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INFORMATION
STATEMENT PURSUANT TO SECTION 14(c) OF THE SECURITIES
EXCHANGE
ACT OF 1934
Check the
appropriate box:
ý Preliminary
Information Statement
¨ Confidential,
for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
¨ Definitive
Information Statement
BROADPOINT
SECURITIES GROUP, INC.
(Name of
Registrant As Specified in Charter)
Payment
of Filing Fee (Check the appropriate box):
¨
No
fee required.
ý
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
(1)
Title
of each class of securities to which transaction applies: Common Stock,
par value $0.01 per share
(2)
Aggregate
number of securities to which transaction
applies: 23,000,000
(3)
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
$3.66
(4)
Proposed
maximum aggregate value of
transaction: $84,180,000
(5)
Total
fee paid: $4,697.24
¨
Fee
paid previously with preliminary
materials.
¨
Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
On March2, 2009, we entered into an Agreement and Plan of Merger among Broadpoint
Securities Group, Inc., a New York corporation (the “Company” or “we”), Magnolia
Advisory LLC (our wholly-owned subsidiary), Gleacher Partners Inc., certain
stockholders of Gleacher Partners Inc., and each of the holders of interests in
Gleacher Holdings LLC (the “Merger Agreement”). Pursuant to the
Merger Agreement, we will acquire Gleacher Partners Inc., an internationally
recognized financial advisory boutique best known for advising major companies
in mergers and acquisitions, for 23,000,000 shares of common stock and $20
million in cash (of which $10 million is to be paid at the closing of the
transaction and $10 million is to be paid five years after closing, subject to
acceleration under certain circumstances). The number of shares of
our common stock to be issued in the transaction, together with the shares
currently outstanding and shares issued pursuant to outstanding warrants and
employee arrangements, exceeds the number of shares currently authorized under
the Amended and Restated Certificate of Incorporation of the Company (the
“Certificate of Incorporation”). Accordingly, if the acquisition is
completed, we will amend the Certificate of Incorporation to increase the
authorized number of shares of our common stock from 100,000,000 shares to
200,000,000 shares. In addition, the issuance of the common stock in
the transaction requires shareholder approval under NASD Marketplace Rule
4350(i)(1)(C)(ii)(a) because we are issuing more than 20% of our currently
outstanding common stock. In connection with the acquisition, we also
intend to amend our Certificate of Incorporation to change the name of the
Company to “Broadpoint Gleacher Securities Group, Inc.” These actions
were approved on March 2, 2009 by the Board of Directors of the Company and, to
the extent shareholder approval was required for any action, on the same day by
MatlinPatterson FA Acquisition LLC, the shareholder that holds a majority of our
issued and outstanding common stock, by written consent in lieu of a special
meeting in accordance with our Certificate of Incorporation and the New York
Business Corporation Law.
WE
ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
No action
is required by you. The accompanying information statement is
furnished only to inform our shareholders of the actions described above before
they take place in accordance with Rule 14c-2 of the Securities Exchange Act of
1934. This information statement is being mailed to you on or about
[l].
Please
feel free to call us at (212) 273-7178 if you have any questions regarding the
enclosed Information Statement. We thank you for your continued
interest in Broadpoint Securities Group, Inc.
This
Information Statement is being furnished to the shareholders of Broadpoint
Securities Group, Inc., a New York corporation (the “Company” or “we”), in
connection with (i) the adoption of an amendment to our Certificate of
Incorporation and (ii) the issuance of 23,000,000 shares of our common stock
(the “Stock Issuance”) pursuant to the Merger Agreement, both actions having
been approved by our Board of Directors and by the written consent of the holder
of a majority of our issued and outstanding common stock in lieu of a special
meeting.
On March2, 2009, our Board of Directors approved an amendment to our Certificate of
Incorporation (a) to change the name of the Company from “Broadpoint Securities
Group, Inc.”, to “Broadpoint Gleacher Securities Group, Inc.” and (b) to
increase the number of authorized shares of our common stock from 100,000,000
shares to 200,000,000 shares (the “Amendment”). The Amendment will
become effective on the date of filing of the Certificate of Amendment with the
New York Secretary of State (the “Effective Date”) in accordance with the
relevant sections of the New York Business Corporation Law. We expect
to file the Certificate of Amendment on the date that the acquisition of
Gleacher Partners Inc. is completed. The acquisition is subject to
regulatory approvals and other customary conditions. We currently
expect the closing will occur before June 30, 2009. Although we
expect the transactions contemplated by the Merger Agreement to close, there can
be no assurances at this time that such transactions will be
consummated.
As of
April 3, 2009, there were 81,556,246 shares of our common stock issued and
outstanding, 25,057,828 shares of our common stock reserved for issuance
pursuant to outstanding warrants and employment agreements and 1,000,000 of
our Series B Mandatory Redeemable Preferred Stock are issued and
outstanding. MatlinPatterson FA Acquisition LLC, a shareholder that
owned approximately 54% of our outstanding common stock on March 2, 2009,
executed a written consent on March 2, 2009 approving the Amendment and the
Stock Issuance.
The
approval of these actions by written consent is made possible by Section 615 of
the New York Business Corporation Law, which provides that the written consent
of the holders of outstanding shares of voting stock, having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote
thereon
were present and voted, may be substituted for such a meeting, and Article Tenth
of our Amended and Restated Certificate of Incorporation.
Pursuant
to Section 615 of the New York Business Corporation Law, we are required to
provide notice of the taking of the corporate actions described above without a
meeting of shareholders to all shareholders who did not consent in writing to
such action. This Information Statement serves as this
notice. This Information Statement will be mailed on or about [l] to shareholders of
record, and is being delivered to inform you of the corporate actions described
herein before they take effect in accordance with Rule 14c-2 of the Securities
Exchange Act of 1934.
The
entire cost of furnishing this Information Statement will be borne by the
Company. We will request brokerage houses, nominees, custodians,
fiduciaries and other like parties to forward this Information Statement to the
beneficial owners of our voting securities held of record by them, and we will
reimburse such persons for out-of-pocket expenses incurred in forwarding such
material.
No
Dissenter’s Rights
No
dissenter’s rights are afforded to our shareholders under New York law as a
result of the adoption of the Amendment or as a result of the Stock
Issuance.
As of
April 3, 2009, we had 81,556,246 shares of our common stock outstanding,
25,057,828 shares of our common stock reserved for issuance pursuant to
outstanding warrants and employee arrangements, and 1,000,000 of our Series B
Mandatory Redeemable Preferred Stock issued and outstanding. We do
not have a sufficient number of shares of common stock authorized to effect the
Stock Issuance pursuant to the terms of the Merger
Agreement. Therefore, we intend to amend our Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 100,000,000 to 200,000,000, which will allow us to effect the Stock
Issuance.
We also
intend to amend our Certificate of Incorporation to change the name of the
Company from “Broadpoint Securities Group, Inc.” to “Broadpoint Gleacher
Securities Group, Inc.”
MatlinPatterson
FA Acquisition LLC, a shareholder that owned approximately 54% of our
outstanding common stock on March 2, 2009, executed a written consent approving
the Amendment on March 2, 2009.
Stock
Issuance
Our
common stock is listed on the NASDAQ Stock Market under the Symbol “BPSG” and we
are subject to the NASD Marketplace rules. Under NASD Marketplace
Rule 4350(i)(1)(C)(ii)(a), shareholder approval is required for issuances of
securities in an amount that is 20% or more of the Company’s outstanding common
stock before the issuance (the “NASD Rule”). The shares of common
stock to be issued pursuant to the Stock Issuance constitute more than 20% of
our outstanding common stock before the Stock Issuance. As a result, in order to
comply with the NASD Rule, we were required to obtain shareholder approval prior
to the Stock Issuance.
MatlinPatterson
FA Acquisition LLC, a shareholder that owned approximately 54% of our
outstanding common stock on March 2, 2009, executed a written consent approving
the Stock Issuance on March 2, 2009.
Terms
of the Merger Agreement
On March2, 2009, the Company and Magnolia Advisory LLC (“Merger Sub”), a wholly-owned
subsidiary of the Company that was formed to facilitate the transactions
contemplated by the Merger Agreement, entered into an Agreement and Plan of
Merger (the “Merger Agreement”), among the Company, Merger Sub, Gleacher
Partners Inc. (“Gleacher”), certain stockholders of Gleacher (the “Signing
Stockholders”) and each of the holders of interests in Gleacher Holdings LLC, a
Gleacher subsidiary owned 90.85% by Gleacher, other than Gleacher (the
“Holders”, and together with the Signing Stockholders, the “Selling
Parties”). Under the terms of the Merger Agreement:
1
•
following
the consummation of the transactions contemplated by the Merger Agreement,
Merger Sub (which will be the successor to Gleacher under the terms of the
Merger Agreement) and Gleacher Holdings LLC will become wholly-owned
subsidiaries of the Company;
•
the
Company will issue 23,000,000 shares of common stock of the Company to the
stockholders of Gleacher and the
Holders;
•
the
stock consideration will be subject to a five year lock-up period, subject
to acceleration under certain
circumstances;
•
at
the closing of the transactions contemplated by the Merger Agreement, the
Company will pay to the stockholders of Gleacher and the Holders
$10,000,000 in cash;
•
the
Company will pay an additional $10,000,000 in cash after five years,
subject to acceleration under certain
circumstances;
•
the
cash consideration is subject to adjustment as provided in the Merger
Agreement;
•
the
Company will appoint Eric Gleacher as a director and Chairman of its Board
of Directors;
•
the
Company will change its name to Broadpoint Gleacher Securities Group,
Inc.;
•
the
Company will enter into a Registration Rights Agreement with Mr. Gleacher;
and
•
the
Company will enter into a Trade Name and Trademark Agreement with Mr.
Gleacher and certain other parties related to Mr.
Gleacher.
Concurrently
with the execution of the Merger Agreement, the Company and its wholly-owned
subsidiary Broadpoint Capital, Inc. (“Broadpoint Capital”), entered into an
employment agreement and non-competition and non-solicitation agreement with Mr.
Gleacher, Chairman of Gleacher. Mr. Gleacher’s employment agreement
has a duration of three years, commencing on the closing date of the Transaction
(as defined below). Pursuant to his employment agreement, Mr.
Gleacher will be appointed as Chairman of the Board of Directors of the Company
and as a senior member of the Investment Banking Division of the
Company.
Registration
under Securities Act
The Stock
Issuance is intended to be exempt from registration under the Securities Act of
1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and,
as such, the Company’s shares of common stock issued in the Transaction may not
be offered or sold unless they are registered under the Securities Act, or an
exemption from the registration requirements of the Securities Act is
available. Subject to the transfer restrictions described above, Mr.
Gleacher will have the right to have his shares registered in registration
statements that we file, and the right to require us to file a shelf
registration for his shares three years after the closing.
2
Accounting
Treatment
The
Transaction will be accounted for by us under the purchase method of accounting.
Under the purchase method, the purchase price for Gleacher will be allocated to
identifiable assets (including intangible assets) and liabilities of Gleacher
with any excess being treated as goodwill. Since intangible assets are amortized
over their useful lives, we will incur accounting charges from the Transaction.
In addition, intangible assets and goodwill are both subject to periodic
impairment tests and could result in potential write-down charges in future
periods.
A final
determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. The pro-forma
financial information included herein contains an initial estimate of this
allocation and the final estimate will be made once the study to determine the
fair value of certain of Gleacher’s assets and liabilities is completed. For
financial reporting purposes, the results of operations of Gleacher will be
included in our consolidated statement of income following the time that the
Transaction is effective under applicable law. Our financial statements for
prior periods will not be restated as a result of the Transaction.
3
THE
AMENDMENT
The
Amendment will change the name of the Company from “Broadpoint Securities Group,
Inc.” to “Broadpoint Gleacher Securities Group, Inc.” The Amendment
will also increase the number of shares of our common stock, par value $0.01 per
share, that we may issue from 100,000,000 to 200,000,000 shares. A
copy of the proposed Certificate of Amendment to our Certificate of
Incorporation is attached to this Information Statement as Annex B.
Effects
of the Amendment
The
Company’s name will change from “Broadpoint Securities Group, Inc.” to
“Broadpoint Gleacher Securities Group, Inc.”
We
currently have 100,000,000 shares of common stock, par value $0.01 per share,
authorized for issuance, of which 81,556,246 shares were issued and outstanding
and 25,057,828 shares reserved for issuance pursuant to outstanding warrants and
employee arrangements, as of April 3, 2009. After amending our
Certificate of Incorporation, we will have 200,000,000 shares of common stock
authorized for issuance.
The
increase in the number of authorized shares of our common stock does not affect
the number of shares of stock presently outstanding, nor does it affect the
number of shares that you own. However, our issuance of additional
shares in the Transaction will dilute your percentage ownership of the Company,
and any issuance of additional shares subsequent to the consummation of the
transactions contemplated by the Merger Agreement may further dilute your
percentage ownership of the Company. We do not intend to solicit
authorization from our shareholders for the future issuance of the newly
authorized shares unless we are required to obtain such authorization by law or
by the rules of any securities exchange on which our shares are
listed.
MatlinPatterson
FA Acquisition LLC, a shareholder that owned approximately 54% of our
outstanding common stock on March 2, 2009, executed a written consent approving
the Amendment on March 2, 2009. The Amendment will become effective
at the time of the closing of the transactions contemplated by the Merger
Agreement. However, we do not intend to file the Certificate of
Amendment that effects the Amendment if the transactions contemplated by the
Merger Agreement are not consummated. Although we expect the
transactions contemplated by the Merger Agreement to be consummated, there can
be no assurances at this time that the transactions contemplated by the Merger
Agreement will be consummated.
4
THE
STOCK ISSUANCE
The Stock
Issuance is being effected in connection with, and as part of the consideration
for, the transactions contemplated by the Merger Agreement. The Stock Issuance
was agreed upon between the Company and the Selling Parties in connection with
the negotiation of the Merger Agreement. Following the Stock
Issuance, holders of our outstanding common stock prior to the Stock Issuance
will own approximately 78.0% of our outstanding common stock (assuming we do not
issue additional shares before the Stock Issuance).
Our
common stock is listed on the NASDAQ Stock Market under the symbol “BPSG” and we
are subject to the NASD Marketplace rules. Under the NASD Rule,
shareholder approval is required for issuances of securities in an amount that
is 20% or more of the Company’s outstanding common stock before the
issuance. The shares of common stock to be issued pursuant to the
Stock Issuance constitute more than 20% of our outstanding common stock before
the Stock Issuance. As a result, in order to comply with the NASD
Rule, we were required to obtain shareholder approval prior to the Stock
Issuance.
MatlinPatterson
FA Acquisition LLC, a shareholder that owned approximately 54% of our
outstanding common stock on March 2, 2009, executed a written consent approving
the Stock Issuance on March 2, 2009.
The Stock
Issuance is intended to be exempt from registration under the Securities Act,
pursuant to Section 4(2) thereof. As such, the Company’s shares of
common stock issued in the Transaction may not be offered or sold unless they
are registered under the Securities Act, or an exemption from the registration
requirements of the Securities Act is available. No registration
statement covering these securities has been filed with the United States
Securities and Exchange Commission or with any state securities commission in
respect of the Transaction. However, at the closing of the
Transaction we will be entering into a registration rights agreement with Mr.
Gleacher which will allow Mr. Gleacher to register for public resale the shares
issued to him in the Transaction.
5
THE
MERGER AGREEMENT AND RELATED AGREEMENTS
The
Merger Agreement
The following is a summary of certain
material provisions of the Merger Agreement, a copy of which is attached to this
Information Statement as Annex A, and which is incorporated by reference into
this Information Statement. This summary does not purport to be complete and may
not contain all of the information about the Merger Agreement that is important
to you. The Company encourages you to carefully read the Merger
Agreement in its entirety, as the rights and obligations of the parties are
governed by the express terms of the Merger Agreement and not by this summary or
any other information contained in this Information Statement.
The
Parties
The
parties to the Merger Agreement are the Company, Merger Sub, Gleacher, the
Signing Stockholders and the Holders.
The
Transaction
The
Transaction is comprised of: (i) the acquisition by Merger Sub of all the
membership interests in Gleacher Holdings LLC not owned by Gleacher (the
“Interests Purchase”) and (ii) (a) the merger of Augusta Advisory Inc. (“Merger
Corp”), a wholly-owned subsidiary of the Company that was formed to facilitate
the transactions contemplated by the Merger Agreement, with and into Gleacher,
with Gleacher continuing as the surviving company, and (b) promptly thereafter,
the merger of Gleacher with and into Merger Sub, with Merger Sub continuing as
the surviving company (clauses (ii) (a) and (ii) (b), collectively, the
“Merger”, and together with the Interests Purchase, the
“Transaction”).
Gleacher’s
financial advisory business is carried out by Gleacher Partners LLC, which is a
registered broker-dealer. Gleacher Partners LLC is a wholly owned
subsidiary of Gleacher Holdings LLC. Gleacher Holdings LLC is owned
90.85% by Gleacher, with the remaining 9.15% owned by the
Holders. The following diagram illustrates the Gleacher ownership
structure before giving effect to the Transaction:
6
The
Merger is intended to be treated as a “reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), in
which Gleacher is treated as merging directly with and into the
Company. Immediately prior to the Merger, Merger Sub will acquire the
9.15% of membership interests of Gleacher Holdings LLC that are not owned by
Gleacher. At the effective time of the Merger, Merger Corp will merge
with and into Gleacher, with Gleacher continuing as the surviving company and
the separate existence of Merger Corp ceasing, and promptly thereafter, Gleacher
will merge with and into Merger Sub, with Merger Sub as the surviving company
and the separate existence of Gleacher ceasing. Accordingly, after
giving effect to the Transaction, Gleacher Holdings LLC will be a wholly-owned
subsidiary of Merger Sub, and an indirect wholly-owned subsidiary of the
Company. The following diagram illustrates the Gleacher ownership
structure after giving effect to the Transaction:
7
The
Interests Purchase Consideration and the Merger Consideration
As
consideration for the shares held by the stockholders of Gleacher and the
interests held by the Holders, the Company will:
•
issue
23,000,000 shares of common stock of the Company to the stockholders of
Gleacher and the Holders, subject to a five-year lock up period which may
be accelerated in certain circumstances described below, and an escrow
arrangement with respect to 2,300,000 shares also described
below;
•
the
Company will pay $10,000,000 in cash at the closing to the stockholders of
Gleacher and the Holders; and
•
the
Company will pay an additional $10,000,000 after five years, subject to
acceleration in certain circumstances described below and subject to
adjustment as provided in the Merger
Agreement.
Generally,
the transfer restrictions with respect to the stock consideration will lapse and
the second payment of $10,000,000 will be accelerated in the following
circumstances:
•
If
the Selling Party receiving stock consideration is employed by the Company
(or its subsidiaries) on each of the first, second and third anniversaries
of the closing of the Transaction, then one-third of such stock
consideration will no longer be subject to the transfer restrictions on
each such anniversary.
•
If
the Selling Party receiving a part of the second payment of $10,000,000 in
cash is employed by the Company (or its subsidiaries) eighteen months and
thirty-six months following the closing of the Transaction, then one-half
of such cash payment will be made on each such date by the
Company.
In
addition, the transfer restrictions will lapse and the cash payments will be
accelerated as described in this paragraph if an employee is terminated without
cause or resigns for good reason. With respect to approximately 4.3%
of the total consideration, the transfer restrictions will lapse and the cash
payments will be accelerated as described in this paragraph without regard to
any circumstances.
The
Purchase Price Adjustment
The
Merger Agreement provides for a purchase price adjustment to the extent of any
net tangible book value. If the net tangible book value of Gleacher
is less than zero, each of the Selling Parties will pay such Selling Party’s
proportionate share of the amount of such shortfall in cash to the
Company. If the net tangible book value of Gleacher is greater than
zero, the Company will pay such excess in cash to the former holders of shares
of Gleacher and interests in Gleacher Holdings LLC.
8
The
Closing
The
closing will occur on the third business day after the day on which the last of
the conditions to the Transaction set forth in the Merger Agreement is satisfied
or waived or on such other date as the parties to the Merger Agreement may agree
in writing. The date on which the closing occurs is referred to as the Closing
Date.
Representations
and Warranties
The
representations and warranties of each party set forth in the Merger Agreement
have been made solely for the benefit of the other parties to the Merger
Agreement. In addition, such representations and warranties (a) have been
qualified by confidential disclosures made to the other party in connection with
the Merger Agreement, (b) are subject to a materiality standard contained in the
Merger Agreement that may differ from what may be viewed as material by
investors, (c) were made only as of the date of the Merger Agreement or such
other date as is specified in the Merger Agreement, and (d) may have been
included in the Merger Agreement for the purpose of allocating risk among the
parties rather than establishing matters as facts. Accordingly, the
Merger Agreement is included with this filing only to provide investors with
information regarding the terms of the Merger Agreement, and not to provide
investors with any other factual information regarding the parties or their
respective businesses. The Merger Agreement should not be read alone,
but should instead be read in conjunction with the other information regarding
the companies and the Transaction that is contained in, or incorporated by
reference into, this Information Statement, as well as in the Forms 10-K, Forms
10-Q and other filings that the Company may make with the Securities and
Exchange Commission.
Gleacher’s
representations and warranties relate to, among other things:
•
due
organization, valid existence and good standing and power and authority to
carry on its business;
•
corporate
authority to enter into the Merger Agreement and to consummate the
Transaction;
•
the
enforceability of the Merger
Agreement;
•
the
consents and approvals required in connection with the
Transaction;
the
absence of conflicts with organizational documents, laws, orders and
company material contracts as a result of consummation of the
Transaction;
•
the
ownership or possession of assets necessary to carry on the business of
Gleacher;
•
compliance
of financial statements with generally accepted accounting principles
(“GAAP”);
•
accounting
and disclosure controls;
•
bank
accounts;
•
debt;
•
the
absence of certain changes with respect to Gleacher since December 31,2008, including the absence of a “Material Adverse Effect” on
Gleacher (in the Merger Agreement, the term “Material Adverse
Effect” is defined, with respect to the Company and Gleacher, as a
“material adverse effect on (i) the financial condition, results of
operations or business of such party and its Subsidiaries, taken as a
whole, or (ii) the timely consummation of the Transactions, other than, in
the case of clause (i), any change, effect, event, circumstance,
occurrence or state of facts relating to (A) the U.S. or global economy or
the financial, debt, credit or securities markets in general, including
changes in interest or exchange rates, (B) the industry in which such
party and its Subsidiaries operate in general, (C) acts of war, outbreak
of hostilities, sabotage or terrorist attacks, or the escalation or
worsening of any such acts of war, sabotage or terrorism, (D) the
announcement of [the Merger Agreement] or the Transactions, including the
impact thereof on relationships, contractual or otherwise with customers,
suppliers, lenders, investors, partners or employees, (E) changes in
applicable laws or regulations after the date [of the Merger Agreement],
(F) changes or proposed changes in GAAP or regulatory accounting
principles after the date [of the Merger Agreement], (G) earthquakes,
hurricanes or other natural disasters, (H) in the case of [the Company],
declines in the trading prices of [Company] Common Stock, in and of
itself, but not including the underlying causes thereof, or (I) those
resulting from actions or omissions of such party or any of its
Subsidiaries which the other party has requested in writing that are not
otherwise required by [the Merger Agreement] (except, in the cases of (A),
(B), (C), (E), (F) and (G), to the extent such party and its Subsidiaries
are disproportionately adversely affected relative to other companies in
its industry)”);
labor
relations, employment matters and employee benefit
plans;
•
the
disclosure and maintenance of insurance
policies;
•
the
absence of certain unlawful business
practices;
10
•
leasehold
interests in real property;
•
environmental
matters;
•
tax
matters;
•
ownership
and maintenance of intellectual
property;
•
information
technology and security matters;
•
the
applicability of state anti-takeover
statutes;
•
the
use of brokers or finders;
•
regulatory
matters;
•
significant
clients;
•
the
absence of undisclosed liabilities;
•
the
absence of investment advisory activities;
and
•
the
accuracy of information supplied for inclusion in this Information
Statement.
The
representations and warranties of each of the Selling Parties relate to, among
other things:
•
ownership
of Gleacher shares or interests in Gleacher Holdings
LLC;
•
the
acquisition of Company shares for investment purposes and not with a view
to distribution in violation of
law;
•
authority
to enter into the Merger Agreement and to consummate the
Transaction;
•
the
enforceability of the Merger
Agreement;
•
the
required consents and approvals of governmental entities and other
authorities in connection with the
Transaction;
•
the
absence of litigation regarding such Selling Party’s ownership of the
Gleacher shares or interests in Gleacher Holdings
LLC;
•
agreements
that would interfere with the completion of the Transaction or employment
by the Company (or any of its
subsidiaries);
•
affiliation
with other Selling Parties;
•
the
treatment of the confidential nature of the Transaction prior to the
announcement of the Transaction;
11
•
absence
of “short sales” of the Company’s common
stock;
•
transfers
of claims against Gleacher; and
•
the
accuracy of information supplied to the other party for inclusion in this
Information Statement.
The
Company’s representations and warranties relate to, among other
things:
•
due
organization, valid existence and good standing and the power and
authority to carry on its business;
•
corporate
authority to enter into the Merger
Agreement;
•
the
enforceability of the Merger
Agreement;
•
the
consents and approvals of governmental entities and other authorities in
connection with the Transaction;
•
the
absence of litigation that would have a material adverse effect on the
Company;
•
the
availability of sufficient cash to fund the
Transaction;
•
the
due authorization and valid issuance of the shares of our common stock
issued pursuant to the Stock
Issuance;
•
timely
filing of all required SEC reports since January 1,2006;
•
compliance
with regulatory matters;
•
compliance
of financial statements with GAAP and with the rules and regulations of
the SEC;
•
accounting
and disclosure controls;
•
capitalization;
•
compliance
with laws and material permits;
•
the
absence of certain changes with respect to the Company since December 31,2008, including the absence of a “Material Adverse Effect” on the Company
(as defined above);
•
tax
matters;
•
compliance
with the NASDAQ Stock Market listing
requirements;
•
the
use of brokers or finders; and
12
•
the
accuracy of information supplied for inclusion in this Information
Statement.
Covenants
The
parties have agreed that each will use its reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws to consummate and make
effective the Transaction as promptly as practicable.
The
Merger Agreement also contains additional agreements among the parties relating
to, among other things:
•
the
conduct of Gleacher’s business in the ordinary course during the period
following the execution of the Merger Agreement through the closing of the
Transaction;
•
each
party’s access to information;
•
status
of matters relating to the completion of the Transaction and notices of
any material changes in the condition, financial or otherwise, of
Gleacher, any material failure to comply with Gleacher’s obligations under
the Merger Agreement or any litigation to challenge the
Transaction;
•
the
filing with FINRA of the applicable notices and applications necessary to
consummate the Transaction;
•
the
filings necessary to consummate the Transaction under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR
Act”);
•
the
preparation and filing of this Information Statement with the SEC and
responding to any comments received from the SEC on such
document;
•
the
confidential treatment by the Selling Parties of certain information
regarding Gleacher and its
subsidiaries;
•
tax
matters;
•
employee
benefits matters;
•
non-solicitation
of alternative proposals regarding the acquisition of Gleacher by a third
party;
•
transfer
restrictions on the shares of Company common stock to be issued in the
Transaction (such transfer restrictions remaining in effect for five years
after closing, subject to acceleration under certain circumstances
described above);
•
compliance
with applicable securities laws;
•
prohibition
of actions that would make it impossible to satisfy the conditions to
closing in the Merger Agreement;
13
•
consultation
with Mr. Gleacher with respect to actions by the Company outside of the
ordinary course;
•
limits
on the ability of the Selling Parties to acquire additional common stock
of the Company or to influence the management of the Company, subject to
certain exceptions, for two years after the closing;
and
•
the
termination of certain agreements entered into by Gleacher or the Selling
Parties.
Appointment
of Eric Gleacher to the Company Board as Chairman of the Board
The
Company has agreed to appoint Mr. Gleacher to its Board of Directors and
designate him Chairman of the Board of Directors, effective at the time of the
closing of the Transaction. In connection therewith, the Company
agreed to appoint Mr. Gleacher to the class of directors with a term expiring in
2011 (Class I), and also agreed that the Board of Directors of the Company would
not take any action to remove Mr. Gleacher as a director for so long as he is
employed under the employment agreement (described in further detail below)
entered into with the Company on March 2, 2009 (which will become effective at
the closing of the Transaction).
Although
the Merger Agreement provides that Mr. Gleacher will be appointed to Class I,
the parties have agreed that Mr. Gleacher will be nominated instead for election
at the Company’s 2009 annual meeting of shareholders as a Class II director,
with a term expiring in 2012. MatlinPatterson FA Acquisition
LLC, our controlling shareholder, has indicated that it intends to vote all
shares of the Company that it owns in favor or Mr. Gleacher’s election to the
Board of Directors at the Company’s 2009 annual meeting of
shareholders. Mr. Gleacher will be designated Chairman of the Board
of Directors promptly after the later to occur of (1) his election to the Board
of Directors and (2) the closing of the Transaction.
Conditions
to Closing
The
Merger Agreement contains a number of conditions to closing.
The
conditions to each party’s obligation to close are subject to the following
conditions:
•
either
•
written
approval from FINRA is obtained, or
•
(A)
30 calendar days have elapsed after the filing of the FINRA Notice by
Gleacher and, if applicable, the FINRA Notice by the Company; (B) the
Selling Parties or the Company have notified FINRA that the parties hereto
intend to consummate the Transaction without written approval from FINRA
as contemplated by clause (A) above; (C) 15 calendar days have elapsed
following such notice; and (D) FINRA has not indicated in writing that it
is considering imposing Material Restrictions on the Company following the
closing of the Transaction. Pursuant to the Merger Agreement,
the term “Material Restrictions” is defined as “any condition or
restriction imposed in connection with the [Gleacher] FINRA Notice and, if
applicable, the Broadpoint Capital
FINRA
14
Notice,
that could reasonably be expected to have a material adverse effect
(measured on a scale relative to [Gleacher] and its subsidiaries taken as
a whole) on [the Company] or any of its Subsidiaries (including the
Surviving Company and its
Subsidiaries)”;
•
no
governmental entity has instituted any laws or orders that prohibit the
consummation of the Transaction and any waiting period applicable to the
consummation of the Transaction under the HSR Act has expired or been
terminated; and
•
at
least 20 days shall have elapsed from the mailing of this Information
Statement.
The
Company’s obligation to close is subject to the following additional
conditions:
•
the
representations and warranties of Gleacher and each of the Selling Parties
in the Merger Agreement must be true and correct in all respects, without
regard to any “materiality” qualifiers contained in them, as of the date
of the Merger Agreement and as of the closing date of the Transaction, as
though they were made on and as of such time (except to the extent that
any such representation and warranty relates to a specified date, in which
case as of such specified date), unless the failure of any such
representations or warranties to be true and correct would not have a
Material Adverse Effect on Gleacher. (Certain representations,
such as due authorization, title to the shares of Gleacher and
capitalization of Gleacher, must be true in all material
respects.);
•
each
of the Selling Parties must have performed, in all material respects, its
obligations under the Merger Agreement at or prior to the closing
date;
•
the
Company has received the closing documents required under the Merger
Agreement;
•
Gleacher
has repaid in full any and all debt of Gleacher and its subsidiaries;
and
•
(i)
each of the employment and non-competition agreements with Messrs.
Gleacher, Tepper and Ryan must be in full force and effect and enforceable
against each of them; (ii) no less than 75% of the
non-competition agreements with certain other Gleacher professionals must
be in full force and effect and enforceable against each such person; and
(iii) each of Messrs. Gleacher, Tepper and Ryan, and 75% of the
professionals party to the non-competition agreements, must be available
and eligible to work immediately following the
closing.
Gleacher’s
and the Selling Parties’ obligation to close is subject to the following
additional conditions:
•
the
representations and warranties of the Company in the Merger Agreement must
be true and correct in all respects, without regard to any “materiality”
qualifiers contained in them, as of the date of the Merger Agreement and
as of the closing date of the Transaction, as though they were made on and
as of such time (except to the
15
extent
that any such representation and warranty relates to a specified date, in
which case as of such specified date), unless the failure of any such
representations or warranties to be true and correct would not have a
Material Adverse Effect on the Company (certain representations, such as
due authorization and capitalization of Gleacher, must be true in all
material respects);
•
the
Company must have performed, in all material respects, its obligations
under the Merger Agreement at or prior to the closing
date;
•
the
Selling Parties have received the closing documents required under the
Merger Agreement; and
•
Gleacher
has received an opinion from its counsel to the effect that the Merger
will be treated as a “reorganization” within the meaning of Section 368(a)
of the Code.
Termination
and Amendment
The
Merger Agreement may be terminated at any time prior to the closing of the
Transaction under the following circumstances:
•
by
the mutual written consent of Gleacher and us at any time prior to
completing the Transaction;
•
by
either Gleacher or us:
•
if
any injunction, order, decree or ruling permanently restraining, enjoining
or otherwise prohibiting the Transaction shall become final and
nonappealable (provided that the parties shall use their reasonable best
efforts to remove such order);
•
if
the Transaction is not completed by September 30, 2009 (unless the failure
to close by such date was proximately caused by the party seeking to
terminate); and
•
if
the other party has defaulted or breached any of its covenants or
agreements contained in the Merger Agreement, or if the representations or
warranties of such party contained in the Merger Agreement shall have
become inaccurate such that the conditions to closing could not be
satisfied (provided that such breach, default or inaccuracy is not curable
or, if curable, has not been cured or waived within 30 calendar days after
written notice to the other party specifying such claimed default, breach
or inaccuracy and demanding its cure or
satisfaction).
The
Merger Agreement may be amended only by a written agreement signed by the party
against whom the enforcement of such amendment is sought.
Indemnification
The
Selling Parties have agreed to indemnify, defend and hold harmless us, Merger
Sub, and any parent, subsidiary, associate, affiliate, director, officer,
shareholder or agent thereof, and
16
their
respective representatives, successors and permitted assigns from, against and
in respect of any and all losses such parties may suffer, sustain or become
subject to, to the extent relating to:
•
any
misrepresentation or breach of warranty made by Gleacher or any Selling
Party in the Merger Agreement and certain ancillary agreements to be
entered into at the closing of the
Transaction;
•
any
breach or nonfulfillment of any covenant or agreement made or to be
performed by Gleacher or any Selling Party in the Merger Agreement and
certain ancillary agreements to be entered into at the closing of the
Transaction;
•
any
fees or expenses incurred by Gleacher or any Selling Party in connection
with the Merger Agreement;
•
pre-closing
tax liabilities of Gleacher, if
any;
•
any
liabilities or obligations of any nature (other than with respect to the
lease for the principal offices of Gleacher) of Gleacher Partners Inc. and
Gleacher Holdings LLC (but not Gleacher Partners
LLC);
•
any
liabilities or obligations of any nature of Gleacher Partners LLC not
relating to its investment banking advisory
business;
•
any
liabilities or obligations of any nature of a number entities that operate
under the “Gleacher” name but that are not being acquired by the Company;
and
•
any
demand for appraisal rights under Section 262 of the DGCL or any other
proceeding by, or any other liability or obligation in favor of or
otherwise relating to, any stockholder of Gleacher that did not sign the
Merger Agreement arising in respect of such stockholder’s ownership
interest in Gleacher.
We have
agreed to indemnify, defend and hold harmless each of the Selling Parties, and
any parent, subsidiary, associate, affiliate, director, officer, shareholder or
agent thereof, and their respective representatives, successors and permitted
assigns from, against and in respect of any and all losses such parties may
suffer, sustain or become subject to, to the extent relating to:
•
any
misrepresentation or breach of warranty made by the Company in the Merger
Agreement and certain ancillary agreements to be entered into at the
closing of the Transaction;
•
any
breach or nonfulfillment of any covenant or agreement made or to be
performed by the Company in the Merger Agreement and certain ancillary
agreements to be entered into at the closing of the Transaction;
and
•
any
fess or expenses incurred by the Company in connection with the Merger
Agreement.
17
Neither
party will be liable or be obligated to make any payment in respect of losses
suffered by any indemnified party for a misrepresentation or breach of a
representation or warranty by a party, until the aggregate of all losses
suffered by such indemnified party under the Merger Agreement, the registration
rights agreement, the trade name and trademark agreement or the escrow agreement
exceeds $500,000 (the “Deductible”), in which case such indemnified party shall
be entitled to recover the amount of losses only in excess
thereof. Except in the circumstances described below, the aggregate
indemnity amount payable by any indemnifying party cannot exceed $15.0
million.
Claims
for indemnification arising from the following matters are not subject to the
Deductible and are subject to an aggregate cap of $75.0 million instead of $15.0
million: (i) fraud, intentional misconduct or intentional
misrepresentation, (ii) any breach of any of the covenants or agreements
contained in the Merger Agreement, (iii) any breach of any of the Fundamental
Representations and Warranties (as defined below), (iv) any fees, expenses or
other payments incurred or owed in connection with the Transaction, (v) any tax
liabilities, (vi) any liabilities or obligations of any nature of Gleacher and
Gleacher Holdings LLC, (vii) any liabilities or obligations of any nature of
Gleacher Partners LLC not relating to its investment banking advisory business,
(viii) any liabilities or obligations of any nature of a number of entities that
operate under the “Gleacher” name but that are not being acquired by the
Company, or (ix) any demand for appraisal rights under Section 262 of the DGCL
or any other proceeding by, or any other liability or obligation in favor of or
otherwise relating to, any stockholder of Gleacher that did not sign the Merger
Agreement arising in respect of such stockholder’s ownership interest in
Gleacher. Each Selling Party’s liability is capped at such Selling
Party’s pro rata share (based on such Selling Party’s consolidated ownership
percentage in Gleacher and Gleacher Holdings LLC) of $75.0 million.
Most of
the representations and warranties contained in the Merger Agreement will
survive for a period of 18 months following the closing of the
Transaction. The following representations and warranties (the
“Fundamental Representations and Warranties”) will survive until 60 days after
the expiration of the applicable statute of limitations: the representations
made by the Selling Parties regarding the due authorization and effect of the
Merger Agreement, the capitalization of Gleacher, its subsidiaries, transactions
with affiliates, certain representations regarding employees, certain
representations regarding taxes, the use of brokers or finders and the ownership
of Gleacher shares (and interests in Gleacher Holdings LLC), as well as the
representations made by the Company regarding the due authorization and effect
of the Merger Agreement, the capitalization of the Company and the use of
brokers or finders.
At
closing, 2,300,000 of the shares to be issued pursuant to the Stock Issuance
will be deposited and held in an escrow fund for 18 months to satisfy any
indemnification obligations of the Selling Parties arising under the Merger
Agreement. The Company may seek payment of any indemnification
obligations owed to it under the Merger Agreement from the escrow
fund. The Company is also entitled to withhold any amounts due and
payable by it to a Selling Party with respect to any outstanding indemnification
claim against such Selling Party until the claim is finally
resolved.
18
The
MatlinPatterson FA Acquisition LLC Consent
In
connection with the Transaction, the Company’s majority shareholder,
MatlinPatterson FA Acquisition LLC (“MatlinPatterson”), executed a
written consent (the “MP Consent”) concurrent with the execution of the Merger
Agreement. In the MP Consent, MatlinPatterson approved two
amendments, to become effective at the time of the closing of the Transaction,
to the Amended and Restated Certificate of Incorporation of the
Company. The amendments will (1) increase the number of authorized
shares of Company Common Stock to 200,000,000 and (2) change the name of the
Company to Broadpoint Gleacher Securities Group, Inc. In the MP
Consent, MatlinPatterson also approved the Stock Issuance for purposes of the
NASD Rule.
Employment
Arrangements with Eric Gleacher
Concurrently
with the execution of the Merger Agreement, the Company agreed to appoint Mr.
Gleacher as Chairman of the Board and as a senior member of the Investment
Banking Division of Broadpoint Capital. In connection with such
appointment, the Company, Broadpoint Capital, Gleacher Partners LLC (“Gleacher
Partners”) and Mr. Gleacher entered into an employment agreement, to become
effective as of the closing of the Transaction (the “Gleacher Employment
Agreement”). During the period beginning on the date of the closing of the
Transaction and ending as of the date on which the Company determines that Mr.
Gleacher’s employment should be transferred to Broadpoint Capital, Mr. Gleacher
also will continue to serve as the Chief Executive Officer of Gleacher
Partners. The Company will use its reasonable best efforts to combine
Broadpoint Capital and Gleacher Partners, or to transfer the employment of all
employees of Gleacher Partners to Broadpoint Capital, by December 31,2009.
The
Gleacher Employment Agreement provides that Mr. Gleacher will be employed
(initially by Gleacher Partners and then by Broadpoint Capital following the
transfer of his employment) for a three-year term commencing on the closing date
of the Transaction, automatically extended for one additional year upon the
third anniversary of the effective date without any affirmative action, unless
either party to the agreement provides at least six (6) months’ advance written
notice to the other party that the employment period will not be
extended. Mr. Gleacher will be entitled to receive an annual base
salary of $350,000 and to participate in the Company’s Investment Banking
Division’s annual investment banking bonus pool. Mr. Gleacher’s bonus
for the fiscal year that begins prior to the effective date of the Gleacher
Employment Agreement will be pro-rated to correspond to the portion of such
fiscal year that follows the effective date.
The
Gleacher Employment Agreement provides that upon termination of employment, Mr.
Gleacher will be entitled to certain payments or benefits, the amount of which
depends upon the circumstances of termination:
•
If
Mr. Gleacher terminates employment without “Good Reason” (as defined in
the Gleacher Employment Agreement), he will be entitled to any unpaid base
salary and unpaid benefits and any earned but unpaid bonus and continued
vesting or forfeiture in accordance with the schedules provided in the
award agreements of any equity compensation awards granted to him prior to
termination.
19
•
In
the event of his termination by the Company“Without Cause” (as defined in
the Gleacher Employment Agreement) he will receive his base salary for
twelve months following termination; a prorated bonus for the fiscal year
in which the twelve-month base salary continuation period ends;
continuation health coverage paid by the Company for twelve months
following termination; any earned but unpaid bonus; and, if he executes a
settlement and release agreement, continued vesting in accordance with the
schedules provided in the award agreements of any equity compensation
awards granted to him prior to
termination.
•
If
Mr. Gleacher terminates employment for “Good Reason” (as defined in the
Gleacher Employment Agreement) or if his employment is terminated
following (and due to) the expiration of the Gleacher Employment
Agreement, he will be entitled to any unpaid base salary and unpaid
benefits; any earned but unpaid bonus; a pro-rated bonus for the year in
which termination occurs; and continued vesting or forfeiture in
accordance with the schedules provided in the award agreements of any
equity compensation awards granted to him prior to
termination.
•
If
Mr. Gleacher is terminated by the Company for “Cause” (as defined in the
Gleacher Employment Agreement), he will be entitled to any unpaid base
salary and unpaid benefits and any earned but unpaid
bonus.
Following
the termination of Mr. Gleacher’s employment for any reason, he must resign any
and all officerships and directorships he then holds with the Company,
Broadpoint Capital and any of their affiliates. The Gleacher
Employment Agreement provides that, in the event that Mr. Gleacher becomes
subject to the excise tax under Section 4999 of the Code, he will be entitled to
an additional payment such that he will be placed in the same after-tax position
as if no such excise tax had been imposed.
In
connection with the Gleacher Employment Agreement, the Company and Mr. Gleacher
entered into a Non-Competition and Non-Solicitation Agreement (the “Gleacher
Non-Competition and Non-Solicitation Agreement”). The Gleacher
Non-Competition and Non-Solicitation Agreement contains provisions regarding
confidentiality, non-solicitation and other restrictive covenants.
Upon the
closing of the Transaction we will enter into a registration rights agreement
with Mr. Gleacher. The registration rights agreement will, subject to
limited exceptions, entitle Mr. Gleacher to have his shares included in any
registration statement filed by us in connection with a public offering solely
for cash, a right often referred to as a “piggyback registration
right”. Mr. Gleacher will also have the right to require us to
prepare and file a shelf registration statement to permit the sale to the public
from time to time of the shares of our common stock that Mr. Gleacher receives
on the closing of the Transaction. However, we will not be required
to file the shelf registration statement until the third anniversary of the
closing of the Transaction. The Company has agreed to pay all
expenses in connection with any registration effected pursuant to the
registration rights agreement. This agreement may be amended with the
written
20
consent
of the Company and of the holders representing a majority of our common stock
that is registrable pursuant to the agreement.
The
Trade Name and Trademark Agreement
Upon the
closing of the Transaction we will enter into a trade name and trademark
agreement with Mr. Gleacher and a number of entities that operate under the
“Gleacher” name but that are not being acquired by the Company. The
acquisition of Gleacher includes rights in the “Gleacher” name and
mark. Under the trade name and trademark agreement, Merger Sub (or
one of its affiliates) will own the rights to the “Gleacher” name and mark,
including “Gleacher Broadpoint”, in the investment banking
business. Merger Sub’s rights include the right to expand the use of
the “Gleacher” name and mark to the broader financial services field other than
the Gleacher fund management business not acquired in the Transaction, and to
register “Gleacher” marks for products and services in the Financial Services
Field.
21
RISKS
RELATED TO THE TRANSACTION
In
addition to the risk factors detailed in our Annual Report on Form 10-K for the
year ended December 31, 2008 filed with the SEC on March 26, 2009, a copy of
which is attached to this Information Statement as Annex C, and which is
incorporated by reference into this Information Statement, below please find
several risk factors which relate to the Transaction. You should consider the
following factors in conjunction with the other information included or
incorporated by reference in this Information Statement. You should
carefully consider all of the risks described in our Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the SEC on March 26, 2009, the
risks described below and the other information contained in this Information
Statement. If any of the risks described in our Annual Report on Form 10-K for
the year ended December 31, 2008 filed with the SEC on March 26, 2009 or
described in this Information Statement actually occur, our business, financial
condition and results of operations could be materially adversely
affected.
The
fact that the Transaction is pending could harm our business, revenue and
results of operations.
While the
Transaction is pending, it creates uncertainty about our future. As a result of
this uncertainty, customers may decide to defer or avoid doing business with us
pending completion of the Transaction or termination of the Merger Agreement. If
these decisions represent a significant portion of our anticipated revenue, our
results of operations and quarterly revenues could be substantially below the
expectations of our investors.
In
addition, while the Transaction is pending, we are subject to a number of risks
that may harm our business, revenue and results of operations,
including:
•
the
diversion of management and employee attention and the disruption to our
relationships with customers and vendors may detract from our ability to
grow revenues and minimize costs;
•
we
have and will continue to incur significant expenses related to the
Transaction prior to its closing;
and
•
we
may be unable to respond effectively to competitive pressures, industry
developments and future
opportunities.
The
proposed Transaction may not be completed or may be delayed if the conditions to
closing are not satisfied or waived in a timely manner or ever.
The
Transaction may not be completed or may be delayed because the conditions to
closing may not be satisfied or waived. Conditions which must be satisfied or
waived prior to the closing include regulatory approvals and other customary
closing conditions. If the Transaction is not completed, we will not recoup the
costs incurred in connection with negotiating the proposed Transaction, our
relationships with our customers and employees may be damaged and our business
may be seriously harmed.
If
the proposed Transaction is not completed our stock price could
decline.
22
If the
Transaction is not completed, the market price of our common stock may decline.
In addition, our stock price may decline as a result of the fact that we have
incurred and will continue to incur significant expenses related to the
Transaction prior to its closing that will not be recovered if the Transaction
is not completed.
We
expect to incur significant costs and expenses in connection with the
Transaction, which could result in our not realizing some or all of the
anticipated benefits of the Transaction.
We expect
to incur significant one-time, pre-tax closing costs in connection with the
Transaction. These costs include legal and accounting fees, printing expenses
and other related charges incurred and expected to be incurred. We expect to
incur one-time cash and non-cash costs related to the integration of Gleacher,
which cannot be estimated at this time. There can be no assurance
that the costs incurred by us in connection with the Transaction will not be
higher than expected or that the post-Transaction company will not incur
additional unanticipated costs and expenses in connection with the
Transaction.
Our
shareholders will suffer immediate dilution.
Because
we are issuing 23,000,000 shares of our common stock as consideration in the
Transaction, our shareholders will suffer immediate
dilution. Following the Stock Issuance, holders of our outstanding
common stock prior to the Stock Issuance will own approximately 78.0% of our
outstanding common stock after the Stock Issuance (assuming we do not issue
additional shares before the Stock Issuance).
23
SPECIAL
FACTORS
Reasons
for Engaging in the Transaction
The
Company’s mission is to be an industry leading full-service investment bank
providing value-added, unconflicted advice and execution to corporations and
institutional investors. In an effort to fulfill this mission the
Company has and continues to seek to expand upon its existing business through
the acquisition of complementary assets or companies in existing or new product
and service areas that meet the needs of its clients. As part of this
strategy the Company identified investment banking as a key area for growth and
specifically mergers and acquisitions advisory as a key service area within
investment banking that its target clients require. The Company
therefore sought to identify firms that could provide such advisory services for
the Company.
The
Company was interested in Gleacher for the following reasons:
•
the
acquisition of Gleacher was and is consistent with the Company’s mission
to be a full service investment
bank;
•
the
Gleacher brand is internationally recognized providing benefits to the
firm in winning new business and recruiting high quality
professionals;
•
Gleacher
has a long history of providing independent mergers and acquisitions
advice to major corporations;
•
Gleacher
fit the Company’s criteria in terms of historical financial performance
and size as measured by revenues, profits and productivity per
person;
•
Gleacher’s
client relationships and capabilities have the potential to be synergistic
with the Company’s client relationships and capabilities;
and
•
the
deal structure aligns the interests of both parties in terms of creating
value for our shareholders.
Interests
of Certain Persons in the Transaction
To our
knowledge, no shareholder of the Company is currently a stockholder of
Gleacher.
General
Changes Resulting From the Transaction
We intend
to carry on the business of Gleacher as part of our Investment Banking
Division. We intend to change our name from “Broadpoint Securities
Group, Inc.” to “Broadpoint Gleacher Securities Group, Inc.”
Because
MatlinPatterson controls more than 50% of the voting power of our common stock,
we are a “controlled company” within the meaning of the Nasdaq Marketplace
Rules. Under the
Nasdaq Marketplace Rules, a controlled company is a company of which more
than
24
50% of
the voting power is held by an individual, a group or another company. Under
such rules, a controlled company may elect not to comply with certain Nasdaq
corporate governance requirements, including requirements that (1) a
majority of the board of directors consist of independent directors,
(2) compensation of officers be determined or recommended to the board of
directors by a majority of its independent directors or by a compensation
committee that is composed entirely of independent directors and
(3) director nominees be selected or recommended by a majority of the
independent directors or by a nominating committee composed solely of
independent directors. Because the Company is a controlled company, we have
chosen to rely on this exemption to these Nasdaq corporate governance
requirements.
Following
the consummation of the Transaction, we expect that MatlinPatterson will own
less than 50% of the voting power of our common stock, and therefore we will no
longer be a “controlled company” within the meaning of the Nasdaq Marketplace
Rules. Therefore, in order to comply with applicable Nasdaq
Marketplace Rules, the Company expects to take the following
actions:
•
Immediately
following closing of the Transaction, one independent director will be
appointed to each of the Executive Compensation Committee and the
Directors and Corporate Governance
Committee;
•
Within
90 days following closing of the Transaction, each such committee will be
composed of a majority of independent
directors;
•
One
year after the closing of the Transaction, each such committee will be
composed entirely of independent directors;
and
•
One
year after closing, the majority of our Board of Directors will be
composed of independent directors.
Following
the consummation of the Transaction, the Company will also comply (subject to
the applicable phase-in period) with the Nasdaq Marketplace Rules requiring that
(1) compensation of officers be determined or recommended to the board of
directors by a majority of its independent directors or by a compensation
committee that is composed entirely of independent directors and
(2) director nominees be selected or recommended by a majority of the
independent directors or by a nominating committee composed solely of
independent directors.
Regulatory
Approvals
The
Merger Agreement provides that the parties must comply with their obligations
under the HSR Act, which provides that the Transaction cannot be consummated
until the parties submit premerger notification and report forms (and required
supplemental documentation) to the United States Department of Justice (“DOJ”)
and the Federal Trade Commission (“FTC”), and wait the required waiting period
before consummating the Transaction. On March 12, 2009, the parties
submitted their premerger notifications to the DOJ and FTC. On March20, 2009, the FTC notified the Company that the waiting period has been
terminated and that, pursuant to the HSR Act, the parties are free to consummate
the Transaction.
25
In
connection with the Company’s acquisition of Gleacher and its broker-dealer
subsidiary Gleacher Partners LLC, Gleacher is required to file a change of
control notice and continuing membership application pursuant to NASD Rule 1017
(a “Rule 1017 Notice”). Gleacher filed the Rule 1017 Notice with
FINRA on March 6, 2009. On April 3, 2009, FINRA requested additional
information in connection with its consideration of the Rule 1017 Notice, and
Gleacher is currently in the process of responding to the
request. Pursuant to NASD Rule 1017(c), the Company is permitted to
close the Transaction 30 calendar days after the filing of the Rule 1017 Notice
by Gleacher, although if the parties close the Transaction in the absence of
written approval from FINRA, FINRA may impose restrictions on the operations of
the Company.
No other
regulatory approvals are required in connection with the
Transaction.
Accounting
Treatment
The
Transaction will be accounted for by us under the purchase method of accounting.
Under the purchase method, the purchase price for Gleacher will be allocated to
identifiable assets (including intangible assets) and liabilities of Gleacher
with any excess being treated as goodwill. Since intangible assets are amortized
over their useful lives, we will incur accounting charges from the Transaction.
In addition, intangible assets and goodwill are both subject to periodic
impairment tests and could result in potential write-down charges in future
periods.
A final
determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. The pro-forma
financial information included herein contains an initial estimate of this
allocation and the final estimate will be made once the study to determine the
fair value of certain of Gleacher’s assets and liabilities is completed. For
financial reporting purposes, the results of operations of Gleacher will be
included in our consolidated statement of income following the time that the
Transaction is effective under applicable law. Our financial statements for
prior periods will not be restated as a result of the Transaction.
Past
Contacts, Transactions or Negotiations
The terms
of the Merger Agreement are the result of arm’s-length negotiations between
representatives of the Company, Gleacher and the Selling Parties. The
following is a summary of the background of these negotiations and the
Transaction.
On
October 14, 2008, Lee Fensterstock, our Chairman and Chief Executive Officer,
and Eric Gleacher, Gleacher’s Chairman, held a meeting at the offices of
Gleacher. During this meeting, Mr. Fensterstock discussed the
Company’s strategy of building a premier investment bank over the next few
years.
During
the course of the following two months, Messrs. Fensterstock and Gleacher
discussed possible transactions between Gleacher and the Company on several
occasions. During these discussions, Mr. Gleacher expressed an
interest in exploring a potential business combination between Gleacher and the
Company.
26
On
December 16, 2008, Mr. Fensterstock held a dinner with Mr. Gleacher, Jeffrey
Tepper, a Managing Director and Chief Operating Officer of Gleacher, and Kenneth
Ryan, a Managing Director of Gleacher. During the dinner, the parties
discussed the Company, its current businesses and the opportunities presented by
a potential combination of the Company and Gleacher.
During
January 2009, Messrs. Fensterstock, Gleacher and Tepper held
several meetings at which they discussed potential terms for a
business combination, including potential deal consideration values and whether
such consideration would include a cash as well as a stock
component. Mr. Fensterstock also discussed the potential business
combination with various members of the Company’s Board of Directors during this
period.
On
January 23, 2009, Mr. Fensterstock communicated to Mr. Gleacher that
representatives from MatlinPatterson, the Company’s controlling shareholder, had
agreed that the proposed transaction was in the best interests of the
Company. Mr. Fensterstock and representatives from the Company
proceeded to negotiate a term sheet outlining the proposed transaction and to
begin due diligence with respect to Gleacher. Following such
communication, the Company retained Sidley Austin LLP to represent the Company
in a potential transaction. On January 30, 2009, the Company and
Gleacher executed a non-disclosure agreement. Following the execution
of the non-disclosure agreement, the Company began to conduct business due
diligence on Gleacher. During February and March 2009, the parties
and their counsel worked to prepare a merger agreement and several ancillary
agreements.
Throughout
January, February and March 2009, management of the Company conducted conference
calls with members of the Board of Directors of the Company to update them on
the status of the proposed Transaction and to apprise them of the work
remaining.
On March2, 2009, the Company’s Board of Directors met to discuss the terms and
conditions of the Transaction and to review the Merger Agreement and the other
transaction documents. At that meeting, Sidley Austin LLP reviewed
and discussed with the Board of Directors the proposed terms of the Merger
Agreement and related agreements. The members of the Board of
Directors asked questions of the Company’s management and Sidley Austin
LLP. After careful consideration and discussion, the Company’s board
of directors, on behalf of the Company, unanimously (i) declared the Merger
Agreement and the other agreements contemplated thereby advisable for business
reasons and in the best interests of the Company, (ii) approved the Merger
Agreement and the other agreements contemplated thereby, (iii) authorized the
officers of the Company to execute, deliver and perform the Merger Agreement and
the other agreements contemplated thereby, and (iv) approved the
Amendment. On the same day, the Company, as the sole member of Merger
Sub, executed a written consent in lieu of a meeting approving the Transaction
and the Merger Agreement, and MatlinPatterson executed the MP Consent, approving
the Amendment and the Stock Issuance.
Following
the adjournment of the Company board meeting, final details on the Merger
Agreement and related documents were resolved by the parties and their counsel
and the Merger Agreement was executed by the Company, Gleacher and the Selling
Parties. The Transaction was announced before markets opened on March3, 2009.
27
BROADPOINT
SECURITIES GROUP, INC.
Description
of Business
The
Company is an independent investment bank that provides value-added,
unconflicted advice to corporations and institutional investors. The
Company provides services and generates revenues through its Investment Banking,
Debt Capital Markets, Broadpoint DESCAP, Equities and Other
segments. The Investment Banking segment provides capital raising and
advisory services to corporations and institutional investors. The
Debt Capital Markets segment provides sales, trading and research in a broad
range of debt securities and generates revenues primarily through commissions on
the sales of these securities. The Broadpoint DESCAP segment provides
sales, trading and research in mortgage and asset-backed securities and
generates revenues primarily through principal transactions and other trading
activities associated with these securities. The Equities segment
provides sales, trading and research in equity securities primarily through one
of the Company’s broker-dealer subsidiaries, Broadpoint Amtech, generating
revenues mainly through commissions on executing these securities
transactions. The Other segment generates revenue from unrealized
gains and losses as a result of changes in the value of the firm’s investments
and realized gains and losses as a result of sales of equity holdings, and
through the management of and investment in venture capital
funds. This segment also includes the costs related to corporate
overhead and support, including various fees associated with legal and
settlement expenses. The Company has approximately 256 employees, is
a New York corporation, incorporated in 1985, and is traded on the NASDAQ Global
Market under the symbol “BPSG”.
28
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
At the
present time our shares are traded on the NASDAQ Stock Market. Our shares
commenced trading on the NASDAQ Stock Market under the symbol “FACT”, and the
symbol was changed to "BPSG", effective November 12, 2007, in connection with
the Company being renamed Broadpoint Securities Group, Inc.
