and Stock Purchase Plan. As of September 30, 2014, we have issued approximately 176.2 thousand shares of our Class A common stock under the Dividend Reinvestment and Stock Purchase Plan. On April 12, 2013, we filed a resale Registration Statement on Form S-3 pursuant to which 2,810,000 shares of our Class A common stock may be sold by The Cantor Fitzgerald Relief Fund (the "Relief Fund") or by its pledgees, donees, transferees or other successors in interest. Of the 2,810,000 shares, 1,810,000 shares were donated on December 21, 2012 and the remaining 1,000,000 shares were donated on April 2, 2013. 69 -------------------------------------------------------------------------------- Table of Contents Our Compensation Committee may grant stock options, stock appreciation rights, deferred stock such as RSUs, bonus stock, performance awards, dividend equivalents and other equity-based awards, including to provide exchange rights for shares of our Class A common stock upon exchange of limited partnership units and founding/working partner units. On June 3, 2014, at our Annual Meeting of Stockholders, our stockholders approved an amendment to our Fourth Amended and Restated Long Term Incentive Plan (the "Equity Plan") to increase from 200 million to 300 million the aggregate number of shares of our Class A common stock that may be delivered or cash settled pursuant to awards granted during the life of the Equity Plan. On June 12, 2014, we filed a Registration Statement on Form S-8 with respect to the additional 100 million shares. As of September 30, 2014, the limit on the aggregate number of shares authorized to be delivered allowed for the grant of future awards relating to 148.1 million shares. UNIT REDEMPTIONS AND EXCHANGES-EXECUTIVE OFFICERS During 2013, our executive officers participated in the Global Partnership Restructuring Program. In connection with the program, Messrs. Lynn, Windeatt and Sadler received an aggregate of 283,206 newly-issued BGC Holdings limited partnership units (equivalent to 9.75% of their non-exchangeable units that were redeemed in the above transactions). Upon any sale or other transfer by such executive officers of shares of restricted stock, a proportional number of these units will be redeemed for zero by BGC Holdings. These units are not expected to be made exchangeable into shares of Class A common stock. In connection with the sale of certain shares of restricted stock, an aggregate of 91,703 of such units held by Messrs. Lynn, Windeatt and Sadler were redeemed for zero on February 5, 2014. SHARE REPURCHASES FROM EXECUTIVE OFFICERS On April 2, 2013, the Audit Committee and Compensation Committee authorized management to repurchase shares of Class A common stock or partnership units from our executive officers from time to time. On April 2, 2013, we repurchased from Mr. Merkel 33,478 shares of Class A common stock at a price of $5.61 per share, which was the closing price of our Class A common stock on such date, less 2%. On September 20, 2013, we repurchased from Mr. Lynn 533,406 shares of Class A common stock at a price of $5.82 per share, which was the closing price of our Class A common stock on such date. On January 21, 2014, the Compensation Committee authorized the acceleration of restrictions with respect to an aggregate of 1,254,723 shares of restricted Class A common stock held by our executive officers as follows: Mr. Lutnick, 628,872 shares (Mr. Lutnick does not currently intend to sell any of these shares); Mr. Lynn, 424,347 shares; Mr. Merkel, 14,689 shares; Mr. Windeatt, 146,843 shares; and Mr. Sadler, 39,972 shares. The Compensation Committee authorized the Company to repurchase any or all of such shares from the executive officers at a price of $6.51 per share, which was the closing price of our Class A common stock on January 21, 2014. On February 5, 2014, certain executive officers elected to sell, and we agreed to purchase, an aggregate of 636,841 shares of Class A common stock from such executive officers at a price of $6.51 per share as follows: Mr. Lynn, 424,347 shares; Mr. Merkel, 14,689 shares; Mr. Windeatt, 157,833 shares (of which 146,843 shares were previously restricted and an additional 10,990 freely tradable shares); and Mr. Sadler, 39,972 shares. CONTINGENT PAYMENTS RELATED TO ACQUISITIONS The Company has completed acquisitions, whose purchase price included an aggregate of approximately 7.6 million shares of the Company's Class A common stock (with an acquisition date fair value of approximately $40.2 million) and 4.7 million limited partnership units (with an acquisition date fair value of approximately $23.7 million) that may be issued contingent on certain targets being met through 2018. In connection with the acquisitions above, as of September 30, 2014, the Company has issued 4.5 million shares of its Class A common stock and 1.2 million of limited partnership units related to contingent payments. CANTOR RIGHTS TO PURCHASE LIMITED PARTNERSHIP INTERESTS FROM BGC HOLDINGS Cantor has the right to purchase limited partnership interests (Cantor units) from BGC Holdings upon redemption of non-exchangeable founding/working partner units redeemed by BGC Holdings upon termination or bankruptcy of the founding/working partner. Any such Cantor units purchased by Cantor are exchangeable for shares of Class B common stock or, at Cantor's election or if there are no additional authorized but unissued shares of Class B common stock, shares of Class A