The
following table sets forth, for the periods indicated, the range of high and low
sale prices for our common stock through [l], 2009 for the periods
noted, as reported by the NASDAQ Stock Market. Quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
Fiscal
Quarter Ended
High
Low
2007
1st
Quarter
$2.46
$1.42
2nd
Quarter
$1.96
$1.51
3rd
Quarter
$1.81
$1.22
4th
Quarter
$1.74
$0.99
2008
1st
Quarter
$1.90
$1.00
2nd
Quarter
$2.69
$1.75
3rd
Quarter
$3.54
$1.90
4th
Quarter
$3.26
$1.53
2009
1st
Quarter
$3.37
$1.98
2nd
Quarter (through [l],
2009)
We have
not paid any cash dividends on our common stock in the last two fiscal years and
do not anticipate paying any such cash dividends in the foreseeable future.
Earnings, if any, will be retained to finance future growth. We may issue shares
of our common stock and preferred stock in private or public offerings to obtain
financing, capital or to acquire other businesses that can improve our
performance and growth. Issuance or sales of substantial amounts of common stock
could adversely affect prevailing market prices in our common
stock.
As of
April 3, 2009, there were approximately 2,509 beneficial owners of our common
stock, with 81,556,246 shares issued and outstanding and 25,057,828 shares
reserved for issuance pursuant to warrants and employee
arrangements.
29
OUR
PRINCIPAL SHAREHOLDERS
Stock
Ownership of Principal Owners and Management Before Consummation of the
Transaction
The
following table sets forth information concerning the beneficial ownership of
common stock of the Company as of March 5, 2009, by (i) each person
whom we know beneficially owns more than five percent of the common stock,
(ii) each of our directors, (iii) each of our named executive
officers, and (iv) all of our directors and current executive officers as a
group.
Deferred
Stock
Shares Beneficially
Owned(1)
Units(4)
Name
Number
Percent
Number
Mast
Credit Opportunities I Master Fund Limited(8)
8,078,924
9.97
%
0
MatlinPatterson
FA Acquisition LLC(6,7)
43,093,261
53.85
%
0
Lee
Fensterstock
294,118
*
1,831,611
Dale
Kutnick(2)
59,488
*
0
Victor
Mandel
0
*
0
George
C. McNamee(2,3,5)
1,679,769
2.10
%
16,193
Mark
R. Patterson(6,7)
43,093,261
53.85
%
0
Christopher
R. Pechock
0
*
0
Frank
Plimpton
0
*
0
Robert
S. Yingling
15,924
*
0
Peter
J. McNierney(2)
447,302
*
901,652
Patricia
A. Arciero-Craig(2)
25,576
*
220,661
Robert
I. Turner
0
*
491,322
Brian
Coad
72,703
*
120,000
All
directors and current executive officers as a group
(11 persons)(2)
45,615,438
56.90
%
3,461,439
*
References
ownership of less than 1.0%.
(1)
Except
as noted in the footnotes to this table, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock.
(2)
Includes
shares of Common Stock that may be acquired within 60 days of
March 5, 2009 through the exercise of stock options as follows:
Mr. McNamee: 73,874; Mr. McNierney: 52,500;
Ms. Arciero-Craig: 7,359; Mr. Dale Kutnick: 6,000; and all
directors and current executive officers as a group:
139,733.
(3)
Includes
21,363 shares owned by Mr. McNamee’s spouse through her retained
annuity trust. Also includes 39,330 shares owned by Mr. McNamee
as custodian for his minor children.
(4)
The
amounts shown represent restricted stock units held under the Company’s
2007 Incentive Compensation Plan that may possibly be exchanged for shares
of Common Stock within 60 days of March 5, 2009 by reason of any
potential termination, death or disability of the listed directors or
officers as follows: Mr. Fensterstock: 608,333 upon termination or
1,831,611 upon death or disability; Mr. McNierney: 281,667 upon
termination or 901,652 upon death or disability; Mr. Coad: 120,000
upon death or disability; Ms. Arciero-Craig: 80,000 upon termination
or 220,661 upon death or disability; Mr. Turner: 90,000 upon
termination or 491,322 upon death or disability; and, all directors and
current executive officers as a group: 1,060,000 upon termination or
30
3,445,246
upon death or disability. The amounts also include the number of phantom
stock units held under the Company’s nonqualified deferred compensation
plans that may possibly be exchanged for shares of Common Stock within
60 days of March 5, 2009 by reason of any potential termination
of the listed directors or officers as follows: Mr. McNamee: 16,193;
and all directors and current executive officers as a group: 16,193. These
amounts do not take into consideration the potential application of
Section 409A of the Internal Revenue Code, which in some cases could
result in a delay of the distribution beyond 60 days.
(5)
Includes
1,156,000 shares pledged by Mr. McNamee in connection with a
loan from KeyBank. No other current director, nominee director or
executive officer has pledged any of the shares of common stock disclosed
in the table above.
(6)
The
indicated interest was reported on a Schedule 13D/A filed on February19, 2009, with the SEC by MatlinPatterson FA Acquisition LLC on behalf of
itself, MatlinPatterson LLC, MatlinPatterson Asset Management LLC,
MatlinPatterson Global Advisers LLC, MatlinPatterson Global
Partners II LLC, MatlinPatterson Global Opportunities Partners II,
L.P., MatlinPatterson Global Opportunities Partners (Cayman) L.P., David
J. Matlin, and Mark R. Patterson. Beneficial ownership of the shares held
by MatlinPatterson FA Acquisition LLC — 43,093,261 (shared voting and
shared dispositive power) was also reported for: MatlinPatterson Global
Opportunities Partners II L.P. — 43,093,261 (shared voting and
shared dispositive power), MatlinPatterson Global Opportunities Partners
(Cayman) II L.P. — 43,093,261 (shared voting and shared dispositive
power), MatlinPatterson Global Partners II LLC — 43,093,261
(shared voting and shared dispositive power), MatlinPatterson Global
Advisers LLC — 43,093,261 (shared voting and shared dispositive
power), MatlinPatterson Asset Management LLC — 43,093,261 (shared
voting and shared dispositive power), MatlinPatterson LLC —
43,093,261 (shared voting and shared dispositive power), David J.
Matlin — 43,093,261 (shared voting and shared dispositive power), and
Mark R. Patterson — 43,093,261 (shared voting and shared dispositive
power). The address of MatlinPatterson FA Acquisition LLC is
c/o MatlinPatterson Global Advisers LLC, 520 Madison Avenue, NewYork, NY10022.
(7)
For
a description of the transaction which resulted in MatlinPatterson FA
Acquisition LLC acquiring control of the Company, see “Certain
Relationships and Related Transactions.”
(8)
The
indicated interest was reported on a Schedule 13G/A filed on February17, 2009, with the SEC by Mast Credit Opportunities I Master
Fund Limited on behalf of itself, Mast Capital Management, LLC,
Christopher B. Madison, and Daniel J. Steinberg. Beneficial ownership of
the shares held by Mast Credit Opportunities I Master
Fund Limited — 8,078,924 (sole voting and sole dispositive
power) was also reported for: Mast Capital Management LLC — 8,078,924
(sole voting and sole dispositive power), Christopher B. Madison —
8,078,924 (shared voting and shared dispositive power), and
Daniel J. Steinberg — 8,078,924 (shared voting and shared
dispositive power). Includes 1,000,000 shares of Common Stock
that may be acquired within 60 days pursuant to a warrant to purchase the
shares at a price of $3 per share. The address of Mast Credit
Opportunities I Master Fund Limited is c/o Goldman Sachs
(Cayman) Trust, Limited, P.O. Box 896 GT, Harbour Centre, 2nd
Floor, North Church Street, George Town, Cayman
Islands.
Stock
Ownership of Principal Owners and Management Following the Consummation of the
Transaction
The
following table sets forth information concerning the beneficial ownership of
common stock of the Company as of March 5, 2009 assuming the Transaction
had been consummated on such date, by (i) each person whom we know
beneficially owns more than five percent of the common stock, (ii) each of
our directors, (iii) each of our named executive officers, and
(iv) all of our directors and current executive officers as a
group.
31
Deferred
Stock
Shares Beneficially
Owned(1)
Units(4)
Name
Number
Percent
Number
Mast
Credit Opportunities I Master Fund Limited(8)
8,078,924
7.77
%
0
MatlinPatterson
FA Acquisition LLC(6,7)
43,093,261
41.83
%
0
Lee
Fensterstock
294,118
*
1,831,611
Eric
Gleacher(9)
14,542,035
14.12%
0
Dale
Kutnick(2)
59,488
*
0
Victor
Mandel
0
*
0
George
C. McNamee(2,3,5)
1,679,796
1.63
%
16,193
Mark
R. Patterson(6,7)
43,093,261
41.83
%
0
Christopher
R. Pechock
0
*
0
Frank
Plimpton
0
*
0
Robert
S. Yingling
15,924
*
0
Peter
J. McNierney(2)
447,302
*
901,652
Patricia
A. Arciero-Craig(2)
25,576
*
220,661
Robert
I. Turner
0
*
491,322
Brian
Coad
72,703
*
120,000
All
directors and current executive officers as a group
(12 persons)(2)
60,157,473
58.31
%
3,461,439
*
References
ownership of less than 1.0%.
(1)
Except
as noted in the footnotes to this table, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock.
(2)
Includes
shares of Common Stock that may be acquired within 60 days of
March 5, 2009 through the exercise of stock options as follows:
Mr. McNamee: 73,874; Mr. McNierney: 52,500;
Ms. Arciero-Craig: 7,359; Mr. Dale Kutnick: 6,000; and all
directors and current executive officers as a group:
139,733.
(3)
Includes
21,363 shares owned by Mr. McNamee’s spouse and through her
retained annuity trust. Also includes 39,330 shares owned by
Mr. McNamee as custodian for his minor children.
(4)
The
amounts shown represent restricted stock units held under the Company’s
2007 Incentive Compensation Plan that may possibly be exchanged for shares
of Common Stock within 60 days of March 5, 2009 by reason of any
potential termination, death or disability of the listed directors or
officers as follows: Mr. Fensterstock: 608,333 upon termination or
1,831,611 upon death or disability; Mr. McNierney: 281,667 upon
termination or 901,652 upon death or disability; Mr. Coad: 120,000
upon death or disability; Ms. Arciero-Craig: 80,000 upon termination
or 220,661 upon death or disability; Mr. Turner: 90,000 upon
termination or 491,322 upon death or disability; and, all directors and
current executive officers as a group: 1,060,000 upon termination or
3,445,246 upon death or disability. The amounts also include the number of
phantom stock units held under the Company’s nonqualified deferred
compensation plans that may possibly be exchanged for shares of Common
Stock within 60 days of March 5, 2009 by reason of any potential
termination of the listed directors or officers as follows:
Mr. McNamee: 16,193; and all directors and current executive officers
as a group: 16,193. These amounts do not take into consideration the
potential application of Section 409A of the Internal Revenue Code,
which in some cases could result in a delay of the distribution beyond
60 days.
(5)
Includes
1,156,000 shares pledged by Mr. McNamee in connection with a
loan from KeyBank. No other current director, nominee director or
executive officer has pledged any of the shares of common stock disclosed
in the table above.
(6)
The
indicated interest was reported on a Schedule 13D/A filed on February19, 2009, with the SEC by MatlinPatterson FA Acquisition LLC on behalf of
itself, MatlinPatterson LLC, MatlinPatterson Asset Management LLC,
MatlinPatterson Global Advisers LLC, MatlinPatterson Global
Partners II LLC, MatlinPatterson Global Opportunities Partners II,
L.P., MatlinPatterson Global Opportunities
Partners
32
(Cayman)
L.P., David J. Matlin, and Mark R. Patterson. Beneficial ownership of the
shares held by MatlinPatterson FA Acquisition LLC — 43,093,261
(shared voting and shared dispositive power) was also reported for:
MatlinPatterson Global Opportunities Partners II L.P. —
43,093,261 (shared voting and shared dispositive power), MatlinPatterson
Global Opportunities Partners (Cayman) II L.P. — 43,093,261 (shared
voting and shared dispositive power), MatlinPatterson Global
Partners II LLC — 43,093,261 (shared voting and shared
dispositive power), MatlinPatterson Global Advisers LLC — 43,093,261
(shared voting and shared dispositive power), MatlinPatterson Asset
Management LLC — 43,093,261 (shared voting and shared dispositive
power), MatlinPatterson LLC — 43,093,261 (shared voting and shared
dispositive power), David J. Matlin — 43,093,261 (shared voting and
shared dispositive power), and Mark R. Patterson — 43,093,261 (shared
voting and shared dispositive power). The address of MatlinPatterson FA
Acquisition LLC is c/o MatlinPatterson Global Advisers LLC, 520
Madison Avenue, New York, NY10022.
(7)
For
a description of the transaction which resulted in MatlinPatterson FA
Acquisition LLC acquiring control of the Company, see “Certain
Relationships and Related Transactions.”
(8)
The
indicated interest was reported on a Schedule 13G/A filed on February17, 2009, with the SEC by Mast Credit Opportunities I Master
Fund Limited on behalf of itself, Mast Capital Management, LLC,
Christopher B. Madison, and Daniel J. Steinberg. Beneficial ownership of
the shares held by Mast Credit Opportunities I Master
Fund Limited — 8,078,924 (sole voting and sole dispositive
power) was also reported for: Mast Capital Management LLC — 8,078,924
(sole voting and sole dispositive power), Christopher B. Madison —
8,078,924 (shared voting and shared dispositive power), and
Daniel J. Steinberg — 8,078,924 (shared voting and shared
dispositive power). Includes 1,000,000 shares of Common Stock
that may be acquired within 60 days pursuant to a warrant to purchase the
shares at a price of $3 per share. The address of Mast Credit
Opportunities I Master Fund Limited is c/o Goldman Sachs
(Cayman) Trust, Limited, P.O. Box 896 GT, Harbour Centre, 2nd
Floor, North Church Street, George Town, Cayman Islands.
(9)
Includes
1,104,845 shares in escrow pursuant to the terms of the Merger
Agreement.
33
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On
April 26, 2007, the Board of Directors adopted a new Related Party
Transactions Policy (the “Policy”). Under the Policy only those related party
transactions that have terms comparable to those that could be obtained in arm’s
length dealings with an unrelated third party and that are approved or ratified
by the Audit Committee of the Board of Directors of the Company (the “Audit
Committee”), the disinterested members of the Board of Directors, and, if and to
the extent involving compensation, the Executive Compensation Committee, may be
consummated or permitted to continue. “Related Parties” include any senior
officer (including all executive officers of the Company and its subsidiaries)
or director of the Company, any shareholder owning more than 5% of the Company
(or its controlled affiliates), any person who is an immediate family member of
a senior officer or director, and any entity owned or controlled by such persons
or in which such persons have a substantial ownership interest. “Related Party
Transactions” include any transaction between the Company and any Related Party
(including any transactions requiring disclosure under Item 404 of
Regulation S-K under the Exchange Act) except transactions available to all
employees generally or those involving less than $5,000 when aggregated with all
similar transactions. Pursuant to the Policy, any proposed Related Party
Transactions may be submitted for consideration at the Audit Committee’s regular
quarterly meetings. Following the Audit Committee’s review, the Committee will
either approve or disapprove such transactions. In the event that management
recommends any transactions in between regularly scheduled meetings, management
will confer with the Chair of the Audit Committee as to whether the Company may
preliminarily enter into such arrangement subject to ratification by the full
Audit Committee at the next regularly scheduled meeting. Each of the
transactions referenced below that require approval or ratification by the Audit
Committee pursuant to the Policy have been so approved or ratified.
First
Clearing — Margin Loans
During
2008, First Clearing, LLC, a clearing firm with which Broadpoint Capital has
contracted for broker dealer trading activities, extended credit in the ordinary
course of its business to employees, including directors and executive officers,
under Regulation T, which regulates credit in cash and margin accounts. If
an account holder failed to meet a margin call and the securities in the account
holder’s account prove insufficient to satisfy the margin call, the Company
could have been obligated to satisfy the call on behalf of the account holder.
No such extensions of credit required such actions and all were made on the same
terms as for customers. As of July 2008, Broadpoint Capital was no
longer subject to this arrangement.
commitment
period, which expired in July 2006; however, the general partner may continue to
make capital calls up through July 2011 for additional investments in portfolio
companies and the payment of management fees. The Fund is managed by FA
Technology Ventures Corporation (“FATV”), a wholly-owned subsidiary of the
Company, which receives management fees for its services. George C. McNamee is
an employee of this subsidiary and received $305,000 and $240,000 in
compensation from it in 2007 and 2008, respectively. In addition,
Mr. McNamee is a member of FATV GP LLC, the general partner of the Fund,
with a current 16.50% membership interest. As a result of this interest in the
general partner, he would be entitled to receive 17.02% of the 20% carried
interest that may become payable by the Fund to its general partner if the
Fund’s investments are successful. Mr. McNamee is required under the
partnership agreement for the Fund to devote a majority of his business time to
the conduct of the Fund and any parallel funds.
On
April 30, 2008, the Company entered into a Transition Agreement (the
“Transition Agreement”) with FATV, FA Technology Holding, LLC (“NewCo”),
Mr. McNamee, and certain other employees of FATV (such individuals,
collectively, the “FATV Principals”), to effect a restructuring of the
investment management arrangements relating to the Fund, and the formation of FA
Technology Ventures III, L.P., a new venture capital fund (“Fund III”). The
Transition Agreement provides that if the initial closing of Fund III does not
occur on or before March 31, 2009, the parties’ rights and obligations under the
Transition Agreement shall automatically terminate, except as follows: (a)
certain nonsolicitation obligations of the FATV Principals shall continue and
(b) upon the initial closing of any subsequent venture capital fund sponsored by
NewCo or any 4 of the 6 FATV Principals before June 30, 2009, NewCo or such FATV
Principals shall cause NewCo or such subsequent fund to reimburse the Company
for any expenses related to the organization and marketing of Fund III funded by
the Company. The initial closing of Fund III did not occur on or
before March 31, 2009, and the Transition Agreement has terminated in accordance
with its terms.
Johnson
Consulting Agreement
As of
February 1, 2005, the Company entered into a Consulting Agreement (the
“Consulting Agreement”) with Hugh A. Johnson, Jr., a former director of the
Company and Chairman of Johnson Illington (“JIA”). JIA purchased the Albany, New
York operations of FA Asset Management Inc. in February 2005. As part of the
consideration for the purchase, JIA is obligated to pay the Company a percentage
of its revenues earned through 2009. No such payments were made in 2006, 2007 or
2008. In addition, the Company made payments of $36,706 in 2006 to JIA for
certain management fees for investments. No such payments were made in 2007 or
2008. Under the terms of the Consulting Agreement, Mr. Johnson ended his
employment with the Company and began serving as a consultant to the Company for
a three-year period beginning February 2005. The Consulting Agreement further
provided that Mr. Johnson received an annual consulting fee of $250,000 and
provided Mr. Johnson with an office, and reimbursement for reasonable
travel expenses in connection with the consulting services.
Murphy
Settlement Agreement
35
In
connection with the termination of Arthur Murphy’s employment by Broadpoint
Capital as Executive Managing Director, Mr. Murphy, also a former member of
the Board of Directors of the Company, filed an arbitration claim with the
National Association of Securities Dealers on June 24, 2005 against
Broadpoint Capital, Alan Goldberg, former President and Chief Executive Officer,
and George McNamee, former Chairman of the Company. The claim alleged damages in
the amount of $8 million based on his assertions that he was fraudulently
induced to remain in the employ of Broadpoint Capital. Without admitting or
denying any wrongdoing or liability, on December 28, 2006, Broadpoint
Capital, entered into a settlement agreement with Arthur Murphy in connection
with such arbitration claim.
MatlinPatterson
Private Placement
On
September 21, 2007the Company issued and sold 38,354,293 newly-issued
unregistered shares of common stock of the Company for an aggregate cash
purchase price of $50 million (the “Private Placement”) to MatlinPatterson
and certain co-investors pursuant to the Investment Agreement, dated as of
May 14, 2007 (the “Investment Agreement”), between the Company and
MatlinPatterson.
Robert M. Tirschwell.
On September 21, 2007, pursuant to the Investment Agreement,
the Company entered into a Co-Investor Joinder Agreement (the “Tirschwell
Joinder Agreement”) with Mr. Tirschwell and MatlinPatterson wherein the
Company agreed to issue and sell to Mr. Tirschwell the number of shares of
common stock, to be purchased by MatlinPatterson, corresponding to an aggregate
purchase price of $450,000, on the terms set forth in the Investment Agreement.
Pursuant to the Tirschwell Joinder Agreement, Mr. Tirschwell agreed to
become a party to the Investment Agreement as a “Purchaser” thereunder, and
agreed to perform, and be bound by, all the obligations of a Purchaser under the
Investment Agreement. Mr. Tirschwell is the Head of Trading of Broadpoint
DESCAP, a division of Broadpoint Capital.
Robert M. Fine.
On September 21, 2007, pursuant to the Investment Agreement,
the Company entered into a Co-Investor Joinder Agreement (the “Fine Joinder
Agreement”) with Mr. Fine and MatlinPatterson wherein the Company agreed to
issue and sell to Mr. Fine the number of shares of common stock, to be
purchased by MatlinPatterson, corresponding to an aggregate purchase price of
$130,000, on the terms set forth in the Investment Agreement.
36
Pursuant
to the Fine Joinder Agreement, Mr. Fine agreed to become a party to the
Investment Agreement as a “Purchaser” thereunder, and agreed to perform, and be
bound by, all the obligations of a Purchaser under the Investment Agreement.
Mr. Fine is the President of Broadpoint DESCAP.
As a
result of these arrangements, on September 21, 2007 MatlinPatterson
contributed from its working capital $49,420,000 of the $50 million cash
purchase price and received 37,909,383 newly-issued shares of the Company’s
common stock. Mr. Fine contributed from his personal funds $130,000 of the
$50 million cash purchase price and received 99,721 newly-issued shares of
the Company’s common stock. Mr. Tirschwell contributed from his personal
funds $450,000 of the $50,000,000 cash purchase price and received 345,189
newly-issued shares of the Company’s common stock.
The
number of shares issued to MatlinPatterson, Mr. Tirschwell and
Mr. Fine was subject to upward adjustment within 60 days of the
closing of the Investment Agreement in the event that the final net tangible
book value per share of the Company as of September 21, 2007 was less than
$1.60. On February 21, 2008, the Company entered into an agreement with
MatlinPatterson, Mr. Tirschwell and Mr. Fine agreeing that the final
net tangible book value per share of the Company as of September 21, 2007
was $1.25. Pursuant to the terms of such agreement, the Company agreed to issue
3,632,009 additional shares of common stock of the Company to MatlinPatterson,
Mr. Tirschwell and Mr. Fine in satisfaction of this requirement.
MatlinPatterson currently holds approximately 54% of the Company’s outstanding
common stock.
Upon the
closing of the Private Placement, the Company entered into a Registration Rights
Agreement, dated as of September 21, 2007 (the “Registration Rights
Agreement”), with MatlinPatterson, Mr. Tirschwell and Mr. Fine, which
was amended by Amendment No. 1 to the Registration Rights Agreement, dated
as of March 4, 2008. The Registration Rights Agreement contains other
customary terms found in such agreements, including provisions concerning
registration rights, registration procedures and piggyback registration rights
as well as customary indemnification rights for MatlinPatterson,
Mr. Tirschwell and Mr. Fine. Pursuant to the Registration Rights
Agreement, the Company would bear all of the costs of any registration other
than underwriting discounts and commissions and certain other
expenses.
Pursuant
to the Investment Agreement and with respect to last year’s annual meeting of
shareholders, MatlinPatterson had the right to designate directors to be
appointed to the Company’s Board of Directors. Each of Messrs. Patterson,
Fensterstock, Pechock and Plimpton were designated to the Board pursuant to such
right of MatlinPatterson.
Voting
Agreement with MatlinPatterson
On
February 29, 2008, the Company and MatlinPatterson entered into a Voting
Agreement (the “Voting Agreement”) whereby MatlinPatterson agreed to vote its
shares in the Company in favor of an increase in the number of authorized shares
under the 2007 Plan to be submitted to shareholders at the 2008 Annual Meeting
of Shareholders. Such increase in the number of authorized shares was approved
at such meeting.
37
Brokerage
and Investment Banking Services for MatlinPatterson
From time
to time, Broadpoint Capital provides brokerage services to MatlinPatterson or
its affiliated entities, which services are provided by Broadpoint Capital in
the ordinary course of its business. No such services were provided in 2007. In
2008 and for 2009 through February 28, 2009, MatlinPatterson paid $255,441 and
$153,493, respectively, to Broadpoint Capital for such services.
From time
to time Broadpoint Capital also provides investment banking services to
MatlinPatterson or its affiliated entities, which services are provided by
Broadpoint Capital in the ordinary course of its business. No such services were
provided in 2007. In 2008 and 2009 through February 28, 2009, Broadpoint Capital
has earned $8.4 million and $579,991, respectively, from MatlinPatterson Global
Advisers LLC for such services.
Fensterstock
Consulting Arrangement
From July
2007 through September 21, 2007, Mr. Fensterstock served as a
consultant to the Company prior to becoming its Chief Executive Officer. The
Company paid $83,000 to Mr. Fensterstock pursuant to such
arrangement.
Mast
Private Placement
On
March 4, 2008, the Company entered into a stock purchase agreement (the
“Stock Purchase Agreement”) with MatlinPatterson, Mast Credit Opportunities I
Master Fund Limited, a Cayman Islands corporation (“Mast”) and certain
Individual Investors listed on the signature pages to the Stock Purchase
Agreement (the “Individual Investors”, and together with the MatlinPatterson and
Mast, the “Investors”). Pursuant to the terms of the Stock Purchase Agreement,
the Company issued and sold 11,579,592 shares of common stock to the
Investors, with 7,058,824 shares being issued to Mast,
1,594,000 shares being issued to the MatlinPatterson and
2,926,768 shares issued to the Individual Investors. The shares were sold
for an aggregate purchase price of approximately $19.7 million, with the
proceeds from the sale to be used for working capital. In addition, all of the
Individual Investors are employees of the Company and/or its wholly-owned
subsidiary Broadpoint Capital, including Lee Fensterstock, the current Chairman
and Chief Executive Officer of the Company, and other senior officers of
Broadpoint Capital.
Concurrently
with the execution of the Stock Purchase Agreement, the Company entered into a
Registration Rights Agreement, dated as of March 4, 2008 (the “Mast
Registration Rights Agreement”), with Mast with respect to the shares that Mast
purchased pursuant to the Stock Purchase Agreement (the “Mast Shares”). Pursuant
to the Mast Registration Rights Agreement, the Company was required to file
within 30 days following March 4, 2008, and did file on April 1,2008, a registration statement with the SEC for the resale of the Mast Shares in
an offering on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act (the “Mast Shelf Registration”). The registration statement was
declared effective on April 29, 2008. The Company paid for all of the costs of
the Mast Shelf Registration, a total of approximately $45,000, other than
underwriting discounts and commissions and certain other expenses, and grants
customary indemnification rights thereunder to Mast.
38
Mast Mandatory Redeemable Preferred
Stock
On June27, 2008the Company entered into the Preferred Stock Purchase Agreement with
Mast for the issuance and sale of (i) 1,000,000 newly-issued unregistered shares
of Series B Mandatory Redeemable Preferred Stock of the Company, par value $1.00
per share (the “Series B Preferred Stock”) and (ii) a warrant to purchase
1,000,000 shares of the Company’s common stock, at an exercise price of $3.00
per share (the “Warrant”), for an aggregate cash purchase price of
$25 million.
The
Preferred Stock Purchase Agreement and the Series B Preferred Stock include,
among other things, certain negative covenants and other rights with respect to
the operations, actions and financial condition of the Company and its
subsidiaries so long the Series B Preferred Stock remains
outstanding. Cash dividends of 10% per annum must be paid on the
Series B Preferred Stock quarterly, while an additional dividend of 4% per annum
accrues and is cumulative, if not otherwise paid quarterly at the option of the
Company. The Series B Preferred Stock must be redeemed on or before
June 27, 2012.
The
Warrant is subject to customary anti-dilution provisions and expires June 27,2012. Concurrently with the execution of the Preferred Stock Purchase
Agreement, the Company and Mast entered into a Registration Rights Agreement,
dated as of June 27, 2008 (the “Warrant Registration Rights Agreement”), with
respect to the shares of Common Stock that are issuable to Mast pursuant to the
Warrant (the “Warrant Shares”). Pursuant to the Warrant Registration
Rights Agreement, Mast has the right to request registration of the Warrant
Shares if at any time the Company proposes to register common stock for its own
account or for another, subject to certain exceptions for underwriting
requirements. In addition, under certain circumstances Mast may
demand a registration of no less than 300,000 Warrant Shares. The
Company must register such Warrant Shares as soon as practicable and in any
event within forty-five (45) days after the demand. The Company will
bear all of the costs of all such registrations other than underwriting
discounts and commissions and certain other expenses.
Concurrently
with the execution of the Preferred Stock Purchase Agreement, the Company and
Mast entered into a Preemptive Rights Agreement (the “Preemptive Rights
Agreement”). The Preemptive Rights Agreement provides that in the
event that the Company
39
proposes
to offer or sell any equity securities of the Company below the current market
price, the Company shall first offer such securities to Mast to purchase;
provided, however, that in the case of equity securities being offered to
MatlinPatterson, Mast shall only have the right to purchase its pro rata share
of such securities (based upon common stock ownership on a fully diluted
basis). If Mast exercises such right to purchase the offered
securities, Mast must purchase all (but not a portion) of such securities for
the price, terms and conditions so proposed. The preemptive rights do
not extend to (i) common stock issued to employees or directors pursuant to a
plan or agreement approved by the Board of Directors, (ii) issuance of
securities pursuant to a conversion of convertible securities, (iii) stock
splits or stock dividends or (iv) issuance of securities in connection with a
bona fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or
otherwise.
Gleacher,
acting through its subsidiary Gleacher Partners LLC, is a leading corporate
advisory firm which provides strategic financial advice to major corporations
across the world, principally related to mergers, acquisitions and
restructurings. Gleacher Partners was founded in New York in 1990 by
Eric J. Gleacher, who previously headed the Mergers and Acquisitions department
of Lehman Brothers and Global Mergers and Acquisitions at Morgan
Stanley. Gleacher has offices in New York, Atlanta and
Chicago.
Gleacher’s
success is grounded in several fundamental principles that differentiate it from
its competition. The firm’s managing directors are committed to
providing comprehensive strategic advice to clients who value their creativity,
effectiveness and integrity. These senior bankers bring a unique perspective to
their assignments, having run or founded large and successful businesses
themselves, served on numerous Boards of Directors and run departments at
several other Wall Street firms. Gleacher provides the following
services to its global client base:
•
Mergers &
Acquisitions: Financial advice to global clients on acquisitions
and sales of companies, divisions, business units and
assets;
•
Restructurings:
Full-service restructuring advisory services, including renegotiating bank
agreements, obtaining covenant waivers / amendments, advising on
out-of-court and Chapter 11 restructurings, rights offerings, exchange
offers and distressed M&A;
•
Strategic Reviews:
Formal strategic reviews conducted on behalf of Boards of public and
private companies that assess the feasibility of options to meet strategic
objectives and inform as to the impact of the strategy on a client’s
financial and risk profile; and
•
Takeover Defense:
Financial advice to companies regarding hostile offer defense and proxy
solicitation defense.
Gleacher
draws on the established corporate relationships of its managing directors and
senior advisers, as well as its reputation for quality of advice and execution,
to build long-term client relationships with major Fortune 500 corporations and
growth companies. Gleacher’s business model offers clients a highly
confidential engagement with senior banker attention to all aspects of an
assignment. This allows the firm the flexibility to originate and
execute the largest strategic transactions for our clients, as well as those
smaller transactions where high-quality creative advice, discretion and
execution are essential. To date, Gleacher has advised on over $250
billion of transactions.
41
GLEACHER
MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATION OF GLEACHER
THE
FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN
THE FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1 OF THIS
INFORMATION STATEMENT.
Business
Environment
Since
mid-2007, global financial markets have deteriorated resulting in decreased
financing availability. The decrease in available funding has led to a
significant decrease in the overall number of mergers and acquisitions
transactions globally. However, Gleacher believes that the current industry
disruption provides additional long-term opportunity for the firm by increasing
the number of potential restructuring assignments and by allowing the
firm to hire additional revenue generating senior employees to drive future
growth.
Results
Of Operations
2008
Financial Overview
For the
year ended December 31, 2008, net operating revenues were $14.1 million compared
to $22.4 million for the year ended December 31, 2007. Gleacher reported a net
loss of $0.3 million for the year ended December 31, 2008 compared to a net loss
of $0.1 million for the year ended December 31, 2007. The decrease in net income
is primarily due to the decrease in revenues, partially offset by decreases in
compensation and benefits and occupancy expenses.
Net
Revenues
Net
operating revenues declined $8.3 million, or 37% in 2008 on account of a number
of significant transactions that were not completed because of the macro
environment for mergers and acquisitions and Gleacher’s clients having taken an
increasingly conservative viewpoint towards their mergers and acquisitions
strategy. Gleacher earned fees from 12 clients in 2008, down from 16
clients in 2007.
Non-Interest
Expense
Non-interest
expense decreased $7.0 million, or 33% in 2008.
Compensation
and benefits expense declined $6.1 million, or 40% in 2008. The decrease in
compensation and benefits expense is directly linked to the decrease in revenues
as Gleacher’s policy is to pay out compensation based on revenues received and
individual employee’s performance.
Occupancy
expenses declined by $0.6 million, or 22% in 2008. The decline was the result of
the termination of a satellite office lease of $0.3 million and a rent credit
from Gleacher’s primary landlord as the result of an operating expense reduction
of $0.2 million.
42
Liquidity
And Capital Resources
Virtually
all of Gleacher’s assets are liquid, consisting mainly of cash. At December 31,2008, 87% of its assets were in cash or cash equivalents. At December 31, 2007,
78% of its assets were in cash or cash equivalents.
During
2008, Gleacher reduced outstanding debt by making a principal payment of $0.3
million on the outstanding debt facility. Terms of the debt call for similar
reductions in December 2009 and 2010.
Gleacher
does not anticipate any business conditions that would prevent it from
satisfying the outstanding debt.
Off-Balance
Sheet Arrangements
Gleacher
does not have any off-balance sheet arrangements and does not anticipate any in
the future.
43
UNAUDITED
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The
following unaudited pro forma combined consolidated financial information and
explanatory notes give effect to the combination of the Company and Gleacher and
are based on the estimates and assumptions set forth herein and in such
notes. The unaudited pro forma condensed combined financial
information shows the impact of the combination of the Company and Gleacher on
the companies’ respective historical financial positions and results of
operations under the purchase method of accounting with Broadpoint as the
acquirer. Under this method of accounting, the assets and liabilities
of Gleacher will be recorded by the Company at their estimated fair values as of
the date the combination is completed. The unaudited pro forma
condensed combined balance sheet as of December 31, 2008 assumes the combination
was completed on that date. The unaudited pro forma combined
condensed income statements for the year ended December 31, 2008 give effect to
the combination as if the combination had been completed January 1,2008.
Under the
terms of the Merger Agreement, Broadpoint will pay the stockholders of Gleacher
$20 million in cash, subject to adjustment as provided in the Merger Agreement,
and issue 23 million shares of Company common stock subject to resale
restrictions. As previously described in this Information Statement,
MatlinPatterson has executed a written consent approving the Stock
Issuance. The unaudited pro forma condensed combined financial
information has been derived from, and should be read in conjunction with, the
historical consolidated financial statements and the related notes of both the
Company and Gleacher.
The
unaudited pro forma condensed combined financial information is presented for
illustrative purposes only and does not indicate financial results of the
combined companies had the companies actually been combined at the beginning of
the period presented, and the impact of possible revenue enhancements and
expenses efficiencies, among other factors, have not been
considered. In addition, as explained in more detail in the
accompanying notes to the unaudited pro forma condensed combined financial
information, the allocation of the purchase price reflected in the pro forma
condensed combined financial information is subject to adjustment.
44
Broadpoint
Securities Group, Inc. / Gleacher Partners Inc.
Unaudited
Pro Forma Combined Income Statement for the Full Year Ended December 31,2008
(In
thousands of dollars, except per share amounts)
As Reported
Pro
Forma
Pro
Forma
Broadpoint
Gleacher
Adjustments
Combined
Revenues
Principal
transactions
$
$97,032
$
-
$
-
$
97,032
Commissions
6,529
-
-
6,529
Investment
banking
8,296
13,947
(452
)
(A)
21,791
Investment
banking revenue from related party
8,400
-
-
8,400
Investment
(losses) gains
(1,115
)
-
-
(1,115
)
Interest
income
21,946
72
-
22,018
Fees
and others
3,925
362
-
4,287
Total
revenues
145,013
14,381
(452
)
158,942
Interest
expense
10,712
253
(253
)
(B)
10,712
Net
revenues
134,301
14,128
(199
)
148,230
Expenses
(excluding interest)
Compensation
and benefits
111,678
9,278
(2,066
)
(C)
118,643
(247
)
(A)
Clearing,
settlement and brokerage costs
2,794
-
-
2,794
Communications
and data processing
9,245
490
-
9,735
Occupancy
and depreciation
6,259
2,228
(58
)
(D)
8,429
Selling
4,152
-
-
4,152
Gleacher
amortization of intangibles
-
-
2,748
(E)
2,748
Restructuring
4,315
-
-
4,315
Other
10,664
2,371
(9
)
(A)
13,047
21
(G)
Total
expenses (excluding interest)
149,107
14,367
389
163,863
Loss
before income taxes, discontinued operations and cumulative effect of an
accounting change
(14,806
)
(239
)
(588
)
(15,633
)
Income
tax expense (benefit)
2,424
56
(56
)
(H)
2,424
Loss
from continuing operations
(17,230
)
(295
)
(532
)
(18,057
)
(Loss)
income from discontinued operations
(132
)
-
-
(132
)
Loss
attributable to minority interest holders
-
2
(2
)
(I)
-
Net
loss
$
(17,362
)
$
(293
)
$
(534
)
$
(18,189
)
Basic
earnings per share:
Continuing
operations
$
(0.25
)
$
$$(0.04
)
(J)
$
(0.20
)
Loss
per share
$
(0.25
)
$
(0.04
)
$
(0.20
)
Diluted
earnings per share:
Continuing
operations
$
(0.25
)
$
(0.04
)
(J)
$
(0.20
)
Diluted
loss per share
$
(0.25
)
$
(0.04
)
$
(0.20
)
Weighted
average shares of common stock:
Basic
69,296
23,000
(J)
92,296
Diluted
69,296
23,000
(J)
92,296
45
Broadpoint
Securities Group, Inc. / Gleacher Partners Inc.
Unaudited
Pro Forma Consolidated Combined Company Balance Sheet as of December 31,2008
(In
thousands of dollars, except shares and per share amounts)
As Reported
Broadpoint
Gleacher
Pro
Forma
Pro
Forma
Assets
Adjustments
Combined
Cash
and cash equivalents
$
7,377
$
5,914
$
(10,000
)
(K)
$
-
(3,395
)
(B)
(1,152
)
(L)
(390
)
(F)
(362
)
(I)
(152
)
(M)
1,553
(N)
341
(O)
248
(D)
18
(O)
Cash
and securities segregated for regulatory purposes
470
-
-
470
Receivables
from:
Brokers,
dealers and clearing agencies
3,465
-
-
3,465
Related
parties
232
-
-
232
Others
4,490
341
(341
)
(O)
4,490
Securities
owned, at fair value
618,822
-
-
618,822
Investments
15,398
18
(18
)
(O)
15,398
Office
equipment and leasehold improvements, net
1,691
400
(248
)
(D)
1,843
Goodwill
23,283
-
55,602
(P)
83,385
4,500
(T)
Intangible
assets
8,239
-
12,800
(E)
21,039
Other
assets
10,804
142
-
10,946
Total
Assets
$
694,271
$
6,815
$
59,004
$
760,090
Liabilities
and Stockholders’ Equity
Liabilities
Payables
to:
Brokers,
dealers and clearing agencies
$
511,827
$
-
$
1,553
(N)
$
513,380
Others
2,788
-
-
2,788
Securities
sold, but not yet purchased, at fair value
15,228
-
-
15,228
Accounts
payable
2,172
314
-
2,486
Accrued
compensation
31,939
1,469
-
33,408
Accrued
expenses
6,178
123
-
6,301
Due
to Gleacher shareholders
-
-
9,643
(R)
9,643
Bank
loan
-
625
(625
)
(B)
-
Note
payable - shareholder
-
2,770
(2,770
)
(B)
-
Mandatory
redeemable preferred stock debt
24,187
-
-
24,187
Total
Liabilities
594,319
5,301
7,801
607,421
Minority
Interest
Minority
Interest
-
362
(362
)
(I)
--
Commitments
and Contingencies
Subordinated
debt
1,662
-
-
1,662
Stockholders’
Equity
Preferred
stock
-
-
-
-
Common
stock
815
-
230
(S)
1,045
Additional
paid-in capital
236,824
-
48,377
(S)
285,201
Deferred
compensation
954
-
-
954
Accumulated
deficit
(138,062
)
-
4,500
(Q)
(133,952)
(390
)
(F)
Treasury
stock, at cost
(2,241
)
-
-
(2,241)
Gleacher
Equity
-
1,152
(1,152
)
(L)
-
Total
Stockholders’ Equity
98,290
1,152
51,565
151,007
Total
Liabilities and Stockholders’ Equity
$
694,271
$
6,815
$
59,004
$
760,090
46
The pro
forma adjustments included in the unaudited pro forma condensed combined
financial information are as follows:
(A)
To
eliminate revenue, compensation and other expenses associated with
Gleacher Partners’ management of Gleacher Mezzanine Fund I and Gleacher
Mezzanine Fund P, which is excluded from the
acquisition.
(B)
To
eliminate Gleacher’s interest expense associated with the bank loan and
note due to shareholder. Prior to the close, the bank loan and
note due to shareholders will be
repaid.
(C)
Adjustment
to record compensation consistent with Broadpoint’s Investment Banking
target compensation rate.
(D)
To
adjust depreciation and amortization for the disposition of $248,000 of
fixed assets prior to closing.
(E)
To
record the fair value of Gleacher’s intangible assets and the associated
amortization. Intangible assets and their respective
amortization schedule are as
follows:
a.
Non-Compete
agreements – 3 years
b.
Customer
relationships – 3 years
c.
Investment
Banking backlog – 1 year
d.
Trade
name – 20 years
(F)
To
record merger-related legal and accounting expenses associated with the
acquisition.
(G)
To
record incremental capital based taxes (franchise) resultant from
consolidation.
(H)
Broadpoint
and Gleacher will file a consolidated federal and various combined state
and local income tax returns. The pro forma adjusts the
reported income tax provision on Gleacher to reflect a computation on a
consolidated basis. The Combined Company will record a
valuation allowance against its net deferred tax assets, and accordingly
no benefit is recorded on the Pro Forma
Adjustments.
(I)
To
eliminate Minority Interest and the associated
loss.
(J)
Adjustment
to basic earnings per share and diluted earnings per share calculation
includes Gleacher’s net loss, effect of the Pro Forma Adjustments and the
issuance of 23.0 million pro forma shares in connection with the closing
of the transaction.
(K)
To
record a $10 million cash payment to Stockholders of Gleacher at
closing.
(L)
To
record cash distribution to stockholders of Gleacher prior to
closing.
(M)
To
record cash payment to Gleacher Stockholders for net book value of fixed
assets and lease hold improvements.
(N)
To
record the transfer of cash from Broadpoint’s clearing agent to a cash
account.
(O)
To
record the disposition of other assets and investments prior to the
closing date.
(P)
To
record goodwill associated with the acquisition of
Gleacher.
(Q)
Pursuant
to FAS 141 (R), Business Combinations, the Accumulated Deficit is reduced
for the effects of an income tax benefit that will be recorded on the day
of the transaction. The income tax benefit is a result of the
reduction of Broadpoint’s valuation allowance to offset net deferred tax
liabilities that are expected to be recorded in this acquisition and that
are expected to support realization of a portion of Broadpoint’s net
deferred tax assets. This adjustment has not been reflected in
the pro forma income statement due to its nonrecurring
nature.
47
(R)
Adjustment
to record the fair value of the future payment of $10 million to the
stockholders of Gleacher subject to terms of the purchase
agreement.
(S)
Adjustment
to record the fair market value of the 23.0 million shares issued in the
transaction with adjustments for impact of transfer
restrictions.
(T)
Adjustment
to record deferred taxes recorded as the result of the
acquisition.
Notes
to the Unaudited Pro Forma Condensed Combined Financial Information
Note
1. Basis for Pro Forma Presentation
The
unaudited pro forma condensed combined financial information related to the
Transaction is presented as of and for the year ended December 31,2008. The pro forma adjustments consist of the necessary adjustments
necessary to combine the Company and Gleacher including:
As
consideration for their interests in Gleacher and Gleacher Holdings
LLC:
•
at
the closing of the Transaction, the Company will pay to the stockholders
of Gleacher and the Holders $10,000,000 in cash. The Company
will pay to such parties an additional $10,000,000 in cash after five
years, subject to acceleration under certain circumstances. The
cash consideration is subject to adjustment, as provided in the Merger
Agreement, based on the cash net book value of Gleacher at the closing at
the Transaction; and
•
the
Company will issue 23,000,000 shares of common stock of the Company to the
stockholders of Gleacher and the Holders, and such stock consideration
will be subject to a five year lock-up period, subject to acceleration
under certain circumstances.
The
Transaction will be accounted for using the purchase method of
accounting. Accordingly, the Company’s cost to acquire Gleacher will
be allocated to the assets (including identifiable intangible assets) and
liabilities of Gleacher at their respective fair values on the date that the
Transaction is consummated.
The
unaudited pro forma condensed combined financial information includes
adjustments to record the assets and liabilities of Gleacher at their respective
fair values and represents management’s estimates based on available
information. The pro forma adjustments included herein may be revised
as additional information becomes available and as additional analyses are
performed. The final allocation of the purchase price will be
determined after the Transaction is consummated and after completion of a final
analysis to determine the fair values of Gleacher’s tangible, and identifiable
intangible, assets and liabilities as of the date on which the Transaction is
consummated. Accordingly, the final purchase accounting adjustments
may be materially different from the pro forma adjustments presented in this
Information Statement. Increases and decreases in the fair value of
net assets and other items of Gleacher as compared to information shown in this
Information Statement may impact the Company’s statement of income due to
amortization of the adjusted assets or liabilities.
Certain
amounts in the historical consolidated financial statements of Gleacher have
been reclassified to conform to the Company’s historical financial information
presentation. The
48
unaudited
pro forma condensed combined financial information presented in this document
does not necessarily indicate the results of operations or the combined
financial position that would have resulted had the Transaction actually been
completed at the beginning of the applicable period presented, nor is it
indicative of the results of operations in future periods or the future
financial position of the combined company.
Note
2. Pro Forma Adjustments
The
unaudited pro forma condensed combined financial information for the Transaction
includes the pro forma balance sheet as of December 31, 2008 assuming the
Transaction was consummated on December 31, 2008. The unaudited pro
forma combined condensed income statements for the year ended December 31, 2008
give effect to the Transaction as if the Transaction had been consummated
January 1, 2008.
49
DIRECTORS
AND EXECUTIVE OFFICERS
Appointment
of Eric Gleacher to the Company Board as Chairman of the Board
Pursuant
to the terms of the Merger Agreement, the Company has agreed to appoint Mr.
Gleacher to its Board of Directors and designate him Chairman of the Board of
Directors, effective at the time of the closing of the
Transaction. In connection therewith, the Company agreed to appoint
Mr. Gleacher to the class of directors with a term expiring in 2011 (Class I),
and also agreed that the Board of Directors of the Company would not take any
action to remove Mr. Gleacher as a director for so long as he is employed under
the Gleacher Employment Agreement (see “The Merger Agreement and Related
Agreements -- Employment Arrangements with Eric Gleacher” for further
information regarding the Gleacher Employment Agreement).
Although
the Merger Agreement provides that Mr. Gleacher will be appointed to Class I,
the parties have agreed that Mr. Gleacher will be nominated instead for election
at the Company’s 2009 annual meeting of shareholders as a Class II director,
with a term expiring in 2012. MatlinPatterson FA Acquisition
LLC, our controlling shareholder, has indicated that it intends to vote all
shares of the Company that it owns in favor of Mr. Gleacher’s election to the
Board of Directors at the Company’s 2009 annual meeting of
shareholders. Mr. Gleacher will be designated Chairman of the Board
of Directors promptly after the later to occur of (1) his election to the Board
of Directors and (2) the closing of the Transaction.
Mr.
Gleacher will not qualify as an “independent director” as defined in the NASDAQ
Stock Market listing standards.
Additional
Information on Mr. Gleacher
Mr.
Gleacher, age 68, is Chairman of Gleacher Partners, which he founded in 1990.
Previously, Mr. Gleacher founded the M&A department at Lehman Brothers in
1978 and headed global M&A at Morgan Stanley from 1985 to
1990. Mr. Gleacher is Chairman of the Institute for Sports Medicine
at the Hospital for Special Surgery in New York, Chairman of the Ransome
Scholarship Trust for St. Andrews University in St. Andrews, Scotland and a
member of the Board of Trustees of Northwestern University. Mr.
Gleacher received an MBA from The University of Chicago and a BA from
Northwestern University and served as a U.S. Marine infantry officer in the
1960s.
Employment
Agreement with Mr. Gleacher
Concurrently
with the execution of the Merger Agreement, the Company entered into the
Gleacher Employment Agreement, effective as of the closing of the
Transaction. For further information regarding the Gleacher
Employment Agreement, see “The Merger Agreement and Related Agreements --
Employment Arrangements with Eric Gleacher.”
Compensation
Discussion & Analysis
This
Compensation Discussion and Analysis describes and analyzes the objectives,
practices, policies and decisions relating to compensation awards to Eric
Gleacher, who will be one of the Company’s executive officers upon the closing
of the Transaction. The executive
50
officers
of the Company are collectively referred to as our “named executive officers” or
“NEOs”. The Executive Compensation Committee of the Board of
Directors of the Company (the “Executive Compensation Committee”) is responsible
for approving all compensation awarded to our NEOs
In March
2009, the Company entered into the Gleacher Employment Agreement (effective as
of the closing of the Transaction, and described in this Information Statement
in the section titled “The Merger Agreement and Related Agreements -- Employment
Arrangements with Eric Gleacher”). The Gleacher Employment Agreement was
structured to incentivize Mr. Gleacher in his new role as a senior member of the
Company’s Investment Banking Division.
Compensation
Philosophy. Fiscal year 2008 was a historically difficult year
for the U.S. and global economy, characterized by a major lack of liquidity,
substantially volatile and decreased asset values in nearly all asset classes,
and a significant reduction in consumer and investor confidence; 2008 was also a
challenging year for the Company, but in many different ways. The Company
accomplished an enormous amount in 2008, while repositioning itself for the
future. The Company’s overall compensation philosophy of pay for
performance has not changed, and the Company’s compensation practice continues
to evolve to reflect the realities of the marketplace and the Company’s position
in the markets it serves.
Objectives of the Compensation
Program. In an effort to correlate executive compensation to the
performance of the Company, the Executive Compensation Committee considers a
number of different objectives it believes contribute to the financial
well-being of the Company. In particular, the Executive Compensation Committee
may reward executives for continued improvement in some or all of the following
Company-wide performance measures, among others, by:
• paying
for Company and individual performance;
• providing
for long-term incentives and retention;
• aligning
executive interests with shareholders’ interests; and
• competing
effectively for key talent.
In
addition, the Executive Compensation Committee recognizes that individual
performance and contributions made by the NEOs in connection with implementing
the Company’s strategic plan may not always be reflected in the objectives
described above. The Executive Compensation Committee, therefore, also examines
the growth and development of the business in relation to the Company’s
strategic plan and seeks to reward executives who contribute to improvements in
relation thereto and, consequently, to the performance of the Company as a
whole.
The
compensation program for the NEOs is designed to attract, retain and reward
talented executives who have the experience and ability to contribute materially
to the Company’s long-term success and thereby build value for its shareholders.
The program is intended to provide competitive base salaries as well as short-
and long-term incentives which align management and shareholder objectives and
provide the opportunity for NEOs to participate in the success of
the
51
Company. In
2008, the Company attempted to meet these objectives during a period of
unprecedented challenges, including a U.S. and global economic
recession.
Peer Group
Companies. As part of its analysis, the Executive Compensation
Committee compares the NEOs’ compensation to the compensation of executive
officers performing similar functions among a peer group of other publicly
traded investment banks. This comparison takes into account the performance of
the Company relative to the other companies, the executives’ comparative roles,
responsibilities and performance at such companies, and the market size and
composition data for such comparable companies. The Executive Compensation
Committee reviews such companies’ compensation for comparison purposes but this
review is not the determining factor as it is only one of many factors that are
considered by the Executive Compensation Committee in setting
compensation.
The peer
group companies reviewed by the Executive Compensation Committee during the year
included: Piper Jaffray Companies, Rodman & Renshaw Capital Group, Inc., JMP
Group Inc., Stifel Financial Corp. and Cowen Group Inc. The peer group companies
are all publicly traded investment banking companies that compete with the
Company.
Relationship of Compensation Rewards
to Objectives. Each element of compensation described below is
designed to reward different results as summarized below:
Compensation
Element
Designed
to Reward
Relationship
to the Objectives
Base
Salary
Experience,
knowledge of the industry, duties and scope of
responsibility
Provides
a minimum, fixed level of cash compensation to attract and retain talented
executives to the Company
Annual
Cash Bonus
Successful
performance of objectives over the course of the applicable fiscal
year
Motivate
and reward executives for achieving objectives
Long-term
Incentive Compensation
Continued
excellence and attainment of objectives over time
Motivate
and reward executives to achieve long-term objectives
Success
in long-term growth and development
Align
the executives’ interests with long-term stockholder interests in order to
increase overall stockholder value
Provide
competitive compensation to attract and retain talented
executives
Compensation
Elements. In the financial services industry, base salaries
tend to be a relatively modest portion of the total compensation of
a company’s employees, including its executive officers, as compared
to annual cash bonuses and equity-related grants. Base salaries at the Company
are typically set at levels that the Executive Compensation Committee believes
are generally competitive with those of executives in similar positions at
comparable financial services companies. A significant portion of the total
compensation has been historically paid in the form of annual cash bonuses. This
practice is intended to maximize the portion of an individual’s compensation
that is subject to fluctuation each year based upon corporate and individual
performance. Equity-related grants make up the other important component of
total
52
compensation
and focus on longer-term company objectives. As a result, the predominant
portion of our executive officers’ compensation is directly related to short-
and long-term corporate performance.
We
continue to believe that the compensation of our executive officers should be
structured to link the executives’ financial reward directly to the performance
of the business unit they lead or, as the case may be, to the performance of the
Company as a whole as well as to their individual performance. Each
element of compensation paid to the Company’s executive officers is designed to
support one or more of the objectives described above.
Review. All of the
compensation elements awarded to the NEOs is subject to review by the Executive
Compensation Committee. The Executive Compensation Committee believes that each
NEO’s compensation package is reasonable and appropriate and that it is aligned
with the interests of the Company’s shareholders.
Base Salary. Base
salaries are typically set by reference to job positions within the Company with
increases as a reward for superior performance or as a means to attract or
retain necessary executive talent. The Executive Compensation Committee
considers the Chief Executive Officer’s recommendations in determining the
salary of each of the other executive officers. Pursuant to the Gleacher
Employment Agreement, Mr. Gleacher’s initial base salary will be $350,000, and
will be reviewed each year and may be adjusted upward from time to time at the
discretion of the Chief Executive Officer of the Company and, where
appropriate, the Executive Compensation Committee.
Annual Cash
Bonus. The Executive Compensation Committee is charged with
determining the appropriate annual bonus payments, if any, to the Company’s
executive officers. The specific bonus an executive receives is
determined by the Executive Compensation Committee with reference to his level
of responsibility, individual performance and the performance of his or her
business unit and/or the Company. The Executive Compensation Committee evaluates
levels of responsibility annually. The Executive Compensation Committee also
makes assessments of individual performance annually after receiving the
recommendations of the Chief Executive Officer. The approved recommendations are
based on a number of factors, including the achievement of pre-established
individual and corporate performance targets, but also initiative, business
judgment, management skills and potential contribution to the
firm. Under the terms of the Gleacher Employment Agreement, Mr.
Gleacher will participate in the annual bonus pool for the Investment Banking
Division. The amount of his annual bonus will be determined under
terms and conditions developed by the Executive Compensation Committee, as
recommended by the Chief Executive Officer of the Company.
Long-Term Equity
Incentives.
Annual Grants. The Company had
historically relied upon annual grants of stock options and then, in the last
several years, restricted stock and restricted stock units to retain its
executive officers and to focus them on increasing shareholder value over the
long term. Historically, these grants were made in mid-February in conjunction
with the payment of annual cash bonuses for the prior fiscal year and were based
upon job level, and Company and individual performance during the prior fiscal
year.
53
Deferred Compensation
Plans. Historically,
the Company offered its employees, including its executive officers, tax
planning opportunities through nonqualified deferred compensation plans. It
first adopted the Deferred Compensation Plan for Key Employees and the Deferred
Compensation Plans for Professional and Other Highly Compensated Employees (the
“Predecessor Plans”). It then froze these plans in 2005 and adopted new plans
(the 2005 Deferred Compensation Plan for Key Employees (the “Key Plan”) and the
2005 Deferred Compensation Plan for Professional and Other Highly Compensated
Employees (the “Professional Plan”) (collectively, the “2005 Plans”)) as a
result of changes in the tax laws. However, the Company has decided to freeze
the 2005 Plans as well. As a result of declining participation, the costs of
administrating the 2005 Plans were determined to outweigh the benefits of
maintaining them.
Equity-Based Awards
Policy. The Executive
Compensation Committee makes specific stock option, restricted stock and other
equity-based awards (the “Equity-Based Awards”) to employees of the Company. The
Board of Directors also approves all Equity-Based Awards made to executive
officers. Management of the Company provides recommendations to the Executive
Compensation Committee with respect to the Equity-Based Awards and the Executive
Compensation Committee meets as necessary to consider such awards on a timely
basis. Equity-Based Awards approved by the Executive Compensation Committee were
generally granted as of the date of approval, and the exercise price of any
Equity-Based Awards (as applicable) awarded was fixed as of the closing price on
the date of grant.
Termination of Employment; Change in
Control. The Company does not have a severance plan or change
in control plan in place for its employees or its executive officers
generally. Under the Gleacher Employment Agreement, Mr. Gleacher
is entitled to certain severance payments upon certain terminations of his
employment (see “The Merger Agreement and Related Agreements -- Employment
Arrangements with Eric Gleacher”). Equity compensation awards granted
to Mr. Gleacher may also vest upon certain terminations of his employment or a
change in control of the Company pursuant to their terms. The Company
believed it necessary to provide Mr. Gleacher with these protections in
order to secure his employment as a senior member of the Investment Banking
Division of the Company, and in light of his anticipated contributions to the
future success of our Company.
Tax and
Accounting. Section 162(m) of the Code places a limit on
the tax deduction for compensation in excess of $1 million paid to certain
“covered employees” of a publicly held corporation (generally the corporation’s
chief executive officer and its next four most highly compensated executive
officers in the year that the compensation is paid). Compensation that is
considered qualified “performance-based compensation” generally does not count
toward the Section 162(m) $1 million deduction limit. While the
Company is mindful of the limitations that Section 162(m) may have on the
deductibility of compensation, the Company also determined that other reasons
for compensation structure could sometimes take precedence over potential tax
deductions. The Senior Management Bonus Plan is designed so that annual bonus
compensation paid to our covered employees may be considered qualified
performance-based compensation within the meaning of
Section 162(m). Similarly, the 2007 Incentive Compensation Plan
is designed so that awards may be considered performance based
compensation.
54
The
Company’s Board of Directors and Committees of the Board
Because
MatlinPatterson controls more than 50% of the voting power of our common stock,
we are a “controlled company” within the meaning of the Nasdaq Marketplace
Rules. Under the
Nasdaq Marketplace Rules, a controlled company is a company of which more than
50% of the voting power is held by an individual, a group or another company.
Under such rules, a controlled company may elect not to comply with certain
Nasdaq corporate governance requirements, including requirements that (1) a
majority of the board of directors consist of independent directors,
(2) compensation of officers be determined or recommended to the board of
directors by a majority of its independent directors or by a compensation
committee that is composed entirely of independent directors and
(3) director nominees be selected or recommended by a majority of the
independent directors or by a nominating committee composed solely of
independent directors. Because the Company is a controlled company, we have
chosen to rely on this exemption to these Nasdaq corporate governance
requirements. Following the consummation of the Transaction, we
expect that MatlinPatterson will own less than 50% of the voting power of our
common stock, and therefore we will no longer be a “controlled company” within
the meaning of the Nasdaq Marketplace Rules. See “Special Factors --
General Changes Resulting from the Transaction”.
The Board
of Directors has three standing committees: the Audit Committee, the Executive
Compensation Committee and the Committee on Directors and Corporate
Governance.
Each
committee described below operates under a written charter adopted by the Board,
and each such charter was amended and restated in December 2007. The current
charter of each of the committees is available on the Company’s website (www.bpsg.com).
The Committee on Directors and
Corporate Governance. The Board established the Committee on
Directors and Corporate Governance in fiscal year 2002. The primary
purposes of the Committee are to assist the Board of Directors in developing and
implementing policies and procedures intended to assure that the Board of
Directors, including its standing committees, will be appropriately constituted
and organized to meet its fiduciary obligations to the Company and its
shareholders on an ongoing basis; and to develop and recommend to the Board of
Directors for adoption corporate governance guidelines. Among its
specific duties, the committee determines criteria for service as director,
reviews candidates and considers appropriate governance
practices. The committee also oversees the evaluation of the
performance of the Board of Directors and Chief Executive Officer and annually
reviews the Company’s Corporate Governance Guidelines, reporting to the Board
any recommended changes. The committee considers nominees for
directors proposed by shareholders. To recommend a prospective
nominee for the committee’s consideration, shareholders should submit the
candidate’s name and qualifications to the Company’s Corporate Secretary in
writing to the following address: Broadpoint Securities Group, Inc., 12 East
49th
Street, 31st Floor
New York, New York10017, Attn: Corporate Secretary.
Currently,
the committee is comprised of Mr. Plimpton, who serves as Chair, and
Mr. Pechock. In identifying and recommending nominees for
positions on the Board of Directors, the committee places primary emphasis on
the criteria set forth in our Corporate
55
Governance
Guidelines which include judgment, diversity, age and skills, all in the context
of an assessment of the perceived needs of the Board. Recommendations
by shareholders that are made in accordance with these procedures will receive
the same consideration. The committee held three meetings during
2008.
The Audit
Committee. The Audit Committee operates pursuant to a written
charter that the Committee and the Board reviews each year to assess its
adequacy. Among the primary purposes of the Audit Committee are
assisting the Board of Directors in its oversight of the integrity of the
Company’s financial reporting process; the Company’s systems of internal
accounting and financial controls; the annual independent audit of the Company’s
financial statements; the independent registered public accounting firm’s
qualifications and independence; the Company’s compliance with legal and
regulatory requirements; and the Company’s management of market, credit,
liquidity and other financial and operational risks. In addition, the Audit
Committee decides whether to appoint, retain or terminate the Company’s
independent registered public accounting firm and pre-approves all audit,
audit-related, tax and other services, if any, to be provided by the independent
registered public accounting firm. The Audit Committee also prepares the Audit
Committee report required by the rules of the Securities and Exchange Commission
(“SEC”) for inclusion in the Company’s annual proxy statement.
Until
October 14, 2008, this committee was comprised of Mr. Yingling, who served
as Chair, and Messrs. Kutnick and Nesmith. Mr. Nesmith ceased to be a
director on October 14, 2008. Currently, this committee is comprised of
Messrs. Yingling (who serves as Chair), Kutnick and Mandel. Each member of
the Audit Committee is an “independent director” as defined in the NASDAQ Stock
Market listing standards, and is independent within the meaning of
Rule 10A-3 under the Exchange Act and the Company’s Corporate Governance
Guidelines. Each member of the Audit Committee is qualified as an audit
committee financial expert within the meaning of Item 401(h) of
Regulation S-K under the Exchange Act, and the Board has determined that
they have accounting and related financial management expertise within the
meaning of the NASDAQ Stock Market listing standards. The Audit Committee met 15
times during 2008.
The Executive Compensation
Committee. Under its charter, the primary purposes of the
Executive Compensation Committee is to discharge the responsibilities of the
Board of Directors relating to compensation, including implementing and
reviewing executive compensation plans, policies and programs to ensure the
attraction and retention of executive officers in a reasonable and
cost-effective manner, to motivate their performance in the achievement of the
Company’s business objectives and to align the interest of executive officers
with the long-term interests of the Company’s shareholders. The committee
develops and approves periodically a general compensation policy and salary
structure for executive officers of the Company and reviews and approves base
salaries and salary increases for, and perquisites offered to, executive
officers. The committee reviews and approves corporate goals and objectives
relevant to the compensation of the Chief Executive Officer, evaluates the Chief
Executive Officer’s performance in light of those goals and objectives and
establishes the individual elements of the Chief Executive Officer’s total
compensation based on this evaluation. The committee also reviews and makes
recommendations to the Board of Directors with respect to non-Chief Executive
Officer compensation, incentive-compensation plans and equity-based plans and
reviews and supervises, in coordination with management, the overall
compensation policies of the Company. The committee also administers the
Company’s 1999 Long-Term Incentive Plan, 2001 Long-Term
56
Incentive
Plan, Management Bonus Compensation Plan, Deferred Compensation Plan for Key
Employees and the 2007 Incentive Compensation Plan. In addition, the
committee also prepares its report regarding the Compensation Discussion and
Analysis as required by the rules and regulations of the SEC.
The
committee may form, and delegate authority to, subcommittees when it deems
appropriate. The committee has the authority to retain and terminate
compensation consultants to assist in the evaluation of Director, CEO or
executive officer compensation, including sole authority to approve the
consultants’ fees and other retention terms. The committee also has authority to
obtain advice and assistance from any officer or employee of the Company or any
outside legal expert or other adviser.
The
committee is currently comprised of Mr. Pechock, who serves as Chair, and
Mr. Plimpton. During the year 2008, the committee met 11
times.
Shareholder
Communications
The
Company has also adopted a procedure by which shareholders may send
communications as defined within Item 407(f) of Regulation S-K under
the Exchange Act, to one or more members of the Board of Directors by writing to
such director(s) or to the whole Board of Directors in care of the Company’s
Corporate Secretary at the following address: Broadpoint Securities Group, Inc.,
12 East 49th Street,
31st
Floor New York, New York10017, Attn: Corporate Secretary. Any such
communications will be promptly distributed by the Corporate Secretary to such
individual director(s) or to all directors if addressed to the whole Board of
Directors.
57
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES TO OUR SHAREHOLDERS
There
will be no U.S. federal income tax consequences to a holder of our stock as a
result of the Transaction.
The
Merger is intended to qualify as a “reorganization” within the meaning of
Section 368(a) of the Code in which Gleacher is treated as merging directly with
and into the Company. It is a condition to the obligations of the
Selling Parties to complete the Transaction that Gleacher receive an opinion of
counsel that the Merger will be treated as a “reorganization” within the meaning
of the Code. No ruling has been or will be sought from the Internal
Revenue Service, and we are not obtaining an opinion of counsel, on the tax
consequences of the Transaction.
58
INCORPORATION
BY REFERENCE
The SEC
allows us to “incorporate by reference” into this Information Statement certain
documents we file with the SEC. This means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be part of
this Information Statement, and later information that we file with the SEC,
prior to the closing of the Transaction, will automatically update and supersede
that information. We incorporate by reference the documents listed below and any
documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Information Statement and prior to closing
of the Transaction. These include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as information or proxy statements (except for information furnished to the
SEC that is not deemed to be “filed” for purposes of the Exchange
Act).
Any
person, including any beneficial owner, to whom this Information Statement is
delivered may request copies of reports, proxy statements or other information
concerning us, without charge, as described below in “Where You Can Obtain
Additional Information.”
59
FORWARD-LOOKING
STATEMENTS
This
Information Statement contains “forward-looking statements.” These statements
are not historical facts but instead represent the Company’s belief regarding
future events, many of which, by their nature, are inherently uncertain and
outside of the Company’s control. The Company’s forward-looking statements are
subject to various risks and uncertainties, including:
•
the
conditions of the securities markets, generally, and acceptance of the
Company’s services within those
markets;
•
the
effect of the announcement of the Transaction on the Company’s business
relationships, operating results and business
generally;
•
the
occurrence of any event, change or other circumstances that could give
rise to the termination of the Merger
Agreement;
•
the
amount of the costs, fees, expenses and charges related to the
Transaction;
•
the
Company’s ability to meet expectations regarding the timing, completion
and accounting and tax treatments of the
merger;
and other
risks and factors identified from time to time in the Company’s filings with the
SEC. It is possible that the Company’s actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in its forward-looking statements. This Information
Statement also contains statements which contemplate that the Transaction will
be completed. The Transaction is subject to regulatory and other
customary closing conditions. There can be no assurance that the
Transaction will be completed. You are cautioned not to place undue
reliance on these forward-looking statements. The Company does not undertake to
update any of its forward-looking statements.
60
SHAREHOLDERS
SHARING AN ADDRESS
The
Company will deliver only one Information Statement to multiple shareholders
sharing an address unless the Company has received contrary instructions from
one or more of the shareholders. The Company undertakes to deliver promptly,
upon written or oral request, a separate copy of the Information Statement to a
shareholder at a shared address to which a single copy of the Information
Statement is delivered. A shareholder can notify the Company that the
shareholder wishes to receive a separate copy of this Information Statement, or
a future information statement, by written request directed to the Secretary of
the Company, 12 East 49th Street, 31st Floor, New York, New York10117 or by
telephone at (212) 273-7178. Likewise, shareholders sharing an address who are
receiving multiple copies of this Information Statement and wish to receive a
single copy of future information statements may notify the Company at the
address and telephone number listed above.
61
WHERE
YOU CAN OBTAIN ADDITIONAL INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any document we file at the SEC’s
public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public at the
SEC’s website at http://www.sec.gov.
You may
obtain any of the documents we file with the SEC, without charge, by requesting
them in writing or by telephone from us at the following address:
We
have not authorized anyone to provide you with information that is different
from what is contained in this Information Statement. This
Information Statement is dated [l], 2009. You
should not assume that the information contained in this Information Statement
is accurate as of any date other than that date, and the mailing of this
Information Statement to our shareholders does not create any implication to the
contrary.
62
INDEX
TO FINANCIAL STATEMENTS OF GLEACHER PARTNERS INC. AND SUBSIDIARIES
Independent
Auditors’ Report
F-2
Consolidated
Statement of Financial Condition as of December 31, 2008
F-3
Consolidated
Statement of Operations for the Year Ended December 31,2008
F-4
Consolidated
Statement of Changes in Stockholders’ Equity for the Year Ended December31, 2008
F-5
Consolidated
Statement of Cash Flows for the Year Ended December 31,2008
F-6
Notes
to Consolidated Financial Statements for the Year Ended December 31,2008
F-7
Consolidated
Statement of Financial Condition as of December 31, 2007
(unaudited)
F-13
Consolidated
Statement of Operations for the Year Ended December 31, 2007
(unaudited)
F-14
Consolidated
Statement of Changes in Stockholders’ Equity for the Year Ended December31, 2007 (unaudited)
F-15
Consolidated
Statement of Cash Flows for the Year Ended December 31, 2007
(unaudited)
F-16
Notes
to Consolidated Financial Statements (unaudited) for the Year Ended
December 31, 2007
We have
audited the accompanying consolidated statement of financial condition of
Gleacher Partners Inc. and subsidiaries (the "Company") as of December 31, 2008,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Gleacher Partners Inc.
and subsidiaries as of December 31, 2008, and the consolidated results of their
operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
Gleacher
Partners Inc. (the "Company"), is a Delaware Corporation. The Company
has no operations and is primarily a holding Company. The Company
owns 89.9% of Gleacher Holdings LLC ("GH LLC"), and the remaining 10.1% of GH
LLC represents ownership by two professionals employed by Gleacher Partners LLC
("GP LLC"). GH LLC owns 100% of GP LLC, Gleacher Partners (Asia)
Limited and Gleacher Partners Ltd.
GP LLC is
the operating entity which is a registered broker-dealer with the Securities and
Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory
Authority ("FINRA"). GP LLC does not carry customer accounts; as
such, it claims exemption from SEC Rule 15c3-3 pursuant to Section k(2)(ii) of
that rule. GP LLC provides corporate and investment banking advisory
services.
Gleacher
Partners Ltd. ("GP Ltd") is an entity registered in the United
Kingdom. Operations in the United Kingdom ceased in early
2007. GP Ltd is in the process of being
liquidated. Gleacher Partners (Asia) Limited ("GP Asia") was
registered in Hong Kong. GP Asia has not conducted any operations
since inception and was dissolved on February 13, 2009.
GH LLC
maintains the operating lease and fixed assets for the Company. GH
LLC does not earn revenues except for rental income through sub-lease of its
office premises.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly- and majority-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1]
Use
of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
[2]
Revenue
recognition:
The
Company recognizes and records advisory service revenues and expenses based on
service agreements. Rental income is recognized in the month earned
pursuant to lease agreements and reflected in other income.
[3]
Cash
and cash equivalents:
Cash and
cash equivalents consist of operating cash, and a certificate of deposit with a
bank. Terms of the certificate of deposit provide for withdrawal of
funds at any time without penalty.
[4]
Furniture,
equipment and leasehold
improvements:
Furniture
and equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, generally five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of their
estimated useful lives, or the remaining term of the lease.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5]
Impairment
of long lived assets:
In
accordance with Statement of Financial Accounting Standards (''SFAS'') No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"),
the Company records impairment losses on long-lived assets used in operations or
expected to be disposed of when indicators of impairment exist and the cash
flows expected to be derived from those assets are less than carrying amounts of
those assets. The Company has not recorded any impairment charge for
the year ended December 31, 2008.
[6]
Income
taxes:
The
Company is a Subchapter S Corporation pursuant to the Internal Revenue
Code. As such, the shareholders are responsible for income taxes that
result from the Company's operations. Accordingly, no provision for
federal and state income taxes has been made in the accompanying consolidated
financial statements. Appropriate provision for local taxes has been
made.
[7]
Foreign
currency translation:
The
functional currency of the Company's foreign subsidiary ("GP Ltd") is the local
country's currency, the British Pound. In accordance with Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("FAS
52"), the assets and liabilities of the Company's international subsidiaries are
translated at their respective period-end exchange rates, and expenses are
translated at average currency exchange rates for the period. The
resulting balance sheet translation adjustments are included in "Comprehensive
income (loss)" and are reflected as a separate component of stockholders' equity
(deficit). Foreign currency transaction gains and losses are included
in results of operations.
[8]
Allowance
for doubtful accounts:
The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit issues based on historical trends.
NOTE C - FURNITURE, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Furniture,
equipment and leasehold improvements consist of:
NOTE D - BANK LOANS, LINE OF CREDIT AND NOTE PAYABLE
GH LLC is
indebted to a bank pursuant to a promissory note dated December 27,2006. Principal payments of $312,500 are due on the anniversary of
the note in 2009 and 2010. Interest is charged at the three-month
LIBOR rate plus 1.5% and is paid monthly. Additionally, GH LLC has a
$2,000,000 line of credit with the same bank. Terms of the line of
credit require GH LLC to maintain a zero balance for at least 30 days during
each year. GH LLC drew down $500,000 which was outstanding for 26
days during 2008. Interest on outstanding amounts is charged at the
three-month LIBOR plus 1.5% and is paid monthly. There was no balance
outstanding on the line of credit at December 31, 2008. The line of
credit expires on July 5, 2009.
On
January 3, 2006, the Company repurchased 33,000 shares from the majority
shareholder in return for a promissory note in the amount of
$3,413,516. The note carried interest at 4.48% per annum with annual
principal amortization of $682,703. The Company paid $152,925 in
interest on the note on December 29, 2006. On January 3, 2007, the
note was renegotiated with interest, calculated at 8% per annum, and the
remaining principal is due on January 3, 2011. On May 14, 2007, the
Company issued shares to the stockholder whereby the principal of the note was
reduced by $1,068,000. During 2007 and 2008, the Company accrued
interest of $219,008 and $205,162 respectively, on the note. At
December 31, 2008, the outstanding balance on the note is $2,769,686 which
includes $424,170 of accrued interest.
Scheduled
maturities of the principal on the note payable and bank loan are as
follows:
Year
Ending
December
31,
Amount
2009
$
312,500
2010
312,500
2011
2,769,686
$
3,394,686
NOTE E - DEFERRED REVENUE
Management
fees related to the Mezzanine Investment Funds are paid to GP LLC every six
months, in advance. Deferred revenue on the accompanying consolidated
statement of financial condition represents the unearned portion of these
management fees. Management fees earned were approximately $403,000
for the year ended December 31, 2008 and are included in advisory fees in the
accompanying consolidated statement of operations.
NOTE F - REGULATORY REQUIREMENTS
As a
broker-dealer registered with the SEC and the National Association of Securities
Dealers, Inc., GP LLC is subject to the SEC Uniform Net Capital Rule 15c3-1 (the
"Rule") and has elected to compute its net capital based upon the alternative
method pursuant to SEC Rule 15c3-3. The Rule requires the maintenance
of minimum net capital calculated at the greater of $250,000 or 2% of aggregate
debit items. At December 31, 2008, GP LLC had net capital of
$3,945,215 which was $3,695,215 in excess of its required net capital of
$250,000.
Employees
of GP LLC may elect to participate in a defined contribution plan which meets
the requirements of Section 401(k) of the Internal Revenue Code (the
"Plan"). The Company may contribute a match of up to 3% of eligible
employee compensation that vests over a three-year period as defined in the
Plan. For the year ended December 31, 2008, management has elected
not to match employee contributions.
NOTE H - RELATED PARTY TRANSACTIONS
The
Company has entered into various service agreements with
affiliates. The affiliates provide certain administrative services to
the Company, including the use of premises and fixed assets and payment to
certain third-party vendors for which the Company provides
reimbursement. Total payments to these affiliates for the year ended
December 31, 2008 were approximately $1,688,000.
The
Company periodically advances funds for short term operations of affiliates that
are reimbursable to the Company. Included on the consolidated
statement of financial condition is a due from affiliates of approximately
$157,000 which relates to reimbursable advances made by the Company and due to
affiliates of approximately $34,000 which relates to reimbursement of amounts
funded on behalf of the Company.
NOTE I - EQUITY
At
December 31, 2008, the Company had 28,132 shares issued and
outstanding. According to the stockholder agreement, no stockholder
has a right to directly or indirectly sell, assign, pledge or transfer all or
any shares without prior consent of the Board of Directors. The Board
of Directors has the right to call the shares at its sole discretion by giving a
14-day written notice to the stockholder. Moreover, the Board of
Directors has the sole discretion to take any action it deems necessary
regarding the shares in case of a liquidating event. In the event of
a change in control and the Board of Directors calls the shares, the Company may
be required to recognize compensation cost based on guidance in SFAS 123(R),
"Share-Based Payment".
NOTE J - RECENT ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (''FASB'') issued SFAS
No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 requires use
of a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three levels: quoted market prices in active
markets for identical assets and liabilities (Level 1), inputs other than quoted
market prices that are observable for the asset or liability, either directly or
indirectly (Level 2), and unobservable inputs for the asset and liability (Level
3). FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company believes the
adoption of FAS 157 did not have a material effect on its financial
statements.
In July
2006, FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109" ("FIN 48"), as amended, was issued
and is effective for nonpublic entities for fiscal years beginning after
December 15, 2008. FIN 48 sets forth a threshold for financial statement
recognition, measurement and disclosure of a tax position taken or expected to
be taken on a tax return. FIN 48 requires the managing member to
determine whether a tax position of the Company is more likely than not to be
sustained upon examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on technical
merits of the position. FIN 48 must be applied to all existing tax
positions upon initial adoption and the cumulative effect, if any, is to be
reported as an adjustment to the Company's consolidated financial statements as
of the beginning of the year of adoption. The Company does not expect
that adoption of FIN 48 will result in a material impact on the Company's
consolidated financial statements. However, the Company's conclusion
may be subject to adjustment at a later date based on factors including
additional implementation guidance from the Financial Accounting Standards Board
and ongoing analyses of tax laws, regulations and related
interpretations. No returns of the Company have been audited,
therefore all years which are statutorily open are subject to examination by the
appropriate taxing authorities. Any interest and penalties determined
to result from uncertain tax positions will be classified as interest expense
and other general and administrative expenses.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS
159"). The fair value option established by FAS 159 permits, but does
not require, all entities to choose to measure eligible items at fair value at
specified election dates. An entity would report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. FAS 159 is applicable to the Company
from January 1, 2008. The Company did not elect to apply the fair
value option to any eligible assets or liabilities.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("FAS
160"). This standard establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of
the Company's fiscal year beginning after December 15, 2008. The
Company is currently assessing the impact of the adoption of FAS 160 on the
Company's financial position and results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities ("FAS 161"). FAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. FAS 161 also improves transparency about the location and
amounts of derivative instruments in an entity's financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. The Company is evaluating the impact of the adoption of
FAS 161 on its consolidated financial statements but believes the adoption of
FAS 161 will not have a material effect on its consolidated financial position
and results of operations.
Minimum
annual rentals payable under non-cancelable operating leases for the Company's
office space and equipment leases are the following:
Year
Ending
December
31,
Amount
2009
$
1,602,768
2010
534,256
$
2,137,024
The
Company has entered into a sub-lease for a portion of its office
space. Pursuant to the sub-lease the minimum annual rental income is
as follows:
Year
Ending
December
31,
Amount
2009
$
255,171
2010
85,548
$
340,719
The
Company is the beneficiary of letters of credit from the sub-tenant in the
amount of $86,000 to secure the performance of the sub-lease.
NOTE L - SUBSEQUENT EVENTS
[1]
Subsequent
to December 31, 2008 and in a single transaction, the Company sold 19,798
shares of common stock to existing shareholders and received proceeds of
$1,979,800.
[2]
On
March 3, 2009, the Company announced its merger with Broadpoint Securities
Group, Inc. (BPSG on NASDAQ). Subject to receiving certain
regulatory approvals, the deal is expected to close on or before June 30,2009.
F-12
GLEACHER
PARTNERS INC.
Consolidated
Statement of Financial Condition - Unaudited
Adjustments
to reconcile net loss to net cash provided by operating
activities:
Changes
in:
Accounts
receivable
1,608,081
Prepaid
expenses and other
4,078
Accrued
compensation and benefits
(293,472
)
Accounts
payable and accrued liabilities
(367,593
)
Deferred
revenue
(1,073,423
)
Net
cash provided by operating activities
1,314,034
Cash
flows from financing activities:
Proceeds
from issuance of common stock
572,200
Proceeds
from subsidiary equity issuance
215,000
Commons
stock repurchase
(432,433
)
Subsidiary
equity interest repurchase
(287,609
)
Net
cash provided by financing activities
67,158
Cash
flows from investing activities:
Purchase
of furniture & equipment
(120,579
)
Purchase
of investment and marketable securities
(175,542
)
Net
cash used for investing activities
(296,121
)
Effects
of exchange rate changes on cash
51,579
Net
increase in cash and cash equivalents
1,136,650
Cash
and cash equivalents - beginning of year
4,625,129
Cash
and cash equivalents - end of year
$
5,761,779
Supplemental
cash flow disclosures:
Cash
paid for interest
$
96,247
NOTES TO 2007 CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
NOTE A - ORGANIZATION
Gleacher
Partners Inc. (the "Company"), is a Delaware Corporation. The Company owns 89.9%
of Gleacher Holdings LLC (“GH LLC”), and the remaining 10.1% of GH LLC pertains
to minority interest, which represents ownership by two professionals employed
by Gleacher Partners LLC (“GP LLC”). GH LLC owns 100% of GP LLC, Gleacher
Partners (Asia) Limited and Gleacher Partners Ltd.
GP LLC is
the operating entity which is a registered broker-dealer with the Securities and
Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory
Authority (“FINRA”). GP LLC does not carry customer accounts; as
such, it claims exemption from SEC Rule 15c3-3 pursuant to Section k(2)(ii) of
that rule. GP LLC provides corporate and investment banking advisory
services.
Gleacher
Partners Ltd (“GP Ltd”) is an entity registered in the United
Kingdom. Operations in the United Kingdom ceased in early
2007. GP Ltd is in the process of being liquidated. Gleacher Partners
(Asia) Limited (“GP Asia”) was registered in Hong Kong. GP Asia has not
conducted any operations since inception and it was dissolved on February 13,2009.
GH LLC
maintains the operating lease and the fixed assets for the Company. GH LLC does
not earn revenues except for the rental income through sub-lease of its office
premises.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1]
Use
of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
[2]
Revenue
recognition:
The
Company recognizes and records advisory service revenues and expenses based on
service agreements. Rental income is recognized in the month earned
pursuant to lease agreements and reflected in other income.
[3]
Cash
and cash equivalents:
Cash
equivalents consist of operating cash, a deposit in a money market fund and an
interest bearing account with a bank. Terms of the bank interest bearing account
provide for withdrawal of funds at any time without penalty.
[4]
Furniture,
equipment and leasehold
improvements
Furniture
and equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, generally five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of their
estimated useful lives, or the remaining term of the lease.
In
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (“FAS 144”), the Company
records impairment losses on long-lived assets used in operations or expected to
be disposed of when indicators of impairment exist and the cash flows expected
to be derived from those assets are less than carrying amounts of those assets.
The Company has not recorded any impairment charge for the year ended December31, 2007.
NOTES TO 2007 CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED - CONTINUED
[5]
Income
taxes:
The
Company is a Subchapter S Corporation pursuant to the Internal Revenue
Code. As such, the shareholders are responsible for income taxes that
result from the Company's operations. Accordingly, no provision for
federal or state income taxes has been made in the accompanying consolidated
financial statements. Appropriate provision for city taxes has
been made.
[6]
Foreign
Currency Translation
The
functional currency of the Company’s foreign subsidiary is the local country’s
currency, the British Pound. In accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation (“FAS 52”), the assets
and liabilities of the Company’s international subsidiaries are translated at
their respective period-end exchange rates, and expenses are translated at
average currency exchange rates for the period. The resulting balance sheet
translation adjustments are included in “Other comprehensive income (loss)” and
are reflected as a separate component of stockholders’ equity (deficit). Foreign
currency transaction gains and losses are included in results of
operations.
[7]
Allowance
for Doubtful Accounts
The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit issues based on historical trends.
NOTE C – FURNITURE, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Furniture,
equipment and leasehold improvements consist of:
Depreciation
and amortization expense for the period ended December 31, 2007 amounted to
$180,394.
NOTE D – BANK LOANS, LINE OF CREDIT AND NOTE PAYABLE
GH LLC is
indebted to Bank of America, NA pursuant to a promissory note dated December 27,2006. Principal payments of $312,500 are each due on the anniversary
of the note in 2008, 2009 and 2010. Interest is charged at 3 month
LIBOR + 1.5% and interest is paid monthly. Additionally, GH LLC has a
$2 million line of credit with Bank of America, NA. Terms of the line
of credit call for GH LLC to maintain a zero outstanding balance for at least 30
days during each year. Interest on outstanding amounts is charged at
the BBA LIBOR + 1.5% and is paid monthly.
On
January 3, 2006the Company repurchased 33,000 shares from the majority
shareholder in return for a promissory note in the amount of
$3,413,516. The note carried interest at 4.48% per annum with annual
principal amortization of $682,703. The Company paid $152,925 in
interest on the note on December 29, 2006. On January 3, 2007 the
note was renegotiated with interest at 8% per annum and the principal due on
January 3, 2011. On May 14, 2007the Company issued shares to the
stockholder whereby the principal of the note was reduced by
$1,068,000. During 2007 the Company accrued interest of $219,008 on
the note. At December 31, 2007 the outstanding balance on the note is
$2,564,524 which includes $219,008 of accrued interest.
NOTES TO 2007 CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED - CONTINUED
Scheduled
maturities of the principal on notes payable / subordinated debt are as
follows:
Year
Ending
December
31,
Amount
2008
$
312,500
2009
312,500
2010
312,500
2011
2,564,524
$
3,502,024
NOTE E - DEFERRED REVENUE
Management
fees related to the Mezzanine Investment Funds (“Mezzanine”) are paid to GP LLC
every six months, in advance. Deferred revenue on the accompanying
statement of financial condition represents the unearned portion of these
management fees. Management fees earned were approximately $1,231,000
for the year ended December 31, 2007 and are included in advisory fees in the
accompanying statement of operations.
NOTE F - REGULATORY REQUIREMENTS
As a
broker-dealer registered with the SEC and the National Association of Securities
Dealers, Inc., GP LLC is subject to the SEC Uniform Net Capital Rule 15c3-1 (the
"Rule") and has elected to compute its net capital based upon the alternative
method pursuant to SEC Rule 15c3-3. The Rule requires the maintenance
of minimum net capital calculated at the greater of $250,000 or 2% of aggregate
debit items. At December 31, 2007, GP LLC had net capital of
$3,426,000 which was $3,176,000 in excess of its required net capital of
$250,000.
NOTE G - RETIREMENT PLAN
Employees
of GP LLC may elect to participate in a defined contribution plan which meets
the requirements of Section 401(k) of the Internal Revenue Code (the
"Plan"). The Company may contribute a match of up to 3% of eligible
employee compensation that vests over a three-year period as defined in the
Plan. For the year ended December 31, 2007, the Company contributed
$108,000 to the Plan.
NOTE H - RELATED PARTY TRANSACTIONS
The
Company has entered into various service agreements with
affiliates. The affiliates provide certain administrative services to
GP LLC, including the use of premises and fixed assets and payment to certain
third-party vendors for which GP LLC provides reimbursement. Total
payments with affiliates for the year ended December 31, 2007 were approximately
$2,178,000.
Included
in securities owned, at fair value, are investments in the Mezzanine Funds
totaling approximately $161,000.
The
Company periodically advances funds for short term operations of affiliates that
are reimbursable to the Company. Included on the consolidated
statement of financial condition is a due from affiliates of approximately
$261,000.
NOTE I – EQUITY
At
December 31, 2007, the Company had 30,132 shares issued and
outstanding. According to the stockholder agreement, no stockholder
has a right to directly or indirectly sell, assign, pledge or transfer all or
any shares
NOTES TO 2007 CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED - CONTINUED
without
prior consent of the Board of Directors. The Board of Directors has
the right to call the shares at its sole discretion by giving a 14-day written
notice to the stockholder.
NOTE J – RECENT ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“FAS 157”). FAS 157 requires use of a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three levels: quoted market prices in active markets for
identical assets and liabilities (Level 1), inputs other than quoted market
prices that are observable for the asset or liability, either directly or
indirectly (Level 2), and unobservable inputs for the asset and liability (Level
3). FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company believes the adoption of
FAS 157 does not have a material effect on the financial
statements.
In July
2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), was issued and
is effective for nonpublic entities for fiscal years beginning after December15, 2007. FIN 48 sets forth a threshold for financial statement recognition,
measurement and disclosure of a tax position taken or expected to be taken on a
tax return. FIN 48 requires the Managing Member to determine whether
a tax position of the Company is more likely than not to be sustained upon
examination by the applicable taxing authority, including resolution of any
related appeals or litigation processes, based on technical merits of the
position. FIN 48 must be applied to all existing tax positions upon
initial adoption and the cumulative effect, if any, is to be reported as an
adjustment to the Company’s financial statements as of the beginning of the year
of adoption. The Company does not expect that adoption of FIN 48 will result in
a material impact on the Company’s financial statements. However, the
Company’s conclusion may be subject to adjustment at a later date based on
factors including additional implementation guidance from the Financial
Accounting Standards Board and ongoing analyses of tax laws, regulations and
related interpretations.
In
February 2007 , the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“FAS 159”). The fair value
option established by FAS 159 permits, but does not require, all entities to
choose to measure eligible items at fair value at specified election dates. An
entity would report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The
Company did not elect the fair value option.
In
December 2007 , the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51 (“FAS
160”). This standard establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of the
Company’s fiscal year beginning after December 15, 2007. The Company is
currently assessing the impact of the adoption of FAS 160 on the Company’s
financial position and results of operations.
Note
K – Commitments and Contingent Liabilities
[1] Operating
Leases:
Minimum
annual rentals under non-cancelable operating leases for the Company’s office
space and equipment leases are the following:
Year
Ending
December
31,
Amount
2008
$
1,602,768
2009
$
1,602,768
2010
$
534,256
NOTES TO 2007 CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED - CONTINUED
The
Company has entered into a sub-lease for a portion of its office
space. Pursuant to the sub-lease the minimum annual rental income are
as follows:
Year
Ending
December
31,
Amount
2008
$
175,896
2009
$
255,171
2010
$
85,548
The
Company is the beneficiary of letters of credit from the sub-tenant in the
amount of $86,000 to secure the performance of the sub-lease.
This
AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made
and entered into as of March 2, 2009 by and among Broadpoint Securities
Group, Inc., a New York corporation (“Parent”), Magnolia
Advisory LLC, a Delaware limited liability company (“Merger Sub” and
together with Parent, the “Buying Parties”),
Gleacher Partners Inc., a Delaware corporation (the “Company”), certain
stockholders (the “Signing
Stockholders”) of the Company signatory hereto, and each of the holders
of interests in Gleacher Holdings LLC, a Delaware limited liability company
(“Holdings”),
signatory hereto (each such holder, other than the Company, a “Holder”, and
collectively the “Holders”, and
together with the Signing Stockholders, the “Selling
Parties”).
RECITALS
WHEREAS,
(a) the stockholders of the Company (each, a “Stockholder” and
collectively the “Stockholders”) own
all of the issued and outstanding shares of common stock (the “Company Shares”), par
value $.01 per share of the Company (“Company Common
Stock”), as set forth in Exhibit A
hereto, and (b) the Holders own all the issued and outstanding membership
interests in Holdings that are not owned by the Company (the “Interests”), in each
case as set forth in Exhibit A
hereto;
WHEREAS
each of the respective Boards of Directors of Parent and the Company, and
Parent, as sole member of Merger Sub, have approved the merger (the “Merger”) of the
Company with and into Merger Sub on the terms and subject to the conditions set
forth in this Agreement, whereby each issued and outstanding share of Company
Common Stock shall be converted into the right to receive shares of common
stock, par value $.01 per share, of Parent (“Parent Common Stock”)
or cash, or a combination thereof, as provided in Section 2.7(c)
hereof;
WHEREAS,
for U.S. federal income tax purposes it is intended that (i) the Merger
will be treated as a “reorganization” within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the “Code”);
(ii) this Agreement shall be, and hereby is, adopted as a “plan of
reorganization” for purposes of Sections 354 and 361 of the Code; and
(iii) Parent and the Company will each be a party to a reorganization
within the meaning of Section 368 of the Code;
WHEREAS,
concurrently with the execution of this Agreement, each of Eric Gleacher,
Jeffrey Tepper and Kenneth Ryan (collectively, the “Principal
Stockholders”) are entering into an Employment Agreement and a
Non-Competition and Non-Solicitation Agreement, each in the form attached hereto
as Exhibit B
(collectively, the “Employment and
Non-Competition Agreements”);
WHEREAS,
concurrently with the execution of this Agreement, each of the employees of the
Company set forth on Exhibit C hereto
is entering into a Non-Competition Agreement in the form set forth in Exhibit D (the
“Non-Competition
Agreements”);
WHEREAS,
concurrently with the execution of this Agreement, MatlinPatterson FA
Acquisition LLC (the “Parent Principal
Stockholder”) is executing a written consent (the
“Stockholders
Consent”) approving (i) an amendment, to become effective at the
time of Closing (as defined below), to the Amended and Restated Certificate of
Incorporation of Parent (as amended to the date hereof, the “Parent Charter”) to
increase the number of authorized shares of Parent Common Stock and to change
the name of Parent to Broadpoint Gleacher Securities Group, Inc. (the “Charter Amendment”)
and (ii) the issuance of Parent Common Stock pursuant to the Merger (the
“Share
Issuance”) as required by the rules of the NASDAQ Global
Market;
WHEREAS,
it is contemplated that, after the Closing (as defined below), the employees and
assets of the Company and its Subsidiaries will be transferred to Broadpoint
Capital, Inc., and Broadpoint Capital, Inc. will be renamed Broadpoint Gleacher
Capital, Inc.; and
WHEREAS,
Parent, Merger Sub, the Company and the Selling Parties desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW,
THEREFORE, in consideration of the mutual representations, warranties, covenants
and agreements herein contained, the parties hereto agree as
follows:
ARTICLE
I
DEFINITIONS
AND DEFINED TERMS
Section
1.1 Definitions and Defined
Terms.
(a) Unless
the context otherwise requires or as otherwise defined herein, capitalized terms
used in this Agreement shall have the meanings set forth below:
“Accounts Receivable”
shall mean: (i) all trade accounts receivable and other rights
to payment from customers of the business of the Company and its Subsidiaries
and the full benefit of all security for such accounts or rights to payment,
including all trade accounts receivable representing amounts receivable in
respect of goods shipped or products sold or services rendered to customers of
the Company or its Subsidiaries; (ii) all other accounts or notes
receivable of the Company and its Subsidiaries and the full benefit of all
security for such accounts or notes; and (iii) any claim, remedy or other
right related to any of the foregoing.
“Affiliate” shall mean
with respect to any Person, any other Person who, directly or indirectly,
controls, is controlled by or is under common control with that
Person. For purposes of this definition, a Person has control of
another Person if it has the direct or indirect ability or power to direct or
cause the direction of management policies of such other Person or otherwise
direct the affairs of such other Person, whether through ownership of more than
fifty percent (50%) of the voting securities of such other Person, by Contract
or otherwise.
“Alternative Proposal”
shall mean any inquiry or proposal relating to a sale of stock, merger,
consolidation, share exchange, business combination, partnership, joint venture,
disposition of assets (or any interest therein) or other similar transaction
involving the Stockholders or the Company or its Subsidiaries.
“Ancillary Agreements”
shall mean the Employment and Non-Competition Agreements, the Non-Competition
Agreements, the Registration Rights Agreement, the Escrow Agreement
2
and the
Trademark Agreement, provided, that, solely for
purposes of Article
X (Indemnification) the term “Ancillary Agreements” shall not include the
Employment and Non-Competition Agreements and the Non-Competition
Agreements.
“Business Day” shall
mean a day other than a Saturday, Sunday or other day on which commercial banks
in New York City are authorized or required by law to close.
“Company Charter
Documents” shall mean the organizational documents including, as
applicable, the certificate of incorporation or formation, the by-laws or the
limited liability company agreement of each of the Company and its
Subsidiaries.
“Company Intellectual
Property” shall mean all Intellectual Property that is owned or held by
or on behalf of the Company or its Subsidiaries or that is being used by or in
the Company business as it is currently conducted by the Company and its
Subsidiaries.
“Consent” shall mean
any consent, approval, waiver or authorization of, notice to, permit, or
designation, registration, declaration or filing with, any Person.
“Contract” shall mean,
whether written or oral, any note, bond, mortgage, indenture, contract,
agreement, permit, license, lease, purchase order, sales order, arrangement or
other commitment, obligation or understanding (including, without limitation,
any understanding with respect to pricing) to which a Person is a party or by
which a Person or its assets or properties are bound.
“Debt” shall mean any
credit facilities, notes, trade liabilities, other indebtedness (excluding,
however, capital leases other than currently due payments of arrearages) and
deferred compensation arrangements of the Company and its
Subsidiaries.
“Disclosure Schedule”
shall mean the disclosure schedule delivered by the Selling Parties to Parent or
by Parent to the Selling Parties’ Representative, as the case may be,
concurrently with the execution of this Agreement.
“Employee Stock Incentive
Plans” means Parent’s: (i) 1989 Stock Incentive Plan,
(ii) 1999 Long-Term Incentive Plan (Amended and Restated Through
April 27, 2004, as amended), (iii) 2001 Long-Term Incentive Plan, as
amended, (iv) Restricted Stock Inducement Plan for Descap Employees, as
amended, (v) 2003 Directors’ Stock Plan, as amended, (vi) 2007
Incentive Compensation Plan and (vii) any amendments, replacements or new
plans, in each case, approved by the Parent Board or any duly authorized
committee thereof, including, without limitation, any employee stock purchase
plans; provided
that, all
shares of Parent Common Stock (or options, warrants or other rights to purchase
such shares of Common Stock) issued pursuant to such amendments, replacements or
new plans are either exempt from, or issued in compliance with the requirements
of Section 409A of the Code and the guidance thereunder.
“Employee Stock
Options” means any stock options granted pursuant to any Employee Stock
Incentive Plan.
3
“Environmental Law”
shall mean any Law relating to the environment, natural resources, or safety or
health of humans or other living organisms, including the manufacture,
distribution in commerce and use or Release of any Hazardous
Substance.
“Exchange Act” shall
mean the Securities Exchange Act of 1934 and the rules and regulations of the
SEC thereunder.
“FINRA” shall mean the
Financial Industry Regulatory Authority, Inc.
“GAAP” shall mean
United States generally accepted accounting principles.
“Governmental
Authority” shall mean any federal, state, local or foreign government or
any subdivision, agency, instrumentality, authority (including any regulatory,
administrative, and self-regulatory authority), department, commission, board or
bureau thereof or any federal, state, local or foreign court, arbitrator or
tribunal.
“Hazardous Substance”
shall mean any pollutant, contaminant, hazardous substance, hazardous waste,
medical waste, special waste, toxic substance, petroleum or petroleum-derived
substance, waste or additive, asbestos, PCBs, radioactive material, or other
compound, element, material or substance in any form whatsoever (including
products) regulated, restricted or addressed by or under any applicable
Environmental Law.
“Intellectual
Property” shall mean: (i) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereon, and all patents, patent applications and patent
disclosures, together with all reissues, continuations, continuations-in-part,
divisions, reissues, extensions and re-examinations thereof; (ii) all
trademarks whether registered or unregistered, service marks, domain names,
corporate names and all combinations thereof, and all applications,
registrations and renewals in connection therewith, including all goodwill
associated therewith; (iii) all copyrights whether registered or
unregistered, and all applications, registrations and renewals in connection
therewith; (iv) all Trade Secrets; (v) all Software; (vi) all
datasets, databases and related documentation; and (vii) all other
intellectual property and proprietary rights.
“Interests Purchase
Consideration” shall mean the amount of cash and Parent Common Stock
payable to each Holder in connection with the Interests Purchase as set forth in
Exhibit A.
“IRS” shall mean the
United States Internal Revenue Service.
“Knowledge of the Buying
Parties” and “Knowledge of Parent”,
including other similar phrases or uses, shall each mean the actual knowledge,
after reasonable inquiry, of the individuals set forth on Section 1.1(a)
of the Disclosure Schedule delivered by the Buying Parties. An
individual’s inclusion on such schedule shall not imply any personal liability
on the part of such individual.
“Knowledge of the
Company”, including other similar phrases or uses, shall mean the actual
knowledge, after reasonable inquiry, of the individuals set forth on Section 1.1(a)
of the Disclosure Schedule delivered by the Selling Parties. An
individual’s inclusion on such schedule
4
shall not
imply any personal liability on the part of such individual other than such
liability as such individual may already have as specifically provided in this
Agreement.
“Knowledge of the Selling
Parties”, including other similar phrases or uses, shall mean the actual
knowledge of the Selling Parties.
“Laws” shall mean all
federal, state, local or foreign laws, judgments, orders, writs, injunctions,
decrees, ordinances, awards, stipulations, treaties, statutes, judicial or
administrative doctrines, rules or regulations enacted, promulgated, issued or
entered by a Governmental Authority or any legally binding agreement with a
Governmental Authority.
“Liens” shall mean all
title defects or objections, mortgages, liens, claims, charges, pledges or other
encumbrances of any nature whatsoever, including, without limitation, licenses,
leases, chattel or other mortgages, collateral security arrangements, pledges,
title imperfections, defect or objection liens, liens for Taxes, security
interests, conditional and installment sales agreements, easements,
encroachments or restrictions, of any kind and other title or interest retention
arrangements, reservations or limitations of any nature.
“Losses” shall mean
all losses, liabilities, demands, claims, actions or causes of action, costs,
damages, judgments, debts, settlements, assessments, deficiencies, Taxes,
penalties, fines or expenses, and any diminution in value of the Company and its
Subsidiaries, whether or not arising out of any claims by or on behalf of a
third party, including, without limitation, interest, penalties, reasonable
attorneys’ fees and expenses and all reasonable amounts paid in investigation,
defense or settlement of any of the foregoing, in all cases other than exemplary
damages or punitive damages (except to the extent included as part of any award
against any of the Indemnified Parties in a claim made or brought by an
unaffiliated third party).
“Mast Preferred Stock
Purchase Agreement” shall mean that certain Preferred Stock Purchase
Agreement dated June 27, 2008, between Broadpoint Securities Group, Inc.
and Mast Credit Opportunities I Master Fund Limited.
“Material Adverse
Effect” shall mean, with respect to Parent or the Company, as the case
may be, a material adverse effect on (i) the financial condition, results
of operations or business of such party and its Subsidiaries, taken as a whole,
or (ii) the timely consummation of the Transactions, other than, in the
case of clause (i), any change, effect, event, circumstance, occurrence or
state of facts relating to (A) the U.S. or global economy or the financial,
debt, credit or securities markets in general, including changes in interest or
exchange rates, (B) the industry in which such party and its Subsidiaries
operate in general, (C) acts of war, outbreak of hostilities, sabotage or
terrorist attacks, or the escalation or worsening of any such acts of war,
sabotage or terrorism, (D) the announcement of this Agreement or the
Transactions, including the impact thereof on relationships, contractual or
otherwise with customers, suppliers, lenders, investors, partners or employees,
(E) changes in applicable laws or regulations after the date hereof,
(F) changes or proposed changes in GAAP or regulatory accounting principles
after the date hereof, (G) earthquakes, hurricanes or other natural
disasters, (H) in the case of Parent, declines in the trading prices of
Parent Common Stock, in and of itself, but not including the underlying causes
thereof, or (I) those resulting from actions or omissions of such party or
any of its Subsidiaries which the other party has requested in writing that are
not otherwise required by
5
this
Agreement (except, in the cases of (A), (B), (C), (E), (F) and (G), to the
extent such party and its Subsidiaries are disproportionately adversely affected
relative to other companies in its industry).
“Net Tangible Book
Value” shall mean total consolidated assets, minus consolidated
intangible assets, and minus consolidated liabilities.
“Outstanding Claim”
shall mean any good faith claim for indemnification that is the subject of a
Claims Notice that at any time in question is (i) not resolved or disposed
of pursuant to this Agreement or (ii) not determined by a court of
competent jurisdiction, such determination not being appealable, to be not
payable to the Indemnified Party.
“Owned Company Intellectual
Property” shall mean all Company Intellectual Property that is owned or
purported to be owned by the Company or any of its Subsidiaries.
“Ownership Percentage”
shall mean the percentage set forth across from such Stockholder’s (or Holder’s)
name on Exhibit A. To
the extent the Selling Parties are required to make any payment hereunder in
proportion to their Ownership Percentages, for purposes of such payments the
Ownership Percentages shall be deemed proportionately increased to cover the
Ownership Percentages of the Stockholders that are not Signing
Stockholders.
“Permits” shall mean
all permits, licenses, approvals, franchises, registrations, accreditations and
written authorizations issued by any Governmental Authority that are used or
held for use in, necessary or otherwise relate to the ownership, operation or
other use of any of a party’s or any of its Subsidiaries’ business.
“Permitted Liens”
shall mean (i) mechanics’, carriers’, workmen’s, repairmen’s or other like
Liens arising or incurred in the ordinary course of business for amounts which
are not material and not yet due and payable and which secure an obligation of
the Company, (ii) Liens arising under Contracts with third parties entered
into in the ordinary course of business in respect of amounts still owing, which
Liens are disclosed in the Financial Statements, (iii) Liens for Taxes not
yet due and payable or delinquent and for which there are adequate reserves in
the Financial Statements, (iv) any other Liens disclosed in the Financial
Statements, and (v) such easements, rights of way, imperfections or
irregularities of title, or such other Liens as do not materially affect the use
of the properties or assets subject thereto or affected thereby or otherwise
materially impair business operations at such properties.
“Person” shall mean
any individual, partnership, limited liability company, association, joint
venture, corporation, trust, unincorporated organization, Governmental Authority
or other entity.
“Personal Information”
shall mean any personally identifying information (including name, address,
telephone number, email address, account and/or policy information) of any
Person and any and all other “nonpublic personal information” (as such term is
defined in the Gramm-Leach-Bliley Act of 1999 and implementing regulations, both
as may be amended from time to time).
6
“Pre-Closing Tax
Period” shall mean any Tax period ending on or before the Closing Date
and, with respect to any Straddle Period, the portion of such Straddle Period
ending on the Closing Date.
“Release” shall mean
any release, pumping, pouring, emptying, injecting, escaping, leaching,
migrating, dumping, seepage, spill, leak, flow, discharge, disposal or
emission.
“Registration Rights
Agreement” shall mean a Registration Rights Agreement in the form of
Exhibit E
hereto.
“RSU” means a unit
representing a right to purchase Restricted Stock that is subject to an RSU
Award.
“RSU Award” means an
award granted under an Employee Stock Incentive Plan in the form of
RSUs.
“SEC” shall mean the
United States Securities and Exchange Commission.
“Securities Act” shall
mean the Securities Act of 1933, as amended.
“Selling Parties’
Representative” shall mean Eric Gleacher.
“Software” shall mean
all computer software programs and related documentation and materials
(including Internet Web sites and Intranet sites), including, but not limited to
programs, tools, operating system programs, application software, system
software, firmware and middleware, including the source and object code versions
thereof, in any and all forms and media, and all documentation, user manuals,
training materials and development materials related to the
foregoing.
“Straddle Period”
shall mean any taxable period beginning on or prior to the Closing Date and
ending after the Closing Date.
“Subsidiary” and
“Subsidiaries”
shall mean, with respect to any Person, any other Person in which such Person
(i) owns, directly or indirectly, fifty percent (50%) or more of the
outstanding voting securities, equity securities, profits interest or capital
interest, (ii) is entitled to elect at least a majority of the board of
directors or similar governing body or (iii) in the case of a limited
partnership or limited liability company, is a general partner or managing
member, respectively.
“Tax Return” shall
mean any report, return, election, notice, estimate, declaration, information
statement, claim for refund, amendment or other form or document (including all
schedules, exhibits and other attachments thereto) relating to and filed or
required to be filed with a Taxing Authority in connection with any
Tax.
7
“Taxes” shall mean any
and all federal, national, provincial, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions, levies and
liabilities (including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
gains, franchise, estimated, withholding, payroll, recapture, employment,
excise, unemployment, insurance, social security, business license, occupation,
business organization, stamp, environmental and property taxes), together with
all interest, penalties and additions imposed with respect to such
amounts.
“Taxing Authority”
shall mean any federal, national, provincial, foreign, state or local
government, or any subdivision, agency, commission or authority thereof
exercising Tax regulatory, enforcement, collection or other
authority.
“Trade Secrets” shall
mean any and all trade secrets, including any non-public and confidential
information, technology, information, know-how, proprietary processes, formulae,
algorithms, models or methodologies constituting trade secrets, customer lists,
and all rights in and to the same.
“Trademark Agreement”
shall mean a Trademark Agreement in the form of Exhibit F
hereto.
“Transfer” shall mean
any transfer, sale, gift, assignment, distribution, conveyance, pledge,
hypothecation, encumbrance or other voluntary or involuntary transfer of title
or beneficial interest, whether or not for value, including, without limitation,
any disposition by operation of Law or any grant of a derivative or economic
interest therein.
“Transfer
Restrictions” shall mean, with regard to any share or shares of Parent
Common Stock, that such share or shares may not be Transferred to any Person
under any circumstances except, (1) with the written consent of Parent (it
being understood that Parent shall not unreasonably withhold its consent to any
Transfer made for purposes of estate administration or tax planning to the
spouse, children or grandchildren of the applicable Selling Party, or a trust
for the benefit of any such person), (2) pursuant to a tender or exchange
offer within the meaning of the Exchange Act for any or all of the Parent Common
Stock, (3) in connection with any plan of reorganization, restructuring,
bankruptcy, insolvency, merger or consolidation, reclassification,
recapitalization, or, in each case, similar corporate event of Parent, or
(4) through an involuntary transfer pursuant to operation of Law, including
pursuant to the laws of descent and distribution following the death of such
Selling Party or any permitted transferee.
“Treasury Regulations”
shall mean the regulations, including temporary regulations, promulgated under
the Code, as the same may be amended hereafter from time to time (including
corresponding provisions of succeeding regulations).
Each of
the following terms is defined in the Section set forth opposite such
term:
(a) All
article, section, schedule and exhibit references used in this Agreement are to
articles, sections, schedules and exhibits to this Agreement unless otherwise
specified. The schedules and exhibits attached to this Agreement
constitute a part of this Agreement and are incorporated herein for all
purposes.
(b) If a term
is defined as one part of speech (such as a noun), it shall have a corresponding
meaning when used as another part of speech (such as a verb). Terms
defined in the singular have the corresponding meanings in the plural, and vice
versa. Unless the context of this Agreement clearly requires
otherwise, words importing the masculine gender shall include the feminine and
neutral genders and vice versa. The term “includes” or “including”
shall mean “including without limitation.” The words “hereof,”“hereto,”“hereby,”“herein,”“hereunder” and words of similar import, when used
in this Agreement, shall refer to this Agreement as a whole and not to any
particular section or article in which such words appear unless otherwise
specified. The phrase “the date of this Agreement,”“date hereof” and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to the date set forth in the preamble of this Agreement.
(c) Whenever
this Agreement refers to a number of days, such number shall refer to calendar
days unless Business Days are specified. Whenever any action must be
taken hereunder on or by a day that is not a Business Day, then such action may
be validly taken on or by the next day that is a Business Day.
(d) The
parties hereto acknowledge that each party hereto has reviewed, and has had an
opportunity to have its attorney review, this Agreement and that any rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party, or any similar rule operating against the drafter of an
agreement, shall not be applicable to the construction or interpretation of this
Agreement. Any controversy over construction of this Agreement shall
be decided without regard to events of authorship or negotiation.
(e) Titles
and headings to sections herein are inserted for convenience of reference only,
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement.
(f) All
references to currency herein shall be to, and all payments required hereunder
shall be paid in United States dollars.
(g) Any
disclosure set forth in any section of the Disclosure Schedules shall be deemed
set forth for purposes of any other section of the Disclosure Schedules to which
such disclosure is relevant, to the extent and only to the extent that there is
an express cross reference to such disclosure in such other
section.
11
(h) All
accounting terms used herein and not expressly defined herein shall have the
meanings given to them under GAAP.
ARTICLE
II
THE
MERGER
Section
2.1 The
Merger. On the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Delaware General Corporation Law
(the “DGCL”)
and the Delaware Limited Liability Company Act (the “DLLCA”), the Company
shall be merged with and into Merger Sub at the Effective Time (as defined
below). At the Effective Time, the separate corporate existence of
the Company shall cease and Merger Sub shall continue as the surviving company
(the “Surviving
Company”). The Merger, the Share Issuance, the payment by
Parent of cash in connection with the Merger and the other transactions
contemplated by this Agreement are referred to collectively as the “Transactions”.
Section
2.2 Effective
Time. On the Closing Date (as defined below), Parent shall
file with the Secretary of State of the State of Delaware a certificate of
merger or other appropriate documents (in any such case, the “Certificate of
Merger”) executed in accordance with the relevant provisions of the DGCL
and the DLLCA and shall make all other filings or recordings required under the
DGCL and the DLLCA. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with such Secretary of State, or at such
other time as Parent and the Company shall agree and specify in the Certificate
of Merger (the time the Merger becomes effective being the “Effective
Time”).
Section
2.3 Effects. The
Merger shall have the effects set forth in Section 18-209 of the
DLLCA.
Section
2.4 Certificate of Formation and
Limited Liability Company Agreement.
(a) The
Certificate of Formation of the Surviving Company shall be the Certificate of
Formation of Merger Sub.
(b) The
limited liability company agreement of the Surviving Company shall be the
limited liability company agreement of Merger Sub.
Section
2.5 Managers. The
managers of Merger Sub immediately prior to the Effective Time shall be the
managers of the Surviving Company, until the earlier of their resignation or
removal or until their respective successors are duly elected or appointed and
qualified, as the case may be.
Section
2.6 Officers. The
officers of Merger Sub immediately prior to the Effective Time shall be the
officers of the Surviving Company, until the earlier of their resignation or
removal or until their successors are duly elected or appointed and qualified,
as the case may be.
12
Section
2.7 Effect on Limited Liability
Company Interests and Company Common Stock. At the Effective
Time, by virtue of the Merger and without any action on the part of any
Stockholder or the holder of any limited liability company interests of Merger
Sub:
(a) Each
issued and outstanding limited liability company interest of Merger Sub shall
remain outstanding.
(b) Subject
to Section 2.8(c)
and 2.10, all
the issued Company Shares shall be converted into the right to receive in the
aggregate: (i) at the Closing, 23,000,000 shares of Parent
Common Stock reduced by the number of shares of Parent Common Stock included in
the Interests Purchase Consideration; (ii) at the Closing, $10 million
in cash reduced by 50% of the cash included in the Interests Purchase
Consideration; and (iii) on the day that is five years following the
Closing Date, $10 million in cash reduced by 50% of the cash included in
the Interests Purchase Consideration, subject to earlier payment to a
Stockholder as specified on Schedule I
attached hereto, in each case allocated to the Stockholders in accordance with
Exhibit A.
(c) The
shares of Parent Common Stock to be issued and the cash to be payable upon the
conversion of Company Shares pursuant to Section 2.7(b)
and 2.8(c) are
referred to collectively as the “Merger
Consideration”. As of the Effective Time, all such Company
Shares (whether physically certificated or uncertificated) shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each Stockholder shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration, without
interest.
Section
2.8 Exchange of Company Common
Stock and Purchase of Interests.
(a) At the
Closing, subject to Section 2.9,
Parent shall (i) pay the amount of cash to which the Stockholders are
entitled to receive on the Closing Date in accordance with Section 2.7 by
either (x) one or more bank checks made to the order of the parties
designated by the Selling Parties’ Representative in writing no later than two
(2) Business Days prior to the Closing delivered to the Selling Parties’
Representative or (y) wire transfer to one or more accounts designated by
the Selling Parties’ Representative in writing no later than two
(2) Business Days prior to the Closing, and (ii) deliver to the
Selling Parties’ Representative certificates representing the number of whole
shares of Parent Common Stock into which each Stockholder’s Company Shares shall
have been converted in accordance with Section 2.7. With
respect to any payment required to be made hereunder after the Closing, on the
applicable payment date Parent shall pay by wire transfer to one or more
accounts designated by the Selling Parties’ Representative in writing no later
than five (5) Business Days prior to such date or by check payable to the
Stockholder entitled thereto and delivered by reputable courier to any address
designated by such Stockholder in writing no less than five (5) Business
Days prior to such anniversary (or, if no such address is so designated, to the
address reflected in the Company’s books and records) the amount of cash to
which the Stockholder(s) are entitled to receive on such date in accordance with
Section 2.7.