common stock, in each case on a one-for-one basis (subject to customary anti-dilution adjustments). On July 21, 2014, the Company issued exchange rights with respect to, and Cantor purchased, an aggregate of 3,142,257 exchangeable limited partnership units in BGC Holdings consisting of (i) 1,371,058 such units in connection with the redemption by BGC Holdings of an aggregate of 1,371,058 non-exchangeable founding partner units from former Cantor partners who were former founding partners of BGC Holdings, and (ii) 1,771,199 such units in connection with the grant of exchangeability to 1,771,199 units held by former Cantor partners who were former founding partners of BGC Holdings. Such exchangeable limited partnership units were exchangeable by Cantor at any time on a one-for-one basis for shares of common stock of the Company. The aggregate net purchase price paid by Cantor for such units was $10,605,549. Immediately after Cantor's purchases of such 70 -------------------------------------------------------------------------------- Table of Contents exchangeable limited partnership units, also on July 21, 2014, the Company purchased from Cantor an aggregate of 5 million units and shares, consisting of (i) all of such 3,142,257 units and (ii) 1,857,743 previously-owned shares of the Company's Class A common stock, for $38.7 million based on the closing price per share of the Class A common stock on the date of such purchases. GUARANTEE AGREEMENT FROM CF&CO Under rules adopted by the CFTC, all foreign introducing brokers engaging in transactions with U.S. persons are required to register with the National Futures Association ("NFA") and either meet financial reporting and net capital requirements on an individual basis or obtain a guarantee agreement from a registered Futures Commission Merchant ("FCM"). Our European-based brokers engage from time to time in interest rate swap transactions with U.S.-based counterparties, and therefore we are subject to the CFTC requirements. CF&Co has entered into guarantees on our behalf, and we are required to indemnify CF&Co for the amounts, if any, paid by CF&Co on our behalf pursuant to this arrangement. NINTH AMENDMENT TO PARTNERSHIP AGREEMENT On November 6, 2013, BGC GP, LLC, a subsidiary of the Company and the General Partner of the Company's majority-owned subsidiary, BGC Holdings, and Cantor, the Majority in Interest Exchangeable Limited Partner of the Partnership, entered into the Ninth Amendment to the Agreement of Limited Partnership of the Partnership (the "Ninth Amendment") effective as of July 1, 2013. In order to facilitate partner compensation and for other corporate purposes, the Ninth Amendment creates new preferred partnership units ("Preferred Units") that may be awarded to holders of, or contemporaneous with the grant of, PSUs, PSIs, PSEs, LPUs, APSUs, APSIs, APSEs, REUs, RPUs, AREUs, and ARPUs. Each quarter, the net profits of BGC Holdings will be allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation (the "Preferred Distribution"), which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units. The Preferred Units will not be entitled to participate in partnership distributions other than with respect to the Preferred Distribution. The Preferred Units may not be made exchangeable into our Class A common stock and are only entitled to the Preferred Distribution, and accordingly they will not be included in the fully diluted share count. The Ninth Amendment was approved by the Board of Directors and the Audit Committee of the Board of Directors. TENTH AMENDMENT TO THE PARTNERSHIP AGREEMENT On May 9, 2014, partners of BGC Holdings approved the Tenth Amendment to the Agreement of Limited Partnership of BGC Holdings (the "Tenth Amendment") effective as of May 9, 2014. In order to facilitate partner compensation and for other corporate purposes the Tenth Amendment creates a new class of partnership units ("NPSUs"), which are working partner units. NPSUs are identical to PSUs except that NPSUs will not be entitled to participate in Partnership distributions, will not be allocated any items of profit or loss and may not be made exchangeable into shares of the Company's Class A common stock. Upon grant, NPSUs may be assigned a written vesting schedule pursuant to which a certain number of NPSUs would be converted for PSUs/PPSUs on each vesting date, subject to terms and conditions determined by the General Partner of the Partnership in its sole discretion, including that the recipient continue to provide substantial services to the Company and comply with his or her partnership obligations. The Tenth Amendment was approved by the Audit Committee of the Board of Directors and by the full Board of Directors. STOCK LOAN TRANSACTIONS WITH CANTOR On October 3, 2014, management was granted approval to enter into stock loan transactions with CF&Co. utilizing shares of NASDAQ OMX stock or other equities. Such stock loan transactions will bear market terms and rates. EXECUTIVE COMPENSATION On May 9, 2014, the Compensation Committee authorized the grant of 4 million NPSUs to Mr. Lutnick and 1 million NPSUs to Mr. Merkel. The NPSUs granted to Mr. Lutnick will vest ratably on January 1 of each year beginning January 1, 2015 and ending January 1, 2018, such that an equal number of NPSUs will vest and automatically be converted into an equivalent number of PSUs/PPSUs on each vesting date. The NPSUs granted to Mr. Merkel will vest ratably on January 1 of each year beginning January 1, 2015 and ending January 1, 2021, such that an equal number of NPSUs will vest and automatically be converted into an equivalent number of PSUs/PPSUs on each vesting date. Exchange rights with respect to any non-exchangeable PSUs/PPSUs will be determined in accordance with the Company's practices when determining discretionary bonuses or awards, which may include the Compensation Committee's exercise of negative discretion to reduce or withhold any such awards. 