(b) The
Merger Consideration issued and paid in accordance with the terms of this Article II upon
conversion of any Company Shares shall be deemed to have been issued and
13
paid in
full satisfaction of all rights pertaining to such Company Shares, and after the
Effective Time, there shall be no further registration of transfers on the
transfer books of the Company of Company Shares that were outstanding prior to
the Effective Time.
(c) No
certificate or scrip representing fractional shares of Parent Common Stock shall
be issued upon the conversion of Company Common Stock. For purposes
of this paragraph (c), all fractional shares to which a single record holder
would be entitled shall be aggregated. In lieu of any such fractional
shares, each Stockholder who would otherwise be entitled to such fractional
shares shall be entitled to an amount in cash, without interest, rounded to the
nearest cent, equal to the product of (A) the amount of the fractional
share interest in a share of Parent Common Stock to which such holder is
entitled and (B) the last closing price per share of Parent Common Stock
prior to the date on which the payment became due.
(d) All cash
to be paid or shares to be delivered hereunder as part of the Merger
Consideration, including shares to be delivered to the Escrow Agent (as defined
below) pursuant to Section 2.9 and
any shares to be delivered to the Stockholders by the Escrow Agent pursuant to
Section 10.5,
shall be allocated among and paid to the Stockholders as set forth on Exhibit
A.
(e) Subject
to Section 2.9,
immediately prior to the Effective Time, Merger Sub shall purchase (and Parent
shall cause Merger Sub to purchase) (the “Interests Purchase”)
from the Holders set forth on Exhibit A, and
each such Holder shall sell, convey, transfer, assign and deliver, and cause to
be sold, conveyed, transferred, assigned and delivered to Merger Sub, on the
Closing Date and upon the Closing, the Interests set forth on Exhibit A
opposite such Holder’s name, free and clear of any Liens, and Merger Sub shall
pay (and Parent shall cause Merger Sub to pay) to each Holder the Interests
Purchase Consideration. Parent shall (i) pay the cash portion of
the Interests Purchase Consideration to which the Holders set forth on Exhibit A are
entitled to receive on the Closing Date either by (x) one or more bank
checks made to the order of the parties designated by the Selling Parties’
Representative in writing no later than two (2) Business Days prior to the
Closing delivered to the Selling Parties’ Representative or (y) by wire
transfer to one or more accounts designated by the Selling Parties’
Representative in writing no later than two (2) Business Days prior to the
Closing, and (ii) deliver to the Selling Parties’ Representative
certificates representing the stock portion of the Interests Purchase
Consideration to which the Holders set forth on Exhibit A are
entitled to receive on the Closing Date.
(f) Parent
shall use its reasonable best efforts to cause all of the shares of Parent
Common Stock issued in the Merger or delivered pursuant to the Interests
Purchase to be listed on the NASDAQ Global Market before the Transfer
Restrictions lapse in accordance with Section 7.13. If
between the date of this Agreement and the Effective Time, the outstanding
shares of Parent Common stock shall have been increased, decreased, changed into
or exchanged for a different number or kind of shares or securities as a result
of a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, an
appropriate and proportionate adjustment shall be made to the Merger
Consideration and the Interests Purchase Consideration.
14
Section
2.9 Escrow. At
Closing, Parent, each of the Selling Parties and an escrow agent selected by
Parent and reasonably acceptable to the Selling Parties’ Representative (the
“Escrow
Agent”), shall enter into an escrow agreement substantially in the form
of Exhibit G
hereto with such changes as the Escrow Agent may reasonably request (the “Escrow
Agreement”). The Escrow Agreement shall provide for the
creation of an escrow fund (the “Escrow Fund”) to be
held as a source of funds for any indemnification obligations of the Selling
Parties pursuant to Article X. Upon
the Closing, Parent shall deposit into the Escrow Fund an aggregate of 2,300,000
shares of Parent Common Stock (the “Escrowed Shares”), in
lieu of delivering such shares of Parent Common Stock to the Stockholders (or
Holders) pursuant to Section 2.8(a)
and 2.8(e).
(a) Post-Closing
Payment. In the event that the actual Net Tangible Book Value
on the Closing Date, as determined pursuant to Section 2.10(b)
and 2.10(c)
(the “Actual Net
Tangible Book Value”), is less than $0 (the “Target Amount”), each
of the Selling Parties shall pay to Parent in cash, within three
(3) Business Days of the final determination of the Actual Net Tangible
Book Value pursuant to Section 2.10(b)
and 2.10(c),
such Selling Party’s proportionate share of the amount of such shortfall, in
accordance with such Selling Party’s Ownership Percentage as set forth on Exhibit A. In
the event that the Actual Net Tangible Book Value is greater than the Target
Amount, Parent shall pay each Selling Party in cash, in accordance with such
Selling Party’s Ownership Percentage as set forth on Exhibit A within
three (3) Business Days of the final determination of the Actual Net
Tangible Book Value pursuant to Section 2.10(b)
and 2.10(c),
such Selling Party’s proportionate share of the amount of such excess; provided, however, that the
aggregate amount of cash paid to the Selling Parties pursuant to this Section 2.10(a),
together with the aggregate amount of any dividend or distributions of cash
permitted under Section 7.1(b)
and the fair market value of any other assets identified in Section 7.1(b)
of the Disclosure Schedule and distributed pursuant to Section 7.1(b),
shall not exceed $10 million.
(b) Closing Date Balance
Sheet. Parent, in conjunction with its independent
accountants, shall prepare and present to the Selling Parties’ Representative,
as soon as practicable after the Closing Date, but not more than sixty
(60) days after the Closing Date, a balance sheet reflecting the financial
position of the Company as of the Closing Date and setting forth Parent’s
calculation of Net Tangible Book Value as of close of business on the Closing
Date (the “Closing
Date Balance Sheet”). All items on the Closing Date Balance
Sheet shall be determined and computed in accordance with GAAP in effect as of
the date hereof, applied in a manner consistent with the Audited Financial
Statements. The Selling Parties’ Representative and its independent
accountants shall have the right to observe and participate in the preparation
of the Closing Date Balance Sheet and, during such sixty (60) day period,
Parent shall provide the Selling Parties’ Representative and its independent
accountants and other authorized representatives with reasonable access to the
Surviving Company’s facilities, books and records and its personnel and
accountants for the purpose of such observation or participation; provided, however, that
(i) such observation, participation and access shall not unreasonably
interfere with the business operations of Parent or its Subsidiaries;
(ii) Parent shall not be required to provide access to any information or
take any other action that would constitute a waiver of the attorney-client
privilege; and (iii) Parent need
15
not
supply any Person with any information which, in the reasonable judgment of
Parent, Parent is under a legal obligation not to supply; provided, however, that in the
case clause (ii) or (iii) applies, Parent shall make appropriate
substitute disclosure arrangements and, if applicable, use its reasonable best
efforts to obtain any consent required to disclose such
information. The Selling Parties will use their reasonable best
efforts to cooperate with Parent in the preparation of the Closing Date Balance
Sheet.
(c) Post-Closing Adjustment
Disputes. The Closing Date Balance Sheet shall be final and
binding upon the parties unless the Selling Parties’ Representative provides
Parent with a written notice of dispute (a “Dispute Notice”) with
respect to the Closing Date Balance Sheet, identifying with specificity the
disputed calculations, not later than thirty (30) days after receipt by the
Selling Parties’ Representative of the Closing Date Balance
Sheet. During the thirty (30) day period following the receipt
by Parent of a Dispute Notice, Parent and the Selling Parties’ Representative
shall cooperate in good faith to resolve any such dispute. If Parent
and the Selling Parties’ Representative are unable to resolve the dispute within
such thirty (30) day period, then the parties shall submit the dispute to a
mutually acceptable independent “Big Four” accounting firm (the “Reviewing
Accountants”) for arbitration. The parties shall use
commercially reasonable efforts to cause the Reviewing Accountants to resolve
any such dispute within thirty (30) days of submission. The
Reviewing Accountants shall determine all amounts in dispute with respect to the
Closing Date Balance Sheet and shall determine the Actual Net Tangible Book
Value. The decision of the Reviewing Accountants with respect to the
Actual Net Tangible Book Value shall be within the range represented by Parent
and the Selling Parties’ Representative’s respective positions. The
Reviewing Accountant’s determination with respect to the Closing Date Balance
Sheet and Actual Net Tangible Book Value shall be final and binding on the
parties. The fees and expenses of such Reviewing Accountants shall be
borne by Parent, on the one hand, and by the Selling Parties, on the other hand,
in inverse proportion as they may prevail on the matters resolved by the
Reviewing Accountants, which allocation shall be determined by the Reviewing
Accountants at the time such Reviewing Accountants render their determination on
the merits of the matters submitted to them.
Section
2.11 Alternative Merger
Structure. Notwithstanding anything else in this Agreement to
the contrary, at Parent’s request, the Company and the Selling Parties will
agree to amend such provisions of this Agreement as are necessary to provide
that, in lieu of effecting the Merger as described in Section 2.1,
(i) Parent shall form a wholly-owned subsidiary corporation (“Merger Corp”),
(ii) Merger Corp shall be merged with and into the Company at the Effective
Time and the separate corporate existence of Merger Corp shall thereupon cease
and the Company shall continue as the surviving company, and (iii) promptly
thereafter, Parent will cause the Company to merge with and into Merger Sub and
the separate corporate existence of the Company shall thereupon cease and Merger
Sub shall be the Surviving Company (collectively, clauses (i),
(ii) and (iii) hereof, the “Alternative
Structure”); provided that no such
amendment shall (a) change the Merger Consideration to be received by the
Stockholders, the Interests Purchase Consideration to be received by the
Holders, or the intended tax treatment thereof, (b) prevent or materially
delay the Closing or (c) violate any Law. The parties hereto
intend that, if Parent elects to effect the Alternative Structure, the steps
described in clauses (i), (ii) and (iii) hereof, taken together,
are to be treated as a “reorganization” under Section 368(a) of the Code
(to which each of Parent and the Company are to be “parties to the
reorganization”
16
under
Section 368(b) of the Code) in which the Company is to be treated as
merging directly with and into Parent.
Section
2.12 Withholding
Rights. Parent shall be entitled to deduct and withhold from
the consideration otherwise payable to any Stockholder (or Holder) pursuant to
this Agreement such amounts as may be required to be deducted and withheld under
the Code, or under any provision of state, local or foreign Tax
law. To the extent that amounts are so withheld and timely paid over
to the appropriate Taxing Authority, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the Stockholder in respect
of which such deduction and withholding was made and Parent will be treated as
though it withheld an appropriate amount of the type of consideration otherwise
payable pursuant to this Agreement, sold such consideration for an amount of
cash equal to the fair market value of such consideration at the time of such
deemed sale and paid such cash proceeds to the appropriate Taxing
Authority.
Section
2.13 Written Consent of the
Signing Stockholders. By its execution of this Agreement, each
Signing Stockholder, in its capacity as a registered or beneficial stockholder
of Company Common Stock, hereby approves and adopts this
Agreement. For purposes of the DGCL, such execution shall be deemed
to be action taken by the irrevocable written consent of the Signing
Stockholders holding at least 75 percent of the Company Shares, in accordance
with the Company’s Amended and Restated Bylaws.
ARTICLE
III
CLOSING
Section
3.1 Closing. The
closing (the “Closing”) of the
Merger shall take place at the offices of Sidley Austin LLP, 787 Seventh Avenue,
New York, New York10019 at 10:00 a.m. on the third Business Day following
the satisfaction (or, to the extent permitted by this Agreement, waiver by all
parties) of the conditions set forth in Section 8.1, or,
if on such day any condition set forth in Section 8.2 or
8.3 has not
been satisfied (or, to the extent permitted by this Agreement, waived by the
party or parties entitled to the benefits thereof), as soon as practicable after
all the conditions set forth in Article VIII
have been satisfied (or, to the extent permitted by this Agreement, waived by
the parties entitled to the benefits thereof), or at such other place, time and
date as shall be agreed in writing between Parent and the Selling Parties’
Representative. The date on which the Closing occurs is referred to
in this Agreement as the “Closing
Date”.
Section
3.2 Deliveries of the Company at
Closing. At the Closing, the Company shall deliver the
following to Parent:
(a) a
certificate, dated as of the Closing Date and executed by the Secretary of the
Company, certifying that (A) true and complete copies of the Company
Charter Documents as in effect on the Closing Date are attached to such
certificate, (B) the signature of each officer of the Company executing
this Agreement and any other agreement, instrument or document executed and
delivered by the Company at or before Closing is genuine and each such officer
is duly appointed to the office of the Company set forth underneath such
officer’s signature
17
thereon
and (C) true and complete copies of the resolutions of the Board of
Directors of the Company (the “Company Board”),
which were approved prior to the execution of this Agreement, authorizing the
execution, delivery and performance of this Agreement, and the consummation of
the Transactions, are attached to such certificate, and such resolutions have
not been amended or modified and remain in full force and effect;
and
(b) long-form
good standing certificates in respect of the Company and each of the CompanySubsidiaries, from the Secretary of State in their respective jurisdictions of
incorporation or formation, in each case dated not more than seven (7) days
prior to the Closing Date.
Section
3.3 Selling Parties Deliveries
at Closing. At the Closing the Selling Parties shall deliver
or cause to be delivered to Parent the following:
(a) certificates
representing the Company Shares owned by each Selling Party, free and clear of
any and all Liens;
(b) an
instrument of assignment, duly executed by each Holder, in respect of the
Interests owned by each Holder, transferring such Interests to Merger Sub, free
and clear of any and all Liens;
(c) the
Registration Rights Agreement, duly executed by Eric Gleacher;
(d) the
Escrow Agreement, duly executed by the Selling Parties’ Representative on behalf
of the Selling Parties;
(e) the
Trademark Agreement, duly executed by Eric Gleacher on his own behalf and on
behalf of the other entities signatory thereto (other than the Buying Parties)
and;
(f) all other
documents and instruments required to be delivered by the Company or the Selling
Parties on or prior to the Closing Date pursuant to this Agreement, including,
without limitation, those items set forth in Sections 8.2 and
11.2 hereof and
assignment agreements in respect of the Interests.
Section
3.4 Parent Deliveries at
Closing. At the Closing, Parent shall deliver or cause to be
delivered to the Selling Parties’ Representative (except as provided below) the
following:
(a) the cash
and certificates representing shares of Parent Common Stock required to be
delivered on the Closing Date pursuant to Section 2.8(a),
2.8(c) and
2.8(e), which
shall be delivered to the Selling Parties’ Representative, the Selling Parties
and the Escrow Agent as set forth in Section 2.8(a),
2.8(e) and
2.9;
(c) the
Escrow Agreement, duly executed by Parent;
(d) the
Trademark Agreement, duly executed by Parent;
18
(e) a
certificate, dated as of the Closing Date and executed by the Secretary of
Parent, certifying that (A) true and complete copies of the Parent Charter,
the certificate of formation of Merger Sub, the limited liability company
agreement of Merger Sub and the by-laws of Parent, as in effect on the Closing
Date, are attached to such certificate, (B) the signature of each officer
of Parent or Merger Sub executing this Agreement, the Ancillary Agreements to
which Parent or Merger Sub is a party and any other agreement, instrument or
document executed and delivered by Parent or Merger Sub at or before Closing is
genuine and each such officer is duly appointed to the office of Parent or
Merger Sub set forth underneath such officer’s signature thereon, and
(C) true and complete copies of the resolutions of the Board of Directors
of Parent (the “Parent
Board”) and the written consent of Parent as sole member of Merger Sub,
which were approved prior to the execution of this Agreement, authorizing the
execution, delivery and performance of this Agreement and the consummation of
the Transactions, are attached to such certificate, and such resolutions and
written consent have not been amended or modified and remain in full force and
effect;
(f) long-form
good standing certificates of the Secretary of State of New York with respect to
Parent and of the Secretary of State of Delaware with respect to Merger Sub, in
each case dated not more than seven (7) days prior to the Closing Date;
and
(g) to the
Selling Parties’ Representative, all other documents and instruments required to
be delivered by Parent or Merger Sub to the Company or the Selling Parties on or
prior to the Closing Date pursuant to this Agreement, including, without
limitation, those set forth in Section 8.3
hereof and assignment agreements in respect of the Interests.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY AND THE SELLING PARTIES
Except as
set forth in the Disclosure Schedules, the Company and each of the Selling
Parties represents and warrants to Parent as of the date hereof and as of the
Closing Date (or as of such other date as may be expressly provided in any
representation or warranty) as follows:
Section
4.1 Organization and Good
Standing; Charter Documents. Each of the Company and its
Subsidiaries is duly incorporated or organized, validly existing and in good
standing under the Laws of the jurisdiction of its incorporation or organization
and has all requisite power and authority to own, lease, operate and otherwise
hold its properties and assets and to carry on its business as presently
conducted. Each of the Company and its Subsidiaries is duly qualified
or licensed to do business as a foreign corporation and is in good standing in
every jurisdiction in which the nature of the business conducted by it or the
assets or properties owned or leased by it requires
qualification. The Company has provided Parent with true, correct and
accurate copies of each of the Company Charter Documents.
Section
4.2 Authorization and Effect of
Agreement. The Company has all requisite right, power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by the Company, and the performance by
the Company of its obligations
19
hereunder,
and the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action on the part of the Company, and no
other corporate action on the part of the Company is necessary to authorize the
Company’s execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby. The Board of Directors of the
Company has duly and unanimously adopted resolutions (i) approving this
Agreement, the Merger and the other Transactions, (ii) determining that the
terms of the Merger and the other Transactions are fair to and in the best
interests of the Company and its stockholders, (iii) recommending that the
Company’s stockholders adopt this Agreement and (iv) declaring that this
Agreement is advisable. Pursuant to Section 2.13 hereof, this
Agreement has been approved by the irrevocable written consent of the Signing
Stockholders holding more than 75 percent of the Company Shares and no other
vote or approval of the holders of Company Shares is necessary to approve the
Merger or any other Transaction. This Agreement has been duly and
validly executed and delivered by the Company and, assuming due authorization,
execution and delivery hereof by the other parties hereto, constitutes a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting or
relating to creditors’ rights generally and subject, as to enforceability, to
general principles of equity.
Section
4.3 Consents and Approvals; No
Violations. Except for (i) compliance with and filings
under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the
“HSR Act”),
(ii) the filing of the Certificate of Merger with the Secretary of State of
Delaware and appropriate documents with the relevant authorities of the other
jurisdictions in which the Company is qualified to do business and
(iii) compliance with FINRA rules and filing of a change of control
application on Form 1017, no filing with, and no Permit or Consent of any
Governmental Authority or any other Person is necessary to be obtained, made or
given by the Company or any of its Subsidiaries in connection with the execution
and delivery by the Company of this Agreement, the performance by the Company of
its obligations hereunder and the consummation of the transactions contemplated
hereby. Neither the execution and delivery of this Agreement by the
Company nor the consummation by the Company of the transactions contemplated
hereby nor compliance by the Company with any of the provisions hereof will
(a) conflict with or result in any breach of any provision of the Company
Charter Documents, (b) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, modification, cancellation or acceleration or loss of
material benefits) under any of the terms, conditions or provisions of any
Contract to which the Company or any of its Subsidiaries is a party or otherwise
may be subject to or bound or result in the creation of any Lien, other than
Permitted Liens, on any of the assets or properties of the Company or any of its
Subsidiaries, (c) violate any Permit or Law applicable to the Company of
any of its Subsidiaries or to which the Company or any of its Subsidiaries or
any of its or their assets or properties may be subject to or bound, or
(d) result in the creation of any Lien on the Company Shares, except in the
case of (b) or (c), a violation, breach or default which would not have or
would not reasonably be expected to have a Material Adverse Effect.
Section
4.4 Permits; Compliance with
Law.
(a) Section 4.4(a)
of the Disclosure Schedule sets forth a complete and accurate list of all
Permits issued by FINRA or any other securities regulator, and all other
material Permits,
20
held or
maintained by the Company or any of its Subsidiaries. The Company and
its Subsidiaries hold all material Permits necessary for the ownership and lease
of its and their properties and assets and the lawful conduct of its business as
it is now substantially conducted under and pursuant to all applicable
Laws. All material Permits have been legally obtained and maintained
and are valid and in full force and effect. The Company and its
Subsidiaries are in compliance in all material respects with all of the terms
and conditions of all Permits. To the Knowledge of the Company,
(i) there has been no material change in the facts or circumstances
reported or assumed in the application for or granting of any Permits and
(ii) no outstanding violations are or have been recorded in respect of any
Permits. No action, proceeding, claim or suit is pending or, to the
Knowledge of the Company, threatened, to suspend, revoke, withdraw, modify or
limit any Permit, and, to the Knowledge of the Company, no investigation is
pending or threatened in writing, to suspend, revoke, withdraw, modify or limit
any Permit. To the Knowledge of the Company, there is no fact, error
or admission relevant to any Permit that could reasonably be expected to result
in the suspension, revocation, withdrawal, material modification or material
limitation of, or could reasonably be expected to result in the threatened
suspension, revocation, withdrawal, material modification or material limitation
of, or in the loss of any Permit. Each Permit shall continue to be
valid and in full force and effect immediately following the Closing without any
Consent, approval or modification required by or from any Governmental
Authority.
(b) The
Company and its Subsidiaries and its and their properties, assets, operations
and business are currently being, and since December 31, 2006 have been,
operated in compliance in all material respects with all Permits and applicable
Laws except for such noncompliance as has not had or would not reasonably be
expected to have a Material Adverse Effect.
Section
4.5 Capitalization of the
Company; Accredited Investors.
(a) The
entire authorized capital stock of the Company consists solely of 100,000 shares
of Company Common Stock, of which 45,841 shares are issued and outstanding and
held by the Stockholders in the amounts set forth in Exhibit A
hereto. The issued and outstanding capital stock of the Company
consists solely of the Company Shares. There are no accrued and
unpaid dividends in respect of any Company Shares. No other class of
equity securities or other securities or rights of any kind of the Company are
authorized, issued or outstanding. All of the Company Shares are duly
authorized, validly issued, fully paid and non-assessable and are not subject to
preemptive rights created by statute, the Company’s organizational documents or
any agreement to which the Company is a party or by which it is
bound.
(b) The
authorized capital stock or other equity interests of each of the Company’s
Subsidiaries is set forth in Section 4.5(b)
of the Disclosure Schedule. There are no accrued and unpaid dividends
in respect of any share of capital stock or other equity interests of any
Subsidiary of the Company. No other class of equity securities or
other securities or rights of any kind of any Subsidiary of the Company are
authorized, issued or outstanding. All of the shares of capital stock
or other equity interests of each Subsidiary of the Company are duly authorized,
validly issued, fully paid and non-assessable, and are owned of record and
beneficially as set forth in Section 4.5(b)
of the Disclosure Schedule, free and clear of any and
21
all
Liens. The Company owns all the issued and outstanding membership
interests in Holdings (other than the Interests to be purchased by Merger Sub
pursuant to the Interests Purchase), free and clear of any and all
Liens. Holdings owns all the issued and outstanding membership
interests of Gleacher Partners LLC, a Delaware limited liability company (“Partners”), free and
clear of any all Liens.
(c) Neither
the Company nor any of its Subsidiaries has issued any securities in violation
of any preemptive or similar rights. There are not any bonds,
debentures, notes or other indebtedness of the Company or any of its
Subsidiaries having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which holders of Company
Common Stock or holders of interests in any Company Subsidiary may vote (“Voting Company
Debt”). There are not any options, warrants, rights,
convertible or exchangeable securities, “phantom” stock rights, stock
appreciation rights, stock-based performance units, commitments, Contracts,
arrangements or undertakings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound (collectively, “Options”)
(i) obligating the Company or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other equity interests in, or any security convertible or exercisable
for or exchangeable into any capital stock of or other equity interest in, the
Company or of any of its Subsidiaries or any Voting Company Debt,
(ii) obligating the Company or any of its Subsidiaries to issue, grant,
extend or enter into any such option, warrant, call, right, security,
commitment, Contract, arrangement or undertaking or (iii) that give any person
the right to receive any economic benefit or right similar to or derived from
the economic benefits and rights occurring to holders of Company Common Stock or
holders of interests in any Company Subsidiary. The Company is not a
party to or bound by and, to the Knowledge of the Company, there are no,
restrictions upon, or voting trusts, proxies or other agreements or
understandings of any kind with respect to, the voting, purchase, redemption,
acquisition or transfer of, or the declaration or payment of any dividend or
distribution on, the Company Shares or any shares of the capital stock of or
equity interests in any Subsidiary of the Company.
(d) To the
Knowledge of the Company, all of the individuals listed on Exhibit A hereto
are Accredited Investors (as defined in Regulation D promulgated under the
Securities Act).
(e) Without
limiting the Selling Parties’ right to indemnification from Parent as
contemplated by Article X or the
Selling Parties’ other rights under this Agreement, Parent’s issuance and
payment of the Merger Consideration and the Interests Purchase Consideration, as
applicable, as and when due under the terms hereof and as reflected on Exhibit A, is
the only obligation Parent or the Surviving Company shall have with respect to
the ownership or right to be issued, or otherwise in respect of, any Company
Shares or Interests under existing agreements or instruments to which the
Company is a party.
Section
4.6 No
Subsidiaries. Except as set forth in Section 4.6 of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries is the
owner of record or beneficial owner, nor does it control, directly or
indirectly, any capital stock, securities convertible into capital stock, or any
other equity interest in any Person. Except as set forth in Section 4.6 of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries is or
has ever been a
22
partner
or member, or has, or has ever had, any other ownership interest in any general
or limited partnership, or any similar entity.
Section
4.7 Minutes; Books and
Records. The Company has made available to Parent true,
complete and accurate copies, or the complete original, of the minute books of
the Company and its Subsidiaries. The minute books of the Company and
its Subsidiaries accurately reflect in all material respects all actions taken
at meetings, or by written consent in lieu of meetings, of the stockholders,
members, board of directors and all committees of the board of directors of the
Company and its Subsidiaries. All corporate actions taken by the
Company and its Subsidiaries have been duly authorized, and no such actions
taken by the Company and its Subsidiaries have been taken in breach or violation
of the Company Charter Documents.
Section
4.8 Litigation. Except
as set forth in Section 4.8 of
the Disclosure Schedule, there are no actions, proceedings, claims, suits,
oppositions, challenges, charge or governmental or regulatory investigations
(“Proceedings”)
pending or, to the Knowledge of the Company, threatened against the Company or
any of its Subsidiaries or its or their assets, properties, businesses, or
employees. There are no outstanding judgments, writs, injunctions,
orders, decrees or settlements, whether preliminary, temporary or permanent
(“Orders”),
imposed by any Governmental Authority against or that apply, in whole or in
part, to the Company or any of its Subsidiaries, or its or their assets,
properties, businesses, or employees, in each case to the extent relating to the
business of the Company or any of its Subsidiaries.
Section
4.9 Assets Necessary to the
Company. The Company and its Subsidiaries own or have a valid
license or leasehold interest in all of the rights, properties and assets,
including Intellectual Property, that are used or held for use in or are
necessary for the Company or any of its Subsidiaries to conduct the Company’s
and its Subsidiaries’ business as currently conducted. Immediately
following the Closing, none of the Selling Parties will own, license or lease
any rights, properties or assets that are used or held for use in or are
necessary for the Company or any of its Subsidiaries or the Surviving Company,
as the case may be, to conduct the Company’s and its Subsidiaries’ business as
currently conducted.
Section
4.10 Financial
Statements.
(a) The
Company has delivered to the Buying Parties (i) the audited balance sheets
of Partners as of December 31, 2006, December 31, 2007 and
December 31, 2008 (the date of the most recent such balance sheet being
referred to herein as the “Balance Sheet Date”),
and the related audited statements of income, change in member’s equity, and of
cash flows of Partners for the three years ended December 31, 2008 (the
foregoing audited financial statements, together with any additional audited
financial statements of Partners provided after the date hereof pursuant hereto,
including the notes thereto and all related compilations, reviews and other
reports issued by its accountants with respect thereto, the “Audited Financial
Statements”), and (ii) unaudited balance sheets of Partners as of
January 31, 2009, and the related unaudited statements of income of
Partners for the month ended January 31, 2009 (the foregoing unaudited
financial statements, together with any additional unaudited financial
statements of Partners provided after the date hereof pursuant hereto, including
the notes thereto and all related compilations, reviews and other reports issued
by its accountants with respect thereto, the “Most Recent Financial
Statements”, and together with the Audited
23
Financial
Statements, the “Financial
Statements”). The Financial Statements have been prepared in
accordance with GAAP consistently applied, and fairly present in all material
respects the financial condition of Partners as of the dates thereof and the
results of their operations for the periods covered thereby; provided, however, that the
interim Most Recent Financial Statements are subject to normal recurring
year-end adjustments, which in the aggregate are not material, and lack
footnotes and other presentation items. No financial statements of
any Person other than Partners are required by GAAP to be included in the
consolidated financial statements of Partners.
(b) The
Company has delivered to the Buying Parties (i) the unaudited balance
sheets of Holdings as of December 31, 2006, December 31, 2007 and
December 31, 2008, and the related statements of income, member’s equity,
and of cash flows of Holdings for the three years ended December 31, 2008,
and (ii) an unaudited balance sheet of Holdings as of January 31,2009, and the related unaudited statements of income of Holdings for the month
ended January 31, 2009. The financial statements described in
this Section 4.10(b),
together with any additional financial statements of the Company or Holdings
provided after the date hereof pursuant hereto, including the notes thereto and
all related compilations, reviews and other reports issued by its accountants
with respect thereto, have been prepared in accordance with GAAP consistently
applied, and fairly present in all material respects the financial condition of
the Company or Holdings as of the dates thereof and the results of their
operations for the periods covered thereby; provided, however, that the
interim financial statements described in this Section 4.10(b)(ii)
are subject to normal recurring year-end adjustments, which in the aggregate are
not material, and lack footnotes and other presentation items.
(c) The
Company and its Subsidiaries maintain internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in
accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management’s general or specific authorization
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(d) The
records, systems, controls, data and information of the Company and its
Subsidiaries are recorded, stored, maintained and operated under means
(including any electronic, mechanical or photographic process, whether
computerized or not) that are under the exclusive ownership and direct control
of the Company (including all means of access thereto and therefrom), except for
any non-exclusive ownership and non-direct control that would not reasonably be
expected to have a material adverse effect on the system of internal accounting
controls described below in this Section 4.10(d). The
Company (x) has implemented and maintains disclosure controls and
procedures to ensure that material information relating to the Company and its
Subsidiaries is made known to the chief executive officer and the chief
financial officer of the Company by others within those entities and
(y) has disclosed, based on its most recent evaluation, to the Company’s
outside auditors (i) any significant deficiencies and material weaknesses
in the design or operation of internal controls over financial reporting that
are reasonably likely to adversely affect the Company’s ability to record,
process, summarize and report financial information and (ii) any fraud,
24
whether
or not material, that involves management or other employees who have a
significant role in the Company’s internal controls over financial
reporting. These disclosures were made in writing by management to
the Company’s auditors, true and complete copies of which have been made
available to Parent before the date hereof.
(e) The
Company does not have any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) or assets (other than its membership
interest in Holdings), and since the date of its incorporation has not conducted
any business other than through Partners.
(f) Except as
set forth in Section 4.10(f)
of the Disclosure Schedule or as reflected in the financial statements described
in Section 4.10(b)
and delivered to Parent prior to the date hereof, Holdings does not have any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) or assets (other than its membership interest in Partners), and
since the date of its formation has not conducted any business other than
through Partners.
Section
4.11 Bank
Accounts. Section 4.11 of
the Disclosure Schedule contains a true, complete and accurate list of
(a) the names and locations of all banks, trust companies, securities
brokers and other financial institutions at which the Company or any of its
Subsidiaries has an account or safe deposit box or maintains a banking,
custodial, trading or other similar relationship, (b) a true, complete and
accurate list and description of each such account, box and relationship and
(c) the name of every Person authorized to draw thereon or having access
thereto.
Section
4.12 Debt. Section 4.12 of
the Disclosure Schedule sets forth a complete and accurate list of the amounts
and types of all of the Company’s and its Subsidiaries’ outstanding Debt as of
the date hereof.
Section
4.13 Absence of Certain
Changes. Since the Balance Sheet Date, (a) the Company
and its Subsidiaries have been operated in all material respects in the ordinary
course of business consistent with past practice, (b) the Company and its
Subsidiaries have not taken or agreed to take any of the actions set forth in
Section 7.1
hereof, (c) there has not occurred any event or condition that,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect on the Company, and (d) through the date hereof,
the Company and its Subsidiaries have not suffered the loss of service of any
officers, directors, employees, consultants or agents (collectively, “Personnel”) who are
material, individually or in the aggregate, to the operations or conduct of the
Company.
Section
4.14 Transactions with
Affiliates. Except as set forth in Section 4.14 of
the Disclosure Schedule, no Related Party (as defined in this Section 4.14)
either currently or at any time since December 31,2005: (i) has or has had any interest in any material property
(real or personal, tangible or intangible) that the Company or any of its
Subsidiaries uses or has used in or pertaining to the business of the Company or
any of its Subsidiaries or (ii) has or has had any business dealings or a
financial interest in any transaction with the Company or any of its
Subsidiaries or involving any material assets or property of the Company or any
of its Subsidiaries. For purposes of this Agreement, the term “Related Party” shall
mean as of any time: an officer or director, Stockholder holding more
than 2.5% of the Company Shares, any
25
Holder,
employee or Affiliate of the Company or any of its Subsidiaries at such time,
any present spouse, stepchild, stepparent, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, or any child,
grandchild, parent, grandparent or sibling, including any adoptive
relationships, of any such officer, director or Affiliate of the Company or any
of its Subsidiaries or any trust or other similar entity for the benefit of any
of the foregoing Persons.
(a) Section 4.15(a)
of the Disclosure Schedule sets forth a complete and accurate list of each
Contract of the following types or having the following terms to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries or its or their properties or assets is or may be bound as of
the date hereof (collectively, the “Company
Contracts”):
(i) all
Contracts providing for the employment, retention, bonus, severance or other
service relationship with any current or former officer, director, employee,
consultant or other person requiring compensation by the Company (the name,
position or capacity and rate of compensation of each such person and the
expiration date of each such Contract being set forth in Section 4.15(a)
of the Disclosure Schedule), to the extent there are continuing obligations of
the Company or its Subsidiaries thereunder in excess of $50,000;
(ii) all
material Contracts (other than employment contracts) with any current or former
officer, director, stockholder, employee, consultant, agent or other
representative of the Company or any of its Subsidiaries or with an entity in
which any of the foregoing is a controlling person;
(iii) (A) all
instruments relating to indebtedness for borrowed money, any note, bond, deed of
trust, mortgage, indenture or agreement to borrow money, and any agreement
relating to the extension of credit or the granting of a Lien other than
Permitted Liens, or (B) any Contract of guarantee of credit in favor of any
Person or entity in excess of $100,000;
(iv) all
lease, sublease, rental, license or other Contracts under which the Company or
any of its Subsidiaries is a lessor or lessee of any real property or the
guarantee of any such lease, sublease, rental or other Contracts providing for
lease or rental payments in excess of $100,000 per annum and a term of at least
twelve (12) months;
(v) all
Contracts containing any covenant or provision limiting the freedom or ability
of the Company or any of its Subsidiaries to engage in any line of business,
engage in business in any geographical area or compete with any other Person or
requiring exclusive dealings by the Company or any of its
Subsidiaries;
(vi) (A) all
Contracts for the purchase of materials, inventory, supplies or equipment
(including, without limitation, computer hardware and Software), or for the
provision of services, involving annual payments of more than $100,000,
containing any escalation, renegotiation or redetermination provisions, other
than Contracts that are
26
terminable
within ninety (90) days without premium or penalty to the Company or any of
its Subsidiaries; and (B) notwithstanding (A), all Contracts (i) with
material customers of the business of the Company or any of its Subsidiaries,
(ii) for the sale by the Company or any of its Subsidiaries of materials,
supplies, inventory or equipment (including, without limitation, computer
hardware and Software), or (iii) for the provision of services by the
Company or any of its Subsidiaries (including, without limitation, consulting
services, data processing and management, and project management services), the
performance of which will extend over a period of more than one (1) year
and involve consideration in excess of $100,000;
(viii) all
Contracts or purchase orders relating to capital expenditures involving total
payments by the Company and its Subsidiaries of more than $100,000 per
year;
(ix) all
Contracts relating to licenses of Intellectual Property (whether the Company or
any of its Subsidiaries is the licensor or licensee thereunder) material to the
business of the Company;
(x) all
Contracts relating to the future disposition or acquisition of any business
enterprise or any interest in any business enterprise;
(xi) all
Contracts between or among (A) the Company or any of its Subsidiaries, on
the one hand, and (B) any Stockholder (or Holder), such Stockholder’s
Affiliate (or Holder’s Affiliate), or any Related Party (other than the
Company), on the other hand;
(xiii)Contracts
which are (A) outside the ordinary course of business for the purchase,
acquisition, sale or disposition of any assets or properties or (B) for the
grant to any Person of any option or preferential rights to purchase any assets
or properties;
(xvi) any other
Contract which involves consideration in excess of $100,000 per
year.
(b) (i) Each
Company Contract is legal, valid, binding and enforceable against the Company or
the party to such Company Contract which is a Subsidiary of the Company, as the
case may be, and to the Knowledge of the Company as of the date hereof, against
each other party thereto, and is in full force and effect, and (ii) neither
the Company nor any of its
27
Subsidiaries
nor, to the Knowledge of the Company as of the date hereof, any other party, is
in material breach or default, and no event has occurred which could constitute
(with or without notice or lapse of time or both) a material breach or default
(or give rise to any right of termination, modification, cancellation or
acceleration) or loss of any benefits under any Company Contract.
(c) The
Company has delivered to Parent complete and accurate copies of each Company
Contract through the date hereof and there has been no material modification,
waiver or termination of any Company Contract or any material provision thereto
through the date hereof. The Company is not contemplating as of the
date hereof any modification, waiver or termination of any Company
Contract. Except as set forth on Section 4.15(c)
of the Disclosure Schedule, no Company Contract is terminable or cancelable as a
result of the consummation of the transactions contemplated in this
Agreement.
(d) There are
no non-competition or non-solicitation agreements or any similar agreements or
arrangements that could restrict or hinder the operations or conduct of the
business of the Company or any of its Subsidiaries or the use of its properties
or assets or any “earn-out” agreements or arrangements (or any similar
agreements or arrangements) to which any of the Stockholders (or Holders) or the
Company or any of its Subsidiaries is a party or may be subject or bound (other
than this Agreement or pursuant to this Agreement).
Section
4.16 Labor. Neither
the Company nor any of its Subsidiaries is party to any collective bargaining
agreements and there is no labor strike, slowdown, work stoppage or lockout
actually pending or, to the Knowledge of the Company, threatened, with respect
to the employees of the Company. The Company and each of its
Subsidiaries has, in all material respects, complied with applicable Laws
relating to the terms and conditions of employment including without limitation
such Laws relating to wages and hours, immigration and workplace safety, except
for any noncompliance which, individually or in the aggregate, have not had or
would not reasonably be expected to have a Material Adverse Effect.
Section
4.17 Insurance. The
Company and its Subsidiaries have in place insurance policies in amounts and
types that are customary in the industry for similar companies and all such
policies are valid and in full force and effect. Section 4.17 of
the Disclosure Schedule contains a complete and accurate list of all insurance
policies currently maintained relating to the Company and its
Subsidiaries. The Company has delivered to Parent complete and
accurate copies of all such policies together with (a) all riders and
amendments thereto and (b) if completed, the applications for each of such
policies. All premiums due on such policies have been paid, and the
Company and its Subsidiaries have complied in all material respects with the
provisions of such policies and, to the Knowledge of the Company, such policies
are valid and in full force and effect. No Proceedings are pending
or, to the Knowledge of the Company, threatened, to revoke, cancel, limit or
otherwise modify such policies and no notice of cancellation of any of such
policies has been received. The Company and its Subsidiaries are in
compliance with all warranties contained in all insurance policies.
Section
4.18 Intentionally
Omitted.
28
Section
4.19 Absence of Certain Business
Practices. Neither the Company, nor any of its Subsidiaries,
nor any Stockholder, Holder, director, officer, employee or agent of the Company
or any of its Subsidiaries, nor any other Person acting on behalf of the Company
or any of its Subsidiaries, directly or indirectly, has, to the Knowledge of the
Company, given or agreed to give any gift or similar benefit to any customer,
supplier, governmental employee or other Person which (a) could reasonably
be expected to subject the Company or any of its Subsidiaries to any damage or
penalty in any civil, criminal or governmental litigation or Proceeding or
(b) is reasonably likely to, individually or in the aggregate, have a
Material Adverse Effect or which could subject the Company or any of its
Subsidiaries or Parent or any of its Subsidiaries to suit or penalty in any
private or governmental litigation or Proceeding.
Section
4.20 Real Property; Title; Valid
Leasehold Interests.
(a) Neither
the Company nor any of its Subsidiaries owns or has owned in the three
(3) years prior to the date hereof, and is not under any Contract to
purchase, any real property.
(b) The
Company has delivered or made available to Parent a true, complete, and accurate
copy of each real property lease of the Company and its Subsidiaries, together
with all amendments, modifications, and extensions thereof (the “Company
Leases”).
(c) The
Company and its Subsidiaries have valid and enforceable leasehold interests in
each property covered by each Company Lease. Neither the Company nor
any of its Subsidiaries has subleased or granted to any Person the right to use
or occupy any such leased property or any portion thereof.
(d) The
Company and its Subsidiaries are in compliance in all material respects with the
provisions of each Company Lease, and each such Company Lease is in full force
in all material respects.
(e) To the
Knowledge of the Company, with respect to the Company Leases, there are no
(i) material violations of building codes and/or zoning ordinances or other
governmental or regulatory laws affecting the applicable real property,
(ii) existing, pending, or threatened condemnation proceedings affecting
any such real property or (iii) existing, pending, or threatened zoning,
building code, or similar matters, which are reasonably likely to interfere with
the operations of the Company’s or any of its Subsidiaries’ business in any
material respect.
Section
4.21 Environmental. Except
as could not reasonably be likely to result in a material liability to the
Company or any of its Subsidiaries, there has been no Release or, to the
Knowledge of the Company, threatened Release of any Hazardous Materials at, on,
under or from any property currently or formerly owned, leased or operated by
the Company or any of its Subsidiaries or any other location.
Section
4.22 Employee
Benefits.
(a) Section 4.22(a)
of the Disclosure Schedule contains a list of: (i) each
“employee pension benefit plan” (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), and referred
to herein as a “Pension Plan”),
(ii) each
29
“employee
welfare benefit plan” (as defined in Section 3(1) of ERISA and referred to
herein as a “Welfare
Plan”) and (iii) each other “Benefit Plan”
(defined herein as any Pension Plan, Welfare Plan and any other plan, fund,
program, arrangement or agreement (including any employment or consulting
agreement or any employee stock ownership plan) to provide medical, health,
disability, life, bonus, incentive, stock or stock-based right (option,
ownership or purchase), retirement, deferred compensation, severance, change in
control, salary continuation, vacation, sick leave, fringe, incentive insurance
or other benefits) to any current or former employee, officer, director or
consultant of the Company or any of its Subsidiaries, or to any worker providing
services to the Company or any of its Subsidiaries through an employee leasing
arrangement, that is maintained, or contributed to, or required to be
contributed to, by the Company or any of its Subsidiaries, or with respect to
which the Company or any of its Subsidiaries has any liability. With
respect to each Benefit Plan, the Company has delivered or made available to
Parent true, complete and accurate copies of: (i) such Benefit
Plan (or, in the case of an unwritten Benefit Plan, a written description
thereof), (ii) the three (3) most recent IRS Form 5500 annual
reports filed with the IRS (if any such report was required), (iii) the
most recent summary plan description and all subsequent summaries of material
modifications for such Benefit Plan (if a summary plan description was
required), (iv) each trust agreement and group annuity contract relating to
such Benefit Plan, if any, (v) the most recent determination letter from
the IRS with respect to such Benefit Plan, if any, and (vi) the most recent
actuarial valuation with respect to such Benefit Plan, if any.
(b) Each
Benefit Plan has, in all material respects, been established, funded, maintained
and administered in compliance with its terms and with the applicable provisions
of ERISA, the Code and all other applicable Laws. Neither the Company
nor any of its Subsidiaries has undertaken or committed to make any amendments
to any such Benefit Plan (other than amendments which have been provided to
Parent prior to the date hereof) or to establish, adopt or approve any new plan
that, if in effect on the date hereof, would constitute a Benefit
Plan.
(c) Each
Pension Plan and any trust established pursuant thereto intended to be qualified
and tax exempt under Sections 401(a) and 501(a) have been the subject of a
favorable and up-to-date determination letter from the IRS (or if not up to
date, the period to apply for an up-to-date determination letter has not
elapsed) or an up-to-date opinion letter from the IRS upon which the Company is
entitled to rely with respect to such Pension Plan to the effect that such
Pension Plan and trust are qualified and exempt from federal income taxes under
Section 401(a) and 501(a), respectively, of the Code. To the
Knowledge of the Company, there are no circumstances or events that have
occurred that could reasonably be expected to result in the disqualification of
any Pension Plan.
(d) Neither
the Company nor any of its Subsidiaries nor any ERISA Affiliate of the Company
or any of its Subsidiaries has maintained, contributed to or been required to
contribute to any benefit plan in the past six years that is subject to the
provisions of Section 412 of the Code or Title IV of
ERISA. Neither the Company nor any of its Subsidiaries nor any ERISA
Affiliate maintains or has an obligation to contribute to or has within the past
six (6) years maintained or had an obligation to contribute to a
“multiemployer plan.” For purposes hereof, “ERISA Affiliate”
means, with respect to any entity, trade or business, any other entity, trade or
business that is, or was at the relevant time, a member of a
30
group
described in Section 414(b), (c), (m) or (o) of the Code or
Section 4001(b)(1) of ERISA that includes or included the first entity,
trade or business or that is, or was at the relevant time, a member of the same
“controlled group” as the first entity, trade or business pursuant to
Section 4001(a)(14) of ERISA.
(e) Neither
the Company nor any of its Subsidiaries has any liability for life, health,
medical or other welfare benefits for former employees or beneficiaries or
dependents thereof with coverage or benefits under Benefit Plans, other than as
required by COBRA or any other applicable Law. Except as would not
reasonably be expected to result in a material liability, all contributions or
premiums owed by the Company or any of its Subsidiaries with respect to Benefit
Plans under Law, contract or otherwise have been paid on a timely basis and all
contributions required to be made under each Benefit Plan have been timely made
and, to the extent not required to be contributed or paid, all obligations in
respect of each Benefit Plan have been properly accrued or reflected in the
Financial Statements. There are no pending or, to the Knowledge of
the Company, threatened, claims, lawsuits, arbitrations or audits asserted or
instituted against any Benefit Plan, any fiduciary (as defined by
Section 3(21) of ERISA) of any Benefit Plan, the Company or any of its
Subsidiaries, or any employee or administrator thereof, in connection with the
existence, operation or administration of a Benefit Plan (other than claims in
the ordinary course), in each case that could reasonably be expected to result
in a material liability. To the Knowledge of the Company, with
respect to each Benefit Plan, there has not occurred, and no Person whom the
Company has an obligation to indemnify is contractually bound to enter into, any
nonexempt “prohibited transaction” within the meaning of Section 4975 of
the Code or Section 406 of ERISA that could, individually or in the
aggregate, reasonably be expected to result in material liability.
(f) Neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) cause or result in the
accelerated vesting, funding or delivery of, or increase the amount or value of
any Benefit Plan, (ii) cause or result in the obligation to fund any
Benefit Plan or (iii) cause or result in a limitation on the right of the
Company or any of its Subsidiaries to amend, merge, terminate or receive a
reversion of assets from any Benefit Plan or related trust. Without
limiting the generality of the foregoing, no amount paid or payable pursuant to
the terms of a Benefit Plan by the Company or any of its Subsidiaries in
connection with the transactions contemplated hereby (either solely as a result
thereof or as a result of such transactions in conjunction with any other event)
will be an “excess parachute payment” within the meaning of Section 280G of
the Code.
(g) The
Company does not maintain any Benefit Plans (i) outside the U.S. or
(ii) for the benefit of any individual whose principal place of employment
is outside the U.S.
Section
4.23 Employees.
(a) The
Company has delivered or made available to Parent a true and correct schedule
setting forth (i) the name, title and total compensation in respect of the
Company’s 2008 fiscal year of each officer and director of the Company and each
of its Subsidiaries and each other employee, consultant and agent, (ii) all
bonuses and other incentive compensation received by such Persons in respect of
the Company’s 2008 fiscal year and (iii) all Contracts or commitments by
the Company or any of its Subsidiaries to increase the compensation or to
31
modify
the conditions or terms of employment of any of its officers or directors, or
employees, consultants and agents.
(b) To the
Knowledge of the Company, no officer, director or employee of the Company or any
of its Subsidiaries is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, non-competition, or proprietary
rights agreement, between such Person and any other Person that could reasonably
be expected to (i) prohibit the performance by such Person of his/her
duties for or on behalf of the Company or any of its Subsidiaries or
(ii) adversely affect the ability of the Company or any of its Subsidiaries
to conduct its or their primary business.
(c) Neither
the Company nor any of its Subsidiaries has classified any individual as an
“independent contractor” or similar status who, under applicable Law or the
provisions of any Benefit Plan, should have been classified as an
employee. Neither the Company nor any of its Subsidiaries has any
material liability by reason of any individual who provides or provided services
to the Company or any of its Subsidiaries, in any capacity, being improperly
excluded from participating in any Benefit Plan.
(d) No
executive, key employee or significant group of employees has informed the
Company or any of its Subsidiaries of his, her or its definite intent to
terminate employment with the Company or any of its Subsidiaries during the next
twelve (12) months.
Section
4.24 Taxes and Tax
Returns. Except as set forth in Section 4.24 of
the Disclosure Schedule:
(a) All
material Tax Returns required to be filed by or with respect to the Company and
the Company’s Subsidiaries or their respective assets and operations (but not
any Tax Returns of, or required to be filed by, any Selling Party) (“Company Tax Returns”)
have been timely filed (taking into account valid extensions of the time for
filing). All such Company Tax Returns (i) were prepared in the
manner required by applicable Law and (ii) are true, complete and accurate
in all material respects. True, complete and accurate copies of all
federal, state, local and foreign Company Tax Returns filed in the previous
three (3) years have been provided to Parent prior to the date
hereof.
(b) The
Company and the Company’s Subsidiaries have timely paid, or caused to be paid,
all material Taxes required to be paid by them, whether or not shown (or
required to be shown) on a Tax Return (except for Taxes being contested in good
faith with a Taxing Authority and for which there is a sufficient reserve
(without regard to deferred Tax assets and liabilities) on the balance sheet
included in the Financial Statements), and the Company and the Company’s
Subsidiaries have established, in accordance with GAAP, a sufficient reserve
(without regard to deferred Tax assets and liabilities) on the balance sheet
included in the Financial Statements for the payment of all material Taxes not
yet due and payable. Since December 31, 2008, neither the
Company nor any of the Company’s Subsidiaries has incurred any liability for
Taxes other than Taxes incurred in the ordinary course of business.
(c) The
Company and the Company’s Subsidiaries (i) have complied in all material
respects with the provisions of the Code relating to the withholding and payment
of Taxes,
32
including
the withholding and reporting requirements under Sections 1441 through
1464, 3101 through 3510, and 6041 through 6053 of the Code and related Treasury
Regulations, (ii) have complied in all material respects with all
provisions of state, local and foreign Law relating to the withholding and
payment of Taxes, and (iii) have, within the time and in the manner
prescribed by Law, withheld the applicable amount of material Taxes required to
be withheld from amounts paid to any employee, independent contractor or other
third party and paid over to the proper Governmental Authorities all amounts
required to be so paid over.
(d) Within
the five (5) years prior to the date hereof, none of the Company Tax
Returns have been audited by the IRS or any state, local or foreign Taxing
Authority and no adjustment relating to any Company Tax Return has been proposed
or threatened in writing by any Taxing Authority. Neither the Company
nor any of the Company’s Subsidiaries has entered into a closing agreement
pursuant to Section 7121 of the Code (or an analogous provision of state,
local or foreign Law). To the Knowledge of the Company, there are no
examinations or other administrative or court proceedings relating to Taxes in
progress or pending, and there is no existing, pending or threatened in writing
claim, proposal or assessment against the Company or any of the Company’s
Subsidiaries or relating to its assets or operations asserting any deficiency
for Taxes.
(e) Within
the five (5) years prior to the date hereof, no written claim has ever been
made by any Taxing Authority with respect to the Company or any Subsidiary of
the Company in a jurisdiction where the Company or such Subsidiary does not file
Tax Returns that the Company or such Subsidiary is or may be subject to taxation
by that jurisdiction. There are no security interests on any of the
assets of the Company or the Company’s Subsidiaries that arose in connection
with any failure (or alleged failure) to pay any Taxes and, except for liens for
real and personal property Taxes that are not yet due and payable, there are no
liens for any Taxes upon any assets of the Company or the Company’s
Subsidiaries.
(f) No
extension of time with respect to any date by which a Company Tax Return was or
is to be filed is in force, and no written waiver or agreement by the Company or
any of the Company’s Subsidiaries is in force for the extension of time for the
assessment or payment of any Taxes.
(h) Neither
the Company nor any of the Company’s Subsidiaries (i) is a party to any
contract, agreement, plan or arrangement relating to allocating or sharing the
payment of, indemnity for, or liability for, Taxes (other than any such
contract, agreement, plan or arrangement between or among the Company and/or its
Subsidiaries), (ii) is or has ever been a member of any affiliated group
that filed or was required to file an affiliated, consolidated, combined or
unitary Tax Return (other than the group of which the Company or any of the
Company Subsidiaries is the common parent), (iii) has any liability for the
Pre-Closing Tax Period Taxes of another Person pursuant to Treasury
Regulation Section 1.1502-6 (or any comparable provision of Law)
(other than such liability for the group of which the Company or any of the
Company Subsidiaries is the common parent), or (iii) has any liability for
33
Pre-Closing
Tax Period Taxes of any other Person as a transferee or successor, or by
contract or otherwise.
(i) Neither
the Company nor any of the Company’s Subsidiaries is, or has been, a “United
States real property holding corporation” within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code. No transaction
contemplated by this Agreement is subject to withholding under Section 1445
of the Code or otherwise.
(j) Neither
the Company nor any of the Company’s Subsidiaries has participated in any
“reportable transaction” within the meaning of Treasury
Regulation Section 1.6011-4(b).
(k) The
Company made a valid election under Subchapter S of the Code to which all
Persons who were shareholders on the date of such election gave their (and if
necessary each shareholder’s spouse gave his or her) consent and such election
became effective on March 18, 1999. The Company is, and has been
since the date of its incorporation, an S corporation (as defined in
Section 1361 of the Code). With respect to all states in which
the Company files Tax Returns and which, for state Tax purposes, allow a
corporation to be treated as an “S corporation” or similar entity entitled to
special Tax treatment, all elections for such treatment have been properly and
validly made in such states and the Company has complied at all times with all
applicable requirements and filing procedures for such treatment.
(l) The
Company has not taken or agreed to take any action (nor is it aware of any
agreement, plan or circumstance) that to the Knowledge of the Company is
reasonably likely to prevent the Merger from being treated as a “reorganization”
within the meaning of Section 368(a) of the Code.
(m) Neither
the Company nor any of the Company’s Subsidiaries has been included with any
other entity in any consolidated, combined, unitary or similar return for any
Tax period for which the statute of limitations has not expired (other than a
Tax Return for a group of which the Company or any Company Subsidiary was the
common parent).
(n) Neither
the Company nor any of the Company’s Subsidiaries has been a “distributing
corporation” or a “controlled corporation” in a distribution of stock qualifying
for tax-free treatment under Section 355 of the Code (x) in the two
(2) years prior to the date of this Agreement or (y) in a distribution
which could otherwise constitute part of a “plan” or “series of related
transactions” (within the meaning of Section 355(e) of the Code) in
conjunction with the transactions contemplated by this Agreement.
(o) Neither
the Company nor any of the Company’s Subsidiaries will be required to include
any item of income, or exclude any item of deduction from taxable income, for
any taxable period (or portion thereof) ending after the Closing Date as a
result of: (i) an installment sale or open transaction
disposition on or before the Closing Date or (ii) any change in method of
accounting for a taxable period ending on or before the Closing
Date.
(p) Gleacher
Partners Ltd. has filed an IRS Form 8832 (Entity Classification Election)
electing classification as a disregarded entity for U.S. federal and state
income Tax purposes, effective on a date prior to the date hereof.
34
(q) Since the
date of its formation, Gleacher Partners (Asia) Ltd. has been an inactive
corporation, has recognized no income and has incurred only a de minimis amount
of expenses.
Notwithstanding
anything to the contrary in this Agreement, it is understood and agreed that no
representation or warranty is made by the Company or its Subsidiaries in respect
of Tax matters in any Section of this Agreement other than this Section 4.24.
Section
4.25 Intellectual Property
Rights.
(a) Section 4.25(a)
of the Disclosure Schedule lists all registered Owned Company Intellectual
Property (other than Trade Secrets).
(b) Except as
set forth in Section 4.25(b)
of the Disclosure Schedule, (i) all registrations for material Owned
Company Intellectual Property are valid and in force in all material respects,
and (ii) all applications to register any unregistered material Owned
Company Intellectual Property Rights are pending and in good standing in all
material respects, all without challenge. No claims are pending or,
to the Knowledge of the Company, have been threatened in writing to the Company
or any of its Subsidiaries challenging the validity, enforceability or ownership
by the Company or any of its Subsidiaries of any of the material Owned Company
Intellectual Property.
(c) Each item
of material Company Intellectual Property is either: (i) owned
by the Company or any of its Subsidiaries free and clear of any Liens; or
(ii) rightfully used and authorized for use by the Company or any of its
Subsidiaries pursuant to a valid and enforceable written Contract.
(d) To the
Knowledge of the Company, the activities of the Company and its Subsidiaries,
the Owned Company Intellectual Property and any Company Intellectual Property
licensed exclusively to the Company or any of its Subsidiaries in any field of
use does not infringe, dilute or misappropriate the Intellectual Property of any
third Person. Neither the Company nor any of its Subsidiaries has
received any written claim or notice from any Person alleging the Company or any
of its Subsidiaries is engaging in any activity that infringes, or that any of
the material Owned Company Intellectual Property or any material Company
Intellectual Property licensed exclusively to the Company or any of its
Subsidiaries in any field of use infringes upon, any Intellectual Property of
any third Person. Neither the Company nor any of its Subsidiaries has
received any written claim or notice from any Person challenging the Company’s
or any of its Subsidiaries’ ownership or right to use any of the material Owned
Company Intellectual Property or any material Company Intellectual Property
licensed exclusively to the Company or any of its Subsidiaries; and there are no
infringement suits, actions or proceedings pending or, to the Knowledge of the
Company, threatened against the Company or any of its Subsidiaries with respect
to any third Person’s Intellectual Property. To the Knowledge of the
Company, no Person is engaging in any activity that infringes, dilutes or
misappropriates any of the material Owned Company Intellectual Property or any
material Company Intellectual Property licensed exclusively to the Company or
any of its Subsidiaries in any field of use.
35
Section
4.26 Information Technology;
Security & Privacy. All material information technology
and computer systems (including Software, information technology and
telecommunication hardware and other equipment) relating to the transmission,
storage, maintenance, organization, presentation, generation, processing or
analysis of data and information whether or not in electronic format, used in or
necessary to the conduct of the business of the Company or any of its
Subsidiaries (collectively, “Company IT Systems”)
have been properly maintained in all material respects by technically competent
personnel, in accordance with standards set by the manufacturers or otherwise in
accordance with standards prudent in the industry, to ensure proper operation,
monitoring and use. The Company IT Systems are in all material
respects in good working condition to effectively perform all information
technology operations necessary to conduct the business of the Company or any of
its Subsidiaries. Neither the Company nor any of its Subsidiaries has
experienced within the past three (3) years any material disruption to, or
material interruption in, its conduct of business attributable to a defect, bug,
breakdown or other failure or deficiency of the Company IT
Systems. The Company and its Subsidiaries have taken commercially
reasonable measures to provide for the back-up and recovery of the data and
information necessary to the conduct of the business of the Company and its
Subsidiaries (including such data and information that is stored on magnetic or
optical media in the ordinary course) without material disruption to, or
material interruption in, the conduct of the business of the Company or any of
its Subsidiaries. Neither the Company nor any of its Subsidiaries is
in material breach of any material Contract related to any Company IT
System.
Section
4.27 State Takeover
Statutes. No state takeover or similar statute or regulation
is applicable to the Transaction, this Agreement or any of the transactions
contemplated hereby.
Section
4.28 No
Broker. No agent, broker, investment banker, financial advisor
or other firm or Person is or will be entitled to any broker’s or finder’s fee
or any other commission or similar fee payable by the Company in connection with
any of the transactions contemplated by this Agreement.
Section
4.29 Regulatory
Matters. In addition to, and without limiting the generality
of, the foregoing representations and warranties, including, but not limited to,
those contained in Sections 4.3 and
4.4
hereof:
(a) Since
December 31, 2005, the Company and its Subsidiaries have timely filed all
registrations, declarations, reports, notices, forms and other filings required
to be filed by it with the SEC, FINRA, or any other Governmental Authority
(including applicable state securities regulatory bodies), and all amendments or
supplements to any of the foregoing.
(b) The
Company has made available to Parent a copy of the currently effective
Form BD as filed by the Company and its Subsidiaries with the
SEC. Except as set forth in Section 4.29(b)
of the Disclosure Schedule, the information contained in such form was complete
and accurate in all material respects as of the time of filing thereof and
remains complete and accurate in all material respects as of the date
hereof.
(c) Except
with respect to employees in training or employees who have been employed by the
Company or any of its Subsidiaries for fewer than 90 days, all of the
36
employees
who are required to be licensed or registered to conduct the business of the
Company and its Subsidiaries are duly licensed or registered in each state and
with each Governmental Authority in which or with which such licensing or
registration is so required.
(d) Neither
the Company nor any of its Subsidiaries nor, to the Knowledge of the Company,
any of its or their employees or “associated persons” (as defined in the
Exchange Act) has been the subject of any disciplinary proceedings or orders of
any Governmental Authority arising under applicable Laws. No such
disciplinary proceeding or order is pending or, to the Knowledge of the Company,
threatened. Neither the Company nor any of its Subsidiaries nor, to
the Knowledge of the Company, any of its or their employees or associated
persons has been permanently enjoined by the order of any Governmental Authority
from engaging or continuing any conduct or practice in connection with any
activity or in connection with the purchase or sale of any
security. Neither the Company nor any of its Subsidiaries is or has
been ineligible to serve as a broker-dealer or an associated person of a
broker-dealer under Section 15(b) of the Exchange Act (including being
subject to any “statutory disqualification” as defined in Section 3(a)(39)
of the Exchange Act). None of the Company’s or any of its
Subsidiaries’ employees or associated persons are or, to the Knowledge of the
Company, have been ineligible to serve as a broker-dealer or an associated
person of a broker-dealer under Section 15(b) of the Exchange Act
(including being subject to any “statutory disqualification” as defined in
Section 3(a)(39) of the Exchange Act).
(e) As of the
date of this Agreement, the Company and its Subsidiaries are, and at all times
until the Closing the Company and its Subsidiaries shall be, in compliance with
Rules 15c3-1 and 15c3-3 under the Exchange Act and FINRA Rule 3130, and as
of the date of this Agreement, the Company and its Subsidiaries have sufficient
net capital such that it is not required to effect an early warning notification
pursuant to Rule 17a-11 under the Exchange Act.
(f) The
information provided by the Company and its Subsidiaries to the Central
Registration Depository with respect to the employees of the Company or any of
its Subsidiaries (including any Form BD, Form U4 or Form U5) is true, accurate
and complete in all material respects.
(g) Each of
the Company and its Subsidiaries and each of its and their respective officers,
employees and “associated persons” (as defined under the Exchange Act) who are
required to obtain a Permit as a broker-dealer, a principal, a representative,
an agent or a salesperson (or any limited subcategory thereof) with the SEC or a
Governmental Authority are duly registered as such and such registrations, all
of which are set forth on Section 4.29(g)
of the Disclosure Schedule, are in full force and effect. All such
Permits have been complied with in all material respects, and such Permits as
currently filed, and all periodic and other reports required to be filed with
respect thereto, are accurate and complete in all material
respects. The information contained in such Permits, forms and
reports was true and complete in all material respects as of the date of the
filing thereof, and timely amendments were filed, as necessary, to correct or
update any information reflected in such registrations, forms or
reports. Section 4.29(g)
of the Disclosure Schedule hereto sets forth all Governmental Authorities with
which any of the Company or its Subsidiaries is registered, licensed, authorized
or approved as a broker-dealer, including any membership in any such
37
Governmental
Authority. Each of the Company and its Subsidiaries, by virtue of its
broker-dealer activities, is not required to be registered or obtain a Permit in
any jurisdiction other than those listed in Section 4.29(g)
of the Disclosure Schedule.
Section
4.30 Significant
Clients. Section 4.30 of
the Disclosure Schedule lists, for the current fiscal year through the date of
this Agreement and the three prior fiscal years (i) all of the clients of
the Company and its Subsidiaries that made any payment to the Company or any of
its Subsidiaries during any such period; and (ii) the amounts paid to the
Company and its Subsidiaries by each such client. Neither the Company
nor any of its Subsidiaries has received notice prior to the date hereof from
any of such clients that a client has a material dispute with the Company, and,
to the Knowledge of the Company as of the date hereof, none of such clients has
any material disputes with the Company or any of its Subsidiaries.
Section
4.31 Absence of Undisclosed
Liabilities. Except for (a) specifically those
liabilities or obligations described on the Disclosure Schedule, (b) those
liabilities that are reflected or reserved against on the Financial Statements
delivered to Parent prior to the date hereof and (c) liabilities incurred
in the ordinary course of business consistent with past practice since the
Balance Sheet Date or obligations under this Agreement or the Ancillary
Agreements, neither the Company nor any of its Subsidiaries has any liabilities
or obligations of any nature (whether accrued, absolute, contingent or
otherwise) that would be material to the business of the Company and its
Subsidiaries.
Section
4.32 Investment Advisory
Activities. The conduct of the business of the Company and its
Subsidiaries, as presently conducted and as conducted at all times prior to the
date hereof, does not require the Company or any of its Subsidiaries or any of
their respective officers or employees to be registered as an investment adviser
under the Investment Advisers Act of 1940 or as an investment adviser or
investment adviser representative or agent under the Laws of any Governmental
Authority.
Section
4.33 Information
Supplied. None of the information supplied or to be supplied
by or on behalf of the Company for inclusion or incorporation by reference in
the Information Statement (as defined below) shall, at the time the Information
Statement is first mailed to the holders of Parent Common Stock, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not
misleading.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF THE SELLING PARTIES
Except as
set forth in the Disclosure Schedules, each Selling Party hereby represents and
warrants to Parent, severally and not jointly, as of the date hereof and as of
the Closing Date (or as of such other date as may be expressly provided in any
representation or warranty), as to such Selling Party, as follows:
Section
5.1 Ownership of the Company
Shares or Interests. Such Selling Party is the owner,
beneficially and of record, of the Company Shares set forth opposite such
Selling Party’s
38
name on
Exhibit A
hereto (or, as applicable, the Interests set forth opposite such Selling Party’s
name on Exhibit A
hereto), free and clear of any and all Liens. Such Selling Party is
not party to or otherwise bound by, and to the Knowledge of such Selling
Parties, there are no restrictions upon, or voting trusts, proxies or other
agreements or understandings of any kind with respect to, the voting, purchase,
redemption, acquisition or transfer of, or the declaration or payment of any
dividend or distribution on, the Company Shares or Interests, as applicable,
owned by such Selling Party. Neither the Company Shares nor the
Interests are subject to any preemptive right, right of first refusal or other
right or restriction. Each Holder represents that it is transferring
the Interests to be transferred by such Holder pursuant to the Interests
Purchase free and clear of any and all Liens.
Section
5.2 Acquisition of Parent
Stock.
(a) Such
Selling Party is an “accredited investor” as such term is defined in
Rule 501 of Regulation D under the Securities Act.
(b) The
Parent Common Stock to be received by such Selling Party as Merger Consideration
or Interests Purchase Consideration, as the case may be, is being acquired by
such Selling Party for its own account for the purpose of investment and not
(A) with a view to, or for sale in connection with, any distribution
thereof in violation of the Securities Act or (B) for the account or
benefit of, as a nominee or agent for, or on behalf of any Person in
circumstances that would preclude Parent and Merger Sub from relying on any
exemption from the registration requirements under the Securities
Act.
(c) Such
Selling Party understands that the Parent Common Stock to be issued to such
Selling Party as Merger Consideration or Interests Purchase Consideration, as
the case may be, will be issued in reliance upon Rule 506 of
Regulation D under the Securities Act or in reliance upon another exemption
from the registration requirements of the Securities Act, and such Selling Party
will not, without the prior written consent of Parent, offer, sell, pledge or
otherwise transfer the Parent Common Stock except as permitted under applicable
Law.
(d) Such
Selling Party has not, and none of its Affiliates or any person acting on behalf
of such Selling Party or any such Affiliate has, engaged or will engage in any
general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) with respect to the Parent Common
Stock.
(e) To the
knowledge of such Selling Party, the Transactions contemplated by this Agreement
(A) have not been pre-arranged with a buyer of the Parent Common Stock in
circumstances that would preclude Parent and Merger Sub from relying on any
exemption from the registration requirements under the Securities Act, and
(B) are not part of a plan or scheme to evade the registration requirements
of the Securities Act.
(f) Such
Selling Party understands that the Parent Common Stock has not been registered
under the Securities Act by reason of a specific exemption therefrom, and may
not be transferred or resold except pursuant to an effective registration
statement or pursuant to an exemption from registration (and based upon an
opinion of counsel reasonably satisfactory to Parent and its counsel) and each
certificate representing the Parent Common Stock will be
39
endorsed
with the following legends (which Parent shall cause to be removed at such
Selling Party’s request at such time as such transfer restrictions no longer
apply):
(i) “THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, GIFTED,
ASSIGNED, DISTRIBUTED, CONVEYED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE
DISPOSED OF UNLESS SUCH TRANSFER, SALE, GIFT, ASSIGNMENT, DISTRIBUTION,
CONVEYANCE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR DISPOSITION IS DONE
(1) WITH THE WRITTEN CONSENT OF BROADPOINT SECURITIES GROUP, INC.,
(2) PURSUANT TO A TENDER OFFER WITHIN THE MEANING OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, FOR ANY OR ALL OF THE COMMON STOCK OF
BROADPOINT SECURITIES GROUP, INC., (3) IN CONNECTION WITH ANY PLAN OF
REORGANIZATION, RESTRUCTURING, BANKRUPTCY, INSOLVENCY, MERGER OR CONSOLIDATION,
RECLASSIFICATION, RECAPITALIZATION, OR, IN EACH CASE, SIMILAR CORPORATE EVENT OF
BROADPOINT SECURITIES GROUP, INC., (4) THROUGH AN INVOLUNTARY TRANSFER
PURSUANT TO OPERATION OF LAW, OR (5) IN COMPLIANCE WITH THE PROVISIONS OF
AND THE RESTRICTIONS CONTAINED IN THAT CERTAIN AGREEMENT AND PLAN OF MERGER, BY
AND AMONG BROADPOINT SECURITIES GROUP, INC., MAGNOLIA ADVISORY LLC, GLEACHER
PARTNERS INC. AND THE OTHER PARTIES THERETO (COPIES OF SUCH AGREEMENT
MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY). IN ADDITION, NO TRANSFER, SALE, GIFT, ASSIGNMENT,
DISTRIBUTION, CONVEYANCE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR DISPOSITION OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND THE RULES
AND REGULATIONS IN EFFECT THEREUNDER (THE “ACT”) AND ALL APPLICABLE STATE
SECURITIES OR “BLUE SKY” LAWS, OR EXCEPT PURSUANT TO RULE 144 OR REGULATION S OR
OTHER APPLICABLE EXEMPTION UNDER THE ACT.”; and
(ii) Any other
legend required to be placed thereon by applicable United States federal or
state, or other applicable state and foreign securities laws.
Section
5.3 Authorization and Effect of
Agreement.
(a) Such
Selling Party has all requisite right, capacity and authority to execute and
deliver this Agreement and the Ancillary Agreements to which such Selling Party
is or is proposed to be a party and to perform the obligations applicable to
such Selling Party hereunder and under any such Ancillary Agreements and to
consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Ancillary Agreements by such
Selling Party and the performance by such Selling Party of the obligations
applicable to such Selling Party hereunder and thereunder, as the case may be,
and the consummation of the transactions contemplated hereby and thereby, as the
case may be, have been duly authorized and no other action on the part of such
Selling Party is necessary to
40
authorize
the execution and delivery of this Agreement and the Ancillary Agreements to
which such Selling Party is or is proposed to be a party or the consummation of
the transactions contemplated hereby or thereby. This Agreement and
the Ancillary Agreements that have been executed on the date hereof have been,
and, upon execution by the Stockholders at the Closing, each other Ancillary
Agreement will be, duly and validly executed and delivered by such Selling Party
and, assuming due authorization, execution and delivery hereof by the other
parties hereto and thereto, constitutes (or, with respect to such other
Ancillary Agreements, will constitute) legal, valid and binding obligations of
such Selling Party, enforceable against such Selling Party in accordance with
their terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting or relating to
creditors’ rights generally and subject, as to enforceability, to general
principles of equity.
(b) If such
Selling Party is a natural person, such Selling Party is competent to execute
and deliver this Agreement and the Ancillary Agreements to which it is or is
proposed to be a party, to consummate the transactions contemplated hereby and
thereby and to comply with the provisions hereof and thereof. If such
Selling Party is a natural person and is married, and such Selling Party’s
Company Shares (or Interests, as applicable) constitute community property or
such Selling Party otherwise needs spousal or other approval for this Agreement
to be valid and binding, the execution, delivery and performance of this
Agreement, the consummation by such Selling Party of the transactions
contemplated hereby and the compliance by such Selling Party of the provisions
hereof have been duly authorized by, and, assuming the due authorization,
execution and delivery by each of the other parties thereto, constitutes a
legal, valid and binding obligation of, such Selling Party’s spouse, enforceable
against such spouse in accordance with its terms.
Section
5.4 Consents and Approvals; No
Violations. Except as set forth in Section 5.4 of
the Disclosure Schedule, no filing with, and no Permit or Consent of any
Governmental Authority or any other Person is necessary to be obtained, made or
given by such Selling Party in connection with the execution and delivery by
such Selling Party of this Agreement or any Ancillary Agreement to which such
Selling Party is, or is proposed to be, a party, the performance by such Selling
Party of the obligations applicable to such Selling Party hereunder or
thereunder and the consummation of the transactions contemplated hereby or
thereby. Neither the execution and delivery by such Selling Party of
this Agreement or any such Ancillary Agreement nor the consummation by such
Selling Party of the transactions contemplated by this Agreement or any such
Ancillary Agreement nor compliance by such Selling Party with any of the
provisions hereof or thereof will (a) if such Selling Party is a trust,
conflict with or result in any breach of any provisions of the trust agreement
or other constitutive documents of such Selling Party, (b) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, modification,
cancellation or acceleration or loss of material benefits) under any of the
terms, conditions or provisions of any Contract to which such Selling Party is a
party or may otherwise be subject or bound or result in the creation of any Lien
on the Company Shares or Interests, as applicable, owned or held by such Selling
Party or any of the assets or properties of the Company or any of its
Subsidiaries, or (c) violate any Permit or Law applicable to such Selling
Party or to which such Selling Party or any of his, her or its assets or
properties may be subject or bound.
41
Section
5.5 Litigation. There
is no Proceeding pending or, to the Knowledge of such Selling Party, threatened,
that relates to the ownership of the Company Shares or the Interests, as
applicable, by such Selling Party. There are no outstanding Orders
imposed by any Governmental Authority that apply, in whole or in part, to the
Company Shares or Interests, as applicable, owned by such Selling
Party.
Section
5.6 Selling Party
Agreements. Such Selling Party is not a party to, nor is
otherwise bound by, any Contract, including any confidentiality,
non-competition, non-solicitation or proprietary rights agreement, between such
Selling Party and any other Person that will (a) materially and adversely
affect the ability of the Company or any of its Subsidiaries, the Surviving
Company or any of its respective Affiliates to conduct their business from and
after the Closing, or (b) if such Selling Party is an employee, officer or
director of the Company or any of its Subsidiaries, materially impair or
restrict the ability of such Selling Party to operate, control, manage or work
for the Company or any of its Subsidiaries, the Surviving Company or any of its
respective Affiliates from and after the Closing (in each case, other than
Contracts entered into with Parent, Merger Sub or any of their respective
Affiliates in connection with or contemplation of this Agreement).
Section
5.7 Selling Party’s
Affiliates. Except as set forth in Section 5.7 of
the Disclosure Schedule, such Selling Party is not an Affiliate of, nor
otherwise has any other economic interest in, any other Stockholder or
Holder.
Section
5.8 Short Sales and
Confidentiality Prior to the Date Hereof. Other than the
transaction contemplated hereunder, such Selling Party has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Selling Party, executed any Prohibited Transaction, in
or with respect to the securities of Parent during the period commencing from
the date hereof until the earlier to occur of (i) Parent’s issuance of a
press release disclosing the transactions contemplated hereby and
(ii) Parent’s filing of a Current Report on Form 8-K disclosing the
transactions contemplated hereby. Other than confidential disclosures
to other Persons party to this Agreement and other than confidential disclosures
made to such Selling Party’s representatives and family members, such Selling
Party has maintained the confidentiality of all disclosures made to it in
connection with this transaction (including through the date hereof the
existence and terms of this transaction). “Prohibited
Transaction” shall mean any hedging or other transaction which is
designed to or could reasonably be expected to lead to or result in, or be
characterized as, a sale, an offer to sell, a solicitation of offers to buy,
disposition of, loan, pledge or grant of any right with respect to Parent Common
Stock by the Selling Party or any Person acting on behalf of or pursuant to any
understanding with such Selling Party. Such prohibited hedging or
other transaction could include without limitation effecting any short sale
(whether or not such sale or position is “against the box”) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to Parent Common Stock or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Parent Common Stock.
Section
5.9 Released
Matters. Such Selling Party has not knowingly assigned or
transferred or purported to assign or transfer to any Person any Released
Matters and no Person other than such Selling Party has any interest in any
Released Matter by Law or Contract by
42
virtue of
any action or inaction by such Selling Party, except for any such interest
conferred under the Laws of estate or succession.
Section
5.10 Information
Supplied. None of the information supplied or to be supplied
by or on behalf of such Selling Party for inclusion or incorporation by
reference in the Information Statement (as defined below) shall, at the time the
Information Statement is first mailed to the holders of Parent Common Stock,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE
VI
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Except as
set forth in the Disclosure Schedules, Parent and Merger Sub each represents and
warrants to the Selling Parties as of the date hereof and as of the Closing Date
(or as of such other date as may be expressly provided in any representation or
warranty) as follows:
Section
6.1 Organization and Good
Standing. Parent is duly incorporated, validly existing and in
good standing under the laws of the State of New York, and Merger Sub is duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each of the Buying Parties have all requisite power and authority
to own, lease, operate and otherwise hold its properties and assets and to carry
on its business as presently conducted. Each of the Buying Parties is
duly qualified or licensed to do business as a foreign corporation and is in
good standing in every jurisdiction in which the nature of the business
conducted by it or the assets or properties owned or leased by it requires
qualification. Merger Sub is, and has been at all times since the
date of its formation, wholly owned by Parent and a disregarded entity for U.S.
federal and state income Tax purposes. Parent has provided the
Company and the Selling Parties’ Representative with true, correct and complete
copies of the organizational documents of Merger Sub. Each Subsidiary
of Parent (i) is duly incorporated or duly formed, as applicable to each
such Subsidiary, and validly existing and in good standing under the laws of its
jurisdiction of organization, (ii) has the requisite corporate power and
authority or other power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted and
(iii) is duly qualified to do business in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary.
Section
6.2 Authorization and Effect of
Agreement. Each of the Buying Parties has all requisite right,
power and authority to execute and deliver this Agreement and the Ancillary
Agreements to which it is or is proposed to be a party and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this
Agreement and the Ancillary Agreements to which it is a party and the
performance by the Buying Parties of their obligations hereunder and thereunder,
and the consummation of the transactions contemplated hereby and thereby, have
been duly authorized by the board of directors of Parent, and by the written
consent of Parent, as sole member of Merger Sub and no other corporate or other
action on the part of any Buying Party is necessary to authorize the execution
and delivery of this Agreement and the Ancillary Agreements to
43
which it
is or is proposed to be a party. The acquisition by the Selling
Parties who will be officers or directors of Parent after the Merger of the
Parent Common Stock to be issued in the Merger has been approved by the Board of
Directors of Parent and such approval specifies (i) the name of each such
officer or director, (ii) the number of shares of Parent Common Stock to be
received by such officer or director in the Merger and (iii) that the approval
is given for the purpose of exempting the receipt of such shares from the
applicability of Section 16(b) of the Exchange Act pursuant to
Rule 16b-3 promulgated thereunder. No approval or consent of the
stockholders of Parent is required under applicable Law or under any applicable
contractual obligation in connection with the consummation of the Transactions
other than the consent of the Principal Parent Stockholder set forth in the
Stockholders Consent. This Agreement and the Ancillary Agreements
have been duly and validly executed and delivered by the Buying Parties and,
assuming due authorization, execution and delivery hereof by the other parties
hereto, constitutes a legal, valid and binding obligation of the Buying Parties
enforceable against the Buying Parties in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors’ rights generally and subject,
as to enforceability, to general principles of equity.
Section
6.3 Consents and Approvals; No
Violations. Except for (i) the matters set forth in Section 4.3(i),
(ii), and (iii) hereof;
(ii) the mailing of the Information Statement to Parent’s shareholders;
(iii) such filings as are required to be made with the SEC in connection
with this Agreement under the Exchange Act; and (iv) such filings as may be
made with the SEC and other Governmental Authorities under applicable securities
laws in connection with this Agreement or the Registration Rights Agreement, no
filing with, and no Permit or Consent of any Governmental Authority or any other
Person is necessary to be obtained, made or given by any Buying Party in
connection with the execution and delivery by the Buying Parties of this
Agreement and any Ancillary Agreement to which any Buying Party is a party, the
performance by the Buying Parties of their obligations hereunder and thereunder
and the consummation by the Buying Parties of the Transactions. The
execution and delivery of this Agreement by each of the Buying Parties and the
execution and delivery by such Buying Party of each Ancillary Agreement to which
such Buying Party is or is proposed to be, a party, the consummation by the
Buying Parties of the transactions contemplated hereby and thereby, and the
compliance by the Buying Parties with any of the provisions hereof or thereof
will not (a) conflict with or result in any breach of any provision of the
certificate of incorporation or by-laws of Parent or the organizational
documents of Merger Sub, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or loss of
material benefits) under any of the terms, conditions or provisions of any
Contract to which Parent or Merger Sub is a party or otherwise may be subject to
or bound or result in the creation of any Lien (other than Permitted Liens) on
any of the assets or properties of Parent or Merger Sub, or (c) violate any
Permit or Law applicable to Parent or Merger Sub or to which Parent or Merger
Sub or any of its assets or properties may be subject to or bound, except in the
case of (b) or (c), any violation, breach or default which would not have
or would not reasonably be expected to have a Material Adverse Effect on
Parent.
Section
6.4 Litigation. There
are no Proceedings pending or, to the Knowledge of the Buying Parties,
threatened against the Parent or any of its Subsidiaries or its or their assets,
properties, businesses, or employees that would reasonably be expected to have a
Material Adverse Effect on Parent. There are no Orders imposed by any
Governmental Authority against
44
or that
apply, in whole or in part, to Parent or any of its Subsidiaries, or its or
their assets, properties, businesses, or employees that would reasonably be
expected to have a Material Adverse Effect on Parent.
Section
6.5 Sufficiency of
Funds. At the Closing, the Buying Parties shall have available
funds in an amount sufficient to permit them to pay the cash portion of the
Merger Consideration and the Interests Purchase Consideration to be paid at
Closing and related fees and expenses required to be paid by the Buying
Parties.
Section
6.6 Parent Common
Stock. The Parent Common Stock to be issued pursuant to this
Agreement will be duly authorized, validly issued, fully paid and non-assessable
and will not be subject to preemptive rights created by statute, Parent’s
organizational documents or any agreement to which Parent is a party or by which
it is bound and will be free and clear of all Liens (other than those
restrictions pursuant to the Securities Act) and shall be listed for trading on
the NASDAQ Global Market or such other exchange on which the Parent Common Stock
is then listed or quoted on the date of such issuance. Subject to the
representations and warranties given by the Company and the Selling Parties in
this Agreement being true and complete, no registration under the Securities Act
is required for the offer and sale of the Parent Common Stock to the Selling
Parties under this Agreement.
Section
6.7 Regulatory
Compliance.
(a) Since
January 1, 2006, Parent has timely filed all reports, statements, forms,
schedules, registration statements, prospectuses, proxy statements, and other
documents, together with any amendments required to be made with respect
thereto, required to be filed by it with the SEC pursuant to the Exchange Act or
the Securities Act, as the case may be (the “Parent SEC
Reports”). Except as disclosed therein, each of the Parent SEC
Reports, at its effective date (in the case of Parent SEC Reports that are
registration statements), at the meeting date (in the case of Parent SEC Reports
that are proxy statements), or at the time filed, furnished or communicated (in
the case of all other Parent SEC Reports), complied in all material respects
with the applicable requirements of the Exchange Act or the Securities Act, and
the rules and regulations of the SEC promulgated thereunder, each as in effect
on the applicable date referred to above, applicable to such Parent SEC Reports,
and did not, as of the applicable date referred to above, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that
information as of a later date (but before the date of this Agreement) shall be
deemed to modify information as of an earlier date. As of the date of
this Agreement, no executive officer of Parent has failed in any respect to make
the certifications required of him or her under Section 302 or 906 of the
Sarbanes-Oxley Act.
(b) In
addition to, and without limiting the generality of, the other representations
and warranties in this Article VI,
including, but not limited to, those contained in Section 6.3 and
6.9
hereof:
(i) Since
December 31, 2005, Parent and its Subsidiaries have timely filed all
registrations, declarations, reports, notices, forms and other filings required
to be filed by
45
it with
the SEC, FINRA, or any other Governmental Authority (including applicable state
securities regulatory bodies), and all amendments or supplements to any of the
foregoing.
(ii) The
information contained in the currently effective Form BD as filed by Parent and
its Subsidiaries with the SEC was complete and accurate in all material respects
as of the time of filing thereof and remains complete and accurate in all
material respects as of the date hereof.
(iii) Neither
Parent nor any of its Subsidiaries nor, to the Knowledge of Parent, any of its
or their employees or associated persons has been permanently enjoined by the
order of any Governmental Authority from engaging or continuing any conduct or
practice in connection with any activity or in connection with the purchase or
sale of any security. Neither Parent nor any of its Subsidiaries is
or has been ineligible to serve as a broker-dealer or an associated person of a
broker-dealer under Section 15(b) of the Exchange Act (including being
subject to any “statutory disqualification” as defined in Section 3(a)(39)
of the Exchange Act). None of Parent’s or any of its Subsidiaries’
employees or associated persons are or, to the Knowledge of Parent, have been
ineligible to serve as a broker-dealer or an associated person of a
broker-dealer under Section 15(b) of the Exchange Act (including being
subject to any “statutory disqualification” as defined in Section 3(a)(39)
of the Exchange Act).
(iv) Each of
Parent and its Subsidiaries and each of its and their respective officers,
employees and “associated persons” (as defined under the Exchange Act) who are
required to obtain a Permit as a broker-dealer, a principal, a representative,
an agent or a salesperson (or any limited subcategory thereof) with the SEC or a
Governmental Authority are duly registered as such and such registrations are in
full force and effect.
(c) The
consolidated financial statements of Parent and its Subsidiaries (the “Parent Financial
Statements”) included (or incorporated by reference) in the Parent SEC
Reports (including the related notes, where applicable, and including the
financial statements included in the Current Report on Form 8-K filed by
Parent on February 24, 2009) (i) have been prepared from, and are in
accordance with, the books and records of Parent and its Subsidiaries;
(ii) complied as to form, as of their respective dates of filing with the
SEC, in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto; and
(iii) were prepared in accordance with GAAP applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto or, in the case of unaudited statements, for the absence of footnotes),
and presented fairly the consolidated financial position, results of operations,
changes in stockholders’ equity and cash flows of Parent and the consolidated
Subsidiaries of Parent as of the respective dates thereof and for the respective
periods indicated therein (subject, in the case of unaudited statements other
than those included in the Current Report referenced in the preceding portion of
this sentence, to normal year-end adjustments). The financial
statements to be included in Parent’s Annual Report on Form 10-K for the
year ended December 31, 2008, shall be consistent in all material respects
with the financial statements included in the Current Report on Form 8-K
filed by Parent on February 24, 2009.
46
(d) Parent
and its Subsidiaries maintain internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(e) The
records, systems, controls, data and information of Parent and its Subsidiaries
are recorded, stored, maintained and operated under means (including any
electronic, mechanical or photographic process, whether computerized or not)
that are under the exclusive ownership and direct control of Parent (including
all means of access thereto and therefrom), except for any non-exclusive
ownership and non-direct control that would not reasonably be expected to have a
material adverse effect on the system of internal accounting controls described
below in this Section 6.7(e). Parent
(x) has implemented and maintains disclosure controls and procedures to
ensure that material information relating to Parent and its Subsidiaries is made
known to the chief executive officer and the chief financial officer of Parent
by others within those entities and (y) has disclosed, based on its most
recent evaluation, to Parent’s outside auditors (i) any significant
deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting that are reasonably likely to adversely affect
Parent’s ability to record, process, summarize and report financial information
and (ii) any fraud, whether or not material, that involves management or
other employees who have a significant role in Parent’s internal controls over
financial reporting. These disclosures were made in writing by
management to Parent’s auditors, true and complete copies of which have been
made available to the Company and the Selling Parties’ Representative before the
date hereof.
Section
6.8 Capitalization of
Parent.
(a) As of
February 27, 2009 (the “Parent Capitalization
Date”), the authorized capital stock of Parent consists of 100,000,000
shares of Parent Common Stock and 1,500,000 shares of preferred
stock. As of the Parent Capitalization Date, of the shares of Parent
Common Stock authorized: (i) 80,187,795 shares are outstanding,
(ii) 166,401 shares are held in a rabbi trust to hedge certain deferred
compensation obligations, (iii) 483,601 shares are reserved for issuance
upon the exercise of Parent Common Stock purchase warrants issued to purchasers
of the Parent’s senior notes dated June 13, 2003, (iv) 7,545,996
shares are reserved for issuance upon the exercise of Employee Stock Options,
(v) 8,530,793 shares are reserved for the issuance of Parent Common Stock
upon the settlement of RSU Awards that are currently outstanding,
(vi) 750,000 additional RSU Awards are committed to Lee Fensterstock and
Peter McNierney pursuant to, and in accordance with the schedule in and terms
of, their current employment agreements, (vii) 6,367,325 additional shares
are, as of the Parent Capitalization Date, reserved for issuance pursuant to the
Employee Stock Incentive Plans in respect of future awards under such plans, and
(viii) no other shares of Parent Common Stock are reserved for issuance for
any purpose. As of the Parent Capitalization Date, of the shares of
Parent preferred stock authorized: (i) 1,000,000 shares of
Parent’s Series B Mandatory Redeemable Preferred Stock are currently outstanding
and (ii) no other shares of Parent preferred stock are
47
currently
outstanding and, other than Parent’s Series A Junior Participating Preferred
Stock referred to in the Rights Agreement, no series of Parent preferred stock
has been designated or reserved for issuance. The Rights Agreement
terminated on March 31, 2008 and, as of the date hereof, (i) the
Rights Agreement has no further force or effect and (ii) the Company has
not taken any action to amend the Rights Agreement to extend its term or to
adopt a new rights agreement.
(b) Neither
Parent nor any of its Subsidiaries has issued any securities in violation of any
preemptive or similar rights. There are not any bonds, debentures,
notes or other indebtedness of Parent having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any matters
on which holders of Parent Common Stock may vote (“Voting Parent
Debt”). As of the Parent Capitalization Date, except pursuant
to this Agreement, there are not any Options (i) obligating Parent or any
of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other equity interests in, or any
security convertible or exercisable for or exchangeable into any capital stock
of or other equity interest in, Parent or of any of its Subsidiaries or any
Voting Parent Debt, (ii) obligating Parent or any of its Subsidiaries to
issue, grant, extend or enter into any such option, warrant, call, right,
security, commitment, Contract, arrangement or undertaking or (iii) that give
any person the right to receive any economic benefit or right similar to or
derived from the economic benefits and rights occurring to holders of Parent
Common Stock. Parent is not a party to or bound by and, to the
Knowledge the Buying Parties, there are no, restrictions upon, or voting trusts,
proxies or other agreements or understandings of any kind with respect to, the
voting, purchase, redemption, acquisition or transfer of, or the declaration or
payment of any dividend or distribution on, Parent Common Stock or any shares of
the capital stock of or equity interests in any Subsidiary of
Parent.
Section
6.9 Permits; Compliance with
Law.
(a) Parent
and its Subsidiaries hold all material Permits necessary for the ownership and
lease of its and their properties and assets and the lawful conduct of its
business as it is now substantially conducted under and pursuant to all
applicable Laws. All material Permits have been legally obtained and
maintained and are valid and in full force and effect. Parent and its
Subsidiaries are in compliance in all material respects with all of the terms
and conditions of all Permits. To the Knowledge of the Buying
Parties, (i) there has been no material change in the facts or
circumstances reported or assumed in the application for or granting of any
Permits and (ii) no outstanding violations are or have been recorded in
respect of any Permits. No action, proceeding, claim or suit is
pending or, to the Knowledge of the Buying Parties, threatened, to suspend,
revoke, withdraw, modify or limit any Permit, and, to the Knowledge of the
Buying Parties, no investigation is pending or threatened in writing, to
suspend, revoke, withdraw, modify or limit any Permit. To the
Knowledge of the Buying Parties, there is no fact, error or admission relevant
to any Permit that could reasonably be expected to result in the suspension,
revocation, withdrawal, material modification or material limitation of, or
could reasonably be expected to result in the threatened suspension, revocation,
withdrawal, material modification or material limitation of, or in the loss of
any Permit.
48
(b) Parent
and its Subsidiaries and its and their properties, assets, operations and
business are currently being, and since December 31, 2006 have been,
operated in compliance in all material respects with all Permits and applicable
Laws except for such noncompliance as has not had or would not reasonably be
expected to have a Material Adverse Effect.
Section
6.10 Absence of Certain
Changes. Since December 31, 2008, (a) through the
date hereof Parent and its Subsidiaries have been operated in all material
respects in the ordinary course of business consistent with past practice and
(b) there has not occurred any event or condition that, individually or in
the aggregate, has had or is reasonably likely to have a Material Adverse Effect
on Parent.
Section
6.11 Intentionally
Omitted.
Section
6.12 Taxes and Tax
Returns.
(a) All
material Tax Returns required to be filed by or with respect to Parent and
Parent’s Subsidiaries or their respective assets and operations (“Parent Tax Returns”)
have been timely filed (taking into account valid extensions of the time for
filing). All such Parent Tax Returns (i) were prepared in the
manner required by applicable Law and (ii) are true, complete and accurate
in all material respects.
(b) Parent
and the Parent’s Subsidiaries have timely paid, or caused to be paid, all
material Taxes required to be paid by them, whether or not shown (or required to
be shown) on a Tax Return (except for Taxes being contested in good faith with a
Taxing Authority and for which there is a sufficient reserve (without regard to
deferred Tax assets and liabilities) on the balance sheet included in the Parent
Financial Statements), and Parent and Parent’s Subsidiaries have established, in
accordance with GAAP, a sufficient reserve (without regard to deferred Tax
assets and liabilities) on the balance sheet included in the Parent Financial
Statements for the payment of all material Taxes not yet due and
payable. Since December 31, 2008, neither Parent nor any of
Parent’s Subsidiaries has incurred any liability for Taxes other than Taxes
incurred in the ordinary course of business.
(c) To the
Knowledge of Parent, there are no examinations or other administrative or court
proceedings relating to material Taxes in progress or pending, and there is no
existing, pending or threatened in writing claim, proposal or assessment against
Parent or any of Parent’s Subsidiaries or relating to its assets or operations
asserting any deficiency for material Taxes.
(d) Parent
has not taken or agreed to take any action (nor is it aware of any agreement,
plan or circumstance) that to the Knowledge of Parent is reasonably likely to
prevent the Merger from being treated as a “reorganization” within the meaning
of Section 368(a) of the Code.
Notwithstanding
anything to the contrary in this Agreement, it is understood and agreed that no
representation or warranty is made by Parent or Merger Sub in respect of Tax
matters in any Section of this Agreement other than this Section 6.12.
49
Section
6.13 Listing and Maintenance
Requirements. The shares of Parent Common Stock are registered
pursuant to the Exchange Act and are listed on The NASDAQ Global Market, and
Parent has taken no action designed to terminate the registration of Parent
Common Stock or delisting Parent Common Stock from The NASDAQ Global
Market.
Section
6.14 No
Broker. No agent, broker, investment banker, financial advisor
or other firm or Person is or will be entitled to any broker’s or finder’s fee
or any other commission or similar fee payable by the Buying Parties in
connection with any of the transactions contemplated by this
Agreement.
Section
6.15 Information
Supplied. None of the information supplied or to be supplied
by or on behalf of the Buying Parties for inclusion or incorporation by
reference in the Information Statement shall, at the date it is first mailed to
the holders of Parent Common Stock, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Information Statement
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations
thereunder. Notwithstanding the foregoing, no representation is made
by the Buying Parties (in this Section 6.15 or
otherwise) with respect to statements made or incorporated by reference based on
information supplied by or on behalf of the Company or the Selling
Parties.
ARTICLE
VII
COVENANTS
Section
7.1 Operation of the Company
Pending the Closing. The Company shall not, and the Selling
Parties shall cause the Company and its Subsidiaries not to, take any action
with the purpose of causing any of the conditions to the Buying Parties’
obligations set forth in Article VIII
hereof to not be satisfied. Except with the prior written consent of
Parent, during the period from the date of this Agreement to the Closing, the
Company shall, and the Selling Parties shall cause the Company and its
Subsidiaries to, comply in all material respects with all applicable Laws and
conduct its and their businesses in all material respects according to its
ordinary and usual course of business and to use all commercially reasonable
efforts consistent therewith (x) to preserve intact its and their present
business operations and material properties, assets and business organizations
and (y) to maintain satisfactory relationships with all customers,
regulators, creditors and others having significant business relationships with
the Company or any of its Subsidiaries. Without limiting the
generality of the foregoing, and except as set forth in the Disclosure Schedule,
as otherwise provided in this Agreement or as required by applicable Law, during
the period from the date of this Agreement to the Closing, the Company shall
not, and the Selling Parties shall cause the Company and its Subsidiaries not
to, without the prior written consent of Parent (which consent shall not be
unreasonably withheld, conditioned or delayed):
(a) issue,
sell or pledge, or authorize or propose the issuance, sale or pledge of
additional shares of capital stock of any class, or any Options;
51
(b) split,
combine or reclassify any shares of capital stock of the Company or any of its
Subsidiaries or declare, set aside for payment or pay any dividend or
distribution, payable in cash, stock, property or otherwise, with respect to any
of the capital stock of the Company or any of its Subsidiaries, other than any
dividend or distribution of cash and other assets identified in Section 7.1(b)
of the Disclosure Schedule, not reasonably expected to result in a negative Net
Tangible Book Value or a failure to comply with any applicable net minimum
capital requirements or any other applicable Law (provided, however, that the
aggregate amount of any such dividend or distribution of cash and the fair
market value of any other assets identified in Section 7.1(b)
of the Disclosure Schedule shall not exceed $10 million);
(c) enter
into an agreement with respect to any merger, consolidation, liquidation or
business combination involving the Company or any of its Subsidiaries, or any
acquisition or disposition of any material properties, assets or securities of
the Company or any of its Subsidiaries;
(d) terminate,
amend or provide any waiver or consent under any Company Contract other than in
the ordinary course of business, provided that the
Company shall consult with Parent before taking any action pursuant to this
Section 7.1(d)
in the ordinary course of business;
(e) terminate
or amend any Permit issued by FINRA or any other securities regulator or any
other material Permit;
(f) propose
or adopt any amendment to the Company Charter Documents;
(g) (i)
acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division or line of
business thereof or (ii) make any material investment either by purchase of
stock or securities, contributions to capital, property transfer or purchase of
any property or assets of any Person;
(h) incur any
indebtedness or issue any debt securities or assume, guarantee or endorse the
obligations of any other Person, other than trade payables in the ordinary
course of business which are not material in amount, consistent with past
practice;
(i) pay,
discharge, satisfy or cancel any direct or indirect, primary or secondary,
material liability, indebtedness, obligation, penalty, cost or expense
(including costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person of any type, whether accrued,
absolute or contingent, liquidated or unliquidated, matured or unmatured, or
otherwise, unless in the ordinary course of business;
(j) (i)
increase in any manner the rate or terms of compensation or Benefit Plans for
any of its directors, officers or other employees, except as may be required
under existing employment agreements or applicable Law, (ii) hire any new
employees or (iii) unless authorized or required by Law, enter into or
amend any employment, bonus, severance or retirement contract or adopt or amend
any Benefit Plan;
51
(k) (i) sell,
lease, transfer or otherwise dispose of, any of its material property or assets
other than in the ordinary course of business consistent with past practice or
(ii) create Liens on any of its material property or assets, other than
Permitted Liens;
(l) sell,
assign, lease, license, transfer or otherwise dispose of, mortgage, pledge or
encumber, any real property or amend in any material respect, terminate, modify
in any material respect, renew or assign any rights under any real property
lease;
(m) sell,
assign, lease, license, transfer or otherwise dispose of, mortgage, pledge or
encumber, any Owned Company Intellectual Property or amend in any material
respect, terminate, modify in any material respect, renew or assign any rights
under any Contract related to any Company Intellectual Property other than in
the ordinary course of business, provided that the
Company shall consult with Parent before taking any action pursuant to this
Section 7.1(m)
in the ordinary course of business;
(n) make any
loans, advances or capital contributions (other than advances for travel and
other normal business expenses to officers and employees), except in the
ordinary course of business;
(o) commit to
make any capital expenditure or fail to make any planned capital expenditures,
or enter into any commitments or transactions not in the ordinary course of
business, in any case involving aggregate value in excess of $100,000, or make
aggregate capital expenditures or commitments in excess of
$100,000;
(p) fail to
maintain all its assets in good repair and condition in all material respects,
except to the extent of wear or use in the ordinary course of business or damage
by fire or other unavoidable casualty;
(q) except as
may be required as a result of a change in applicable Law or GAAP, change any
accounting principles or practices used by the Company or any of its
Subsidiaries;
(r) institute,
settle or dismiss any material action, claim, demand, lawsuit, proceeding,
arbitration or grievance by or before any court, arbitrator or governmental or
regulatory body threatened against, relating to or involving the Company or any
of its Subsidiaries in connection with any business, asset or property of the
Company or any of its Subsidiaries;
(s) enter
into any Contract with a term of more than twelve (12) months or involving the
payment, or provision of goods or services, in excess of $100,000 (other than
Contracts entered into in the ordinary course of business consistent with past
practice or Contracts that can be terminated on no more than 60 days notice
without payment of any fee);
(t) make,
revoke or change any Tax election or change any Tax accounting method, settle or
compromise any Tax liability, or waive or consent to the extension of any
statute of limitations for the assessment and collection of any Tax (this
clause (t) being the sole provision of this Section 7.1
governing Tax matters);
52
(u) either
fail to pay in any material respect the accounts payable or other liabilities of
the Company or any of its Subsidiaries, or fail to pursue to collect in any
material respect any of the accounts receivable or other indebtedness owed to
the Company or any of its Subsidiaries, in a manner consistent with the
practices of the Company prior to the date hereof;
(v) abandon
or fail to maintain in any material respect any registration for or registration
of any Owned Company Intellectual Property; or
(w) authorize,
agree or commit to take any of the foregoing actions.
This
Section 7.1 is
not intended to, in any way, confer overall control of the Company or its
operations to Parent or any of its directors, officers, employees,
Affiliates. Related Parties or any investment banker, financial
advisor, attorney, accountant or other advisor, agent or representative
(collectively, “Representatives”). As
of the Closing, the Company and its Subsidiaries shall not, and the Selling
Parties shall cause the Company and its Subsidiaries not to, have any
Indebtedness outstanding or any assets subject to any Liens. Solely
for purposes of this Section 7.1,
“Indebtedness” and “Liens” shall have the respective meaning given to each such
in the Mast Preferred Stock Purchase Agreement.
Section
7.2 Access. From
the date of this Agreement until the Closing Date or the termination of this
Agreement, each party will afford the other and each of their authorized
Representatives access at all reasonable times and upon reasonable notice to all
of its and its Subsidiaries’ assets, properties, Personnel and operations and to
all its and its Subsidiaries’ books and records, and each party will permit the
other and each of their authorized Representatives to review its books and
records and to conduct such inspections as they may reasonably request, and the
Company will permit the Buying Parties and each of their authorized
Representatives to review the Financial Statements, subject to compliance with
applicable Law; provided, however, that
(i) such investigation shall not unreasonably interfere with the business
operations of any party; (ii) no party shall be required to provide access
to any information or take any other action that would constitute a waiver of
the attorney-client privilege; (iii) no party need supply the other party
with any information which, in the reasonable judgment of such party, such party
is under a legal obligation not to supply; and (iv) no Stockholder (or
Holder) other than the Selling Parties’ Representative shall have any rights
under this Section 7.2;
provided, however, that in the
case of clause (iii), such party shall promptly provide to the other party
a general description of such information not being supplied and such party
shall use its reasonable best efforts to obtain any consent required to disclose
such information. Each party will instruct its officers to furnish
such Persons with such financial and operating data and other information with
respect to its business, prospects and properties as such Persons may from time
to time reasonably request. All information obtained in connection
with such access shall be governed by the Non-Disclosure Agreement between
Parent and the Company dated January 28, 2009 (the “Confidentiality
Agreement”), the terms and provisions of which shall be incorporated by
reference into this Agreement.
Section
7.3 Notification. The
Company and each of the Selling Parties (only with respect to information within
its, his or her possession) shall promptly notify Parent, and Parent shall
promptly notify the Company, of (i) any fact, change, condition,
circumstance, event, occurrence or non-occurrence that has caused or is
reasonably likely to cause any representation
53
or
warranty in this Agreement made by it, him or her to be untrue or inaccurate in
any material respect at any time after the date hereof and prior to the Closing,
(ii) any material failure on its or their part to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder or (iii) any litigation, arbitration or administrative proceeding
pending or, to their Knowledge, threatened against the Company or any of its
Subsidiaries, the Stockholders, the Holders, or the Buying Parties, as the case
may be, which challenges the transactions contemplated by this Agreement or any
Ancillary Agreement; provided that each of
the parties hereto agrees that the delivery of any notice pursuant to this Section 7.3
shall not limit, diminish or otherwise affect the remedies available hereunder
to the party receiving such notice, or the representations or warranties of, or
the conditions to the obligations of, the parties hereto. No failure
to comply with this Section 7.3
shall by itself constitute the failure of any condition set forth in Article VIII, or
by itself give rise to any rights of termination under Article IX or
indemnification under Article X,
except to the extent the underlying matter would independently result in the
failure of a condition set forth in Article VIII or
give rise to any rights of termination or indemnification under Article IX or
X,
respectively.
Section
7.4 Reasonable Best
Efforts.
(a) Upon the
terms and subject to the conditions of this Agreement, the Company, each of the
Selling Parties and the Buying Parties shall use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable Laws to consummate and
make effective the Transactions and the transactions contemplated by the
Ancillary Agreements as promptly as practicable, including, without limitation,
(i) the prompt preparation and filing of all forms, registrations, notices
and other filings required to be filed to consummate the Transactions and the
transactions contemplated by the Ancillary Agreements and the taking of such
reasonable best efforts as are necessary to obtain at the earliest practicable
date any approvals, consents, orders, exemptions or waivers of any Governmental
Authority or any other Person, and (ii) using reasonable best efforts to
cause the satisfaction of all conditions to Closing. Each of Parent,
on the one hand, and the Company and the Selling Parties, on the other hand,
shall promptly consult with the other with respect to, provide any necessary
information with respect to, and provide the other (or its counsel) advanced
copies of, all filings made by such party with any Governmental Authority or any
other Person or any other information supplied by such party to a Governmental
Authority or any other Person in connection with this Agreement and the
transactions contemplated by this Agreement. The Company shall allow
the Buying Parties to be present and participate in all communications and
meetings with any Governmental Authority.
(b) Without
limiting the generality of the foregoing, (i) as promptly as practicable, but in
no event later than ten Business Days following the execution and delivery
hereof, the Selling Parties shall file or cause to be filed with FINRA a change
of control notice and continuing membership application pursuant to NASD Rule
1017 with respect to Partners (the “Partners FINRA
Notice”) and Parent shall file or cause to be filed with FINRA the FINRA
notice, if required for the Transaction, with respect to Broadpoint Capital,
Inc. (the “Broadpoint
Capital FINRA Notice” and, together with the Partners FINRA Notice, the
“FINRA
Notices”) and (ii) as promptly as practicable, but in no event later than
ten Business Days following the determination that the filing is required by
applicable Law, each of the
54
Selling
Parties and Parent shall file or cause to be filed with the United States
Federal Trade Commission (the “FTC”) and the United
States Department of Justice (the “DOJ”) the
notification and report form, if any, required for the Transactions and shall,
as promptly as practicable, file with the FTC and DOJ any supplemental
information requested in connection therewith pursuant to the HSR Act. Any such
notification and report form and supplemental information shall be in
substantial compliance with the requirements of the HSR Act or FINRA rules, as
applicable. Each of the Company, the Selling Parties, Parent and Merger Sub
shall furnish to the other such necessary information and reasonable assistance
as the other may request in connection with its preparation of any filing or
submission that is necessary under the HSR Act or required by
FINRA.
(c) Each
party hereto shall promptly inform the others of any communication from any
Governmental Authority regarding any of the Transactions.
(d) Each of
the Selling Parties agrees that he shall not sell, transfer, pledge,
hypothecate, mortgage or encumber his Company Shares or Interests, as
applicable, other than as contemplated by this Agreement or take any action
reasonably expected to cause the non-satisfaction of the conditions to Closing
set forth in Article VIII
hereof.
Section
7.5 Parent Information
Statement.
(a) As
promptly as practicable following the execution of this Agreement, Parent shall
prepare and, after consultation with and receipt of any comments from the
Company, file with the SEC an information statement (the “Information
Statement”) to be sent to Parent’s stockholders in connection with the
approval through the execution of the Stockholders Consent of the Charter
Amendment and Share Issuance pursuant to the provisions of Section 615 of
the New York Business Corporation Law. Each of the Company and the
Selling Parties shall cooperate with Parent in connection with the preparation
of the Information Statement and shall furnish all information concerning such
party as Parent may reasonably request in connection with the preparation of the
Information Statement including all information related to the Company and the
Selling Parties required to be set forth in the Information Statement pursuant
to rules and regulations promulgated by the SEC under the Exchange
Act. Parent, the Company and each of the Selling Parties shall each
use its reasonable best efforts to have the Information Statement cleared by the
SEC as promptly as reasonably practicable after such filing. Parent
shall use its reasonable best efforts to cause the Information Statement to be
mailed to Parent’s shareholders promptly after the Information Statement is
cleared by the SEC.
(b) Parent
shall promptly notify the Company of (i) the receipt of any comments from
the SEC and all other written correspondence and oral communications with the
SEC relating to the Information Statement and (ii) any request by the SEC
for any amendment or supplement to the Information Statement or for additional
information with respect thereto. Drafts of the Information Statement
and any amendment or supplement thereto shall be provided to the Company for its
review and comment before Parent files them with the SEC.
(c) If at any
time prior to the Effective Time any party hereto becomes aware of any
information relating to the Company, the Selling Parties or the Buying Parties
or any of their
55
respective
Affiliates, directors or officers, which should be set forth in an amendment or
supplement to the Information Statement, so that the Information Statement would
not include any misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, such party shall promptly notify the
other parties and an appropriate amendment or supplement describing such
information shall be promptly filed with the SEC and, to the extent required by
law, disseminated to Parent’s shareholders.
Section
7.6 Further
Assurances. From time to time after the Closing, without
additional consideration, each party hereto will (or, if appropriate, cause its
Affiliates to) execute and deliver such further instruments and take such other
action as may be necessary or reasonably requested by the other party to make
effective the transactions contemplated by this Agreement and the Ancillary
Agreements and to provide the other party with the intended benefits of this
Agreement and the Ancillary Agreements.
Section
7.7 Confidentiality. The
Selling Parties acknowledge and agree that from and after the date hereof each
Selling Party shall keep confidential any and all information (whether in oral
or written form, electronically stored or otherwise) (i) that is related in any
way to the Company or any of its Subsidiaries or the Buying Parties or
(ii) received from another party that is related to this Agreement, any of
the Ancillary Agreements or the transactions contemplated hereby and thereby
(collectively, “Confidential
Information”); provided that any
Confidential Information that (i) was or becomes generally available to the
public other than as a result of a disclosure by the party receiving such
Confidential Information in violation of this Agreement, (ii) was or
becomes available to a party on a non-confidential basis from a source other
than the party disclosing such Confidential Information or its Representatives;
provided, further, that such
source was not known to the Selling Party to be bound by any agreement or
obligation to keep such information confidential, or (iii) was
independently developed by the party receiving such Confidential Information or
its Representatives without reference to any Confidential Information, shall not
be subject to the restrictions contained in this Section 7.7. Notwithstanding
anything to the contrary contained herein, a party may disclose the Confidential
Information to its Representatives who need to know such Confidential
Information to evaluate the Transactions or the transactions contemplated by the
Ancillary Agreements, are informed of its confidential nature, and agree to
abide by this Section 7.7. In
the event that a Selling Party is required by Law, regulation, supervisory
authority or other applicable judicial or governmental order to disclose any
Confidential Information, such Selling Party shall provide Parent with prompt
written notice, unless notice is prohibited by Law, of any such request or
requirement so that Parent may seek a protective order or other appropriate
remedy. If, failing the entry of a protective order (which the party
required to disclose will use its commercially reasonable efforts to obtain),
the Selling Party required to disclose the Confidential Information is, upon the
advice of its counsel, compelled to disclose such Confidential Information, such
Selling Party may disclose that portion of the Confidential Information that
counsel advises that such Selling Party is compelled to disclose and will
exercise commercially reasonable efforts to obtain assurance to the extent
possible that confidential treatment will be accorded to that portion of the
Confidential Information that is being disclosed. In any event, any
Selling Party required to disclose the Confidential Information will use its
commercially reasonable efforts to, and will not oppose action by Parent to,
obtain an appropriate protective order or other reliable assurance that
confidential treatment will be accorded the Confidential
Information. The Selling Parties’
56
obligations
under this Section 7.7
shall survive the Closing Date until the second anniversary thereof, provided
that if this Agreement terminates prior to the Closing, this Section 7.7
shall terminate concurrently with the Agreement.
Section
7.8 Consents. The
parties will use their reasonable best efforts to obtain such Consents and
authorizations of third parties, give notices to third parties and take such
other actions as may be necessary or appropriate in order to effect the
consummation of the transactions contemplated by this Agreement and to enable
the Company and its Subsidiaries to carry on its business after the Closing Date
substantially as such business was conducted by it prior to the Closing Date
including, without limitation, the Consents referred to in Section 4.3. If
the Company is unable to obtain any such Consent or authorization from any
Person (other than a Governmental Authority) prior to the Closing, following the
Closing until such Consents or authorizations are obtained, the Selling Parties
shall use their reasonable best efforts in cooperation with the Buying Parties
(at the Buying Parties request and expense) to obtain such Consents or
authorizations.
Section
7.9 Tax
Matters.
(a) Parent
shall prepare and file, or cause to be prepared and filed, all Company Tax
Returns for any taxable period ending on, before or including the Closing Date
and with due dates (including extensions) after the Closing Date. To
the extent any Taxes shown as due on any Tax Return described in this Section 7.9(a)
are indemnifiable by the Selling Parties pursuant to this Agreement, such Tax
Returns shall be prepared in a manner consistent with prior practice unless a
contrary treatment is required by applicable Law, and the Parent shall provide
(or cause the Company and the Company’s Subsidiaries to provide) the Selling
Parties’ Representative with copies of such Tax Returns at least 30 days
prior to the due date for filing thereof (including extensions) for the Selling
Parties’ Representative’s review and approval. Parent and the Selling
Parties’ Representative shall attempt in good faith to resolve any disagreements
regarding such Tax Returns prior to the due date for filing. In the
event that Parent and the Selling Parties’ Representative are unable to resolve
any dispute with respect to such Tax Return at least fifteen (15) days
prior to the due date for filing, such dispute shall be resolved by the
Reviewing Accountant, which resolution shall be binding on the
parties. Notwithstanding the foregoing, nothing contained in this
Section 7.9(a)
shall in any manner terminate, limit or adversely affect any right to receive
indemnification pursuant to any provision in this Agreement.
(b) All
transfer, documentary, sales, use, registration and other such Taxes incurred in
connection with this Agreement and the transactions contemplated hereby shall be
shared equally by the Selling Parties, on the one hand, and the Buying Parties,
on the other; provided that,
notwithstanding anything to the contrary in this Agreement, all transfer,
documentary, sales, use, registration and other such Taxes incurred in
connection with the distribution or transfer of any asset identified in Section
7.1(b) of the Disclosure Schedule shall be borne by the Selling
Parties. The Buying Parties and the Selling Parties shall cooperate
to the extent necessary in the timely making of all filings, returns, reports
and forms as may be required in connection therewith.
57
(c) All
contracts, agreements or arrangements under which the Company or any of the
Company’s Subsidiaries may at any time have an obligation to indemnify for or
share the payment of or liability for any portion of a Tax (or any amount
calculated with reference to any portion of a Tax) (other than any such
contract, agreement, arrangement between or among the Company and/or its
Subsidiaries) shall be terminated with respect to the Company and any such
Subsidiary as of the Closing Date, and the Company and such Subsidiary shall
thereafter be released from any liability thereunder.