71-------------------------------------------------------------------------------- Table of Contents Upon the signing of any agreement that would result in a "Change in Control" (as defined in the Amended and Restated Change in Control Agreements entered into by each of Messrs. Lutnick and Merkel) (1) any unvested NPSUs held by Messrs. Lutnick or Merkel shall vest in full and automatically be converted for exchangeable PSUs/PPSUs (i.e., such PSUs shall be exchangeable for shares of Class A common stock and PPSUs shall be exchangeable for cash), and (2) any non-exchangeable PSUs/PPSUs held by Messrs. Lutnick and Merkel shall become immediately exchangeable, which exchangeability may be exercised in connection with such "Change in Control." TENDER OFFER TO ACQUIRE GFI GROUP, INC. On October 22, 2014, we commenced a tender offer to acquire all outstanding shares of common stock, par value $0.01 per share (the "Shares"), of GFI Group Inc. ("GFI"), for $5.25 per Share, net to the seller in cash, without interest and less any required withholding taxes. (the "Offer"). The Offer is valued at approximately $675 million. As of September 30, 2014, we owned approximately 13.5% of GFI's Shares. The Offer is subject to certain terms and conditions, including the tender of a sufficient number of Shares such that, when added to the Shares owned by us, we would own a majority of the Shares on a fully diluted basis. The full terms and conditions of the Offer are set forth in the offering documents on Schedule TO that we filed with the SEC on October 22, 2014, as they may be amended from time to time (the "Tender Offer Documents"). The Offer is not subject to any financing condition. The Offer is currently scheduled to expire at 12:00 midnight, New York City time, at the end of the day on November 19, 2014, subject to any extensions. GFI is currently a party to a series of agreements, including an Agreement and Plan of Merger and a Purchase Agreement (the "CME Merger Agreement"), each dated July 30, 2014, with CME Group Inc. ("CME"), whereby GFI agreed to merge with and into a wholly owned subsidiary of CME and, immediately following such merger, a private consortium of current GFI management would acquire from CME GFI's wholesale brokerage and clearing businesses (the "CME Transaction"). The CME offer is $4.55 per share in stock. In addition, CME and certain stockholders of GFI, who control approximately 38% of GFI's issued and outstanding common stock, entered into an agreement, dated July 30, 2014 (the "Support Agreement"), that provides for such stockholders to vote for the CME Transaction and vote against any alternative transaction and that prevents such stockholders from transferring their shares, including by tendering into the Offer. The restrictions in the Support Agreement continue for 12 months following the termination of the CME Merger Agreement. The Offer is not conditioned on the termination of the CME Merger Agreement or the Support Agreement, and is not conditioned on the tender of the Shares subject to the Support Agreement. Our $5.25 per share all-cash offer represents a premium of more than 15% to the $4.55 per share all-stock transaction announced by CME and GFI on July 30, 2014 and a premium of more than 68% to the price of the Shares on July 29, 2014, the last day prior to the announcement of the CME Transaction. Additional information is set forth in the Tender Offer Documents and in our other public filings. CF&Co is acting as our financial advisor and as the dealer-manager in connection with the Offer and will receive customary fees in connection with this engagement. We have agreed to reimburse the dealer-manager for reasonable out-of-pocket expenses incurred in connection with the Offer and to indemnify the dealer manager against certain liabilities, including certain liabilities under the U.S. federal securities laws. 72-------------------------------------------------------------------------------- Table of Contents This transaction has not been approved or disapproved by the U.S. Securities and Exchange Commission ("SEC") or any state securities commission, nor has the SEC or any state securities commission passed upon the fairness or merits of this transaction or upon the accuracy or adequacy of the information contained in this document. Any representation to the contrary is a criminal offense. MARKET SUMMARY The following table provides certain volume and transaction count information for the quarterly periods indicated: September 30, June 30, September 30, 2014 2014 2013 Notional Volume (in billions) Total fully electronic volume $ 3,919 $ 3,538 $ 2,167 Total hybrid volume - (1) 36,822 37,486 36,837 Total fully electronic and hybrid volume $ 40,741 $ 41,024 $ 39,004 Transaction Count (in thousands, except for days) Total fully electronic transactions 2,502 2,122 1,151 Total hybrid transactions 650 659 642 Total transactions 3,152 2,781 1,793 Trading days 64 63 64 (1) Defined as volume from hybrid transactions conducted