(d) The
Company, the Company’s Subsidiaries, the Buying Parties and the Selling Parties
shall, and shall each cause their Affiliates to, provide to the other
cooperation and information, as and to the extent reasonably requested, in
connection with the filing of any Tax Return, in conducting any audit,
examination, litigation or other proceeding with respect to Taxes or in
connection with any other matter related to Taxes. Such cooperation
shall include the retention and (upon the other party’s request) the provision
of records and information that are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. The Selling Parties, the Buying Parties
and the Company shall, and shall cause their respective Affiliates to
(i) retain all books and records with respect to Tax matters pertinent to
the Company and its Subsidiaries relating to any Pre-Closing Tax Period, and to
abide by all record retention agreements entered into with any Taxing Authority,
and (ii) to give the other party reasonable written notice prior to
destroying or discarding any such books and records and, if the other party so
requests, the Selling Parties and the Buying Parties, as the case may be shall
allow the other party to take possession of such books and
records. The Selling Parties, the Buying Parties and the Company
further agree, upon request, to use all commercially reasonable efforts to
obtain any certificate or other document from any Governmental Authority or
customer of the Company or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including but not limited to
with respect to the Merger).
(e) Prior to
Closing, each Selling Party shall deliver to the Buying Parties a completed IRS
Form W-9.
(f) The
Buying Parties, the Company and the Selling Parties shall cooperate with each
other and use their respective reasonable efforts to cause the Merger or the
Alternative Structure, as the case may be, to qualify as a “reorganization”
within the meaning of Section 368 of the Code (the “Intended Tax
Treatment”), including (i) not taking any action that is reasonably
likely to prevent the Intended Tax Treatment, (ii) executing such
amendments to this Agreement as may be reasonably required in order to obtain
the Intended Tax Treatment (it being understood that no party will be required
to agree to any such amendment that it determines in good faith materially
adversely affects the value of the transactions contemplated hereby to such
party or its stockholders), and (iii) executing customary letters of
representation in connection with obtaining the opinion referred to in Section 8.3(e). Unless
waived in writing by the Company, the Company and the Selling Parties shall use
their reasonable best efforts to obtain the opinion referred to in Section 8.3(e),
including by executing the letters referred to in the preceding
clause (iii). In the event that, for any reason, the Company
learns that the opinion referred to in Section 8.3(e)
cannot be, or may not be, delivered for any reason, it shall deliver prompt
written notice of such fact to Parent and
58
shall
have a period of 30 days after delivering such notice to use reasonable
best efforts to find other reputable tax counsel reasonably satisfactory to the
Company to deliver such opinion to the Company. Neither the Buying
Parties, the Company, the Selling Parties nor any of their respective Affiliates
will take any action or knowingly fail to take any action that would, or is
reasonably likely to, prevent the Merger from qualifying as a “reorganization”
within the meaning of Section 368(a) of the Code.
(g) The
appropriate Selling Parties shall be entitled to any refunds or credits of or
against any Taxes of the Company or any Company Subsidiary related to a
Pre-Closing Tax Period. Parent shall, and shall cause the Company and
the CompanySubsidiaries to, promptly forward to the appropriate Selling Parties
or to reimburse the appropriate Selling Parties (in accordance with their
relative Ownership Percentages) for any refunds or credits due them pursuant to
the terms hereof.
Section
7.10 Employee
Benefits.
(a) From and
after the Effective Time, Parent shall, and shall cause the Surviving Company
to, honor all Benefit Plans and compensation arrangements and agreements in
accordance with their terms as in effect immediately before the Effective
Time. Notwithstanding the foregoing, Parent and Surviving Company
may, upon at least 60 days notice to participating employees and their employer,
amend any Benefit Plan to cease providing coverage (other than COBRA
continuation coverage, if applicable) to any employee who does not become an
Affected Employee (as defined below). For the period from the
Effective Time through December 31, 2009 (the “Benefits Continuation
Period”), Parent shall, or shall cause the Surviving Company to, provide
each employee of the Company and its Subsidiaries (each, an “Affected Employee”)
with continued benefits coverage under the Benefit Plans at the same level and
on the same basis (and with the same costs for such Affected Employees) as
provided to each such Affected Employee immediately before the Effective Time,
and following the Benefits Continuation Period, Parent shall, or shall cause the
Surviving Company to, provide each Affected Employee with benefits that are no
less favorable than those provided to similarly situated employees of Parent and
its Subsidiaries (other than the Surviving Company). From and after
the Effective Time through the Benefits Continuation Period, Parent shall, or
shall cause the Surviving Company to, provide each Affected Employee with at
least the same salary or wage rate and incentive compensation opportunities as
those provided to each such Affected Employee immediately before the Effective
Time.
(b) For
purposes of vesting, eligibility to participate and benefit accrual (other than
for purposes of benefit accruals under any pension plan sponsored by Parent or
its Subsidiaries (other than the Surviving Company and its Subsidiaries)) under
the employee benefit plans of Parent and its Subsidiaries providing benefits to
any Affected Employees after the Effective Time (the “New Plans”), each
Affected Employee shall be credited with his or her years of service with the
Company and its Subsidiaries before the Effective Time, to the same extent as
such Affected Employee was entitled, before the Effective Time, to credit for
such service under any similar Company employee benefit plan in which such
Affected Employee participated or was eligible to participate immediately prior
to the Effective Time (and to the extent there is no a similar Company plan,
service as recognized for purposes of the
59
Company’s
401(k) Plan), provided that the foregoing shall not apply to the extent that its
application would result in a duplication of benefits with respect to the same
period of service. In addition, and without limiting the generality
of the foregoing: (i) each Company Employee shall be immediately
eligible to participate, without any waiting time, in any and all New Plans to
the extent coverage under such New Plan is comparable to a Benefit Plan in which
such Affected Employee participated immediately before the consummation of the
Merger (such plans, collectively, the “Old Plans”); and
(ii) for purposes of each New Plan providing welfare benefits to any
Affected Employee, Parent shall, or shall cause the Surviving Company to, cause
all pre-existing condition exclusions and actively-at-work requirements of such
New Plan to be waived for such employee and his or her covered dependents,
unless such conditions would not have been waived under the comparable plans of
the Company or its Subsidiaries in which such employee participated immediately
prior to the Effective Time and Parent shall, or shall cause the Surviving
Company to, cause any eligible expenses incurred by such employee and his or her
covered dependents during the portion of the plan year of the Old Plan ending on
the date such employee’s participation in the corresponding New Plan begins to
be taken into account under such New Plan for purposes of satisfying all
deductible, coinsurance and maximum out-of-pocket requirements applicable to
such employee and his or her covered dependents for the applicable plan year as
if such amounts had been paid in accordance with such New Plan.
(c) The
Company shall take all actions and obtain any waivers or consents as may be
required in order to terminate and fully discharge without further liability of
the Company or the Buying Parties, effective on the Closing Date, any stock
option plans and agreements and any other equity rights plans, agreements or
arrangements. The Company shall take all actions necessary to ensure
that, as of immediately prior to the Closing, there are no subscriptions,
options, warrants, calls, commitments or other rights of any kind (absolute,
contingent or otherwise) outstanding relating to the issuance, purchase or
receipt of any capital stock (including, without limitation, outstanding,
authorized but unissued, unauthorized, treasury or other shares thereof) or
other equity interest or any debt security or interest of the Company or any of
its Subsidiaries.
Section
7.11 No
Solicitation. (i) The Company shall, and the Company
shall cause its officers, employees, Subsidiaries, Affiliates, agents and other
representatives to and (ii) each of the Selling Parties shall, and shall
cause their agents, representatives and Affiliates and the Company to,
immediately cease any existing discussions or negotiations with respect to any
Alternative Proposal and shall not, and shall cause such Persons not to,
directly or indirectly, encourage, solicit, participate in, initiate or
facilitate discussions or negotiations with, or provide any information to, any
Person (other than Parent or its directors, officers, employees, Subsidiaries,
Affiliates, agents and other representatives) concerning any Alternative
Proposal. The Selling Parties and the Company shall immediately
communicate to Parent any such inquiries or proposals regarding an Alternative
Proposal, including the terms thereof.
Section
7.12 Appointment of Eric Gleacher
to Parent Board. On or prior to the Closing Date, Parent shall
take all such corporate and other actions as are necessary to appoint Eric
Gleacher as a member of the Parent Board and as Chairman of the Parent
Board. Mr. Gleacher shall be appointed to the class of Parent
directors with a term expiring in 2011 (Class I), and the
60
Parent
Board shall not take any action to remove Eric Gleacher as a director for so
long as Eric Gleacher is employed under his Employment Agreement.
Section
7.13 Lock-up. Each
Selling Party hereby agrees that any of the shares of Parent Common Stock
received by such Selling Party as Merger Consideration or Interests Purchase
Consideration, as applicable, shall, at all times, be subject to Transfer
Restrictions; provided, however, that such
Transfer Restrictions shall be lifted in full on the day that is five years
following the Closing Date, subject to earlier lifting with respect to a Selling
Party as specified on Schedule I
hereto.
Section
7.14 Private
Offering. Each Selling Party shall not offer to sell or
otherwise dispose of the Parent Common Stock acquired by it hereunder in
violation of any of the registration requirements of the Securities Act or any
other applicable securities Laws.
Section
7.15 Certain Actions of Parent
Pending Closing. Parent shall not, and Parent shall cause its
Subsidiaries not to, take any action with the purpose of causing any of the
conditions to the obligations set forth in Article VIII
hereof to not be satisfied, and shall not amend the Parent certificate of
incorporation or bylaws in a manner that would adversely affect the Selling
Parties as compared to other holders of Parent Common Stock. Except
after consultation with the Selling Parties’ Representative (and, in the case of
any action that would reasonably be expected to impede or materially delay the
Closing, after obtaining the consent of the Selling Parties’ Representative),
during the period from the date of this Agreement to the Closing, Parent shall,
and Parent shall cause its Subsidiaries to, comply in all material respects with
all applicable Laws and conduct its and their businesses in all material
respects according to its ordinary and usual course of business and to use all
commercially reasonable efforts consistent therewith (x) to preserve intact
its and their present business operations and material properties, assets and
business organizations and (y) to maintain satisfactory relationships with
all customers, regulators, creditors and others having significant business
relationships with Parent or any of its Subsidiaries.
Section
7.16 Standstill. Each
Selling Party agrees that for a period of two years from the date hereof (the
“Standstill
Period”), neither it nor any of its affiliates, alone or with others
comprising a “group” (as defined under the Exchange Act), will in any manner
(1) acquire, agree to acquire, or make any proposal (or request permission
to make any proposal) to acquire any securities (or direct or indirect rights,
warrants or options to acquire any securities) representing in the aggregate two
percent (2%) or more of the voting power of Parent Common Stock (other than the
Parent Common Stock to be issued as Merger Consideration or Interests Purchase
Consideration, as the case may be, and Parent Common Stock that may be issued to
individuals who are among the Selling Parties as employee compensation) or
material property of Parent, unless such acquisition, agreement or making of a
proposal shall have been expressly first approved (or in the case of a proposal,
expressly first invited) by the Parent Board, (2) form, join or in any way
participate in a “group” (as defined under the Exchange Act) with respect to any
securities of Parent or any of its Subsidiaries or otherwise act, alone or in
concert with others, to solicit proxies from shareholders of Parent or otherwise
seek to influence or control the management or policies of Parent or any of its
affiliates (except, in the case of Eric Gleacher, in his role as director,
Chairman of the Parent Board and employee of Broadpoint Capital, Inc., and in
the case of any other Selling Party, in such Selling Party’s role as an employee
of Parent or
61
any of
its Subsidiaries; it being understood that the foregoing shall not prohibit any
such person from expressing his or her views on matters to be voted upon by
stockholders so long as such expressions do not constitute a “solicitation”
necessitating a public filing under the applicable rules of the Exchange Act),
or (3) assist, advise or encourage (including by knowingly providing or
arranging financing for that purpose) any other person in doing any of the
foregoing. Each Selling Party hereby represents that neither it nor
its affiliates beneficially own any shares of Parent Common Stock as of the date
hereof or as of the Closing Date (other than the Parent Common Stock to be
issued as Merger Consideration or Interests Purchase Consideration, as the case
may be). Notwithstanding the foregoing, such Selling Party and its
affiliates will not be subject to any of the restrictions set forth in this
paragraph, and this paragraph shall terminate and be of no further force or
effect, if Parent shall have entered into a definitive agreement providing for
(i) any acquisition of a majority of the voting securities of Parent by any
person or group (other than by MatlinPatterson FA Acquisition LLC and its
affiliates (collectively, the “Permitted Holders”)),
(ii) any acquisition or disposition of substantially all the consolidated
assets of Parent by any person or group (other than the Permitted Holders) or
(iii) any form of merger, business combination, acquisition, restructuring,
recapitalization or similar transaction with respect to Parent pursuant to
which, immediately following such transaction, any person (other than the
Permitted Holders) or the direct or indirect shareholders of such person shall
beneficially own a majority of the outstanding voting power of Parent or of the
surviving parent entity in such transaction.
Section
7.17 Termination of Certain
Agreements. Notwithstanding any provision to the contrary in
this agreement (including Section 7.1), on
or prior to Closing Date, the Selling Parties will cause each of the following
actions to be taken, such that neither the Company nor any Company Subsidiary
shall have any liabilities, obligations or commitment with respect thereto: (w)
(i) terminate or assign to a third party the Letter Agreement, dated as of
August 7, 2006, between the Company and ELMA Philanthropies,
(ii) terminate or assign to a third party the Letter Agreement, dated as of
January 23, 2008, between the Company and Concierge Capital LLC, (iii)
terminate or assign to a third party the Loan Agreement, between Bank of
America, N.A. and Holdings, dated as of July 31, 2008, and (iv) to the extent
that any employee or “associated person” (as defined under the Exchange Act) of
Partners is compensated by, or has any type of compensation arrangement with,
any private investment fund, whereby such person receives “selling compensation”
as defined in FINRA Rule 3040(e)(2), such compensation arrangement shall be
terminated; (x) the Company shall sell or otherwise transfer the real property
owned by the Company on East 87th Street
in New York City; (y) (i) any Debt owing from the Selling Parties to the Company
or any Company Subsidiary shall be repaid, and (ii) any Debt owing from the
Company or any Company Subsidiary to any Selling Party or any person related to
a Selling Party shall be repaid, together with all interest accrued thereon; and
(z) the Company shall cause Partners to terminate or assign to a third party
that certain Management Agreement (as amended), among Gleacher Mezzanine Fund I,
L.P., Gleacher Mezzanine Fund P, L.P. and Partners (f/k/a Gleacher & Co.
LLC), dated as of March 9, 2001.
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ARTICLE
VIII
CONDITIONS
TO CLOSING
Section
8.1 Conditions to Each Party’s
Obligations. The respective obligations of each party to
effect the transactions contemplated by this Agreement is subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
which may be waived (to the extent the Closing may legally be effected despite
the non-fulfillment of such condition) by mutual agreement of Parent and the
Selling Parties’ Representative, as applicable:
(a) Either
(i) written approval shall have been received from FINRA with respect to the
Partners FINRA Notice and, if applicable, the Broadpoint Capital FINRA Notice;
or (ii) (A) thirty (30) calendar days shall have elapsed after the filing of the
Partners FINRA Notice and, if applicable, the Broadpoint Capital FINRA Notice;
(B) the Selling Parties or the Buying Parties shall have notified FINRA that the
parties hereto intend to consummate the Closing without written approval from
FINRA as contemplated by clause (i) above; (C) fifteen (15) calendar days shall
have elapsed following such notice; and (D) FINRA shall not have indicated in
writing that it is considering imposing Material Restrictions on Parent or any
of its Subsidiaries (including the Surviving Company and its Subsidiaries) if
the Closing is effected without written FINRA approval; for purposes of this
Section 8.1(a),
“Material Restrictions” shall mean any condition or restriction imposed in
connection with the Partners FINRA Notice and, if applicable, the Broadpoint
Capital FINRA Notice, that could reasonably be expected to have a material
adverse effect (measured on a scale relative to the Company and its subsidiaries
taken as a whole) on Parent or any of its Subsidiaries (including the Surviving
Company and its Subsidiaries).
(b) There
shall not be in effect any Law of any Governmental Authority of competent
jurisdiction restraining, enjoining or otherwise preventing the consummation of
the Merger or the Interests Purchase and any waiting period applicable to the
consummation of the Merger or the Interests Purchase under the HSR Act shall
have expired or been terminated.
(c) No Order
issued by any Governmental Authority of competent jurisdiction preventing the
consummation of the Merger or the Interests Purchase shall then be in
effect.
(d) At least
20 days shall have elapsed from the mailing of the Information Statement in
accordance with Rule 14c-2(b) under the Exchange Act.
Section
8.2 Conditions Precedent to
Obligations of Parent and Merger Sub. The obligation of Parent
and Merger Sub to effect the transactions contemplated by this Agreement is
subject to the satisfaction or waiver by Parent (to the extent the Closing may
legally be effected despite the non-fulfillment of such condition) of the
following conditions:
(a) The
representations and warranties of the Company and the Selling Parties in this
Agreement shall be true, complete and accurate in all respects (without regard
to any materiality qualifiers therein) as of the date hereof and at and as of
the Closing with the same effect as though such representations and warranties
had been made at and as of such time, other than representations and warranties
that speak as of another specific date or time prior to
63
the date
hereof (which need only be true and correct as of such date or time); provided, however, that for
purposes of determining the satisfaction of this condition, such representations
and warranties (other than the representations and warranties contained in Section 4.2,
4.5, 4.6, and 5.1, which shall be
true, complete and accurate in all material respects and the representations and
warranties contained in Section 4.13(c)
which shall be true, complete and accurate in all respects) shall be deemed to
be true, complete and accurate in all respects unless the failure or failures of
such representations and warranties to be so true and correct, individually or
in the aggregate, would have a Material Adverse Effect on the
Company.
(b) All of
the terms, covenants and conditions to be complied with and performed by the
Company or any of the Selling Parties on or prior to the Closing Date shall have
been complied with or performed in all material respects.
(c) Parent
shall have received certificates, dated as of the Closing Date, executed on
behalf of the Company and by each Selling Party or the Selling Parties’
Representative on behalf of each such Selling Party certifying that the
conditions specified in Section 8.2(a)
hereof and Section 8.2(b)
hereof have been fulfilled.
(d) Parent
shall have received valid and binding Consents for the Contracts set forth on
Section 8.2(d)
of the Disclosure Schedule.
(e) The
Company shall have repaid in full any and all of the Indebtedness of the Company
and its Subsidiaries, and shall have caused any and all Liens on any of their
assets to be discharged, including those items referenced in Section 4.12 of
the Disclosure Schedule, and shall have delivered to Parent payoff letters (or
other evidence) evidencing such payoff and discharge. Solely for
purposes of this Section 8.2(e),
“Indebtedness” and “Liens” shall have the respective meaning given to each such
term in the Mast Preferred Stock Purchase Agreement.
(f) Parent
shall have received all deliverables required to be delivered to Parent pursuant
to Section 3.2 and
3.3.
(g) Each of
the Employment and Non-Competition Agreements and no less than 75% of the
Non-Competition Agreements shall be in full force and effect and enforceable
against the Stockholder party thereto and no breach thereof shall have occurred
or been threatened in writing by any party thereto (other than Parent or Merger
Sub). The Stockholder party to each Employment and Non-Competition
Agreement, and the Stockholders party to 75% of the Non-Competition Agreements,
shall be available and eligible to work immediately following the Closing (other
than those Stockholders not then available due to vacation, maternity leave,
sickness, non-permanent disability or similar temporary absence).
Section
8.3 Conditions Precedent to
Obligations of the Company and the Selling Parties. The
obligation of the Company and the Selling Parties to effect the transactions
contemplated by this Agreement is subject to the satisfaction or waiver by the
Selling Parties’ Representative (to the extent the Closing may legally be
effected despite the non-fulfillment of such condition) of the following
conditions:
64
(a) The
representations and warranties of Parent and Merger Sub in this Agreement shall
be true, complete and accurate in all respects (without regard to any
materiality qualifiers therein) as of the date hereof and at and as of the
Closing with the same effect as though such representations and warranties had
been made at and as of such time, other than representations and warranties that
speak as of another specific date or time prior to the date hereof (which need
only be true, complete and accurate as of such date or time); provided, however, that for
purposes of determining the satisfaction of this condition, such representations
and warranties (other than the representations and warranties contained in Section 6.2 and
the first sentence of Section 6.8(a),
which shall be true, complete and accurate in all material respects and the
representations and warranties contained in Section 6.10(b)
which shall be true, complete and accurate in all respects) shall be deemed to
be true, complete and accurate in all respects unless the failure or failures of
such representations and warranties to be so true and correct, individually or
in the aggregate, would have a Material Adverse Effect on Parent.
(b) All of
the terms, covenants and conditions to be complied with and performed by Parent
or Merger Sub on or prior to the Closing Date shall have been complied with or
performed in all material respects.
(c) The
Selling Parties’ Representative shall have received a certificate, dated as of
the Closing Date, executed on behalf of Parent and Merger Sub, certifying in
such detail as the Selling Parties may reasonably request that the conditions
specified in Section 8.3(a)
and Section 8.3(b)
hereof have been fulfilled.
(d) The
Selling Parties’ Representative shall have received all deliverables required to
be delivered to the Selling Parties’ Representative pursuant to Section 3.4.
(e) The
Company shall have received the opinion of its counsel, Wachtell, Lipton, Rosen
& Katz, in form and substance reasonably satisfactory to the Company, dated
the Closing Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion that are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated as a “reorganization” within the meaning of Section 368(a) of the
Code. In rendering such opinion, counsel may require and rely upon
customary representations contained in certificates of officers of Company and
Parent.
ARTICLE
IX
TERMINATION
Section
9.1 Termination. This
Agreement may be terminated and the transactions contemplated by this Agreement
may be abandoned at any time prior to the Closing:
(a) by mutual
written consent of Parent and the Company;
(i) a
Governmental Authority shall have issued an order, decree or ruling or taken any
other action (which order, decree or ruling or other action the parties shall
use reasonable best efforts to lift), in each case permanently restraining,
enjoining or
65
otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
or
(ii) the
Closing shall not have occurred on or before September 30, 2009; provided, however, that the
right to terminate this Agreement under this Section 9.1(b)(ii)
shall not be available to (A) the Company if the failure of the Closing to
occur on or before such date was proximately caused by any action or failure to
act on the part of any Selling Party or the Company or (B) Parent, if the
failure of the Closing to occur on or before such date was proximately caused by
any action or failure to act on the part of Parent or Merger Sub;
(c) by Parent
if there is a default or breach by the Company or the Selling Parties of any of
their respective covenants or agreements contained herein, or if the
representations or warranties of the Company or the Selling Parties contained in
this Agreement shall have become inaccurate, in either case such that the
conditions set forth in Section 8.2
hereof could not be satisfied and such breach or default or inaccuracy is not
curable or, if curable, has not been cured or waived within thirty (30) calendar
days after written notice to the Company or the Selling Parties, as applicable,
specifying, in reasonable detail, such claimed default, breach or inaccuracy and
demanding its cure or satisfaction; or
(d) by the
Company if there is a default or breach by Parent or Merger Sub with respect to
any of its covenants or agreements contained herein, or if the representations
or warranties of Parent or Merger Sub contained in this Agreement shall have
become inaccurate, in either case such that the conditions set forth in Section 8.3
hereof could not be satisfied and such breach or default or inaccuracy is not
curable or, if curable, has not been cured or waived within thirty (30) calendar
days after written notice to Parent specifying, in reasonable detail, such
claimed default, breach or inaccuracy and demanding its cure or
satisfaction.
Section
9.2 Procedure and Effect of
Termination. In the event of termination and abandonment of
the transactions contemplated by this Agreement pursuant to Section 9.1
hereof, written notice thereof shall forthwith be given to the other parties to
this Agreement specifying the reasons for such termination and this Agreement
shall terminate (subject to the provisions of this Section 9.2) and
the Transactions shall be abandoned, without further action by any of the
parties hereto. If this Agreement is terminated as provided
herein:
(a) Upon the
written request therefor, each party will (i) redeliver or
(ii) destroy with certification thereto in form and substance reasonably
satisfactory to the other party, all documents, work papers and other materials
of any other party relating to the transactions contemplated by this Agreement,
whether obtained before or after the execution hereof, to the party furnishing
the same; and
(b) In the
event of the termination and abandonment of this Agreement pursuant to Section 9.1
hereof, this Agreement shall forthwith become void and have no effect, without
any liability on the part of any party hereto or its Affiliates, directors,
officers, agents, advisors, representatives or stockholders, other than the
provisions of Section 7.7 and
Article XI
hereof; provided, however, nothing
contained in this Section 9.2
shall relieve any party from liability for fraud or intentional breach of this
Agreement.
66
ARTICLE
X
SURVIVAL;
INDEMNIFICATION
Section
10.1 Survival of Indemnification
Rights.
(a) The
representations and warranties of the Company and the Selling Parties contained
in Article IV and
Article V
hereof and in any Ancillary Agreement shall survive the Closing and remain in
full force and effect for a period of 18 months following the Closing Date and,
if a written notice for a claim for indemnification pursuant to this Article X (a
“Claims
Notice”) has been provided in good faith by such date, shall remain in
full force and effect with respect to any Outstanding Claim until final
resolution of such Outstanding Claim; provided, that,
except as set forth in clause (i) below, the representations and warranties
contained in Section 4.24
shall not survive the Closing Date; provided, however, the
following representations and warranties shall survive and remain in full force
and effect for the period indicated:
(i) Section 4.2
(Authorization and Effect of Agreement), Section 4.5
(Capitalization of the Company; Accredited Investors), Section 4.6 (No
Subsidiaries), Section 4.14
(Transactions with Affiliates), paragraph (c) of Section 4.23
(Employees), paragraphs (e), (g), (j), (p) and (q) of Section 4.24
(Taxes and Tax Returns), Section 4.28 (No
Broker), Section 5.1
(Ownership of the Company Shares), and Section 5.3
(Authorization and Effect of Agreement) until sixty (60) days following the
expiration of the applicable statute of limitations (including extensions
thereof); provided, however, each such
representation and warranty shall remain in full force and effect with respect
to any Outstanding Claim until final resolution of such Outstanding
Claim.
(b) The
representations and warranties of Parent and Merger Sub contained in Article VI
hereof and in any Ancillary Agreement shall survive the Closing and remain in
full force and effect for a period of 18 months following the Closing Date and,
if a Claims Notice has been provided by such date, shall remain in full force
and effect with respect to any Outstanding Claim until final resolution of such
Outstanding Claim; provided, however, the
following representations and warranties shall survive and remain in full force
and effect for the period indicated:
(i) Section 6.2
(Authorization and Effect of Agreement), Section 6.6
(Parent Common Stock), and Section 6.9 (No
Broker), until sixty (60) days following the expiration of the applicable
statute of limitations (including extensions thereof); provided, however, each such
representation and warranty shall remain in full force and effect with respect
to any Outstanding Claim until final resolution of such Outstanding
Claim.
(c) The
covenants and agreements of the Selling Parties, the Company, Parent and Merger
Sub contained in this Agreement or any Ancillary Agreement that contemplate
performance thereof following the Closing Date shall survive and remain in full
force and effect until fully performed or for the applicable period specified
therein, or if no such period is specified, for the applicable statute of
limitations. The provision of this Article X shall
survive
67
so long
as any other Section of this Agreement shall survive to the extent
applicable. None of the Closing, any party’s waiver of any condition
to the Closing or any party’s knowledge of any breach prior to the Closing,
shall constitute a waiver of any of the rights that any such party may have
hereunder (including rights to indemnification) whether by reason of any
investigation by such party or its Representatives, pursuant to Section 7.2
hereof or otherwise.
Section
10.2 Indemnification
Obligations.
(a) Selling Parties
Indemnification Obligations. Subject to the limitations set
forth in this Article X, each
Selling Party, severally but not jointly, in the proportion to such Selling
Party’s Ownership Percentage as set forth on Exhibit A, shall
indemnify, defend and hold harmless Parent, the Surviving Company, and any
parent, subsidiary, associate, Affiliate, director, officer, stockholder or
agent thereof, and their respective Representatives, successors and permitted
assigns (all of the foregoing are collectively referred to as the “Parent Indemnified
Parties”), from and against all Losses which any such party may suffer,
sustain or become subject to, to the extent relating to:
(i) any
inaccuracy in, or breach of, any representation or warranty made by the Company
or any Selling Party (provided the Parent Indemnified Parties may only seek
indemnification under this Article X for
any inaccuracy in, or breach of, any representation or warranty made by a
Selling Party from such Selling Party) under this Agreement or any Ancillary
Agreement (in each case, without regard to any materiality qualifiers contained
therein, other than any materiality qualifier in Section 4.13(a)
or Section 4.13(c)
of this Agreement and other than with respect to those representations and
warranties requiring a list of “material” items);
(ii) any
breach or non-fulfillment of any covenant or agreement on the part of the
Company or any Selling Party (provided the Parent Indemnified Parties may only
seek indemnification under this Article X for
any breach or non-fulfillment of any covenant or agreement by a Selling Party
from such Selling Party), under this Agreement or any Ancillary
Agreement;
(iii) any fees,
expenses or other payments incurred or owed by the Selling Parties or the
Company to any counsel, advisor, agent, broker, investment banker or other firm
or Person retained or employed in connection with the transactions contemplated
by this Agreement;
(iv) without
duplication of amounts otherwise indemnified hereunder, any (A) Tax of the
Company or any Company Subsidiary related to a Pre-Closing Tax Period, and
(B) Pre-Closing Tax Period Taxes of another Person for which the Company
may be liable pursuant to Treasury Regulation Section 1.1502-6 (or any
comparable provision of Law), as a transferee or successor, or by contract or
otherwise;
(v) (A) any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) of the Company and Holdings (other than liabilities relating to
the real property currently leased by Holdings as the principal offices of the
Company); (B) any liabilities or obligations of any nature (whether
accrued, absolute, contingent or
68
otherwise)
of Partners not relating to its investment banking advisory business; and
(C) any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) relating to JGKP Management, LLC; Gleacher
Fund Advisors LLC; Gleacher Advisors LLC; Gleacher Mezzanine LLC; Gleacher
Mezzanine Fund I, L.P.; Gleacher Mezzanine Fund II, L.P.; Gleacher Mezzanine
Fund P, L.P.; Gleacher CBO 2000-1 Corp.; Gleacher CBO 2000-1 Ltd.; Gleacher
Partners Ltd.; Gleacher Partners (Asia) Ltd.; Gleacher Acquisition Corp.;
Gleacher Acquisition Holdings LLC; Gleacher Investment Administration LLC;
Gleacher Capital LLC; Gleacher Capital Management Corporation; Gleacher
Diversified Strategies Fund LP; Gleacher Diversified Strategies Fund LTD;
Gleacher Equity Opportunity Fund LP; Gleacher Investment Corporation; Gleacher
Strategic Fund Ltd, and any “Passive Investment Vehicle” as defined in the
Trademark Agreement; and
(vi) any
demand for appraisal rights under Section 262 of the DGCL or any other
Proceeding by, or any other liability or obligation in favor of or otherwise
relating to, any Stockholder that is not a Signing Stockholder arising in
respect of such Stockholder’s ownership interest in the Company or that is a
matter that would be a Released Matter if such Stockholder had signed this
Agreement.
For
purposes of this Agreement, in the case of any Straddle Period, (A) the
periodic Taxes of the Company and the Company’s Subsidiaries that are not based
on income or receipts (e.g., property Taxes) for any Pre-Closing Tax Period
shall be computed based upon the ratio of the number of days in the Pre-Closing
Tax Period and the number of days in the entire taxable period, and (B) the
Taxes of the Company and the Company’s Subsidiaries for any Pre-Closing Tax
Period, other than Taxes described in clause (A), shall be computed as if
such taxable period ended on the Closing Date.
(b) Parent Indemnification
Obligations. Subject to the limitations set forth in this
Article X,
Parent shall indemnify, defend and hold harmless the Selling Parties, and any
parent, subsidiary, associate, Affiliate, director, officer, stockholder or
agent thereof, and their respective Representatives, successors and permitted
assigns (all of the foregoing are collectively referred to as the “Selling Parties Indemnified
Parties”) from and against all Losses which any such party may suffer,
sustain or become subject to, to the extent relating to:
(i) any
inaccuracy in, or breach of, any representation or warranty made by Parent or
Merger Sub under this Agreement or any Ancillary Agreement (without regard to
any materiality qualifiers contained therein, other than any materiality
qualifier in Section 6.10(a)
or Section 6.10(b)
of this Agreement);
(ii) any
breach or non-fulfillment of any covenant or agreement on the part of Parent or
Merger Sub under this Agreement or any Ancillary Agreement; and
(iii) any fees,
expenses or other payments incurred or owed by Parent or Merger Sub to any
counsel, advisor, agent, broker, investment banker or other firm or Person
retained or employed in connection with the transactions contemplated by this
Agreement.
69
Section
10.3 Indemnification
Procedure.
(a) If any
Parent Indemnified Party or Selling Parties Indemnified Party, as the case may
be (such parties, collectively, the “Indemnified Parties”)
intends to seek indemnification pursuant to this Article X, such
Indemnified Party shall notify the party from whom indemnification is being
sought promptly after the Indemnified Party becomes aware of the basis of the
claim for indemnification in the case of a claim that is not a third party claim
(the “Indemnifying
Party”) by providing written notice of such claim to the Indemnifying
Party. The Indemnified Party will provide the Indemnifying Party with
prompt written notice of any third party claim in respect of which
indemnification is sought. Such notice will specify in reasonable
detail the basis for such claim, and set forth, if known, the facts constituting
the basis for such claim. In the case of a third party claim,
promptly following such notice, the Indemnified Party will provide the
Indemnifying Party the notice of claim, pleadings or such other information and
documents in each case received from such third party in connection with the
making of such third party claim by such third party. The failure to
provide such notice, information and documents will not affect any rights
hereunder except to the extent the Indemnifying Party shall have been prejudiced
as a result of such failure.
(b) If such
claim involves a claim by a third party against the Indemnified Party, the
Indemnifying Party may, within thirty (30) calendar days after receipt of such
notice by the Indemnifying Party and upon notice to the Indemnified Party,
assume, through counsel of its own choosing and at its own expense, the
settlement or defense thereof, and the Indemnified Party shall reasonably
cooperate with them in connection therewith; provided that the
Indemnified Party may participate in such settlement or defense through counsel
chosen by it at the expense of the Indemnified Party; provided, further, that if the
Indemnified Party has been advised by outside counsel that representation by the
Indemnifying Party’s counsel of the Indemnifying Party and the Indemnified Party
is likely to present such counsel with a conflict of interest, then the
Indemnifying Party shall pay the reasonable fees and expenses of one Indemnified
Party’s counsel. Notwithstanding anything in this Section 10.3(b)
to the contrary, the Indemnifying Party may not, without the prior written
consent of the Indemnified Party (such consent not to be unreasonably withheld,
conditioned or delayed), settle or compromise any action or consent to the entry
of any judgment unless such settlement, compromise or judgment (i) does not
involve any finding or admission of any violation of Law or any violation of the
rights of any Person and would not have any adverse effect on any other claims
that may be made against the Indemnified Party, (ii) does not involve any
relief other than monetary damages that are paid in full by the Indemnifying
Party and (iii) completely, finally and unconditionally releases the
Indemnified Party in connection with such claim and would not otherwise
adversely affect the Indemnified Party. So long as the Indemnifying
Party is contesting any such claim in good faith, the Indemnified Party shall
not pay or settle any such claim without the Indemnifying Party’s consent, such
consent not to be unreasonably withheld, conditioned or delayed. If
the Indemnifying Party is not contesting such claim in good faith, then the
Indemnified Party may conduct and control, through counsel of its own choosing
and at the expense of the Indemnifying Party, the settlement (after giving prior
written notice of its intention to do so to the Indemnifying Party and obtaining
the prior written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld, conditioned or delayed, provided that such consent shall
not be required if the Indemnifying Party assumed the defense of a claim but
failed to contest such claim in good faith) or defense thereof, and the
70
Indemnifying
Party shall cooperate with it in connection therewith. The failure of
the Indemnified Party to participate in, conduct or control such defense shall
not relieve the Indemnifying Party of any obligation it may have
hereunder.
(c) Notwithstanding
anything in Section 10.3(b)
hereof to the contrary, the Selling Parties’ Representative shall control all
proceedings taken in connection with any claim related to Taxes of the Company
or any of the Company’s Subsidiaries for any Pre-Closing Tax Period, provided that
(i) the Selling Parties’ Representative shall keep Parent informed in
respect of all material aspects of such claims and (ii) Parent may also
participate in (but not control) such proceedings at its own
expense. If Parent elects to participate in any proceedings, all
parties agree to cooperate in the defense or prosecution
thereof. With respect to any claim related to Taxes of the Company or
any of the Company’s Subsidiaries relating to a Straddle Period, the party which
would bear the burden of the greater portion of the sum of the adjustment, Tax
and any corresponding adjustments or Taxes that may reasonably be anticipated
for future taxable periods shall control such claim; provided, however, that the
controlling party shall not settle or compromise the proceeding without the
prior written consent of the non-controlling party (such consent not to be
unreasonably withheld, conditioned or delayed); provided, further, that the
controlling party shall keep the non-controlling party informed in respect of
all material aspects of such claim and such non-controlling party may also
participate in such proceedings at its own expense. The payment by
any Parent Indemnified Party of any Tax shall not relieve the Selling Parties of
their obligation under Section 10.2(a). Notwithstanding
any provision to the contrary contained in this Agreement, if Parent provides
the Selling Parties’ Representative with written notice of a claim in respect of
Section 10.2(a)(iv)
at least 30 days prior to the date on which the relevant Tax is required to
be paid by a Parent Indemnified Party, within that 30-day period the Selling
Parties shall discharge their obligation to indemnify Parent Indemnified Party
against such Tax by making payments to the relevant Taxing Authority or a Parent
Indemnified Party, as directed by Parent, in an aggregate amount equal to the
amount of such Tax.
Section
10.4 Calculation of Indemnity
Payments. The amount of any Loss for which indemnification is
provided under this Article X shall
be net of any insurance amounts and amounts recovered from other third parties
when and to the extent actually received by the Parent Indemnified Parties with
respect to such Loss provided that no Parent Indemnified Party shall have any
obligation to seek or pursue any insurance recoveries (other than under those
policies covering the Company and its Subsidiaries before the Effective Time) or
seek or pursue recoveries from other third parties (and may terminate, delay or
abandon its seeking or pursuit of any such insurance or other recovery at any
time in its sole discretion). However, in the event that any Parent
Indemnified Party does not seek or pursue any insurance under policies covering
the Company and its Subsidiaries before the Effective Time or recoveries from
other third parties, such Parent Indemnified Party shall promptly notify the
Selling Parties’ Representative of such fact in writing and the rights of each
Selling Party Indemnifying Party shall be subrogated to any right of action that
the Parent Indemnified Party may have under such insurance policies or against
any other third parties, with respect to any matter giving rise to a claim for
indemnification hereunder. Any indemnity payment under this Article X shall
be treated as an adjustment to the Purchase Price for Tax purposes to the extent
permitted by Tax Law. The amount of any Loss for which
indemnification is provided under this Article X shall
be (i) reduced by the amount of the net Tax benefit actually realized by
the Indemnified Party by
71
reason of
such Loss and (ii) increased to take account of any net Tax cost actually
incurred by the Indemnified Party arising from the receipt or accrual of
indemnity payments hereunder (i.e., grossed-up for such
increase). For purposes of calculating Losses hereunder with respect
to determining whether the Losses exceed the Deductible for purposes of Section 10.6(a),
any materiality or Material Adverse Effect qualifications in the
representations, warranties, covenants and agreements shall be
ignored.
Section
10.5 Relation of Indemnity to
Post-Closing Payments and Escrow Fund. Parent may withhold any
amounts otherwise due to be paid, but only on a several and not joint basis, if
there is any Outstanding Claim as against an Indemnifying Party or Parties, in
an amount equal to the Outstanding Claim until such claim is resolved under the
terms hereof. Parent shall have the right to notify the Escrow Agent
of any claim for indemnification made by any Parent Indemnified Party pursuant
to this Article X.
Promptly following the final determination in accordance with this Article X of any
claim for indemnification made by any Parent Indemnified Party against any
Selling Party pursuant to this Article X, upon
request by Parent, the Selling Parties’ Representative shall execute and deliver
a certificate requesting the Escrow Agent to deliver to Parent a number of
Escrowed Shares with a fair market value (based on the closing price per share
of Parent Common Stock on the business day immediately prior to the date of such
request) equal to the amount of such claim as finally determined in accordance
with this Article X not to
exceed the number of Escrowed Shares then held by the Escrow Agent for the
account of such Selling Party. On the date that is 18 months after
the Closing Date (the “Termination Date”),
Parent and the Selling Parties’ Representative shall execute and deliver a
certificate requesting the Escrow Agent to deliver to the Selling Parties’
Representative all the Escrowed Shares that remain in the Escrowed Fund, less a
number of Escrowed Shares with a fair market value (based on the closing price
per share of Parent Common Stock on the business day immediately prior to the
Termination Date) equal to the sum of any amounts subject to Outstanding Claims
made by any Parent Indemnified Party pursuant to this Article X that
have not been finally determined in accordance with this Article X before
the Termination Date (the “Reserved Shares”);
provided that
following final resolution of an Outstanding Claim after the Termination Date,
Parent and the Selling Parties’ Representative shall execute and deliver a
certificate requesting the Escrow Agent to deliver to the Selling Parties’
Representative any Reserved Shares with respect to such Outstanding Claim, to
the extent such shares are not to be delivered to a Parent Indemnified Party
pursuant to the third sentence of this Section 10.5 but
only to the extent that the fair market value (based on the closing price per
share of Parent Common Stock on the business day immediately preceding such
final resolution) exceeds the sum of any amounts subject to other Outstanding
Claims made by any Parent Indemnified Party. For the avoidance of
doubt, all Escrowed Shares delivered to the Escrow Agent pursuant to Section 2.9
hereof shall be available in respect of indemnification claims due hereunder
regardless of whether any particular Stockholder is or had become a Selling
Party.
Section
10.6 Indemnification
Amounts.
(a) Notwithstanding
any provision to the contrary contained in this Agreement, neither the Selling
Parties on the one hand, nor Parent on the other hand, shall be obligated to
indemnify the Parent Indemnified Parties or the Selling Parties Indemnified
Parties, as the case may be, for any Losses pursuant to this Article X unless
and until the dollar amount of all Losses incurred in the aggregate by such
Parent Indemnified Parties or Selling Parties
72
Indemnified
Parties, as applicable, exceeds $500,000 (the “Deductible”), in
which case the Selling Parties or Parent, as the case may be, will only be
obligated to indemnify the Parent Indemnified Parties or the Selling Parties
Indemnified Parties, as the case may be, for the total amount of Losses in
excess thereof; provided, that in no
event shall the aggregate indemnification obligations of the Selling Parties or
Parent, as the case may be, pursuant to Section 10.2
hereof exceed $15,000,000 (the “Indemnification
Cap”); provided, further, that
notwithstanding the foregoing, Parent Indemnified Parties’ and Selling Parties
Indemnified Parties’ rights to seek indemnification hereunder for any Losses due
to, resulting from or arising out of the following shall not be subject to, the
Deductible or Indemnification Cap limits contained in this Section 10.6:
(i) fraud,
intentional misconduct or intentional misrepresentation of Parent, the Selling
Parties or the Company;
(ii) any
breach by Parent, the Selling Parties or the Company of any of the covenants or
agreements contained in this Agreement;
(iii) any
breach by the Company or any of the Selling Parties of any representations and
warranties referred to in Section 10.1(a)(i)
hereof and any breach by Parent or Merger Sub of any representations and
warranties referred to in Section 10.1(b)(i)
hereof; or
(iv) the items
set forth in Section 10.2(a)(iii),
(iv), (v) or (vi)) or Section 10.2(b)(iii)
hereof.
Any
indemnification amounts paid in connection with the matters referred to in Section 10.6(a)(i),
(ii), (iii) or (iv) hereof shall not
be counted towards or included in the determination of the Indemnification Cap;
provided, however, that
(x) the Selling Parties’ collective total liability under this Article X shall
not exceed in the aggregate the sum of $75,000,000; and (y) Parent’s total
liability under this Article X shall
not exceed in the aggregate the sum of $75,000,000 (less any cash consideration
paid by Parent hereunder).
(b) For
purposes of clarification and notwithstanding anything to the contrary in this
Agreement, in no event and under no circumstance shall any Selling Party be
liable for an amount in excess of the product of (x) such Selling Party’s
Ownership Percentage and (y) $75,000,000.
Section
10.7 Exclusive
Remedy. The parties hereto agree that, from and after the
Closing, the indemnity provisions set forth in this Article X shall
be the sole monetary remedy of Parent, the Company and the Selling Parties after
the Closing for any breach of the representations, warranties or covenants
contained in this Agreement.
Section
10.8 Authorization of the Selling
Parties’ Representative.
(a) By its
execution of this Agreement, each Selling Party shall be deemed to have agreed
to appoint the Selling Parties’ Representative as its agent and attorney-in-fact
for and on behalf of the Selling Parties’ in connection with, and to facilitate
the consummation of the Transactions, and in connection with the activities to
be performed on behalf of the Selling
73
Parties
under this Agreement, for the purposes and with the powers and authority
hereinafter set forth in this Section 10.8,
which shall include the full power and authority:
(i) to accept
the Merger Consideration or Interests Purchase Consideration, as the case may
be, on behalf of such Selling Party as contemplated in Section 2.8(a)
and 2.8(e);
(ii) to attend
and supervise the Closing on behalf of such Selling Party;
(iii) to take
such actions and execute and deliver such amendments, modifications, waivers and
consents in connection with this Agreement and the consummation of the
Transactions as the Selling Parties’ Representative, in his reasonable
discretion, may deem necessary or desirable to give effect to the intentions of
this Agreement;
(iv) as the
agent of such Selling Party, to enforce and protect the rights and interests of
such Selling Party and to enforce and protect the rights and interests of the
Selling Parties’ Representative arising out of or under or in any manner
relating to this Agreement and, in connection therewith,
to: (A) resolve all questions, disputes, conflicts and
controversies concerning indemnification claims pursuant to Article X;
(B) employ such agents, consultants and professionals, to delegate
authority to his agents, to take such actions and to execute such documents on
behalf of such Selling Party in connection with this Agreement as the Selling
Parties’ Representative, in his reasonable discretion, deems to be in the best
interest of the Selling Parties; (C) assert or institute any Proceeding;
(D) investigate, defend, contest or litigate any Proceeding initiated by
any Person against such Selling Party, and receive process on behalf of such
Selling Party in any such Proceeding and compromise or settle on such terms as
the Selling Parties’ Representative shall determine to be appropriate, give
receipts, releases and discharges on behalf of such Selling Party with respect
to any such Proceeding; (E) file any proofs, debts, claims and petitions as
the Selling Parties’ Representative may deem advisable or necessary;
(F) settle or compromise any Proceedings asserted under Article X;
(G) assume, on behalf of such Selling Party, the defense of any Proceeding
that is the basis of any claim asserted under Article X; and
(H) file and prosecute appeals from any decision, judgment or award
rendered in any of the foregoing Proceedings;
(v) to
enforce payment of any other amounts payable to such Selling Party, in each case
on behalf of such Selling Party, in the name of the Selling Parties’
Representative;
(vi) to waive
or refrain from enforcing any right of such Selling Party and/or the Selling
Parties’ Representative arising out of or under or in any manner relating to
this Agreement; and
(vii) to make,
execute, acknowledge and deliver all such other agreements, guarantees, orders,
receipts, endorsements, notices, requests, instructions, certificates, stock
powers, letters and other writings, and, in general, to do any and all things
and to take any and all action that the Selling Parties’ Representative, in his
sole and absolute
74
discretion,
may consider necessary or proper or convenient in connection with or to carry
out the activities described in paragraphs (i) through (vi) above and the
transactions contemplated by this Agreement.
(b) Parent
and Merger Sub shall be entitled to rely exclusively upon the written
communications of the Selling Parties’ Representative relating to the foregoing
as the communications of the Selling Parties. Neither Parent, nor
Merger Sub nor any other Parent Indemnified Party shall be held liable or
accountable in any manner for any act or omission of the Selling Parties’
Representative in such capacity. Without limiting the generality of
the foregoing, any claim for indemnification, and any notice or any other
communication hereunder, on behalf of any Selling Party or Selling Party
Indemnified Party may be made only by the Selling Parties’
Representative. Any notice or communication delivered to the Selling
Parties’ Representative shall be deemed to have been delivered to each Selling
Party and each Selling Party Indemnified Party for all purposes
hereof.
(c) Each
Selling Party, by its approval of this Agreement, makes, constitutes and
appoints the Selling Parties’ Representative as such Selling Party’s true and
lawful attorney-in-fact for and in such Selling Party’s name, place, and stead
and for its use and benefit, to prepare, execute, certify, acknowledge, swear
to, file, deliver, or record any and all agreements, instruments or other
documents, and to take any and all actions, that are within the scope and
authority of the Selling Parties’ Representative provided for in this Section 10.8. The
grant of authority provided for in this Section 10.8(c)
is coupled with an interest and is being granted, in part, as an inducement to
the parties hereto to enter into this Agreement and shall be irrevocable and
survive the death, incompetency, bankruptcy or liquidation of any Selling Party
and shall be binding on any successor thereto.
(d) In the
event the Selling Parties’ Representative becomes unable to perform his
responsibilities hereunder or resigns from such position, the Selling Parties
(acting by the vote of the Selling Parties who immediately prior to the Closing
held in the aggregate an Ownership Percentage of more than 50%) shall select
another representative to fill the vacancy of the Selling Parties’
Representative, and such substituted representative shall be deemed to be a
Selling Parties’ Representative for all purposes of this Agreement and the
Ancillary Agreements.
Section
10.9 Compensation;
Exculpation.
(a) The
Selling Parties’ Representative shall not be entitled to any fee, commission or
other compensation for the performance of service hereunder; provided, however, the
reimbursement of fees, costs and expenses incurred by the Selling Parties’
Representative in connection with performing the services pursuant to this
Agreement shall be made from the Selling Parties by periodic payments during the
course of the performance of service, as and when bills are received or expenses
incurred.
(b) In
dealing with this Agreement and any instruments, agreements or documents
relating hereto, and in exercising or failing to exercise all or any of the
powers conferred upon the Selling Parties’ Representative hereunder or
thereunder (i) the Selling Parties’ Representative shall not assume any,
and shall incur no, responsibility whatsoever to any
75
Selling
Party by reason of any error in judgment or other act or omission performed or
omitted hereunder or in connection with this Agreement or any Ancillary
Agreement, unless by the Selling Parties’ Representative’s willful and
intentional misconduct, and (ii) the Selling Parties’ Representative shall
be entitled to rely on the advice of counsel, public accountants or other
independent experts experienced in the matter at issue, and any error in
judgment or other act or omission of the Selling Parties’ Representative
pursuant to such advice shall in no event subject the Selling Parties’
Representative to liability to any Selling Party unless by the Selling Parties’
Representative’s gross negligence or willful and intentional
misconduct. Except as set forth in the previous sentence,
notwithstanding anything to the contrary contained herein, the Selling Parties’
Representative, in his role as Selling Parties’ Representative, shall have no
liability whatsoever to Merger Sub or any other Person.
(c) All of
the immunities and powers granted to the Selling Parties’ Representative under
this Agreement shall survive indefinitely.
(d) None of
the Selling Parties shall have any right of contribution against the Company or
any of the CompanySubsidiaries with respect to any breach by the Company or the
Stockholders of any of their respective representations, warranties, covenants
or agreements contained in this Agreement.
ARTICLE
XI
MISCELLANEOUS
PROVISIONS
Section
11.1 Notices. All
notices and other communications required or permitted hereunder will be in
writing and, unless otherwise provided in this Agreement, will be deemed to have
been duly given when delivered in person or sent via facsimile (with
confirmation), or one (1) Business Day after having been dispatched by a
nationally recognized overnight courier service to the appropriate party at the
address specified below:
or to
such other address or addresses or facsimile number as any such party may from
time to time designate as to itself by like notice.
Section
11.2 Expenses. Regardless
of whether any or all of the Transactions contemplated by this Agreement are
consummated, and except as otherwise expressly provided herein, direct and
indirect expenses incurred in connection with the negotiation and preparation of
this Agreement and the consummation of the Transactions contemplated hereby
shall be borne by the party incurring such expenses; provided, however, the Selling
Parties shall bear all of the Company’s direct and indirect expenses incurred
prior to the Closing Date in connection with the negotiation and preparation of
this Agreement and the consummation of the Transactions contemplated hereby,
including, but not limited to, the fees and expenses of all legal, accounting,
consultant, agent, advisor, brokerage and other fees and expenses incurred in
connection with the Transactions and shall deliver to Parent at Closing such
proof of the payment of such expenses as Parent may reasonably
request.
Section
11.3 Successors and
Assigns. No party to this Agreement may assign any of its
rights under this Agreement without the prior written consent of the other
parties hereto. Subject to the preceding sentence, this Agreement
will apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties
hereto. Notwithstanding anything to the contrary in this Section 11.3,
upon written notice to the Selling Parties, Parent and Merger Sub shall be
permitted to assign this Agreement and the rights and obligations under it to a
wholly-owned direct or indirect Subsidiary of Parent; provided that in the
event of any such assignment, Parent shall remain liable in full for the
performance of its, Merger Sub’s and any such Subsidiaries’ obligations
hereunder. Nothing expressed or referred to in this Agreement will be
construed to give any Person other than the parties to this Agreement (whether
as an original signatory hereto or through the execution of a supplemental
agreement whereby such party agrees to be bound by the terms and conditions of
this Agreement as if he or she was an original signatory hereto) any legal or
equitable right, remedy or claim
77
under or
with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions
are for the sole and exclusive benefit of the parties to this Agreement and
their successors and assigns.
Section
11.4 Extension;
Waiver. Parent may, by written notice to the Selling Parties’
Representative (a) extend the time for performance of any of the
obligations of the Company or any Selling Party under this Agreement,
(b) waive any inaccuracies in the representations or warranties of the
Company or any Stockholder contained in this Agreement or (c) waive
compliance with any of the obligations or covenants of the Company or any
Stockholder under this Agreement. The Company (on or prior to the
Closing) and Selling Parties’ Representative (after the Closing) may, by written
notice to Parent (a) extend the time for performance of any of the
obligations of Parent or Merger Sub under this Agreement, (b) waive any
inaccuracies in the representations or warranties of Parent or Merger Sub
contained in this Agreement or (c) waive compliance with any of the
obligations or covenants of Parent or Merger Sub under this
Agreement. Except as provided in the two immediately preceding
sentences, no action taken pursuant to this Agreement will be deemed to
constitute a waiver of compliance with any representations, warranties,
conditions or covenants contained in this Agreement and will not operate or be
construed as a waiver of any subsequent breach, whether of a similar or
dissimilar nature.
Section
11.5 Entire
Agreement. This Agreement, which includes the Disclosure
Schedules and Exhibits hereto, supersedes any other agreement, whether written
or oral, that may have been made or entered into by any party relating to the
matters contemplated by this Agreement and together with the Confidentiality
Agreement constitutes the entire agreement by and among the parties
hereto. The fact that any item or information has been included on
any of the Disclosure Schedules to this Agreement shall not be construed to
establish, in whole or in part, any standard of the extent disclosure is
required (including any standard of materiality), for purposes of the Disclosure
Schedules or this Agreement.
Section
11.6 Amendments, Supplements,
Etc. This Agreement may be amended or supplemented only by
written agreement signed by the party against whom the enforcement of such
amendment is sought.
Section
11.7 Applicable Law; Waiver of
Jury Trial.
(a) This
Agreement shall be governed by and construed under the laws of the State of New
York (without regard to the conflict of law principles thereof).
(b) Each of
the parties hereby irrevocably submits to the jurisdiction of any state or
federal court located in Manhattan, New York City solely in respect of the
interpretation and enforcement of the provisions of this Agreement and of the
documents referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said court or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such court, and the parties hereto
irrevocably agree that all claims with
78
respect
to such action or proceeding shall be heard and determined in such
court. The parties hereby consent to and grant any such court
jurisdiction over the person of such parties and agree that mailing of process
or other papers in connection with any such action or proceeding in the manner
provided in Section 11.1
hereof or in such other manner as may be permitted by applicable law shall be
valid and sufficient service thereof.
(c) EACH
PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS
AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE
EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT
(i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, TO IT THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER,
(iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.7(c).
Section
11.8 Execution in
Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same agreement.
Section
11.9 Invalid
Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations under this Agreement of the Selling Parties (or the
Company before the Closing) on the one hand and Parent or Merger Sub (or the
Surviving Company after the Closing) on the other hand will not be materially
and adversely affected thereby, (a) such provision will be fully severable,
(b) this Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part hereof,
(c) the remaining provisions of this Agreement will remain in full force
and effect and will not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Agreement and (d) in lieu of such
illegal, invalid or unenforceable provision, there will be added automatically
as a part of this Agreement a legal, valid and enforceable provision as similar
in terms to such illegal, invalid or unenforceable provision as may be
possible.
Section
11.10 Publicity. Except
as otherwise required by applicable Law or the rules and regulations of any
national securities exchange, no party shall issue any press release or
otherwise make any public statement with respect to the transactions
contemplated by this Agreement without prior consultation with and consent (not
to be unreasonably withheld or delayed) of (i) Parent and (ii) prior
to the Closing, the Company and, after the Closing, the Selling Parties’
Representative.
79
Section
11.11 Specific Performance;
Equitable Remedies.
(a) The
parties hereto agree that, in addition to any other remedies available at law or
under this Agreement, if any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached,
irreparable damage could occur, no adequate remedy at law would exist and
damages could be difficult to determine, and that the parties shall be entitled
to specific performance of the terms hereof, in addition to any other rights or
remedies at law or under this agreement. The parties further agree
that no party hereto shall be required to obtain, furnish or post any bond or
similar instrument in connection with or as a condition to obtaining any remedy
referred to in this Section 11.11,
and the parties irrevocably waive any right any party may have to require the
obtaining, furnishing or posting of any such bond or similar
instrument. The parties hereto agree that, in the event of any breach
or threatened breach by the other party of any covenant or obligation contained
in this Agreement, the non-breaching party shall be entitled (in addition to any
other remedy that may be available to it under this Agreement, including
monetary damages) to seek and obtain (a) a decree or order of specific
performance to enforce the observance and performance of such covenant or
obligation, and (b) an injunction restraining such breach or threatened
breach.
Section
11.12 SELLING PARTY
RELEASE. EFFECTIVE AS OF THE CLOSING, EACH SELLING PARTY DOES
FOR ITSELF, HIMSELF OR HERSELF, AND ITS, HIS OR HER RESPECTIVE AFFILIATES,
PARTNERS, HEIRS, BENEFICIARIES, SUCCESSORS AND ASSIGNS, IF ANY, RELEASE AND
ABSOLUTELY FOREVER DISCHARGE THE SURVIVING COMPANY AND ITS OFFICERS, DIRECTORS,
STOCKHOLDERS, AFFILIATES, EMPLOYEES AND AGENTS (EACH, A “RELEASED PARTY”) FROM
AND AGAINST ALL RELEASED MATTERS. “RELEASED MATTERS”
MEANS ANY AND ALL CLAIMS, DEMANDS, DAMAGES, DEBTS, LIABILITIES, OBLIGATIONS,
COSTS, EXPENSES (INCLUDING ATTORNEYS’ AND ACCOUNTANTS’ FEES AND EXPENSES),
ACTIONS AND CAUSES OF ACTION OF ANY NATURE WHATSOEVER, ARISING ON OR PRIOR TO
THE CLOSING DATE, WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, THAT
SUCH SELLING PARTY NOW HAS, OR AT ANY TIME PREVIOUSLY HAD, OR SHALL OR MAY HAVE
IN THE FUTURE, AS A STOCKHOLDER, OFFICER, DIRECTOR, CONTRACTOR, CONSULTANT OR
EMPLOYEE OF THE COMPANY OR ITS SUBSIDIARIES, ARISING BY VIRTUE OF OR IN ANY
MATTER RELATED TO ANY ACTIONS OR INACTIONS WITH RESPECT TO THE COMPANY OR ITS
AFFAIRS WITH RESPECT TO THE COMPANY ON OR BEFORE THE CLOSING DATE; PROVIDED THAT
RELEASED MATTERS SHALL NOT INCLUDE ANY RIGHT PURSUANT TO THIS AGREEMENT, THE
TRANSACTIONS OR THE DOCUMENTS AND INSTRUMENTS DELIVERED HEREUNDER, ANY RIGHTS
UNDER ANY DIRECTOR AND OFFICER FIDUCIARY AND LIABILITY INSURANCE POLICIES OR ANY
RIGHTS UNDER EARNED BUT UNPAID COMPENSATION AND BENEFITS
PROVIDED UNDER THE BENEFIT PLANS IN ACCORDANCE WITH THEIR TERMS. IT
IS THE INTENTION OF THE SELLING PARTIES IN EXECUTING THIS RELEASE, AND IN GIVING
AND RECEIVING THE CONSIDERATION CALLED FOR HEREIN, THAT THE RELEASE CONTAINED IN
THIS SECTION 11.12
SHALL BE EFFECTIVE AS A FULL AND FINAL ACCORD AND SATISFACTION AND GENERAL
RELEASE OF AND FROM ALL RELEASED MATTERS AND THE FINAL RESOLUTION BY SUCH
SELLING PARTY AND THE RELEASED PARTIES OF ALL RELEASED MATTERS.
80
NOTWITHSTANDING
ANYTHING HEREIN OR OTHERWISE TO THE CONTRARY, THE RELEASE CONTAINED IN THIS
SECTION 11.12
WILL NOT BE EFFECTIVE SO AS TO BENEFIT A PARTICULAR RELEASED PARTY IN CONNECTION
WITH ANY MATTER OR EVENT THAT WOULD OTHERWISE CONSTITUTE A RELEASED MATTER, BUT
INVOLVED FRAUD OR THE BREACH OF ANY APPLICABLE LAW ON THE PART OF SUCH RELEASED
PARTY. THE INVALIDITY OR UNENFORCEABILITY OF ANY PART OF THIS SECTION 11.12
SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE REMAINDER OF THIS SECTION 11.12,
WHICH SHALL REMAIN IN FULL FORCE AND EFFECT.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
81
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
Article FIRST
of the Certificate of Incorporation, relating to the name of the
Corporation, is hereby amended to read in its entirety as
follows:
“FIRST,
The name of the corporation is Broadpoint Gleacher Securities Group,
Inc.”
FOURTH:
Article
FOURTH of the Certificate of Incorporation is hereby amended to increase
the aggregate number of shares of Common Stock, par value $.01 per
share, which the Corporation shall have the authority to issue from
100,000,000 to 200,000,000. To effect the foregoing amendment,
Article FOURTH is hereby amended to read in its entirety as
follows:
“FOURTH,
The aggregate number of shares which the Corporation shall have the
authority to issue is 200,000,000 shares of Common Stock, par value
$.01 per share, and 1,500,000 shares of Preferred Stock, par value
$1.00 per share.”
FIFTH:
This
Certificate of Amendment was authorized pursuant to the provisions of
803(a) of the Business Corporation Law at a meeting of the Board of
Directors of the Corporation duly held on March 2, 2009 followed by an
affirmative vote of the holders of a majority of the outstanding shares of
common stock of the Corporation entitled to vote thereon by means of a
written consent duly executed on March 2,2009.
IN
WITNESS WHEREOF, the undersigned has signed this Certificate of Amendment on
[l],
2009.
[Name]
[Title]
ANNEX
C – ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008 FOR
BROADPOINT SECURITIES GROUP, INC.
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
þ
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Securities
registered pursuant to Section 12(b) of the Act:
Title of
Each Class
Name of Each
Exchange on Which Registered
Common stock, par value $.01 per
share
The NASDAQ Global Market
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”“accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated
Filer o
Accelerated Filer o
Non-accelerated Filer o (Do not check if a smaller reporting company)
Smaller Reporting Company þ
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the shares of common stock of the
Registrant held by non-affiliates based upon the closing price of Registrant’s
shares as reported on The NASDAQ Global Market on June 30, 2008 which was
$2.00 was $41,675,812.
As of March 5, 2009, 80,022,506 shares of common stock, par
value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the Registrant’s definitive proxy statement for the 2009
annual meeting of shareholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III.
C:
C:
PART I
Item 1.
Business
Broadpoint Securities Group, Inc., (the “Company”), is an independent
investment bank that provides value-added advice to corporations and
institutional investors. The Company provides services and generates revenues
through its Investment Banking, Debt Capital Markets, Broadpoint DESCAP,
Equities and Other segments. The Investment Banking segment provides capital
raising and advisory services to corporations and institutional investors. The
Debt Capital Markets segment provides sales and trading in a broad range of debt
securities. Broadpoint DESCAP provides sales and trading in mortgage and
asset-backed securities. The Equities segment provides sales, trading and
research in equity securities primarily through one of the Company’s
broker-dealer subsidiaries, Broadpoint AmTech. The Other segment generates
revenue from unrealized gains and losses as a result of changes in the value of
the firm’s investments and realized gains and losses as a result of sales of
equity holdings, and through the management and investment of venture capital
funds. At March 1, 2009, the Company had approximately 255 employees.
The Company is a New York corporation, incorporated in 1985, and is traded on
The NASDAQ Global Market (“NASDAQ”) under the symbol “BPSG”.
The Company estimated based upon certain assumptions and outside
sources, that the market for the Company’s services in 2008 was approximately
$150 billion, consisting of approximately $50 billion of investment
banking fees for equities and capital markets transactions, debt capital markets
and advisory services and approximately $100 billion of cash commissions on
annual secondary trading volume in the markets in which the Company
participates. The market and competition for these fees and commissions has and
continues to endure dramatic structural and fundamental changes. The credit
crisis and resulting failure or consolidation of a number of major investment
banking firms, combined with the liquidity constraints and government imposed
restrictions placed on a number of the remaining major investment banks, has
created an unprecedented opportunity for a new class of investment banks to fill
the need for these services to corporations and institutional investors.
Nonetheless, boutique firms that lack scale, diversification, strong balance
sheets and profitable business models have been challenged to remain viable
participants in these markets.
Investment
Banking
The Company’s Investment Banking group consists of professionals
committed to providing advice and execution to corporations and institutional
investors by delivering a diverse set of products, advice and expertise. The
goal of the investment banking group is to present to corporate and investor
clients the full product offering of the firm to help clients succeed and to
foster long-term relationships with the Company. Investment banking fees are
generated from capital raising transactions of equity and debt securities, fees
for strategic advisory, fees for restructuring and recapitalization advisory
services, and valuations of structured products.
Debt Capital
Markets
The Company’s Debt Capital Markets team provides sales and trading on
a wide range of debt securities including bank debt, investment grade debt,
high-yield debt, treasuries, convertibles, distressed debt, preferred debt and
reo-org equity securities. Bank debt activities within Debt Capital Markets are
operated through the Company’s subsidiary, Broadpoint Products Corp. The team
generates revenues from spreads and fees on trades executed and on intraday
principal and riskless principal transactions on behalf of clients. The team
consists of sales professionals who have developed strong relationships with
more than 800 institutional investors including mutual funds, pension funds,
insurance companies, hedge funds, investment managers and investment advisors by
providing value-added investment ideas and access to execution services. Sales
professionals deliver investment ideas with support of desk analysts that
monitor and analyze debt securities in a variety of industry verticals where
clients have demonstrated interest. The Debt Capital Markets team also provides
execution services for institutional investor customer trades and corporate debt
repurchase activities
1
where it seeks to match buy side demand with sell side supply to
achieve best execution and liquidity for participating parties.
Broadpoint
DESCAP
Broadpoint DESCAP provides sales and trading on a wide range of
mortgage and asset-backed securities, government securities, structured products
such as CLOs and CDOs, whole loans, swaps, and others. The team generates
revenues from spreads and fees on trades executed on behalf of clients and from
principal transactions executed to facilitate trades for clients. Revenues are
also generated from interest income on securities held primarily for the purpose
of facilitating customer trading. The team consists of sales professionals who
have developed strong relationships with more than 200 institutional investors
including mutual funds, pension funds, insurance companies, hedge funds,
investment managers and investment advisors by providing value-added investment
ideas and access to execution services and inventory capital on an as-needed
basis. Sales professionals deliver investment ideas with support of desk
analysts that monitor and analyze applicable securities where clients have
demonstrated interest. The Broadpoint DESCAP team also provides execution
services for institutional investor customer trades where it seeks to match buy
side demand with sell side supply to achieve best execution and liquidity for
participating parties.
Equities
The Company’s Equities group consists of Equity research, sales, and
trading. Equity sales and trading provides equity executions and delivers
research-driven investment ideas to institutional investors and generates
revenues through cash commissions on customer trades and hard dollar fees for
services and cash commissions on corporate repurchase activities. The results of
the Company’s legacy equities business is included in this segment as well.
Broadpoint
AmTech
On October 2, 2008, the Company acquired American Technology
Research, a broker-dealer specializing in institutional research, sales and
trading in the technology, aerospace and defense and clean tech areas. Since
closing the acquisition, the Company has re-branded this group, Broadpoint
AmTech. Broadpoint AmTech provides sales, trading and research on equity
securities and generates revenues through cash commissions on customer trades
and hard dollar fees for services and cash commissions on corporate repurchase
activities. The team consists of 20 research professionals that seek to provide
quantitative, value-added, differentiated insight on equity securities they
cover. Research analysts develop relationships with corporate management teams
of issuers they cover, maintain networks of industry and competitor contacts to
gain proprietary data points to support investment theses and provide access to
their views via published research, in person and hosted meetings and events for
investors on behalf of the companies whose stocks they cover. As of
March 9, 2009, Broadpoint AmTech research covered approximately 105 stocks
primarily in the technology, aerospace and defense and clean tech sectors and
seeks to cover securities where clients express strong interest or the team
feels significant value can be delivered via proprietary and differentiated
views. Institutional sales professionals deliver investment ideas generated by
our research to approximately 300 institutional investor clients including
mutual funds, hedge funds, investment managers and investment advisors.
Other
The Company’s Other segment includes the results from the Company’s
venture capital business and costs related to corporate overhead and support
including various fees associated with legal and settlement expenses. The
Company’s venture capital business generates revenue through the management and
investment of venture capital funds.
2
FA Technology
Ventures
FA Technology Ventures provides early-stage growth capital to
companies. The team generates revenues from fees for assets under management and
a carried interest in returns on investments.
The Company’s business strategy includes growth driven by
(i) market share gains in our existing product and service offerings,
expansion into new products and services to better serve our corporate and
investor clients and (ii) acquisitions of businesses and assets that add
scale to our existing businesses, are complementary, or diversify our revenue
base. The Company seeks to deploy a variable compensation model and a low-cost
non-compensation expense structure along with a culture of employee ownership.
On March 3, 2009, the Company announced that it agreed to
acquire Gleacher Partners LLC (“Gleacher Partners”), an internationally
recognized financial advisory boutique best known for advising major
corporations in mergers and acquisitions. Under the terms of the merger
agreement, Broadpoint will pay the selling stockholders of Gleacher Partners,
$20 million in cash and issue 23 million shares of common stock
subject to resale restrictions. MatlinPatterson FA Acquisition LLC, Broadpoint’s
majority shareholder, has approved the issuance of the shares of Broadpoint
common stock in the transaction. At closing, the Company will change its name to
Broadpoint Gleacher Securities Group, Inc.
The Company’s broker-dealer subsidiaries, Broadpoint Capital, Inc.
and Broadpoint AmTech are members the Financial Industry Regulatory Authority,
Inc. (“FINRA”) and various other exchanges including in the case of Broadpoint
Capital, Inc. the New York Stock Exchange, Inc. (“NYSE”) and the Boston Stock
Exchange, Inc. (“BSE”) and the Company is registered as a broker-dealer with the
Securities and Exchange Commission (“SEC”).
The Company’s executive offices are located at 12 East
49th Street, 31st Floor, New York, NY10017. The telephone number is
(212) 273-7100 and our internet
address is www.bpsg.com.
Discontinued
Operations
During the past several years the Company restructured nearly all of
its operations. In September 2007, the Company completed the sale of its
Municipal Capital Markets Group to DEPFA BANK plc (“DEPFA”). In June 2007, the
Company closed its Fixed Income Middle Markets Group. In April 2006, the Company
closed its Convertible Arbitrage Advisory Group. In June 2006, the Company
ceased operations in its Taxable Fixed Income division. In December 2004, the
Company closed its asset management operations in Sarasota, Florida and in
February 2005 sold its asset management operations in Albany, New York. In
August 2000, Broadpoint Capital divested its retail brokerage operation.
The operating results of the groups and divisions referred above are
reported as discontinued operations (see Note 25 of the Consolidated
Financial Statements).
Available
Information
The Company is required to file current, annual and quarterly
reports, proxy statements and other information required by the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC. You may
read and copy any document we file with the SEC at the SEC’s Public Reference
Room located at 100 F Street, N.E., Washington, DC 20549. Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. In addition, the SEC
maintains an internet website at http://www.sec.gov, from which interested
persons can electronically access the Company’s SEC filings.
The Company will make available free of charge through its internet
site http://www.bpsg.com, its annual
reports on Form 10-K, quarterly
reports on Form 10-Q, current
reports on Form 8-K, proxy
statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive
officers and certain large stockholders, and any amendments to those documents
filed or furnished pursuant to the Exchange Act. These filings will become
available as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.
3
The Company also makes available, on the Corporate Governance page of
its website, its (i) Corporate Governance Guidelines, (ii) Code of
Business Conduct and Ethics, (iii) the charters of the Audit, Compensation,
and Corporate Governance Committees of our Board of Directors, and (iv) the
Complaint Procedures for Accounting and Auditing Matters. These documents will
also be available in print without charge to any person who requests them by
writing or telephoning: Broadpoint Securities Group, Inc., Att.: Investor
Relations, 12 East 49th Street, 31st Floor, New York, NY10017,
U.S.A., telephone number (212) 273-7100.
Sources of
Revenues
A breakdown of the amount and percentage of revenues from each
principal source for the periods indicated follows (excluding discontinued
operations):
For the Years
Ended
2008
2007
2006
December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in
thousands)
Principal transactions
$
97,032
66.9
%
$
21,229
45.1
%
$
40,605
49.9
%
Commissions
6,529
4.5
%
4,666
9.9
%
11,386
14.0
%
Investment banking
8,296
5.7
%
8,127
17.3
%
26,643
32.8
%
Investment banking
revenue from related party
8,400
5.8
%
—
—
%
—
—
%
Investment
gains(losses)
(1,115
)
(0.8
)%
2,594
5.5
%
(7,602
)
(9.3
)%
Fees and other
3,925
2.7
%
1,856
3.9
%
1,978
2.4
%
Total operating
revenues
$
123,067
84.9
%
$
38,472
81.7
%
$
73,010
89.8
%
Interest income
21,946
15.1
%
8,639
18.3
%
8,295
10.2
%
Total revenues
$
145,013
100.0
%
$
47,111
100.0
%
$
81,305
100.0
%
For information regarding the Company’s reportable segment
information, refer to Note 22 of the Consolidated Financial Statements.
Principal
Transactions
The Company’s Debt Capital Markets and Broadpoint Descap segments
maintain inventories of corporate debt, mortgage-backed and asset-backed
securities, government securities and government agency securities.
The Company’s trading activities may require the commitment of
capital. As a result, the Company exposes its own capital to the risk of
fluctuations in market value. All inventory positions are marked to market; i.e.
their fair value price on a daily basis. The following table sets forth the
highest, lowest, and average month-end inventories (the net of securities owned
and securities sold, but not yet purchased, less securities not readily
marketable) for the year ended December 31, 2008, by securities category,
where the Company acted in a principal capacity.
Highest
Lowest
Average
Continuing
Operations
Inventory,
Net
Inventory,
Net
Inventory,
Net
(In thousands)
Corporate obligations
$
100,131
$
64,865
$
85,414
Corporate stocks
2,798
711
1,226
U.S. Government and
federal agencies obligations
531,220
165,356
259,058
Commissions
A portion of the Company’s revenue is derived from customer
commissions on brokerage transactions for the Company’s institutional clients,
such as investment advisors, mutual funds, hedge funds, and pension and profit
sharing plans, for which the Company is not acting as a market maker.
4
Investment
Banking
Investment banking fees are generated from capital raising
transactions of equity and debt securities, fees for strategic advisory, fees
for restructuring and recapitalization advisory services and valuations and
related advisory services with respect to structured products to a diverse group
of clients.
Capital
Raising
The Company seeks to raise capital for its clients by underwriting
and privately placing a broad range of securities including common and preferred
stock, convertible and exchangeable securities, investment grade debt, high
yield debt, bank debt and mortgage and asset-backed securities. The Company
seeks to provide these services for a wide range of corporate clients primarily
through initial public offerings, follow-on public equity offerings, secondary
equity offerings and direct registered placements of equity securities, private
placements of public and private equity, public and private placements of
investment grade debt, high yield debt, bank debt and convertible debt, among
others. The Company utilizes its team of Investment Banking professionals to
structure transactions and its team of equity and debt distribution
professionals within its Debt Capital Markets, Broadpoint AmTech and Broadpoint
DESCAP segments to place underwritten and agented securities with its investor
clients on behalf of its corporate clients and to provide aftermarket services
on those securities including research, sales and trading.
Advisory
Services
The Company offers a broad range of advisory services for a variety
of corporate and institutional investor constituents. For corporations, the
Company provides corporate strategic reviews, mergers and acquisitions advisory,
takeover defense analyses, fairness opinions and restructuring and
recapitalization advisory services. Corporate strategic advisory services are
offered to a variety of constituents including corporate management teams,
committees of corporate Boards of Directors. The Company seeks to provide advice
in each of these areas to help its clients succeed and achieve their near and
long-term goals. The Company also offers a range of advisory services to
institutional investors including restructuring and recapitalization advisory
and structured products valuation advisory services. Restructuring and
recapitalization advisory services are offered to a variety of constituents
including corporations, creditors, labor related parties, government agencies,
litigation claimants, plan sponsors and stalking horse bidders or other
potential acquirers. The restructuring and strategic advisory teams often
generate financing opportunities from their clients. The Company also has a team
of professionals which provides investment ideas to certain of the Company’s
applicable sales and trading desks and valuation services on complex and
difficult to value structured products to clients.
For the periods indicated, the table below provides a breakdown of
the Company’s investment banking revenues by area.
The Company’s investment portfolio includes interests in privately
held companies and its interest in FA Tech Ventures L.P managed by FATV.
Investment gains (losses) are comprised of both unrealized and realized gains
and losses from the Company’s investment portfolio (see Note 7 of the
Consolidated Financial Statements).
5
Fees and
Other
Fees and Other relate primarily to investment management fees earned
by FATV and equity research fees.
Other Business
Information
Operations
The Company’s broker-dealer subsidiaries clear customers’ securities
transactions through third parties under clearing agreements. Under these
agreements, the clearing agents execute and settle customer securities
transactions, collect margin receivables related to these transactions, monitor
the credit standing and required margin levels related to these customers and,
pursuant to margin guidelines, require the customer to deposit additional
collateral with them or to reduce positions, if necessary.
Research
Broadpoint AmTech, formerly American Technology Research, is a
wholly-owned broker-dealer subsidiary of the Company that provides equity
research, sales, and trading to institutional investors. Many of the firm’s
research analysts have strong technical backgrounds, as well as experience on
both the buy and sell-sides of the market.
Broadpoint AmTech currently employs 13 publishing analysts who review
and analyze the economy, general market conditions, technology trends,
industries and specific companies through fundamental and technical analyses;
make recommendations of specific action with regard to industries and specific
companies; and respond to inquiries from customers.
Employees
As of March 1, 2009, the Company’s continuing operations had
approximately 255 full-time employees, of which, approximately 23 are
investment banking professionals in the Investment Banking segment. The Debt
Capital Markets segment currently employs 43 high yield and high grade sales
professionals, 11 desk analysts and 11 trading professionals. Broadpoint Descap
is comprised of 30 sales professionals, 4 quantitative analysts and 11 trading
professionals, as well as 4 advisory professionals dedicated to complex and
difficult to value structured products. The Equities segment employs 20 research
professionals and 26 sales and trading personnel. The Company considers its
employee relations to be good and believes that its compensation and employee
benefits are competitive with those offered by other securities firms. None of
the Company’s employees are covered by a collective bargaining agreement.
Competition
As an investment bank, all aspects of the Company’s business are
intensely competitive. The Company’s competitors are other investment banks,
commercial banks or bank holding companies, brokerage firms, merchant banks and
financial advisory firms. The Company competes with some of our competitors
nationally and with others on a regional, product or business line basis. Many
of the Company’s competitors have substantially greater capital and resources
than it does and offer a broader range of financial products. The Company
believes that the principal factors affecting competition in its business
include client relationships, reputation, quality and price of our products and
services, market focus and the ability of our professionals. Competition is
intense for the recruitment and retention of qualified professionals. The
Company’s ability to continue to compete effectively in our business will depend
upon its continued ability to retain and motivate our existing professionals and
attract new professionals. In recent years, there has been substantial
consolidation and convergence among companies in the financial services
industry. In particular, a number of large commercial banks have established or
acquired broker-dealers or have merged with other financial institutions. Many
of these firms have the ability to offer a wider range of products than the
Company offers, including loans, deposit taking, and insurance. Many of these
firms also have more extensive investment banking teams and services, which may
enhance their competitive position relative to the Company’s. They also have the
ability to support investment banking and securities products with commercial
banking and other financial
6
services revenue in an effort to gain market share, which could
result in pricing pressure in the Company’s business. This trend toward
consolidation and convergence has significantly increased the capital base and
geographic reach of the Company’s competitors.
Regulation
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The SEC is the federal agency charged
with administration of the federal securities laws. Much of the direct oversight
of broker-dealers, however, has been delegated to self-regulatory organizations,
principally the Financial Industry Regulatory Authority (“FINRA”) and the
U.S. securities exchanges. These self-regulatory organizations adopt rules
(subject to approval by the SEC), which govern the securities industry and
conduct periodic examinations of member broker-dealers. Securities firms are
also subject to substantial regulation by state securities authorities in the
U.S. jurisdictions in which they are registered. The Company’s
subsidiaries, Broadpoint Capital and Broadpoint AmTech are registered, as
broker-dealers in all 50 states, the District of Columbia, Puerto Rico, and
the U.S. Virgin Islands and 27 states and the Province of Ontario,
Canada, respectively.
The U.S. regulations to which broker-dealers are subject cover
many aspects of the securities business, including sales and trading practices,
financial responsibility, including the safekeeping of customers’ funds and
securities as well as the capital structure of securities firms, books and
record keeping, and the conduct of their associated persons. Salespeople,
traders, investment bankers and others are required to take examinations given
and approved by FINRA and all principal exchanges as well as state securities
authorities to both obtain and maintain their securities license registrations.
Registered employees are also required to participate annually in the firm’s
continuing education program.
Additional legislation, federal and state, changes in rules
promulgated by the SEC and by self-regulatory organizations as well as changes
by state securities authorities, and/or
changes in the interpretation or enforcement of existing laws and rules often
directly affect the method of operation and profitability of broker-dealers. The
SEC, self-regulatory organizations, and state securities regulators have broad
authority to conduct broad examinations and inspections, and initiate
administrative proceedings which can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers, or employees. The principal purpose
of U.S. broker-dealer regulation is the protection of customers and the
securities markets rather than protection of stockholders of broker-dealers.
Net Capital
Requirements
The Company’s subsidiaries, Broadpoint Capital and Broadpoint AmTech,
as broker-dealers, are subject to the net capital requirements of Rule 15c3-1 of the Exchange Act (the
“Net Capital Rule”). The Net Capital Rule is designed to measure the general
financial condition and liquidity of a broker-dealer, and it imposes a required
minimum amount of net capital deemed necessary to meet a broker-dealer’s
continuing commitments to its customers.
Compliance with the Net Capital Rule may limit those operations,
which require the use of a firm’s capital for purposes, such as maintaining the
inventory required for trading in securities, underwriting securities, and
financing customer margin account balances. Net capital changes from day to day,
primarily based in part on a firm’s inventory positions, and the portion of the
inventory value the Net Capital Rule requires the firm to exclude from its
capital (see Note 19 of the Consolidated Financial Statements).
At December 31, 2008, net capital and excess net capital of the
Company’s broker-dealer subsidiaries were as follows:
Net
Capital
Excess Net
Capital
(In thousands of
dollars)
Broadpoint Capital
$
26,334
$
26,084
Broadpoint AmTech
$
1,360
$
1,132
7
Item 1A.
Risk Factors
This document includes statements that may constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements often address our
expected future business and financial performance, and often contain words such
as “may”, “will”, “expect”, “anticipate”, “believe”, “estimate”, and “continue”
or similar words. You should consider all statements other than historical
information or current facts to be forward-looking statements. Our
forward-looking statements may contain projections regarding our revenues,
earnings, operations, and other financial projections, and may include
statements of our future performance, strategies and objectives. However, there
may be events in the future that we are not able to accurately predict or
control that may cause our actual results to differ, possibly materially, from
the expectations expressed in our forward-looking statements. All
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those discussed as a result of various factors. Such
factors include, among others, market risk, credit risk and operating risk.
These and other risks are set forth in greater detail below and elsewhere in
this document. We caution you not to place undue reliance on these
forward-looking statements. We do not undertake to update any of our
forward-looking statements.
You should carefully consider the risk factors described below in
addition to the other information set forth or incorporated by reference in this
Annual Report on Form 10-K. If any
of the following risks actually occur, our financial condition or results of
operations could be materially and adversely affected. These risk factors are
intended to highlight some factors that may affect our financial condition and
results of operations and are not meant to be an exhaustive discussion.
Additional risks and uncertainties that we do not presently know or that we
currently believe to be immaterial may also adversely affect us.
Company Risks
Difficult market
conditions have and may continue to adversely affect our business in many
ways. Our businesses are materially affected by conditions in
the financial markets and economic conditions generally, both in the U.S and
elsewhere around the world. Difficult market and economic conditions and
geopolitical uncertainties have in the past adversely affected and may in the
future adversely affect our business and profitability in many ways. Such
conditions have materially and adversely changed over the prior fiscal year to
unprecedented levels, characterized by a major lack of liquidity, substantially
volatile and decreased asset values in nearly all asset classes, and a
significant reduction in consumer and investor confidence. Currently, and as of
the close of fiscal year 2008, the U.S. and the global economy are all in a
recession. Many companies in a broad range of industries are in serious
financial jeopardy due to the lack of consumer spending and business activity,
and the lack of liquidity in the credit markets. Such conditions have also
changed the broader landscape of the financial services industry, causing
several industry leading institutions to fail or merge their businesses.
Despite the various initiatives and actions that the U.S. and
other governments and banks have implemented and taken during 2008, asset values
and consumer and investor confidence continue to decline, and the liquidity
crisis remains in existence. The result of such conditions, among others, could
be to limit our access to sources of funding as well as an increase in the cost
of obtaining such funding, and could limit our ability to engage in certain
activities. Such effects likely will continue until market conditions
substantially improve.
Weakness in the equity and fixed income markets and diminished
trading volume of securities could adversely impact our sales and trading
business. Industry-wide declines in the size and number of underwritings and
mergers and acquisitions also would likely have an adverse effect on our
revenues and prospects. In addition, reductions in the trading prices for equity
securities also tend to reduce the dollar value of investment banking
transactions, such as underwriting and mergers and acquisitions transactions,
which in turn may reduce the fees we earn from these transactions. Our revenues
would likely decline in such circumstances and, if we were unable to reduce
expenses at the same pace, our profit margin would erode. In addition, in the
event of extreme market events, such as the global credit crisis, we could incur
substantial risk of loss due to market volatility.
8
We have incurred
losses in recent periods and may incur losses in the
future. We have incurred losses in recent periods. We recorded
a net loss of $17.4 million for the year ended December 31, 2008 and a
net loss of $19.5 million for the year ended December 31, 2007. In
recent years, we have experienced declines in revenues generated by certain of
our key segments, including Equities and Other. We may incur losses and further
declines in revenue in future periods. If we continue to incur losses and we are
unable to raise funds to finance those losses, they could have a significant
effect on our liquidity as well as our ability to operate.
In addition, we may incur significant expenses if we expand our
underwriting and trading businesses or engage in strategic acquisitions and
investments. Accordingly, we will need to increase our revenues at a rate
greater than our expenses to achieve and maintain profitability. If our revenues
do not increase sufficiently, or we are unable to manage our expenses, we will
not achieve and maintain profitability in future periods.
We are a holding
company and depend on payments from our subsidiaries. We
depend on dividends, distributions and other payments from our subsidiaries to
fund our obligations. Regulatory and other legal restrictions may limit our
ability to transfer funds freely, either to or from our subsidiaries. In
particular, our broker-dealer subsidiaries are subject to laws and regulations
that authorize regulatory bodies to block or reduce the flow of funds to the
parent holding company, or that prohibit such transfers altogether in certain
circumstances. These laws and regulations may hinder our ability to access funds
that we may need to make payments on our obligations. In addition, because our
interests in the firm’s subsidiaries consist of equity interests, our rights may
be subordinated to the claims of the creditors of these subsidiaries.
We may experience
further writedowns of our securities and other losses related to volatile and
illiquid market conditions. The volatility and lack of
liquidity in the market has made it increasingly difficult to value certain of
our securities. Subsequent valuations based on then-current information may
require us to take further writedowns in the value of our securities in future
periods. In addition, when such securities are sold it may be at a price
materially lower than the current fair value. Such events may also have an
adverse effect on our results of operations in future periods.
Our ability to hire
and retain our senior professionals is critical to the success of our
business. In order to operate our business successfully, we
rely heavily on our senior professionals. Their personal reputation, judgment,
business generation capabilities and project execution skills are a critical
element in obtaining and executing client engagements. We encounter intense
competition for qualified employees from other companies in the investment
banking industry as well as from businesses outside the investment banking
industry, such as hedge funds, private equity funds and venture capital funds.
In the past, we have lost investment banking, brokerage, research, and senior
professionals. We could lose more in the future. Any loss of professionals,
particularly key senior professionals or groups of related professionals, could
impair our ability to secure or successfully complete engagements, materially
and adversely affect our revenues and make it more difficult to return to
profitability. In the future, we may need to hire additional personnel. At that
time, there could be a shortage of qualified and, in some cases, licensed
personnel whom we could hire. This could hinder our ability to expand or cause a
backlog in our ability to conduct our business, including the handling of
investment banking transactions and the processing of brokerage orders. These
personnel challenges could harm our business, financial condition and operating
results.
Limitations on our
access to capital could impair our liquidity and our ability to conduct our
businesses. Liquidity, or ready access to funds, is essential
to financial services firms. Failures of financial institutions have often been
attributable in large part to insufficient liquidity, such as the liquidity
crisis that currently exists in the U.S. and global economy. Liquidity is
of particular importance to our trading business and perceived liquidity issues
may affect our clients and counterparties’ willingness to engage in brokerage
transactions with us. Our liquidity has been impaired by the current widening of
credit spreads and significant decline in availability of credit, and could be
further impaired due to other circumstances that we may be unable to control,
such as a general market disruption, negative views about the financial services
industry generally or an operational problem that affects our trading clients,
third parties or us. Further, our ability to sell assets may be impaired if
other market participants are seeking to sell similar assets at the same time.
We rely on cash and assets that have historically been readily convertible into
cash such as our securities held in inventory to finance our operations
generally and to maintain our margin requirements, particularly with our
9
clearing firms, Ridge Clearing Outsource Solutions, Inc. (“Ridge”),
JP Morgan Clearing Corp. (“JP Morgan”), and Pershing LLC (“Pershing”). Our
ability to continue to access these and other forms of capital could be impaired
due to circumstances beyond our control such as a dramatic change in the value
of our collateral, the willingness or ability of lenders to provide credit, and
market disruptions or dislocations, generally. Any such events could have a
material adverse effect on our ability to fund our operations and operate our
business.
In order to obtain funding to grow our business or fund operations in
the event of continuing losses, we may seek to raise capital through issuance
and sale of our common stock or the incurrence of additional debt. The sale of
equity, or securities convertible into equity, would result in dilution to our
stockholders. The incurrence of debt may subject us to covenants restricting our
business activities. Additional funding may not be available to us on acceptable
terms, or at all.
Our venture capital business and investment portfolio may also create
liquidity risk due to increased levels of investments in high-risk, illiquid
assets. We have made substantial principal investments in our private equity
funds and may make additional investments in future funds, which are typically
made in securities that are not publicly traded. There is a significant risk
that we may be unable to realize our investment objectives by sale or other
disposition at attractive prices or may otherwise be unable to complete any exit
strategy. In particular, these risks could arise from changes in the financial
condition or prospects of the portfolio companies in which investments are made,
changes in national or international economic conditions or changes in laws,
regulations, fiscal policies or political conditions of countries in which
investments are made. It takes a substantial period of time to identify
attractive investment opportunities and then to realize the cash value of our
investments through resale. Even if a private equity investment proves to be
profitable, it may be several years or longer before any profits can be realized
in cash. At December 31, 2008, $15.4 million of our total assets
consisted of relatively illiquid private equity investments (see Note 7 of
the Consolidated Financial Statements).
Capital
requirements may impede our ability to conduct our
business. Broadpoint Capital and Broadpoint AmTech, our
broker-dealer subsidiaries, are subject to the net capital requirements of the
SEC and various self-regulatory organizations of which they are members. These
requirements typically specify the minimum level of net capital a broker-dealer
must maintain. Any failure to comply with these net capital requirements could
impair our ability to conduct our core business as a brokerage firm.
Pricing and other
competitive pressures may impair the revenues and profitability of our brokerage
business. In recent years, we have experienced significant
pricing pressures on trading margins and commissions in debt and equity trading.
In the fixed income market, regulatory requirements have resulted in greater
price transparency, leading to increased price competition and decreased trading
margins. In the equity market, we have experienced increased pricing pressure
from institutional clients to reduce commissions, and this pressure has been
augmented by the increased use of electronic, algorithmic and direct market
access trading, which has created additional competitive downward pressure on
trading margins. The trend toward using alternative trading systems is
continuing to grow, which may result in decreased commission and trading
revenue, reduce our participation in the trading markets and our ability to
access market information, and lead to the creation of new and stronger
competitors. As a result of pressure from institutional clients to alter “soft
dollar” practices and SEC rulemaking in the soft dollar area, some institutions
are entering into arrangements that separate (or “unbundle”) payments for
research products or services from sales commissions. These arrangements, both
in the form of lower commission rates and commission sharing agreements, have
increased the competitive pressures on sales commissions and have affected the
value our clients place on high-quality research. Additional pressure on sales
and trading revenue may impair the profitability of our brokerage business.
Moreover, our inability to reach agreement regarding the terms of unbundling
arrangements with institutional clients who are actively seeking such
arrangements could result in the loss of those clients, which would likely
reduce our institutional commissions. We believe that price competition and
pricing pressures in these and other areas will continue as institutional
investors continue to reduce the amounts they are willing to pay, including
reducing the number of brokerage firms they use, and some of our competitors
seek to obtain market share by reducing fees, commissions or margins.
Additionally, in 2008 several prominent financial institutions consolidated,
merged or received substantial government assistance. Such events could result
in our
10
competitors gaining greater capital and other resources, or seeking
to obtain market share by reducing fees, commissions or margins.
Certain of our
businesses focus principally on specific sectors of the economy, and a
deterioration in the business environment in these sectors generally or decline
in the market for securities of companies within these sectors could materially
and adversely affect our business. For example, our equity
business focuses principally on the sectors of the economy we cover. Therefore,
volatility in the business environment in these sectors generally, or in the
market for securities of companies within these sectors particularly, could
substantially affect our financial results and the market value of our common
stock. The market for securities in each of our target sectors may also be
subject to industry-specific risks. Underwriting transactions, strategic
advisory engagements and related trading activities in our target sectors
represent a significant portion of our businesses. This concentration exposes us
to the risk of substantial declines in revenues in the event of downturns in
these sectors of the economy and any future downturns in our target sectors
could materially and adversely affect our business and results of operations.
Markets have and
may continue to experience periods of high
volatility. Financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values accompanied by a reduction in
asset liquidity, such as the asset price deterioration in the subprime
residential mortgage market. Higher interest rates during the first half of 2007
continuing through 2008, falling property prices throughout the year and a
significant increase in the number of subprime mortgages originated in 2005 and
2006 contributed to dramatic increases in mortgage delinquencies and defaults in
2007 and 2008 and led to delinquencies among higher-risk, or subprime, borrowers
in the United States. The widespread dispersion of credit risk related to
mortgage delinquencies and defaults through the securitization of
mortgage-backed securities, sales of collateralized debt obligations and the
creation of structured investment vehicles and the broad range of unregulated
derivative products, caused banks to reduce their loans to each other or make
them at higher interest rates. During the second half of 2007 and 2008, the
economic impact of these problems spread and led to the most significant
disruption of the financial markets since the great depression, and ultimately
what amounted to a complete shutdown of the credit markets. Counterparties and
other financial institutions failed in unprecedented fashion. It is impossible
to predict how long these conditions will continue, whether they will continue
to deteriorate and to know the extent to which our markets, products and
businesses will be adversely affected. As a result, these conditions could
adversely affect our financial condition and results of operations.
Increase in capital
commitments in our trading, underwriting and other businesses increases the
potential for significant losses. The trend in capital markets
is toward larger and more frequent commitments of capital by financial services
firms in many of their activities. For example, in order to win business,
investment banks are increasingly committing to purchase large blocks of stock
from publicly-traded issuers or their significant shareholders, instead of the
more traditional marketed underwriting process, in which marketing was typically
completed before an investment bank committed to purchase securities for resale.
As a result, we may be subject to increased risk as we commit greater amounts of
capital to facilitate primarily client-driven business. Furthermore, we may
suffer losses even when economic and market conditions are generally favorable
for others in the industry.
We may enter into transactions in which we commit our own capital as
part of our trading business. The number and size of these transactions may
materially affect our results of operations in a given period. We may also incur
significant losses from our trading activities due to market fluctuations and
volatility from quarter to quarter. We maintain trading positions in the fixed
income and equity markets to facilitate client-trading activities. To the extent
that we own security positions, in any of those markets, a downturn in the value
of those securities or in those markets could result in losses from a decline in
value. Conversely, to the extent that we have sold securities we do not own in
any of those markets, an upturn in those markets could expose us to potentially
unlimited losses as we attempt to acquire the securities in a rising market.
Moreover, taking such positions in times of significant volatility can lead to
significant unrealized losses, which further impact our ability to borrow to
finance such activities. The unprecedented volatility of the markets for both
fixed income and equity securities in the fourth quarter of 2008, in combination
with the credit crisis, caused
11
several well established investment banks to fail or come close to
failing. If these conditions continue our business, financial condition and
results of operations could be adversely affected.
Our principal
trading and investments expose us to risk of loss. A
significant portion of our revenues is derived from trading in which we act as
principal. The Company may incur trading losses relating to the purchase, sale
or short sale of corporate and asset-backed fixed income securities and equity
securities for our own account and from other principal trading. In any period,
we may experience losses as a result of price declines, lack of trading volume,
and illiquidity. From time to time, we may engage in a large block trade in a
single security or maintain large position concentrations in a single security,
securities of a single issuer, or securities of issuers engaged in a specific
industry. For example, in 2008 we held securities of the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). In general, any downward price movement in these securities could
result in a reduction of our revenues and profits.
In addition, we may engage in hedging transactions and strategies
that may not properly mitigate losses in our principal positions. If the
transactions and strategies are not successful, we could suffer significant
losses.
Our financial
results may fluctuate substantially from period to period, which may impact our
stock price. We have experienced, and expect to experience in
the future, significant periodic variations in our revenues and results of
operations. These variations may be attributed in part to trading related losses
and the fact that our investment banking revenues are typically earned upon the
successful completion of a transaction, the timing of which is uncertain and
beyond our control. As a result, our business is highly dependent on market
conditions and the interest in the market for the products we trade, as well as
the decisions and actions of our clients and interested third parties. This risk
may be intensified by our focus on growth companies in the healthcare, energy
and technology sectors and mortgage asset backed securities, as the market for
these securities has experienced significant variations in the number and size
of offerings as well as the secondary trading volume and prices of newly issued
securities. Because of recent difficult market conditions, more companies
considering initiating the process of an initial public offering are exploring
merger and acquisition exit opportunities. As a result, we are unlikely to
achieve steady and predictable earnings on a quarterly basis, which could in
turn adversely affect our stock price. For more information, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
If we violate the
listing requirements of The NASDAQ Global Market, our common stock may be
delisted. To maintain our listing on The NASDAQ Global Market,
we must meet certain financial and liquidity criteria. One of these criteria
requires that we maintain a minimum bid price per share of $1.00. We currently
meet the listing standards for continued listing on The NASDAQ Global Market.
The last reported sale price of our common stock on March 5, 2009 was $2.30
per share. The market price of our common stock has been and may continue to be
subject to significant fluctuation as a result of periodic variations in our
revenues and results of operations. If we violate The NASDAQ Global Market
listing requirements, we may be delisted.
We face strong
competition from larger firms. The brokerage and investment
banking industries are intensely competitive and we expect them to remain so. We
compete on the basis of a number of factors, including client relationships,
reputation, the abilities of our professionals, market focus and the relative
quality and price of our services and products. We have experienced intense
price competition in some of our businesses, in particular discounts in large
block trades and trading commissions and spreads. In addition, pricing and other
competitive pressures in investment banking, including the trends toward
multiple book runners, co-managers and multiple financial advisors handling
transactions, have continued and could adversely affect our revenues. We believe
we may experience competitive pressures in these and other areas in the future,
as some of our competitors seek to obtain market share by competing on the basis
of price.
Many of our competitors in the brokerage and investment banking
industries have a broader range of products and services, greater financial and
marketing resources, larger customer bases, greater name recognition, more
professionals to serve their clients’ needs, greater global reach and more
established relationships with clients than we have. These larger and
better-capitalized competitors may be better able to
12
respond to changes in the brokerage and investment banking
industries, to compete for skilled professionals, to finance acquisitions, to
fund internal growth and to compete for market share generally.
The scale of our competitors has increased in recent years as a
result of substantial consolidation among companies in the brokerage and
investment banking industries. In addition, a number of large commercial banks,
insurance companies and other broad-based financial services firms have
established or acquired underwriting or financial advisory practices and
broker-dealers or have merged with other financial institutions. These firms
have the ability to offer a wider range of products than we do, which may
enhance their competitive position. They also have the ability to support
investment banking with commercial banking, insurance and other financial
services in an effort to gain market share, which has resulted, and could
further result, in pricing pressure in our businesses. In particular, the
ability to provide financing has become an important advantage for some of our
larger competitors and, because we do not provide such financing, we may be
unable to compete as effectively for clients in a significant part of the
brokerage and investment banking market. Additionally, these broader, more
robust investment banking and financial services platforms may be more appealing
to investment banking professionals than our business, making it more difficult
for us to attract new employees and retain those we have.
If we are unable to compete effectively with our competitors, our
business, financial condition and results of operations will be adversely
affected.
Our risk management
policies and procedures may leave us exposed to unidentified or unanticipated
risk. Our risk management strategies and techniques may not be
fully effective in mitigating our risk exposure in all market environments or
against all types of risk.
Our risk hedging strategies also expose us to the risk that
counterparties that owe us money, securities or other assets will not perform on
their obligations. These counterparties may default on their obligations to us
due to bankruptcy, lack of liquidity, operational failure, breach of contract or
other reasons. 2008 saw a number of counterparties default on obligations in the
financial services community that was unprecedented in recent times. We are also
subject to the risk that our rights against third parties may not be enforceable
in all circumstances. Although we regularly review credit exposures to specific
clients and counterparties and to specific industries and regions that we
believe may present credit concerns, default risk may arise from events or
circumstances that are difficult to detect or foresee. In addition, concerns
about, or a default by, one institution could lead to significant liquidity
problems, losses or defaults by other institutions, which in turn could
adversely affect us. If any of the variety of instruments, processes and
strategies we utilize to manage our exposure to various types of risk are not
effective, we may incur losses.
Our operations and
infrastructure may malfunction or fail. Our businesses are
highly dependent on our ability to process, on a daily basis, a large number of
transactions across diverse markets, and the transactions we process have become
increasingly complex. Our financial, accounting or other data processing systems
may fail to operate properly or become disabled as a result of events that are
wholly or partially beyond our control, including a disruption of electrical or
communications services or our inability to occupy one or more of our buildings.
The inability of our systems to accommodate an increasing volume of transactions
could also constrain our ability to expand our businesses. If any of these
systems do not operate properly or are disabled or if there are other
shortcomings or failures in our internal processes, people or systems, we could
suffer an impairment to our liquidity, financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage.
We also face the risk of operational failure or termination of any of
the clearing agents, exchanges, clearing houses or other financial
intermediaries we use to facilitate our securities transactions. Any such
failure or termination could adversely affect our ability to execute
transactions and to manage our exposure to risk.
In addition, our ability to conduct business may be adversely
impacted by a disruption in the infrastructure that supports our businesses and
the communities in which we are located. This may include a disruption involving
electrical, communications, transportation or other services used by us or third
parties with which we conduct business, whether due to fire, other natural
disaster, power or communications failure, act of
13
terrorism or war or otherwise. Nearly all of our employees in our
primary locations, including Greenwich CT, New York City NY, and Roseland NJ,
work in close proximity to each other. If a disruption occurs in one location
and our employees in that location are unable to communicate with or travel to
other locations, our ability to service and interact with our clients may suffer
and we may not be able to implement successfully contingency plans that depend
on communication or travel.
Our operations also rely on the secure processing, storage and
transmission of confidential and other information in our computer systems and
networks. Although we take protective measures and endeavor to modify them as
circumstances warrant, our computer systems, software and networks may be
vulnerable to unauthorized access, computer viruses or other malicious code and
other events that could have a security impact. If one or more of such events
occur, this potentially could jeopardize our or our clients’ or our
counterparties’ confidential and other information processed and stored in, and
transmitted through, our computer systems and networks, or otherwise cause
interruptions or malfunctions in our, our clients’, our counterparties’ or third
parties’ operations. We may be required to expend significant additional
resources to modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to litigation and
financial losses that are either not insured against or not fully covered
through any insurance maintained by us.
To be successful,
we must profitably expand our business operations. We face numerous risks and
uncertainties as we seek to expand. We seek the growth in our
business primarily from internal expansion and through acquisitions and
strategic partnering. If we are successful in expanding our business, there can
be no assurance that our financial controls, the level and knowledge of our
personnel, our operational abilities, our legal and compliance controls and our
other corporate support systems will be adequate to manage our business and our
growth. The ineffectiveness of any of these controls or systems could adversely
affect our business and prospects.
We may be unable to
fully capture the expected value from acquisitions in investments and
personnel. We currently expect to grow through acquisitions
and through strategic investments as well as through internal expansion. To the
extent we make acquisitions or enter into combinations, we face numerous risks
and uncertainties combining or integrating the relevant businesses and systems,
including the need to combine accounting and data processing systems and
management controls and to integrate relationships with clients and business
partners. In addition, acquisitions may involve the issuance of additional
shares of our common stock, which may dilute our shareholders’ ownership of our
firm. Furthermore, acquisitions could entail a number of risks including
problems with the effective integration of operations, inability to maintain key
pre-acquisition business relationships, increased operating costs, exposure to
unanticipated liabilities and difficulties in realizing projected efficiencies,
synergies and cost savings. There is no assurance that any of our recent
acquisitions or any business we acquire in the future will be successfully
integrated and result in all of the positive benefits anticipated. If we are not
able to integrate successfully our past and future acquisitions, there is a risk
that our results of operations may be materially and adversely affected.
Finally, expansions or acquisitions have required and may in the future requires
significant managerial attentions, which may be diverted from our other
operations. These capital, equity and managerial commitments may impair the
operation of our businesses.
Because
MatlinPatterson FA Acquisition LLC, a Delaware limited liability company
(“MatlinPatterson”), controls a majority of the voting power of our common
stock, investors will not be able to affect the outcome of any shareholder
vote. As of March 4, 2008, MatlinPatterson controls
approximately 54% of the voting power of our common stock. For as long as
MatlinPatterson beneficially owns more than 50% of the outstanding shares of our
common stock, it will be able to direct the election of all of the members of
our board of directors, call a special meeting of shareholders at which our
directors may be removed with or without cause and determine the outcome of most
matters submitted to a vote of our shareholders, including matters involving
mergers or other business combinations, the acquisition or disposition of
assets, the incurrence of indebtedness, the issuance of any additional shares of
common stock or other equity securities and the payment of dividends on common
stock. MatlinPatterson currently has and will have the power to prevent or cause
a change in control, and could take other actions that might be favorable to
MatlinPatterson but not to our other shareholders.
14
Because
MatlinPatterson beneficially owns a majority of the outstanding shares of our
common stock, we are a “controlled company” within the meaning of the Nasdaq
Marketplace Rules and, as a result, we are not subject to all of the Nasdaq
corporate governance requirements. Because MatlinPatterson
controls more than 50% of the voting power of our common stock, we are a
“controlled company” within the meaning of the Nasdaq Marketplace Rules. Under
the Nasdaq Marketplace Rules, a controlled company may elect not to comply with
certain Nasdaq corporate governance requirements, including requirements that
(1) a majority of the board of directors consist of independent directors,
(2) compensation of officers be determined or recommended to the board of
directors by a majority of its independent directors or by a compensation
committee that is composed entirely of independent directors and
(3) director nominees be selected or recommended by a majority of the
independent directors or by a nominating committee composed solely of
independent directors. Because we have taken advantage of the controlled company
exemption to certain Nasdaq corporate governance requirements, our shareholders
do not have the same protections afforded to shareholders of companies that are
subject to all of the Nasdaq corporate governance requirements.
Future sales or
anticipated future sales of our common stock in the public market, by us, by
MatlinPatterson or by others, could cause our stock price to
decline. The sale by us of a significant number of shares of
our common stock, or the perception that such future sales could occur, could
materially and adversely affect the market price of our common stock. In
addition, the sale or anticipated future sale of a significant number of shares
of our common stock in the open market by MatlinPatterson or others, whether
pursuant to a resale prospectus or pursuant to Rule 144, promulgated under
the Securities Act, may also have a material adverse effect on the market price
of our common stock. Any such decline in our stock price could impair our
ability to raise capital in the future through the sale of additional equity
securities at a price we deem appropriate.
Our pending
acquisition of Gleacher Partners Inc. is subject to a variety of conditions and
may not be completed. On March 3, 2009, we announced that
we had entered into a definitive merger agreement to acquire Gleacher Partners
Inc., an internationally recognized financial advisory boutique known for
advising companies in mergers and acquisitions and restructurings. Completion of
this merger is subject to a variety of conditions, many of which are outside of
our control. See Part II — Item 9b. Other Information. We believe
that the completion of this merger will confer substantial benefits on us.
However, we may not ultimately complete this transaction or obtain the
anticipated benefits.
Risks Related to Our
Industry
Our businesses
could be adversely affected by market uncertainty or lack of confidence among
customers and investors due to difficult geopolitical or market
conditions. Our investment banking business has been and may
continue to be adversely affected by market conditions. Unfavorable economic or
geopolitical conditions have and may continue to adversely affect customer and
investor confidence, resulting in a substantial industry-wide decline in
underwritings and financial advisory transactions. Additionally, market
uncertainty and unfavorable economic conditions may result in fewer
institutional clients with lesser amounts of assets to trade. In each case this
could have an adverse effect on our revenues and profits. Additionally,
unfavorable returns on investment, whether due to general adverse market
conditions or otherwise, could adversely affect our ability to retain clients
and attract new clients.
Financial
difficulty of another prominent financial institution could adversely affect
financial markets. The creditworthiness and financial
well-being of many financial institutions may be interdependent because of
credit, trading, clearing or other relationships between the institutions. The
financial difficulty of one company, therefore, could result in further market
illiquidity or financial difficulties with other institutions and may adversely
affect the clearing agencies, clearing houses, banks, exchanges and other
intermediaries with which we conduct business. Such events, therefore, could
adversely impact our business.
Financial services
firms have been subject to increased scrutiny and enforcement activity over the
last several years, increasing the risk of financial liability and reputational
harm resulting from adverse regulatory actions. Firms in the
financial services industry have been operating in a difficult regulatory
environment. The industry has experienced increased scrutiny and enforcement
activity from a variety of regulators,
15
including the SEC, FINRA (formerly NASD), NASDAQ, the state
securities commission and state attorneys general. Penalties and fines sought by
regulatory authorities have increased substantially over the last several years.
This regulatory environment has created uncertainty with respect to a number of
transactions that had historically been entered into by financial services firms
and that were generally believed to be permissible and appropriate. We may be
adversely affected by changes in the interpretation or enforcement of existing
laws and rules by these governmental authorities and self-regulatory
organizations. We also may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United States or foreign
governmental regulatory authorities or self-regulatory organizations that
supervise the financial markets. Among other things, we could be fined,
prohibited from engaging in some of our business activities or subject to
limitations or conditions on our business activities. Substantial legal
liability or significant regulatory action against us could have material
adverse financial effects or cause significant reputational harm to us, which
could seriously harm our business prospects.
In addition, financial services firms are subject to numerous
conflicts of interests or perceived conflicts. The SEC and other federal and
state regulators have increased their scrutiny of potential conflicts of
interest. We have adopted various policies, controls and procedures to address
or limit actual or perceived conflicts and regularly seek to review and update
our policies, controls and procedures. However, appropriately dealing with
conflicts of interest is complex and difficult and our reputation could be
damaged if we fail, or appear to fail, to deal appropriately with conflicts of
interest. Our policies and procedures to address or actual or perceived
conflicts may also result in increased costs, additional operational personnel
and increased regulatory risk. Failure to adhere to these policies and
procedures may result in regulatory sanctions or client litigation.
Extensive
regulation of public companies in the U.S. could reduce our revenue and
otherwise adversely affect our business. Highly-publicized
financial scandals in recent years have led to investor concerns over the
integrity of the U.S. financial markets, and have prompted Congress, the
SEC, the NYSE and NASDAQ to significantly expand corporate governance and public
disclosure requirements, and more such regulation of both public companies and
the financial services industry is considered likely at this time. To the extent
that private companies, in order to avoid becoming subject to these new
requirements, decide to forgo initial public offerings, or list their securities
instead on non-U.S. securities
exchanges, our equity underwriting business may be adversely affected. In
addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate
governance rules imposed by self-regulatory organizations have diverted many
companies’ attention away from capital market transactions, including securities
offerings and acquisition and disposition transactions. In particular, companies
that are or are planning to be public are incurring significant expenses in
complying with the SEC and accounting standards relating to internal control
over financial reporting, and companies that disclose material weaknesses in
such controls under the new standards may have greater difficulty accessing the
capital markets. These factors, in addition to adopted or proposed accounting
and disclosure changes, may have an adverse effect on our business.
Our business is
subject to significant credit risk. In the normal course of
our businesses, we are involved in the execution, settlement and financing of
various customer and principal securities transactions. These activities are
transacted on a cash, margin or delivery-versus-payment basis and are subject to
the risk of counterparty or customer nonperformance. Although transactions are
generally collateralized by the underlying security or other securities, we
still face the risks associated with changes in the market value of securities
that we may be obligated to purchase securities or have purchased in principal
or riskless principal trades where a counterparty or customer fails to perform.
During the recent unprecedented volatility of the financial markets this risk
has been greatly increased. We may also incur credit risk in our derivative
transactions to the extent such transactions result in uncollateralized credit
exposure to our counterparties. We seek to control the risk associated with
these transactions by establishing and monitoring credit limits and by
monitoring collateral and transaction levels daily.
Our business and
results of operations could be adversely affected by governmental fiscal and
monetary policies. Our cost of funds for lending, investment
activities and capital raising are affected by the fiscal and monetary policies
of the U.S. and foreign governmental and banking authorities, changes to
which are not wholly predictable or within our control. Such changes may also
affect the value of the securities we hold.
16
Our exposure to
legal liability is significant, and damages that we may be required to pay and
the reputational harm that could result from legal action against us could
materially adversely affect our businesses. We face
significant legal risks in our businesses and, in recent years, the volume of
claims and amount of damages sought in litigation and regulatory proceedings
against financial institutions have been increasing. These risks include
potential liability under securities or other laws for materially false or
misleading statements made in connection with securities offerings and other
transactions, potential liability for “fairness opinions” and other advice we
provide to participants in strategic transactions and disputes over the terms
and conditions of trading arrangements. We are also subject to claims arising
from disputes with employees for alleged discrimination or harassment, among
other things. These risks often may be difficult to assess or quantify and their
existence and magnitude often remain unknown for substantial periods of time.
As a brokerage and investment banking firm, we depend to a large
extent on our reputation for integrity and high-caliber professional services to
attract and retain clients. As a result, if a client is not satisfied with our
services, it may be more damaging in our business than in other businesses.
Moreover, our role as underwriter to our clients on important underwritings or
as advisor for mergers and acquisitions and other transactions involves complex
analysis and the exercise of professional judgment, including rendering
“fairness opinions” in connection with mergers and other transactions.
Therefore, our activities may subject us to the risk of significant legal
liabilities to our clients and aggrieved third parties, including shareholders
of our clients who could bring securities class actions against us. Our
investment banking engagements typically include broad indemnities from our
clients and provisions to limit our exposure to legal claims relating to our
services, but these provisions may not protect us or may not be enforceable in
all cases. As a result, we may incur significant legal and other expenses in
defending against litigation and may be required to pay substantial damages for
settlements and adverse judgments. Substantial legal liability or significant
regulatory action against us could have a material adverse effect on our results
of operations or cause significant reputational harm to us, which could
seriously harm our business and prospects.
We are subject to claims and litigations in the ordinary course of
our business. For information regarding certain pending claims see
Part I — Item 3 — Legal Proceedings.
Employee misconduct
could harm us and is difficult to detect and deter. There have
been a number of highly publicized cases involving fraud or other misconduct by
employees in the financial services industry in recent years, and we run the
risk that employee misconduct could occur at our Company. For example,
misconduct by employees could involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious
reputational or financial harm. It is not always possible to deter employee
misconduct and the precautions we take to detect and prevent this activity may
not be effective in all cases, and we may suffer significant reputational harm
for any misconduct by our employees.
Item 1B.
Unresolved Staff
Comments.
None.
Item 2.
Properties
The Company currently leases all of its office space. The Company’s
lease for its headquarters in New York, New York (approximately
16,000 square foot space) expires on December 31, 2018
17
A list of office locations as of December 31, 2008 by segment is
as follows:
Equities
Dallas, TX Greenwich, CT Littleton,
CO New York, NY Newport, RI St. Louis, MO
Investment Banking
Boston, MA New York, NY
Debt Capital Markets
San Francisco, CA New York, NY
Roseland, NJ Encino, CA
Broadpoint Descap
New York, NY Tucson, AZ Boston, MA
FT Lauderdale, FL Woodland Hills, CA
Other
Albany, NY Boston, MA New York, NY
Item 3.