by BGC Brokers, exclusive of voice-only transactions. Fully electronic volume, including new products, was $3.9 trillion for the three months ended September 30, 2014, compared to $2.2 trillion for the three months ended September 30, 2013. Our combined voice-assisted and screen-assisted volume for the three months ended September 30, 2014 was $40.7 trillion, compared to $39.0 trillion for the three months ended September 30, 2013. CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table summarizes certain of our contractual obligations at September 30, 2014 (in thousands): Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years Operating leases (1) $ 271,612 $ 52,824 $ 76,923 $ 50,252 $ 91,613 Notes payable and collateralized borrowings (2) 422,500 150,000 160,000 - 112,500 Interest on notes payable (3) 273,255 23,450 23,981 18,281 207,543 Other contractual obligations (4) 17,562 17,562 - - - Total contractual obligations $ 984,929 $ 243,836 $ 260,904 $ 68,533 $ 411,656 (1) Operating leases are related to rental payments under various non-cancelable leases, principally for office space, net of sublease payments to be received. The total amount of sublease payments to be received is approximately $9.3 million over the life of the agreement. These sublease payments are included in the table above. (2) Notes payable and collateralized borrowings reflects the issuance of $150.0 million of the 8.75% Convertible Notes with a contractual maturity date in 2015 (unless earlier repurchased, exchanged or converted), $160.0 million of the 4.50% Convertible Notes (the $160.0 million represents the principal amount of the debt; the carrying value of the 4.50% Convertible Notes as of September 30, 2014 was approximately $151.4 million) with a contractual maturity date in 2016 (unless earlier repurchased, exchanged or converted), and $112.5 million of the 8.125% Senior Notes (the $112.5 million represents the principal amount of the debt; the carrying value of the 8.125% Senior Notes as of September 30, 2014 was approximately $109.0 million) with a contractual maturity date in 2042 (which may be redeemed for cash, in whole or in part, on or after June 26, 2017, at our option). See Note 17-"Notes Payable, Collateralized and Short-Term Borrowings," to our consolidated financial statements for more information regarding these obligations, including timing of payments and compliance with debt covenants. 73 -------------------------------------------------------------------------------- Table of Contents (3) The $207.5 million of interest on notes payable that is due in more than five years represents interest on the 8.125% Senior Notes. The 8.125% Senior Notes may be redeemed for cash, in whole or in part, on or after June 26, 2017, at our option, which may impact the actual interest paid. (4) Other contractual obligations reflect commitments to make charitable contributions, which are recorded as part of "Accounts payable, accrued and other liabilities" in our unaudited condensed consolidated statements of financial condition. OFF-BALANCE SHEET ARRANGEMENTS In the ordinary course of business, we enter into arrangements with unconsolidated entities, including variable interest entities. See Note 13-"Investments" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our investments in unconsolidated entities. CRITICAL ACCOUNTING POLICIES The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our unaudited condensed consolidated financial statements. We believe that of our significant accounting policies (see Note 4-"Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K), the following policies involve a higher degree of judgment and complexity. Revenue Recognition We derive our revenues primarily through commissions from brokerage services, the spread between the buy and sell prices on matched principal transactions, revenues from real estate management services, fees from related parties, fees from certain information products, fees for the provision of certain software solutions, and other revenues. We recognize revenue when four basic criteria have been met: • Existence of persuasive evidence that an arrangement exists; • Delivery has occurred or services have been rendered; • The seller's price to the buyer is fixed and determinable; and • Collectability is reasonably assured. The judgments involved in revenue recognition include determining the appropriate time to recognize revenue. In particular within our Real Estate Services segment, we evaluate our transactions to determine whether contingencies exist that may impact the timing of revenue recognition. Equity-Based and Other Compensation Discretionary Bonus: A portion of our compensation and employee benefits expense is comprised of discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ. Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of the Financial Accounting Standards Board ("FASB") guidance. Restricted stock units ("RSUs") provided to certain employees are accounted for as equity awards, and as per FASB guidance, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. FASB guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because significant assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions. The fair value of RSU awards to employees is determined on the date of grant, based on the market value of our Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards' vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as non-cash equity-based compensation expense in our consolidated statements of operations. Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per FASB guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates' customary noncompete obligations. Such shares of restricted stock are generally saleable by partners in five to 74-------------------------------------------------------------------------------- Table of Contents ten years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our consolidated statements of operations Limited Partnership Units: Limited partnership units in BGC Holdings are generally held by employees. Generally such units receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. As discussed above, our new Preferred Units are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. As prescribed in FASB guidance, the quarterly allocations of net income to such limited partnership units are reflected as a component of compensation expense under "Allocation of net income and grants of exchangeability to limited partnership units and FPUs" in our consolidated statements of operations. Certain of these limited partnership units entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder's termination. These limited partnership units are accounted for as post-termination liability awards under FASB guidance. Accordingly, we recognize a liability for these units on our unaudited condensed consolidated statements of financial condition as part of "Accrued compensation" for the amortized portion of the post-termination payment amount, based on the current fair value of the expected future cash payout. We amortize the post-termination payment amount, less an expected forfeiture rate, over the vesting period, and record an expense for such awards based on the change in value at each reporting period in our unaudited condensed consolidated statements of operations as part of "Compensation and employee benefits." Certain limited partnership units are granted exchangeability into Class A common stock on a one-for-one basis (subject to adjustment). At the time exchangeability is granted, we recognize an expense based on the fair value of the award on that date, which is included in "Allocation of net income and grants of exchangeability to limited partnership units and FPUs" in our unaudited condensed consolidated statements of operations. During the three months ended September 30, 2014 and 2013, we incurred compensation expense, before associated income taxes, of $47.3 and $5.4 million, respectively, related to the grant of exchangeability on partnership units. During the nine months ended September 30, 2014 and 2013, we incurred compensation expense, before associated income taxes, of $96.5 and $28.9 million, respectively, related to the grant of exchangeability on partnership units. In addition, during the nine months ended September 30, 2013, the Company redeemed or exchanged limited partnership units in connection with its Global Partnership Restructuring Program and incurred compensation expense, before associated income taxes of $304.1 million. At the end of the second quarter of 2013, we commenced a Global Partnership Restructuring Program. As a result of the program, we reduced the number of BGC Holdings limited partnership units outstanding by approximately 76 million units and granted approximately 44 million shares of our Class A common stock, of which approximately 41 million were restricted shares. Taken together, these actions reduced our fully diluted share count by approximately 32 million shares. Employee Loans: We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The distributions are treated as compensation expense when made and the proceeds are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. At the end of the second quarter of 2013, the Company commenced a Global Partnership Restructuring Program to provide retention incentives and to allow the Company to take advantage of certain tax efficiencies. Under the program, certain BGC Holdings limited partnership units were redeemed or exchanged for restricted stock. Due to the net redemption/exchange of the limited partnership units described above, the Company determined that the collectability of a portion of the employee loan balances were not expected and, therefore, the Company recognized a reserve for the three months ended June 30, 2013 in the amount of approximately $160.5 million. The compensation expense related to this reserve is included as part of "Compensation and employee benefits" in the Company's unaudited condensed consolidated statements of operations. As of September 30, 2014 and December 31, 2013, the aggregate balance of employee loans, net of reserve, was $143.3 million and $142.8 million, respectively, and is included as "Loans, forgivable loans and other receivables from employees and partners, net" in our unaudited condensed consolidated statements of financial condition. Compensation expense for the above-mentioned employee loans for the three months ended September 30, 2014 and 2013 was $7.1 million and $7.7 million, respectively. Compensation expense for the above-mentioned employee loans for the nine months ended September 30, 2014 and 2013 was $21.4 million and $187.9 million, respectively. The compensation expense related to these loans was included as part of "Compensation and employee benefits" in our unaudited condensed consolidated statements of operations. 75 -------------------------------------------------------------------------------- Table of Contents Goodwill Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in FASB guidance, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative assessment are not conclusive, or if we choose to bypass the qualitative assessment, we perform a goodwill impairment analysis using a two-step process. The first step involves comparing each reporting unit's estimated fair value with its carrying value, including goodwill. To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because significant assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of potential impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. Events such as economic weakness, significant declines in operating results of reporting units, or significant changes to critical inputs of the goodwill impairment test (e.g., estimates of cash flows or cost of capital) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future. Income Taxes We account for income taxes using the asset and liability method as prescribed in FASB guidance on Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Certain of our entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax ("UBT") in the City of New York. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners (see Note 3-"Limited Partnership Interests in BGC Holdings" for a discussion of partnership interests), rather than the partnership entity. As such, the partners' tax liability or benefit is not reflected in our unaudited condensed consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in our unaudited condensed consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in the U.S. or in foreign jurisdictions. Pursuant to FASB guidance on Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement on Accounting for Income Taxes, we provide for uncertain tax positions based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from our estimates under different assumptions or conditions. We recognize interest and penalties related to income tax matters in "Interest expense" and "Other expenses," respectively, in our unaudited condensed consolidated statement of operations. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. Because our interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law. See Note 4-"Summary of Significant Accounting Policies," to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for additional information regarding our significant accounting policies. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1-"Organization and Basis of Presentation," to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements. 76-------------------------------------------------------------------------------- Table of Contents OUR ORGANIZATIONAL STRUCTURE Stock Ownership As of the end of the second quarter of 2013, pursuant to our Global Partnership Restructuring Program, the Company redeemed or exchanged approximately 76 million limited partnership units held by partners of BGC Holdings. Pursuant to the Program, the Company has delivered an aggregate of approximately 44 million shares of the Company's Class A common stock to the partners. As of September 30, 2014, there were 185,380,845 shares of our Class A common stock outstanding, of which 1,812,785 shares were held by Cantor and CFGM, Cantor's managing general partner. Each share of Class A common stock is entitled to one vote on matters submitted to a vote of our stockholders. In addition, as of September 30, 2014, Cantor and CFGM held 34,848,107 shares of our Class B common stock (which represents all of the outstanding shares of our Class B common stock), representing, together with our Class A common stock held by Cantor and CFGM, approximately 65.6% of our voting power on such date. Each share of Class B common stock is generally entitled to the same rights as a share of Class A common stock, except that, on matters submitted to a vote of our stockholders, each share of Class B common stock is entitled to ten votes. The Class B common stock generally votes together with the Class A common stock on all matters submitted to a vote of our stockholders. Through September 30, 2014, Cantor has distributed to its current and former partners an aggregate of 20,272,320 shares of Class A common stock, consisting of (i) 18,845,763 shares to satisfy certain of Cantor's deferred stock distribution obligations provided to such partners on April 1, 2008 (the "April 2008 distribution rights shares"), and (ii) 1,426,557 shares to satisfy certain of Cantor's deferred stock distribution obligations provided to such partners on February 14, 2012 in connection with Cantor's payment of previous quarterly partnership distributions (the "February 2012 distribution rights shares"). As of September 30, 2014, Cantor is still obligated to distribute to its current and former partners an aggregate of 16,327,709 shares of Class A common stock, consisting of 14,525,981 April 2008 distribution rights shares and 1,801,728 February 2012 distribution rights shares. From time to time, we may actively continue to repurchase shares of our Class A common stock, including from Cantor, our executive officers, other employees, partners and others. Partnership Structure We are a holding company, and our business is operated through two operating partnerships, BGC U.S., which holds our U.S. businesses, and BGC Global, which holds our non-U.S. businesses. The limited partnership interests of the two operating partnerships are held by us and BGC Holdings, and the limited partnership interests of BGC Holdings are currently held by limited partnership unit holders, founding/working partners, and Cantor. We hold the BGC Holdings general partnership interest and the BGC Holdings special voting limited partnership interest, which entitle us to remove and appoint the general partner of BGC Holdings, and serve as the general partner of BGC Holdings, which entitles us to control BGC Holdings. BGC Holdings, in turn, holds the BGC U.S. general partnership interest and the BGC U.S. special voting limited partnership interest, which entitle the holder thereof to remove and appoint the general partner of BGC U.S., and the BGC Global general partnership interest and the BGC Global special voting limited partnership interest, which entitle the holder thereof to remove and appoint the general partner of BGC Global, and serves as the general partner of BGC U.S. and BGC Global, all of which entitle BGC Holdings (and thereby us) to control each of BGC U.S. and BGC Global. BGC Holdings holds its BGC Global general partnership interest through a company incorporated in the Cayman Islands, BGC Global Holdings GP Limited. As of September 30, 2014, we held directly and indirectly, through wholly owned subsidiaries, BGC U.S. limited partnership interests and BGC Global limited partnership interests consisting of 220,228,952 units and 220,228,952 units, representing approximately 67.4% and 67.4% of the outstanding BGC U.S. limited partnership interests and BGC Global limited partnership interests, respectively. As of that date, BGC Holdings held BGC U.S. limited partnership interests and BGC Global limited partnership interests consisting of 106,621,664 units and 106,621,664 units, representing approximately 32.6% and 32.6% of the outstanding BGC U.S. limited partnership interests and BGC Global limited partnership interests, respectively. Limited partnership unit holders, founding/working partners, and Cantor directly hold BGC Holdings limited partnership interests. Since BGC Holdings in turn holds BGC U.S. limited partnership interests and BGC Global limited partnership interests, limited partnership unit holders, founding/working partners, and Cantor indirectly have interests in BGC U.S. limited partnership interests and BGC Global limited partnership interests. As of September 30, 2014, outstanding BGC Holdings partnership interests included 40,788,301 limited partnership units, 17,050,430 founding/working partner units and 48,782,933 Cantor units. We may in the future effect additional redemptions of BGC Holdings limited partnership units and founding/working partner units for shares of our Class A common stock. We may also continue our earlier partnership restructuring programs, whereby we redeemed or repurchased certain limited partnership units and founding/working partner units in exchange for new units, grants of exchangeability for Class A common stock or cash and, in many cases, obtained modifications or extensions of partners' employment 77-------------------------------------------------------------------------------- Table of Contents arrangements. We also generally expect to continue to grant exchange rights with respect to outstanding non-exchangeable limited partnership units and founding/working partner units, and to repurchase BGC Holdings partnership interests from time to time, including from Cantor, our executive officers, and other employees and partners, unrelated to our partnership restructuring programs. Cantor units are generally exchangeable with us for our Class B common stock (or, at Cantor's option or if there are no additional authorized but unissued shares of our Class B common stock, our Class A common stock) on a one-for-one basis (subject to customary anti-dilution adjustments). Upon certain circumstances, Cantor may have the right to acquire additional Cantor units in connection with the redemption of or grant of exchangeability to certain non-exchangeable founding/working partner units, none of which was redeemed/exchanged in the Global Partnership Restructuring Program. As of September 30, 2014, there were 511,453 non-exchangeable founding/working partner units with respect to which Cantor had the right to acquire an equivalent number of Cantor units. On November 6, 2013, BGC GP, LLC, a subsidiary of the Company and the General Partner of the Company's majority-owned subsidiary, BGC Holdings, and Cantor, the Majority in Interest Exchangeable Limited Partner of the Partnership, entered into the Ninth Amendment to the Agreement of Limited Partnership of the Partnership effective as of July 1, 2013. In order to facilitate partner compensation and for other corporate purposes, the Ninth Amendment created new preferred partnership units (Preferred Units), which are working partner units that may be awarded to holders of, or contemporaneous with the grant of, PSUs, PSIs, PSEs, LPUs, APSUs, APSIs, APSEs, REUs, RPUs, AREUs, and ARPUs. These new Preferred Units carry the same name as the underlying unit, with the insertion of an additional "P" to designate them as Preferred Units. Such Preferred Units may not be made exchangeable into our Class A common stock and accordingly are not included in the fully diluted share count. Each quarter, the net profits of BGC Holdings will be allocated to such Units at a rate of either 0.6875% (which is 2.75% per calendar year) of the allocation amount assigned to them based on their award price, or such other amount as set forth in the award documentation, before calculation and distribution of the quarterly Partnership distribution for the remaining Partnership units. The Preferred Units will not be entitled to participate in Partnership distributions other than with respect to the Preferred Distribution. As of September 30, 2014, there were 8,544,365 such units granted and outstanding. The Ninth Amendment was approved by the Audit Committee of the Board of Directors and by the full Board. On May 9, 2014, partners of BGC Holdings approved the Tenth Amendment to the Agreement of Limited Partnership of BGC Holdings effective as of May 9, 2014. In order to facilitate partner compensation and for other corporate purposes the Tenth Amendment creates a new class of partnership units (NPSUs), which are working partner units. For more information, see Note 13-"Related Party Transactions" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The Tenth Amendment was approved by the Audit Committee of the Board of Directors and by the full Board of Directors. 78-------------------------------------------------------------------------------- Table of Contents The following diagram illustrates our organizational structure as of September 30, 2014. The diagram does not reflect the various subsidiaries of BGC, BGC U.S., BGC Global, BGC Holdings or Cantor, or the noncontrolling interests in our consolidated subsidiaries other than Cantor's units in BGC Holdings.* [[Image Removed: LOGO]] 79 -------------------------------------------------------------------------------- Table of Contents * Shares of our Class B common stock are convertible into shares of our Class A common stock at any time in the discretion of the holder on a one-for-one basis. Accordingly, if Cantor converted all of its Class B common stock into Class A common stock, Cantor would hold 16.6% of the voting power, and the public stockholders would hold 83.4% of the voting power (and Cantor's indirect economic interests in BGC U.S. and BGC Global would remain unchanged). For purposes of the diagram, Cantor's percentage ownership also includes CFGM's percentage ownership. The diagram does not reflect certain Class A common stock and BGC Holdings partnership units as follows: (a) Cantor's economic interest in our 8.75% convertible notes or the 23,934,994 shares of Class A common stock acquirable by Cantor upon conversion thereof (if Cantor converted all of the 8.75% convertible notes into shares of Class A common stock, Cantor would hold 67.1% of the voting power, and the public stockholders would hold 32.9% of the voting power (and Cantor's indirect economic interests in each of BGC U.S. and BGC Global would be 31.2%)); (b) 16,260,160 shares of Class A common stock issuable upon conversion of our 4.50% convertibles notes; (c) any shares of Class A common stock that may become issuable upon the conversion or exchange of any convertible or exchangeable debt securities that may in the future be sold under our shelf Registration Statement on Form S-3 (Registration No. 333-180331); (d) 8,544,365 Preferred Units granted and outstanding to BGC Holdings partners (see "Partnership Structure" herein); and I 5,000,000 NPSUs granted and outstanding to BGC Holdings partners. The diagram reflects Class A common stock and BGC Holdings partnership unit activity from January 1, 2014 through September 30, 2014 as follows: (a) an aggregate 3,480,230 Global Partnership Restructuring Program shares of Class A common stock issued by us; (b) 120,362 April 2008 distribution rights shares distributed by Cantor, but not the 14,525,981 shares remaining to be distributed by Cantor; (c) 3,869 February 2012 distribution rights shares distributed by Cantor, but not the 1,801,728 shares remaining to be distributed by Cantor; (d) 10,541,939 shares of Class A common stock repurchased by us, including 1,857,743 shares from Cantor; (e) 6,716,775 shares of Class A common stock sold by us under the December 2012 sales agreement pursuant to our shelf Registration Statement on Form S-3 (Registration No. 333-185110), but not the 2,642,587 shares remaining for sale by us under such sales agreement; (f) 1,658,804 shares issued by us under our acquisition shelf Registration Statement on Form S-4 (Registration No. 333-169232), but not the 13,704,822 shares remaining available for issuance by us under such Registration Statement; (g) 36,521 shares issued by us under our Dividend Reinvestment and Stock Purchase Plan shelf Registration Statement on Form S-3 (Registration No. 333-173109), but not the 9,823,808 shares remaining available for issuance by us under such Registration Statement; (h) 100,941 shares sold by selling stockholders under our resale shelf Registration Statement on Form S-3 (Registration No. 333-167953), but not the 246,372 shares remaining available for sale by selling stockholders under such Registration Statement; (i) 205,320 shares sold by selling stockholders under our resale shelf Registration Statement on Form S-3 (Registration No. 333-175034), but not the 1,491,717 shares remaining available for sale by selling stockholders under such Registration Statement; (j) 4,733,550 limited partnership; founding/working partner and Cantor units redeemed or repurchased by us for cash, including 3,142,257 Cantor units; and (k) an aggregate of 24,205,069 limited partnership units granted by BGC Holdings. 80-------------------------------------------------------------------------------- Table of Contents |