Legal
Proceedings
In 1998, the Company was named in lawsuits by Lawrence Group, Inc.
and certain related entities (the “Lawrence Parties”) in connection with a
private sale of Mechanical Technology Inc. stock from the Lawrence Parties that
was approved by the United States Bankruptcy Court for the Northern District of
New York (the “Bankruptcy Court”). The Company acted as placement agent in that
sale, and a number of persons who were employees and officers of the Company at
that time, who have also been named as defendants, purchased shares in the sale.
The complaints alleged that the defendants did not disclose certain information
to the sellers and that the price approved by the court was therefore not
proper. The cases were initially filed in the Bankruptcy Court and the United
States District Court for the Northern District of New York (the “District
Court”), and were subsequently consolidated in the District Court. The District
Court dismissed the cases, and that decision was subsequently vacated by the
United States Court of Appeals for the Second Circuit, which remanded the cases
for consideration of the plaintiffs’ claims as motions to modify the Bankruptcy
Court sale order. The plaintiffs’ claims were referred back to the Bankruptcy
Court for such consideration. In February 2009, the Bankruptcy Court dismissed
the motions in their entirety. Plaintiffs have filed a notice of appeal, which
would be heard by the District Court. The Company believes that it has strong
defenses and intends to vigorously defend itself against the plaintiffs’ claims,
and believes the claims lack merit. However, an unfavorable resolution could
have a material adverse effect on the Company’s financial position, results of
operations and cash flows in the period which resolved.
In early 2008, Broadpoint Capital hired Tim O’Connor and 9 other
individuals to form a new restructuring and recapitalization group within
Broadpoint Capital’s Investment Banking segment. Mr. O’Connor, the new head
of Broadpoint Capital’s Investment Banking Division, and each of the other
employees are former employees of Imperial Capital, LLC (“Imperial”). Upon
Broadpoint Capital’s hiring of these employees, Imperial commenced an
arbitration proceeding against Broadpoint Capital, Mr. O’Connor, another
employee hired by Broadpoint Capital and a former employee of Imperial who is
not employed by Broadpoint Capital before the Financial Industry Regulatory
Authority (“FINRA”). In the arbitration, Imperial alleged various causes of
action against Broadpoint Capital as well as the individuals based upon alleged
violations of restrictive covenants in employee contracts relating to the
non-solicitation of employees and clients. Imperial claimed damages in excess of
$100 million. Concurrently with the filing of the arbitration proceeding,
Imperial sought and obtained a temporary restraining order in New York State
Supreme Court,
18
pending the conclusion of the FINRA arbitration hearing, enjoining
Broadpoint from disclosing or making use of any confidential information of
Imperial, recruiting or hiring any employees of Imperial and seeking or
accepting as a client any client of Imperial, except those clients for whom any
of the hired individuals had provided services as a registered representative
while employed by Imperial. On April 17, 2008, Broadpoint Capital, the
other respondents, and Imperial entered into a Partial Settlement whereby
Imperial’s claims for injunctive relief were withdrawn and it was agreed the
temporary restraining order would be vacated. Imperial’s remaining claim for
damages arbitrated before FINRA at a hearing in September 2008. The Partial
Settlement provides, among other things, for the potential future payment of
amounts from Broadpoint to Imperial contingent upon the successful consummation
of, or receipt of fees in connection with, certain transactions. On
September 16, 2008, the Company agreed to a Settlement resolving all
remaining claims among the parties. In particular, in exchange for a $500,000
payment from Broadpoint Capital, Imperial released its claims against the
respondents. In addition, the respondents released the claims and defenses
raised by them against Imperial (including third-party claims asserted against
Imperial by Tim O’Connor), and the FINRA case was dismissed. The terms and
conditions of the Partial Settlement remain in effect.
Due to the nature of the Company’s business, the Company and its
subsidiaries are now, and likely in the future will be, involved in a variety of
legal proceedings, including the matters described above. These include
litigation, arbitrations and other proceedings initiated by private parties and
arising from our underwriting, financial advisory or other transactional
activities, client account activities and employment matters. Third parties who
assert claims may do so for monetary damages that are substantial, particularly
relative to the Company’s financial position. In addition, the securities
industry is highly regulated. The Company and its subsidiaries are subject to
both routine and unscheduled regulatory examinations of its business and
investigations of securities industry practices by governmental agencies and
self-regulatory organizations. In recent years securities firms have been
subject to increased scrutiny and regulatory enforcement activity. Regulatory
investigations can result in substantial fines being imposed on the Company
and/or its subsidiaries. Periodically
the Company and its subsidiaries receive inquiries and subpoenas from the SEC,
state securities regulators and self-regulatory organizations. The Company does
not always know the purpose behind these communications or the status or target
of any related investigation. The responses to these communications have in the
past resulted in the Company and/or its
subsidiaries being cited for regulatory deficiencies, although to date these
communications have not had a material adverse effect on the Company’s business.
The Company has taken reserves in its financial statements with
respect to legal proceedings to the extent it believes appropriate. However,
accurately predicting the timing and outcome of legal proceedings, including the
amounts of any settlements, judgments or fines, is inherently difficult insofar
as it depends on obtaining all of the relevant facts (which is sometimes not
feasible) and applying to them often-complex legal principles. Based on
currently available information, the Company does not believe that any
litigation, proceeding or other matter to which it is a party or otherwise
involved will have a material adverse effect on its financial position, results
of operations and cash flows; although an adverse development, or an increase in
associated legal fees, could be material in a particular period, depending in
part on the Company’s operating results in that period.
Item 4
Submission of Matters to a
Vote of Security Holders
None
19
PART II
Item 5.
Market for the Registrant’s
Common Equity and Related Stockholder Matters and Issuer Purchases of
Equity Securities
The Company’s common stock trades on The NASDAQ Global Market under
the symbol “BPSG”. As of March 5, 2009 there were approximately 2,342
holders of record of the Company’s common stock. No dividends have been declared
or paid on our common stock in the last two fiscal years. We do not anticipate
that we will pay any cash dividends on our common stock in the foreseeable
future. The following table sets forth the high and low bid quotations for the
common stock during each quarter for the fiscal years ended.
Quarter
Ended
Mar 31
Jun 30
Sep 30
Dec 31
2008
Stock Price Range
High
$
1.90
$
2.69
$
3.54
$
3.26
Low
1.00
1.75
1.90
1.53
2007
Stock Price Range
High
$
2.46
$
1.96
$
1.81
$
1.74
Low
1.42
1.51
1.22
0.99
Information relating to compensation plans under which our common
stock is authorized for issuance will be set forth in our definitive proxy
statement for our annual meeting of stockholders to be held on May 14, 2009
and is incorporated by reference in Part III, Item 12.
ISSUANCE OF UNREGISTERED EQUITY
SECURITIES
There were no undisclosed issuances of unregistered equity securities
during 2008.
ISSUER PURCHASES OF EQUITY
SECURITIES
We did not repurchase any shares of our common stock in the fourth
quarter of 2008.
20
Item 6.
Selected Financial
Data
The following selected financial data has been derived from the
Consolidated Financial Statements of the Company. This information should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto included elsewhere herein.
For the Years Ended December
31:
2008
2007
2006
2005
2004
(In thousands of dollars,
except per share amounts)
Operating results:
Operating revenues
$
123,067
$
38,472
$
73,010
$
101,924
$
99,706
Interest income
21,946
8,639
8,295
9,750
4,931
Total revenues
145,013
47,111
81,305
111,674
104,637
Interest expense
10,712
7,027
8,417
6,423
2,289
Net revenues
134,301
40,084
72,888
105,251
102,348
Expenses (excluding
interest)
149,107
71,709
120,329
111,201
121,247
Income (loss) before
income taxes, discontinued operations and cumulative effect of change in
accounting principles
(14,806
)
(31,625
)
(47,441
)
(5,950
)
(18,899
)
Income tax expense
(benefit)
2,424
(4,703
)
(828
)
7,512
(10,052
)
Income (loss) from
continuing operations
(17,230
)
(26,922
)
(46,613
)
(13,462
)
(8,847
)
Income (loss) from
discontinued operations, net of taxes
(132
)
7,460
2,205
3,245
5,260
Income (loss) before
cumulative effect of an accounting change
(17,362
)
(19,462
)
(44,408
)
(10,217
)
(3,587
)
Cumulative effect of
accounting change, net of taxes
—
—
427
—
—
Net income (loss)
$
(17,362
)
$
(19,462
)
$
(43,981
)
$
(10,217
)
$
(3,587
)
Basic earnings per
share:
Continuing operations
$
(0.25
)
$
(0.98
)
$
(3.08
)
$
(0.97
)
$
(0.71
)
Discontinued operations
—
0.27
0.15
0.23
0.42
Cumulative effect of an
accounting change
—
—
0.03
—
—
Loss per share
$
(0.25
)
$
(0.71
)
$
(2.90
)
$
(0.74
)
$
(0.29
)
Diluted earnings (loss)
per share:
Continuing operations
$
(0.25
)
$
(0.98
)
$
(3.08
)
$
(0.97
)
$
(0.71
)
Discontinued operations
—
0.27
0.15
0.23
0.42
Cumulative effect of an
accounting change
—
—
0.03
—
—
Diluted loss per share
$
(0.25
)
$
(0.71
)
$
(2.90
)
$
(0.74
)
$
(0.29
)
Cash dividend
—
—
—
0.05
0.20
Book Value
1.23
1.41
3.46
6.28
6.45
21
As of December
31:
2008
2007
2006
2005
2004
Financial condition:
Total assets
$
694,271
$
269,517
$
357,118
$
443,541
$
410,113
Short-term bank loans
—
—
128,525
150,075
139,875
Mandatory Redeemable
Preferred Stock Debt
24,187
—
—
—
—
Notes payable
—
—
12,667
30,027
32,228
Obligations under
capitalized leases
—
—
3,522
5,564
3,110
Temporary capital
—
104
104
3,374
3,374
Subordinated debt
1,662
2,962
4,424
5,307
3,695
Stockholders’ equity
98,290
82,267
51,577
87,722
86,085
Reclassification
Certain amounts in operating results for 2004 through 2007 have been
reclassified to conform to the 2008 presentation. Refer to the
“Reclassification” section of Note 1 to the Consolidated Financial
Statements for more information regarding reclassification of amounts included
in discontinued operations and for sale agreements entered into on TBA
mortgage-backed securities. These TBA’s were previously accounted for as short
securities sales and are now recorded as derivative transactions.
Cumulative Effect of Accounting
Change
Upon adoption of FASB Statement No. 123 (revised) “Share-based
Compensation” as described in FASB Staff Position No. FAS 123(R)-3,
Share-Based Payment on January 1, 2006, the Company recognized an after-tax
gain of approximately $0.4 million as the cumulative effect of a change in
accounting principle, primarily attributable to the requirement to estimate
forfeitures at the date of grant instead of recognizing them as incurred.
22
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 7.
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
There are included or incorporated by reference in this document
statements that may constitute “forward-looking statements” within the meaning
of the safe harbor provisions of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are usually
preceded by words such as “may,”“will”, “expect”, “anticipate”, “believe” ,
“estimate”, and “continue” or similar words. All statements other than
historical information or current facts should be considered forward-looking
statements. Forward-looking statements may contain projections regarding
revenues, earnings, operations, and other financial projections, and may include
statements of future performance, strategies and objectives. However, there may
be events in the future, which the Company is not able to accurately predict or
control which may cause actual results to differ, possibly materially, from the
expectations set forth in the Company’s forward-looking statements. All
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those discussed as a result of various factors. Such
factors include, among others, market risk, credit risk and operating risk.
These and other risks are set forth in greater detail throughout this document.
The Company does not intend or assume any obligation to update any
forward-looking information it makes.
Business
Overview
Broadpoint Securities Group, Inc., (the “Company”), is an independent
investment bank that provides value-added, unconflicted advice to corporations
and institutional investors. The Company provides services and generates
revenues through its Investment Banking, Debt Capital Markets, Broadpoint
DESCAP, Equities and Other segments. The Investment Banking segment provides
capital raising and advisory services to corporations and institutional
investors. The Debt Capital Markets segment provides sales and trading in a
broad range of debt securities and generates revenues primarily through
execution of riskless principal transactions on the sales of these securities.
The Broadpoint DESCAP segment provides sales and trading in mortgage and
asset-backed securities and generates revenues primarily through principal
transactions and other trading activities associated with these securities. The
Equities segment provides sales, trading and research in equity securities
primarily through one of the Company’s broker-dealer subsidiaries, Broadpoint
AmTech, generating revenues mainly through commissions on executing these
securities. The Other segment generates revenue from unrealized gains and losses
as a result of changes in the value of the firm’s investments and realized gains
and losses as a result of sales of equity holdings, and through the management
and investment of venture capital funds, this segment also includes the costs
related to corporate overhead and support including various fees associated with
legal and settlement expenses.
The Company has 255 employees, is a New York corporation,
incorporated in 1985, and is traded on The NASDAQ Global Market (“NASDAQ”) under
the symbol “BPSG”. The Company evaluates the performance of its segments and
allocates resources to them based on various factors, including prospects for
growth, return on investment, and return on revenue.
During the past several years the Company restructured nearly all of
its operations. In September 2007, the Company completed the sale of its
Municipal Capital Markets Group to DEPFA BANK plc (“DEPFA”). In June 2007, the
Company closed its Fixed Income Middle Markets Group. In April 2006, the Company
closed its Convertible Arbitrage Advisory Group. In June 2006, the Company
ceased operations in its Taxable Fixed Income division. In December 2004, the
Company closed its asset management operations in Sarasota, Florida and in
February 2005 sold its asset management operations in Albany, New York. In
August 2000, Broadpoint Capital divested its retail brokerage operation.
The operating results of the groups and divisions referred above are
reported as discontinued operations (see Note 25 of the Consolidated
Financial Statements).
23
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
On September 21, 2007, the Company closed the investment from
MatlinPatterson in which the Company received net proceeds of $45.8 million
from the sale of the Company’s common stock. Pursuant to the Investment
Agreement, MatlinPatterson purchased 41.5 million newly issued shares and
two co-investors received a total of 0.5 million newly issued shares which
represented approximately 71.7 percent and 0.8 percent, respectively,
of the issued and outstanding voting power of the Company immediately following
the closing of the investment transaction.
In March 2008, the Company and Broadpoint Capital completed its
hiring of 47 employees of the New Jersey-based Fixed Income division of BNY
Capital Markets, Inc. and the acquisition of certain related assets. The Company
has formed a new Debt Capital Markets group with the new employees that provide
sales and trading on a wide range of debt securities including bank debt,
investment grade debt, high-yield debt, treasuries, convertibles, distressed
debt, preferred debt and re-org equity securities.
On March 4, 2008, the Company closed a $20 million private
placement whereby investors purchased approximately 11.6 million shares of
common stock from the Company at $1.70 per share. A fund managed by MAST Capital
Management, LLC, a Boston-based investment manager that focuses on special
situations debt and equity investment opportunities, led the investment
purchasing 7.1 million of the approximately 11.6 million shares
issued.
On June 27, 2008, the Company entered into a Preferred Stock
Purchase Agreement with Mast Credit Opportunities I Master Fund Limited, a
Cayman Islands corporation (“Mast”), for the issuance and sale of
(i) 1,000,000 newly-issued unregistered shares of Series B Mandatory
Redeemable Preferred Stock of the Company, par value $1.00 per share (the
“Series B Preferred Stock”), and (ii) a warrant to purchase
1,000,000 shares of the Company’s common stock, par value $.01 per share,
at an exercise price of $3.00 per share, for an aggregate cash purchase price of
$25 million.
In October 2008, the Company completed the acquisition of American
Technology Research Holdings, Inc. (“Broadpoint AmTech”), the parent of American
Technology Research, Inc., a broker-dealer specializing in institutional
research, sales and trading in the information technology, cleantech and defense
areas. In connection with the reorganization of its legacy equities business,
Broadpoint recorded a charge in the third quarter of approximately
$1.8 million relating to compensation and other expenses.
On October 16, 2008, the Company completed the merger of two of
its principal broker-dealer subsidiaries, Broadpoint Capital, Inc. and
Broadpoint Securities, Inc. The two firms were merged into a single
broker-dealer under the name Broadpoint Capital, Inc. The Company believes that
the merger will increase efficiencies by enhancing the integration of services
and processes across the firm’s business lines.
On March 3, 2009, the Company announced that it agreed to
acquire Gleacher Partners, an internationally recognized financial advisory
boutique best known for advising major corporations in mergers and acquisitions.
Under the terms of the merger agreement, Broadpoint will pay the selling
stockholders of Gleacher Partners, $20 million in cash and issue
23 million shares of common stock subject to resale restrictions.
MatlinPatterson FA Acquisition LLC, Broadpoint’s majority shareholder, has
approved the issuance of the shares of Broadpoint common stock in the
transaction. At closing, the Company will change its name to Broadpoint Gleacher
Securities Group, Inc. See Part II — Item 9b. Other Information.
RESTRUCTURING
In 2007, the Company implemented a restructuring plan to properly
size the Company’s infrastructure with its then current level of activity. As a
result, the Company incurred approximately $4.3 million in restructuring
costs during 2008 and incurred $2.7 million in restructuring costs during
the fourth quarter of 2007. The plan included a reduction in IT and operations
support headcount, outsourcing the Company’s clearing operations, and
eliminating excess office space. The Company has completed its restructuring
plan to properly size its infrastructure (see Note 26 of the Consolidated
Financial Statements).
24
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
Business Environment in
2008
During the first half of 2008, economic growth slowed and the
U.S. entered a recession. The lessening of liquidity that began in 2007
accelerated during 2008 and the U.S. markets experienced unprecedented
challenges as credit contracted further, the downturn in economic growth
broadened, and a number of major financial institutions faced serious problems.
Concerns regarding future economic growth and corporate earnings, as well as
illiquidity in the credit markets created challenging conditions for the equity
markets which experienced significant broad-based declines, with equity indices
significantly lower at the end of 2008 as compared to the end of 2007. Fixed
income and equity markets experienced high levels of volatility, broad-based
declines in asset prices and further reduced levels of liquidity, particularly
in the fourth quarter of 2008. The impact of these events created extreme
uncertainty around company and asset values, creating a challenging environment
for investment banking advisory businesses and sharply narrowing opportunities
to distribute securities in the equity and debt capital markets.
The financial landscape has also been altered dramatically over the
course of the year with the bankruptcy of Lehman Brothers Holdings Inc.,
acquisitions and consolidations of major financial institutions, the Federal
Government assuming a conservatorship role of both the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association and the
conversion of Goldman Sachs Group, Inc. and Morgan Stanley into bank holding
companies. In early October 2008, the Emergency Economic Stabilization Act of
2008 was enacted, which, among other matters, enables the U.S. Treasury to
purchase mortgage-related and other trouble assets from U.S. financial
institutions. The U.S. Treasury has taken additional measures to provide
liquidity to the capital markets and the U.S. Federal Reserve reduced its
federal funds target rate to a range of 0 to 0.25%, its lowest level since 2003.
The yield on the 10-year
U.S. Treasury note declined to 2.25% at the end of 2008 from 3.91% at the
beginning of the year.
The results of our operations for 2008 reflect these challenging
market factors, which contributed to declining inventory valuations and reduced
levels of capital markets activity. Competitor consolidation and the
destabilization of the financial markets during these periods have conversely
had a positive impact on business prospects as we have seen new customer
activity across many of our businesses. However, a continuation of the volatile
markets and unfavorable economic conditions of 2008 could have a material impact
on our business and results of operations for the near term of 2009 and possibly
subsequent years.
Our financial performance is highly dependent on the environment in
which our businesses operate. Overall, during 2008, and continuing into 2009,
the macro business environment for many of our businesses was extremely
challenging, and there can be no assurance that these conditions will improve in
the near term.
25
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
RESULTS OF
OPERATIONS
Years Ended
December 31
2008
2007
2006
(In thousands of
dollars)
Revenues
Principal transactions
$
97,032
$
21,229
$
40,605
Commissions
6,529
4,666
11,386
Investment banking
8,296
8,127
26,643
Investment banking
revenue from related party
8,400
—
—
Investment gains
(losses)
(1,115
)
2,594
(7,602
)
Interest income
21,946
8,639
8,295
Fees and other
3,925
1,856
1,978
Total revenues
145,013
47,111
81,305
Interest expense
10,712
7,027
8,417
Net revenues
134,301
40,084
72,888
Expenses (excluding
interest)
Compensation and
benefits
111,678
41,286
76,351
Clearing, settlement
and brokerage costs
2,794
3,127
5,833
Communications and data
processing
9,245
7,827
9,273
Occupancy and
depreciation
6,259
6,559
9,154
Selling
4,152
4,157
4,013
Impairment
—
—
7,886
Restructuring
4,315
2,698
—
Other
10,664
6,055
7,819
Total expenses
(excluding interest)
149,107
71,709
120,329
Loss before income
taxes, discontinued operations and cumulative effect of an accounting
change
(14,806
)
(31,625
)
(47,441
)
Income tax expense
(benefit)
2,424
(4,703
)
(828
)
Loss from continuing
operations
(17,230
)
(26,922
)
(46,613
)
Income from
discontinued operations (net of taxes)
(132
)
7,460
2,205
Loss before cumulative
effect of an accounting change
(17,362
)
(19,462
)
(44,408
)
Cumulative effect of an
accounting change
—
—
427
Net loss
$
(17,362
)
$
(19,462
)
$
(43,981
)
Net interest income
(expense)
Interest income
21,946
8,639
8,295
Interest expense
10,712
7,027
8,417
Net interest income
(expense)
$
11,234
$
1,612
$
(122
)
26
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
2008 Financial
Overview
For the year ended December 31, 2008, net revenues from
continuing operations were $134.3 million, compared to $40.1 million
for the year ended December 31, 2007. The 235 percent increase in net
revenues was driven by increased commissions and principal transactions revenue
in Broadpoint’s Descap segment and the addition of the Debt Capital Markets
segment, which commenced operations in March 2008. Investment Banking revenue
and net interest income also improved in 2008 compared to the prior year. The
Company reported a loss from continuing operations of $17.2 million for the
year ended December 31, 2008 compared to the Company’s loss from continuing
operations of $26.9 million for the year ended December 31, 2007. Loss
per diluted share from continuing operations for the year ended
December 31, 2008 was $0.25 compared to a loss per diluted share of $0.98
for the year ended December 31, 2007. The Company reported a consolidated
net loss of $17.4 million for the year ended December 31, 2008,
compared to a consolidated net loss of $19.5 million for the year ended
December 31, 2007. The Company recognized a pre-tax gain on the sale of its
Municipal Capital Markets division of $7.9 million in 2007 as a component
of discontinued operations. Consolidated diluted loss per share for the year
ended December 31, 2008 was $0.25 compared to a consolidated loss per
diluted share of $0.71 for the year ended December 31, 2007.
Net Revenues
For the year ended December 31, 2008, net revenues from
continuing operations were $134.3 million, compared to $40.1 million
for the year ended December 31, 2007. Commissions and principal
transactions increased $77.7 million to $103.6 million from
$25.9 million due to an increase at Broadpoint Descap of $25.9 million
and $54.3 million generated by the Debt Capital Markets segment, which
commenced operations in March 2008, partially offset by a decrease in Equities
of $3.3 million. Investment Banking revenues increased 105 percent or
$8.6 million to $16.7 million in 2008. The Investment Banking segment
generated $12.9 million in revenues of which $10.2 million were due to
its Restructuring and Recapitalization group, which commenced operations in
February 2008. In addition, the Debt Capital Markets segment generated
$3.3 million in placement fees and the Equities segment generated
$0.4 million in investment banking fees for the year. Investment losses
primarily associated with the Company’s venture capital subsidiary were
$1.1 million compared to investment gains of $2.6 million for 2007.
Net interest increased $9.6 million or 597 percent to
$11.2 million due to higher inventory levels at Broadpoint Descap and lower
financing costs. Fees and other revenues of $3.9 million increased by
$2.1 million primarily due to an increase in payments received related to
equity research agreements.
Non-Interest
Expense
Non-interest expense increased $77.4 million, or
108 percent, to $149.1 million in the year ended December 31,2008.
Compensation and benefits expense increased 170 percent, or
$70.4 million, to $111.7 million in the year ended December 31,2008 due to an increase in net revenues of 235 percent.
Clearing, settlement, and brokerage costs were $2.8 million
representing a decrease of 11 percent in the year ended December 31,2008 compared to the prior year. The year-over-year decline was primarily due to
a decrease in equity trading volume that was partially offset by volume in the
Debt Capital Markets segment and increased volume in the Broadpoint Descap
segment.
Communications and data processing costs increased $1.4 million
or 18 percent in the year ended December 31, 2008 due to the addition
of the Debt Capital Markets segment and increased head count at the Broadpoint
Descap segment, which offset cost savings initiatives implemented during the
year. In addition, a
27
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
$0.6 million reserve related to services previously utilized by
the legacy equities business was established in the third quarter of 2008.
Occupancy and depreciation expense decreased $0.3 million or
5 percent in the year ended December 31, 2008.
Selling expense remained relatively unchanged in the year ended
December 31, 2008.
Other expense increased $4.6 million, or 76 percent, for
the year ended December 31, 2008. The increase was driven primarily by an
increase in legal and settlement expenses.
The Company reported an expense of $2.4 million for federal and
state income taxes for the year ended December 31, 2008
2007 Financial
Overview
For the year ended December 31, 2007, net revenues from
continuing operations were $40.1 million, compared to $72.9 million
for the year ended December 31, 2006. An improved performance in
investments gain (losses) was overshadowed by a decline in investment banking
revenues in the Equities and Investment Banking segments. In addition,
commissions and principal transactions revenues in the Equities segment and
Descap decreased. $2.7 million in expenses related to the Company’s
restructuring costs also negatively impacted the Company’s 2007 results. The
Company reported a loss from continuing operations of $26.9 million for the
year ended December 31, 2007 compared to the Company’s loss from continuing
operations of $46.6 million for the year ended December 31, 2006. Loss
per diluted share from continuing operations for the year ended
December 31, 2007 was $0.98 compared to a loss per diluted share of $3.08
for the year ended December 31, 2006. The Company reported a consolidated
net loss of $19.5 million for the year ended December 31, 2007,
compared to a consolidated net loss of $44.0 million for the year ended
December 31, 2006. The Company recognized a pre-tax gain on the sale of its
Municipal Capital Markets division of $7.9 million in 2007 as a component
of discontinued operations. Consolidated diluted loss per share for the year
ended December 31, 2007 was $0.71 compared to a consolidated loss per
diluted share of $2.90 for the year ended December 31, 2006.
Net Revenues
Net revenues decreased $32.8 million, or 45 percent, to
$40.1 million in 2007 led by a decline in investment banking revenue of
$18.5 million and principal transactions and commissions revenue of
$26.1 million. These losses were partially offset by an investment gain of
$2.6 million in 2007 compared to an investment loss of $7.6 million in
2006. A decrease in equity listed commission revenue resulted in a
59 percent decrease in commission revenue. Principal transaction revenue
decreased 48 percent due to a decrease in trading volume as a result of
declines in customer activities. Net interest income increased $1.7 million
for the year ended December 31, 2007 compared to the year ended
December 31, 2006, primarily as a result of an improvement in interest rate
spreads primarily in the Broadpoint Descap segment.
Non-Interest
Expense
Non-interest expense decreased $48.6 million, or
40 percent, to $71.7 million in the year ended December 31, 2007.
Compensation and benefits expense decreased 46 percent, or
$35.1 million, to $41.3 million in the year ended December 31,2007. The decrease was the result of a reduction in other compensation of
$22.3 million and salary expense of $8.0 million. The decline in other
compensation was directly related to a decrease in net revenue of
45 percent. The decline in salary expense was the result of a
26 percent decrease in average full
28
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
time headcount. Included in compensation and benefit expense for the
year ended December 31, 2007 is $2.4 million relating to the
restructuring plan discussed above. The Company completed its restructuring plan
to properly size its infrastructure in the third quarter of 2008.
Clearing, settlement, and brokerage costs were $3.1 million
representing a decrease of 46 percent in the year ended December 31,2007 compared to the prior year. The year-over-year decline was primarily due to
both a reduction in ECN expense of $1.5 million and transaction fee expense
of $0.6 million, as a result of a decrease in NASDAQ trading activity.
Communications and data processing costs decreased $1.4 million
or 16 percent in the year ended December 31, 2007. There was a
$0.8 million decline in data processing expense and a $0.6 million
decrease in market data services expense. Data processing expense was down in
equities due to lower trading volumes and additional pricing concessions from
the Company’s back-office vendor. A decrease in headcount of 26 percent
accounted for the decrease in market data services.
Occupancy and depreciation expense decreased $2.6 million or
28 percent in the year ended December 31, 2007. The decrease was due
to expenses related to office consolidations in the year ended December 31,2006 in which the Company incurred $1.8 million in charges as a result of
consolidating its office space in Albany, New York City, Boston and Greenwich,
CT along with incurring an additional $0.6 million in costs related to the
Company’s additional office space in New York City.
Selling expense increased 4 percent, or $0.1 million, in
the year ended December 31, 2007 as a result of a slight increase in travel
and entertainment and promotional expenses.
In the year ended December 31, 2006, the Company recorded an
impairment of its intangible assets including goodwill relating to Broadpoint
Securities of $7.9 million. The Company had no impairment in the year ended
December 31, 2007.
Other expense decreased $1.8 million, or 23 percent, for
the year ended December 31, 2007. The decrease was driven primarily by a
decline in legal expenses of $1.8 million relating to various legal
settlements during the year ended December 31, 2006.
The Company reported a benefit for federal and state income taxes of
$4.7 million from continuing operations for the year ended
December 31, 2007, an increase of $3.9 million from the year ended
December 31, 2006. Due to the sale and related discontinuance of the
Municipal Capital Markets division, the Company recognized income from
discontinued operations for the year ended December 31, 2007 of
$7.5 million. The Company had loss from continuing operations and continues
to have a full valuation allowance. Under the accounting for income tax rules
described in FASB Statement No. 109, the Company must record a benefit in
continuing operations to offset tax expense recorded in discontinued operations.
The Company recorded tax expense of $4.7 million in discontinued operations
for the year ended December 31, 2007.
Business
Highlights
For presentation purposes, net revenue within each of the businesses
is classified as commissions and principal transactions, investment banking,
investment gains (losses), net interest, and other. Commissions and principal
transactions includes commissions on agency trades and gain and losses from
sales and trading activities. Investment banking includes revenue generated from
capital raising transactions of equity and debt securities, fees for strategic
advisory, fees for restructuring and recapitalization services and valuations of
structured products. Investment gains (losses) reflects gains and losses on the
Company’s investment portfolio. Other revenue reflects management fees received
from the partnerships the Company manages and research fees. Net interest
includes interest income net of interest expense and reflects the effect of
funding rates on the
29
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
Company’s inventory levels. Net revenue presented within each
category may differ from that presented in the financial statements as a result
of differences in categorizing revenue within each of the revenue line items
listed below for purposes of reviewing key business performance.
Equities
2008
2007
2006
(In thousands of
dollars)
Net revenue
Commissions and
Principal Transactions
$
8,052
$
11,381
$
33,581
Investment Banking
434
1,039
4,817
Net Interest
8
8
9
Other
2,481
609
32
Total Net Revenue
$
10,975
$
13,037
$
38,439
Pre-Tax Contribution
$
(8,997
)
$
(12,286
)
$
(8,640
)
2008 vs. 2007
Net revenues in Equities decreased $2.1 million or
16 percent to $11.0 million in 2008. In 2008, equities represented
8 percent of consolidated net revenue compared to 33 percent in 2007.
Commissions and principal transactions revenue declined due, in part, to a
decrease in trading activity and a reduction in Equity trading and sales
personnel in anticipation of the Company’s acquisition of Broadpoint AmTech in
October. Approximately 54 percent of commissions and principal transactions
revenue for the full year was contributed by Broadpoint AmTech in the fourth
quarter. Equity Investment Banking revenues decreased 58 percent compared
to 2007. In the third quarter of 2008 the Company incurred $4.4 million in
costs associated with transitioning the legacy Equity sales and trading
operations to the Broadpoint AmTech platform. Closedown costs of approximately
$1.8 million related to reserves established for clearing, settlement, and
brokerage costs and communications and data processing services the Company had
contracts for, and other costs related to compensation and benefits. In addition
the legacy Equities business reported an operating loss of $2.6 million.
2007 vs. 2006
Net revenues in equities decreased $25.4 million or
66 percent to $13.0 million in 2007. In 2007, equities represented
33 percent of consolidated net revenue compared to 54 percent in 2006.
Equity commissions and principal transactions revenue decreased across all
products with net revenue down 67 percent compared to 2006. Compared to
2006, NASDAQ net revenue was down 69 percent to $7.5 million and
listed net revenue of $3.8 million represented a 63 percent decrease
relative to the prior year. Declines in customer activity and pressure on
overall commission rates for both listed and NASDAQ were partially offset by
improved trading loss ratios related to Market-making activities in both groups.
Investment banking net revenues decreased 78 percent versus the prior year
due to lower transaction volume and lower average fees per transaction.
30
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
Broadpoint
Descap
2008
2007
2006
(In thousands of
dollars)
Net revenue
Commissions and
Principal Transactions
$
41,083
$
15,176
$
18,146
Investment Banking
110
730
223
Net Interest
9,692
(667
)
(794
)
Other
31
25
(14
)
Total Net Revenue
$
50,916
$
15,264
$
17,561
Pre-Tax Contribution
$
21,076
$
2,757
$
(922
)
2008 vs. 2007
Broadpoint Descap net revenue increased 234 percent to
$50.9 million in 2008. Commissions and principal transactions revenue
increased $25.9 million or 171 percent compared to the prior year due
to increased trading volumes and an overall widening of spreads in their
markets. Net interest increased by $10.4 million due to decreased funding
rates and the allocation of additional capital that was utilized to increase net
inventory levels leading to higher interest income. Pre-tax contribution
increased $18.3 million or 664 percent due to the increase in net
revenues.
2007 vs. 2006
Broadpoint Descap net revenue declined 13 percent to
$15.3 million in 2007. Commissions and principal transactions revenue
decreased $3.0 million or 16 percent compared to the prior year due to
the impact of several large block transactions in the second quarter of 2006.
Investment banking revenue increased 227 percent while net interest expense
decreased $0.1 million to $0.7 million.
Debt Capital
Markets
2008
2007
2006
(In thousands of
dollars)
Net revenue
Commissions and
Principal Transactions
$
54,311
$
—
$
—
Investment Banking
3,297
—
—
Net Interest
1,634
—
—
Other
99
—
—
Total Net Revenue
$
59,341
$
—
$
—
Pre-Tax Contribution
$
5,887
$
—
$
—
2008 vs. 2007
The Debt Capital Markets segment commenced operations in March of
2008. The Debt Capital Markets segment provides sales and trading in a broad
range of debt securities.
31
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
Investment
Banking
2008
2007
2006
(In thousands of
dollars)
Net revenue
Commissions and
Principal Transactions
$
—
$
(95
)
$
—
Investment Banking
12,855
6,387
21,594
Net Interest
—
(5
)
16
Other
—
—
—
Total Net Revenue
$
12,855
$
6,287
$
21,610
Pre-Tax Contribution
$
171
$
(1,391
)
$
12,199
2008 vs. 2007
Investment Banking net revenue increased $6.6 million or
104 percent to $12.9 million in 2008. The revenues generated in 2008
primarily resulted from the activities of the Restructuring and Recapitalization
group which commenced operations in February of 2008. The Restructuring and
Recapitalization group completed one significant transaction with
MatlinPatterson which accounted for 58 percent of 2008 revenues.
2007 vs. 2006
Investment Banking net revenues decreased $15.3 million or
71 percent to $6.3 million versus the prior year due to lower
transaction volume and lower average fees per transaction.
Other
2008
2007
2006
(In thousands of
dollars)
Net revenue
Commissions and
Principal Transactions
$
115
$
(567
)
$
264
Investment Banking
—
(29
)
9
Investment Gains/
(Losses)
(1,115
)
2,594
(7,602
)
Net Interest
(100
)
2,276
647
Other
1,314
1,222
1,960
Total Net Revenue
$
214
$
5,496
$
(4,722
)
Pre-Tax Contribution
$
(32,943
)
$
(20,705
)
$
(50,078
)
2008 vs. 2007
Other net revenue decreased $5.3 million compared to 2007. Other
net revenue was negatively impacted by losses incurred on the valuation of the
Company’s investments in Broadpoint’s venture capital subsidiary. For the year
ended 2008, net interest expense was $0.1 million compared to net interest
income of $2.3 million for 2007 due to an increase in interest expense for
the mandatory redeemable preferred stock cash dividend that was partially offset
by the FATV management fee for managing the partnership. Pre-tax contribution
was negatively impacted by costs associated with the restructuring plan and
legal costs.
32
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
2007 vs. 2006
Net revenue increased $10.8 million compared to 2006 as a result
of a change in value related to the Company’s investment portfolio. The
improvement in pre-tax contribution was primarily the result of a
$10.2 million improvement in investment gains in 2007, a $7.9 million
impairment charge in 2006 and $6.8 million in retention expense recognized
in 2006. In 2007, the Company incurred an expense of $0.9 million due to
compensation and occupancy expenses relating to the movement of the Company’s
headquarters.
LIQUIDITY AND CAPITAL
RESOURCES
A substantial portion of the Company’s assets are liquid, consisting
of cash and assets that have historically been readily convertible into cash
such as our securities held in inventory. The majority of these assets are
financed by the Company’s clearing agents. The majority of the Company’s
securities positions in our trading accounts are readily marketable and actively
traded.
The level of assets and liabilities will fluctuate as a result of the
changes in the level of positions held to facilitate customer transactions and
changes in market conditions.
On September 14, 2007, the Company completed the asset sale to
DEPFA Bank plc (“DEPFA”) pursuant to which DEPFA acquired the Municipal Capital
Markets Group of the Company’s subsidiary, Broadpoint Capital, in connection
with which the Company recognized a pre-tax gain on the sale in the amount of
$7.9 million. On September 21, 2007, the Company also closed the
investment from MatlinPatterson in which the Company received net proceeds from
the sale of common stock of $45.8 million. Pursuant to the Investment
Agreement, MatlinPatterson received 41.5 million newly issued shares and
two co-investors received a total of 0.5 million newly issued shares which
represented approximately 71.7 percent and 0.8 percent, respectively
of the issued and outstanding voting power of the Company immediately following
the closing of the investment transaction.
On March 5, 2008the Company completed a $19.7 million
investment at $1.70 per share. A fund managed by MAST Capital Management, LLC
(“Mast”), a Boston-based investment manager that focuses on special situations
debt and equity investment opportunities, led the investment, purchasing
7.1 million of the approximately 11.6 million shares issued.
On June 27, 2008the Company entered into a Preferred Stock
Purchase Agreement with Mast for the issuance and sale of (i) 1,000,000
newly-issued unregistered shares of the Series B Preferred Stock and
(ii) a warrant to purchase 1,000,000 shares of the Company’s common
stock at an exercise price of $3.00 per share, for an aggregate cash purchase
price of $25 million. The Preferred Stock Purchase Agreement and the
Series B Preferred Stock include, among other things, certain negative
covenants and other rights with respect to the operations, actions and financial
condition of the Company and its subsidiaries so long as the Series B
Preferred Stock remains outstanding. Cash dividends of 10 percent per annum
must be paid quarterly on the Series B Preferred Stock, while an additional
dividend of 4 percent per annum accrues and is cumulative, if not otherwise
paid quarterly at the option of the Company. The Series B Preferred Stock
must be redeemed on or before June 27, 2012 (see Note 14 of the
Consolidated Financial Statements).
33
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
In 2007, the Company implemented a restructuring plan to properly
size the Company’s infrastructure with its then current level of activity. As a
result, the Company incurred approximately $2.7 million in restructuring
costs during the fourth quarter of 2007 and incurred an additional
$4.3 million in restructuring costs during of 2008. The plan included a
reduction in IT and operations support headcount, outsourcing the Company’s
clearing operations, and eliminating excess office space. The Company has
completed its restructuring plan to properly size its infrastructure.
On November 2, 2007, the Company entered into a Fifth Amendment
to Sub-Lease Agreement (the “Albany Fifth Amendment”) with Columbia 677, L.L.C.
(the “Albany Landlord”) pursuant to which the Company’s Sub-lease-Agreement with
the Landlord dated August 12, 2003 concerning the lease of certain space in
the building located at 677 Broadway, Albany, New York (the “Albany Premises”)
was amended. The Amendment provided that the Company was to surrender a total of
15,358 square feet (the “Surrender Premises”) of the Albany Premises, a
portion at a time, on or before three surrender dates: November 15, 2007,
December 15, 2007 and April 1, 2008. If the Company failed to vacate
the portion of the Surrender Premises on the applicable surrender dates, it
would owe the Landlord $1,667 for each day of such failure. The Company failed
to vacate 1,398 square feet of the Surrender Premises by April 1, 2008
and as a result began to incur the daily fee on such date. The Company vacated
such portion of the Surrender Premises on April 25, 2008, and paid the
Albany Landlord approximately $42,000. In consideration of the Landlord agreeing
to the surrender of the Surrender Premises, the Amendment provided that the
Company shall pay the Landlord a surrender fee equal to $1,050,000 payable in
three installments, all of which were paid as of June 30, 2008.
On June 19, 2008, the Company entered into a Sixth Amendment to
Sub-Lease Agreement amending a Sub-Lease Agreement dated August 12, 2003,
as previously amended, by and between the Company and the Albany Landlord.
Pursuant thereto and on certain conditions specified therein, the parties agreed
that Tenant shall be entitled to surrender the entire 12th floor of the
Building consisting of 6,805 square feet of space (the “12th Floor
Surrender Premises”), reducing Tenant’s rentable square footage of leased
property in the Building to 2,953 square feet. The Company vacated the
12th Floor Surrender Premises by June 30, 2008. In consideration
therefore the Company paid the Landlord $388,703. This amount is included in
Restructuring in the Company’s Statement of Operations.
On June 23, 2008, the Company entered into a Seventh Amendment
of Lease (the “NYC Amendment”), amending the Agreement of Lease dated
March 21,1996, as previously amended, by and between the Company and One
Penn Plaza LLC (“NYC Landlord”), a New York limited liability company, for the
lease of certain property located at One Penn Plaza, New York, New York.
Pursuant thereto and on certain conditions specified therein, the parties agree
that the term of the Lease for all of the premises currently leased by the
Company on the 41st Floor and a portion of the premises on the
40th Floor will expire on October 31, 2008, as provided under existing
lease terms, but that the term of the Company’s lease of the entire
42nd Floor and the remaining premises on the 40th Floor shall be
extended until March 31, 2021, subject to further renewal. Under the NYC
Amendment, the NYC Landlord will perform certain base building work, and will
also
34
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
provide a cash contribution of up to $1,582,848 towards the Company’s
improvements. At the Company’s election, and pursuant to certain conditions, the
Company may elect to convert a portion of such cash contribution (up to
$1,000,000) to a rent credit equal to 90 percent of the amount so
converted. In connection with the execution and delivery of the Amendment, the
Company is required to provide to NYC Landlord a security deposit in the amount
of $2,107,490, either as cash or a letter of credit, to secure the performance
of the Company’s obligations under the Lease. Under certain conditions, the
Company is entitled to reduce the security deposit to $1,208,708 on
April 1, 2014. An irrevocable standby letter of credit in favor of the NYC
Landlord was issued in the amount of $2,107,490 by the Bank of New York Mellon
on behalf of the Company.
On November 18, 2008, the Company entered into a Sublease (the
“SF Sublease”), by and between the Company and Jefferies & Company,
Inc. (“Subtenant”), a Delaware corporation, for the lease of 19,620 square
feet on the 24th floor at the building known as Post Montgomery Center, One
Montgomery Tower, San Francisco, California. The subleased premises were
originally leased by the Company from Post-Montgomery Associates (the “Master
Landlord”) pursuant to an Office Lease dated as of March 31, 2005. The term
of the SF Sublease commences on the earlier of (i) April 1, 2009 or
(ii) the date Subtenant opens for business in the subleased premises and
expires July 30, 2015; however, Subtenant’s obligation to pay rent does not
commence until July 1, 2009. Subtenant does not have any right to renew the
term of the SF Sublease. In connection with the execution and delivery of the SF
Sublease, and pursuant to the terms of a Consent to Sublease, Recognition
Agreement and Amendment to Lease, the Company is required to provide to Master
Landlord a security deposit in the amount of $338,981 in the form of an
irrevocable letter of credit (the “LOC”). Under certain conditions, the Company
has the right to reduce the LOC through January 1, 2015. The Company
arranged for such a letter of credit in favor of Landlord in the amount of
$338,981 issued by The Bank of New York Mellon.
On October 31, 2008, the Company entered into an Office Lease
(the “Tower 49 Lease”), by and between the Company and Kato International LLC,
(“KATO”) for the lease of 16,000 rental square feet consisting of the
31st floor of 12 East 49th Street, New York, New York10017. The term
of the Lease is for a term of ten years and two months, commencing on
November 1, 2008; however, the obligation to pay rent did not commence
until January 14, 2009. The Company has a one time right of early
termination as of December 31, 2013, upon the payment of a $900,000 early
termination fee and notice provided to the KATO not less than fifteen
(15) months prior to December 31, 2013. KATO will endeavor to provide
notice to the Company if any full floor above the 24th floor becomes
available for leasing until September 30, 2012. However, the Company has no
option, right of first refusal or other right as to same. In connection with the
execution and delivery of the Lease, the Company provided to KATO a security
deposit in the amount of $1,324,000.00 in the form of an irrevocable letter of
credit. Under certain conditions, the Company has the right to reduce the
security deposit by $220,667 on each of July 1, 2010, January 1, 2012
and July 1, 2013, but in no event shall the security deposit be reduced
below $662,000. The Company arranged for such a letter of credit in favor of
Landlord in the amount of $1,324,000 issued by The Bank of New York Mellon.
On March 3, 2009, the Company announced that it has agreed to
acquire Gleacher Partners, an internationally recognized financial advisory
boutique best known for advising major companies in mergers and acquisitions.
Under the terms of the merger agreement, Broadpoint will pay the selling
stockholders of Gleacher Partners $20 million and issue 23 million
shares of common stock subject to resale restrictions. MatlinPatterson FA
Acquisition LLC, Broadpoint’s majority shareholder, has approved the issuance of
the shares of Broadpoint common stock in the transaction. At closing, the
Company will change its name to Broadpoint Gleacher Securities Group, Inc. See
Part II — Item 9b. Other Information.
35
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
During the twelve months ended December 31, 2007, the Company
paid the remaining balance of the term loan of $10.6 million related to the
acquisition of Broadpoint Securities, Inc. pursuant to an agreement (the “Loan
Agreement”) entered into on August 6, 2007 with the Company’s lender and
lessor. The Company agreed to repay, upon closing of the DEPFA transaction,
obligations equal to 75 percent of the net proceeds received by the Company
and upon closing of the MatlinPatterson transaction to pay in full the remaining
balance of the loan. On September 14, 2007, upon the close of the DEPFA
transaction, the Company made a principal payment of $0.8 million pursuant
to the Agreement. On September 21, 2007, upon the close of the
MatlinPatterson transaction, the Company paid the remaining $9.8 million
balance of the term loan.
Regulatory
As of December 31, 2008, Broadpoint Capital Inc. and Broadpoint
AmTech., the Company’s two registered broker-dealer subsidiaries, were in
compliance with the net capital requirements of the Securities and Exchange
Commission. The net capital rules restrict the amount of a broker-dealer’s net
assets that may be distributed. Also, a significant operating loss or
extraordinary charge against net capital may adversely affect the ability of the
Company’s broker-dealer subsidiaries to expand or even maintain their present
levels of business and the ability to support the obligations or requirements of
the Company. As of December 31, 2008, Broadpoint Capital had net capital of
$26.3 million, which exceeded minimum net capital requirements by
$26.1 million, while Broadpoint AmTech had net capital of
$1.4 million, which exceeded minimum net capital requirements by
$1.1 million. Broadpoint Capital had been required and did report the level
of its net capital to its FINRA representative on a weekly basis. During the
third quarter of 2008, Broadpoint Capital was relieved from reporting these
amounts to its FINRA representative on such basis.
Derivatives
The Company utilizes various economic hedging strategies to actively
manage its market, credit and liquidity exposures. The Company also may purchase
and sell securities on a when-issued basis. At December 31, 2008, the
Company had no outstanding underwriting commitments, had not purchased or sold
any securities on a when-issued basis, and had entered into sale agreements on
to-be-announced (“TBA”) mortgage-backed securities in the amount of
$151.2 million and purchase agreements in the amount of $5.1 million.
Investments and
Commitments
As of December 31, 2008, the Company had a commitment to invest
up to an additional $1.3 million in the Partnership. The investment period
expired in July 2006, however, the general partner of the Partnership, FATV GP
LLC (the “General Partner”), may continue to make capital calls up through July
2011 for additional investments in portfolio companies and for the payment of
management fees. The Company intends to fund this commitment from operating cash
flow. The Partnership’s primary purpose is to provide investment returns
consistent with risks of investing in venture capital. In addition to the
Company, certain other limited partners of the Partnership are officers or
directors of the Company. The majority of the commitments to the Partnership are
from non-affiliates of the Company.
The General Partner is responsible for the management of the
Partnership, including among other things, making investments for the
Partnership. The members of the General Partner are George McNamee, a Director
of the Company, Broadpoint Enterprise Funding, Inc., a wholly-owned subsidiary
of the Company, and certain
36
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
other employees of FATV. Subject to the terms of the partnership
agreement, under certain conditions, the General Partner is entitled to share in
the gains received by the Partnership in respect of its investment in a
portfolio company.
As of December 31, 2008, the Company had an additional
commitment to invest up to $0.1 million in (EIF). The investment period
expired in July 2006, but the General Partner may continue to make capital calls
up through July 2011 for additional investments in portfolio companies and for
the payment of management fees. The Company anticipates that this will be funded
by the Company through operating cash flow.
On April 30, 2008, the Company entered into a Transition
Agreement (the “Transition Agreement”) with FATV, FA Technology Holding, LLC
(“NewCo”), Mr. McNamee, and certain other employees of FATV (such
individuals, collectively, the “FATV Principals”), to effect a restructuring of
the investment management arrangements relating to the Partnership, and the
formation of FA Technology Ventures III, L.P., a new venture capital fund
(“Fund III”). This restructuring will result in FATV ceasing to advise the
Partnership and the creation of a new investment advisory company (NewCo).
Fund III will be sponsored and managed by NewCo (which is independent of
the Company and owned by certain of the FATV Principals) and its subsidiaries.
The Company’s Audit Committee approved of the Transactions pursuant to its
Related Party Transactions Policy.
Concurrent with the first closing of Fund III (the “Trigger
Date”), FATV will assign all of its rights, interest, obligations and
liabilities as investment advisor to the Partnership to NewCo. FATV will
continue to operate consistent with current practice (operations, staffing and
expenses) for the purpose of performing its duties to the Partnership and the
Company will provide funding for such operations through the date that is the
earlier to occur of (i) the Trigger Date and (ii) December 31,2008.
Pursuant to the Transition Agreement, and subject to certain
conditions, the Company will make a capital commitment of $10 million to
Fund III (the “Broadpoint Commitment”) at the first closing of
Fund III at which the total commitments to Fund III (excluding the
Broadpoint Commitment) exceed a threshold amount. If such threshold is not met
at the first closing, the Broadpoint commitment shall be made at the closing at
which the threshold is met; provided that if such threshold is not reached by
June 30, 2009, the Company’s obligation to make the Broadpoint Commitment
shall terminate. The Company will also receive an equity interest in the general
partner of Fund III, subject to the making of the Broadpoint Commitment. In
addition, the Company will have the right to receive additional compensation for
capital commitments made to Fund III from certain investors introduced by
its affiliates.
It is also contemplated that, on the Trigger Date, each of the FATV
Principals will resign from FATV and/or
the Company, as the case may be. The Company has also agreed to assign to NewCo
the name “FA Technology.”
Although the Transition Agreement provides that the Company was no
longer obligated, as of January 1, 2009, to fund expenses related to
operations and staffing of the existing fund, or expenses related to
organization and marketing of Fund III, the Company has continued to fund
such expenses. The Transition Agreement provides that if the first closing of
Fund III does not occur on or before March 31, 2009, the parties’
rights and obligations under the Transition Agreement shall automatically
terminate, except as follows: (a) certain nonsolicitation obligations of
the FATV Principals shall continue and (b) upon the initial closing of any
subsequent venture capital fund sponsored by NewCo or any 4 of the 6 FATV
Principals before June 30, 2009, NewCo or such FATV Principals shall cause
NewCo or such subsequent fund to reimburse the Company for any expenses related
to the organization and marketing of Fund III funded by the Company.
Contingent
Consideration
On May 14, 2004, the Company acquired 100 percent of the
outstanding common shares of Descap Securities Inc., subsequently known as
Broadpoint Securities. Per the stock purchase agreement, the sellers
37
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
were to receive future contingent consideration based on the
following: For each of the three years ending May 31, 2005, May 31,2006 and May 31, 2007, if Broadpoint Securities’ Pre-Tax Net Income
(exclusive of certain intercompany charges, as defined) (i) is greater than
$10 million, The Company was to pay to the sellers an aggregate amount
equal to fifty percent (50%) of Broadpoint Securities’ Pre-Tax Net Income for
such period or (ii) is equal to or less than $10 million, the Company
was to pay them an aggregate amount equal to forty percent (40%) of Broadpoint
Securities’ Pre-Tax Net Income for such period. Based upon Broadpoint
Securities’ Pre-Tax Net Income from June 1, 2004 through May 31, 2005,
$2.2 million on contingent consideration was paid to the Sellers and from
June 1, 2005 through May 31, 2006, $1.0 million of contingent
consideration was paid to the Sellers on May 29, 2008. Based upon
Broadpoint Securities’ Pre-Tax Net Income from June 1, 2006 to May 31,2007, no contingent consideration was payable to the Sellers for this period.
On October 2, 2008the Company acquired 100 percent of the
outstanding common shares of American Technology Research Holdings, Inc.
(“AmTech”), subsequently known as Broadpoint AmTech. Per the stock purchase
agreement, the sellers were to receive future contingent consideration
consisting of approximately 100 percent of the profits earned by Broadpoint
AmTech in the fourth quarter of fiscal year 2008 and all of fiscal years 2009,
2010 and 2011, up to an aggregate of $15 million in profits. The Sellers
also will have the right to receive earn-out payments consisting of
50 percent of such profits in excess of $15 million. All such earn-out
payments will be paid 50 percent in cash and, depending on the recipient
thereof, either 50 percent in Company common stock, which will be subject
to transfer restrictions that will lapse ratably over the three years following
issuance, or 50 percent in restricted stock from the Incentive Plan,
subject to vesting based on continued employment with Broadpoint AmTech. Based
on the profits earned by Broadpoint AmTech in the fourth quarter of fiscal year
2008, $0.9 million of contingent consideration has been accrued at
December 31, 2008.
Contingent
Liabilities
On September 14, 2007, the Company consummated the sale of the
Municipal Capital Market Group of its subsidiary, Broadpoint Capital, Inc. to
DEPFA. In connection with such sale, the Company recognized a pre-tax gain on
sale in the amount of $7.9 million. Pursuant to the asset purchase
agreement, the Company was required to deliver an estimate of the accrued
bonuses at closing and a final accrued bonus calculation thirty days following
closing. The Company accrued the bonus consistent with the asset purchase
agreement. All items arising from the sale of the Municipal Capital Markets
Group were reflected in the Gain on Sale of Discontinued Operations. This
includes the closing bonuses paid to employees and the reversal of restricted
stock and deferred cash amortization as a result of the employees’ termination
of employment. On October 30, 2007, DEPFA provided the Company notice that
it was exercising its option pursuant to the agreement to appoint an independent
accounting firm to conduct a special audit of the final accrued bonus amount. On
June 26, 2008, DEPFA provided the Company notice that it was withdrawing
its dispute of the final accrued bonus amount.
Legal
Proceedings
From time to time the Company and its subsidiaries are involved in
legal proceedings or disputes. (See Part I — Item 3 — Legal
Proceedings). An adverse result or development in respect of these matters,
whether in settlement or as a result of litigation or arbitration, could
materially adversely affect the Company’s consolidated financial condition,
results of operations, cash flows and liquidity.
In addition, the securities industry is highly regulated. The Company
is subject to both routine and unscheduled regulatory examinations of our
business and investigations of securities industry practices by governmental
agencies and self-regulatory organizations. In recent years securities firms
have been subject to
38
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
increased scrutiny and regulatory enforcement activity. Regulatory
investigations can result in substantial fines being imposed on the Company.
Periodically the Company receives inquiries and subpoenas from the SEC, state
securities regulators and self-regulatory organizations. The Company does not
always know the purpose behind these communications or the status or target of
any related investigation. The Company’s responses to these communications have
in the past resulted in its being cited for regulatory deficiencies, although to
date these communications have not had a material adverse effect on its
business.
Intangible Assets and
Goodwill
Intangible assets consist predominantly of customer related
intangibles and goodwill related to the acquisitions of Broadpoint Securities,
Broadpoint AmTech, and the Debt Capital Markets Group. These intangible assets
were allocated to the reporting units within Broadpoint Securities Group, Inc.
pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”
Goodwill represents the excess cost of a business acquisition over the fair
value of the net assets acquired. In accordance with SFAS No. 142,
indefinite-life intangible assets and goodwill are not amortized. The Company
reviews its goodwill in order to determine whether its value is impaired on an
annual basis. In addition to annual testing, goodwill is also tested for
impairment at the time of a triggering event requiring re-evaluation, if one
were to occur. Goodwill is impaired when the carrying amount of the reporting
unit exceeds the implied fair value of the reporting unit. When available, the
Company uses recent, comparable transactions to estimate the fair value of the
respective reporting units. The Company calculates an estimated fair value based
on multiples of revenues, earnings and book value of comparable transactions.
However, when such comparable transactions are not available or have become
outdated, the Company uses Income and Market approaches to determine fair value
of the reporting unit. The Income approach applies a discounted cash flow
analysis based on management’s projections, while the Market approach analyzes
and compares the operating performance and financial condition of the reporting
unit with those of a group of selected publicly-traded companies that can be
used for comparison. However, changes in current circumstances or business
conditions could result in an impairment of goodwill. As required the Company
will continue to perform impairment and goodwill testing on an annual basis or
when an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount.
As of December 31, 2008, $23.3 million of goodwill and
$8.2 million of amortizable customer intangibles have been recorded on
Broadpoint Securities Group, Inc.’s financial statements. As a result of annual
impairment testing, the goodwill related to the acquisition of Broadpoint
Securities Inc. was determined not to be impaired. In 2007, as a result of the
annual impairment testing, the goodwill related to the acquisition of Broadpoint
Securities, Inc. was determined not to be impaired.
Tax Valuation
Allowance
At December 31, 2008, the Company had a valuation allowance of
$24.7 million compared to $27.0 million at December 31, 2007. The
valuation allowance was established as a result of weighing all positive and
negative evidence, including the Company’s history of cumulative losses over at
least the past three years and the difficulty of forecasting future taxable
income. As a result, the Company does not anticipate that the payment of future
taxes will have a significant negative impact on its liquidity and capital
resources. See Note 17 of the Consolidated Financial Statements.
OFF-BALANCE SHEET
ARRANGMENTS
Information concerning the Company’s off balance sheet arrangements
are included in the Contractual Obligations section which follows. Except as set
forth in such section, the Company has no off-balance sheet arrangements.
39
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
CONTRACTUAL
OBLIGATIONS
The following table sets forth these contractual obligations by
fiscal year:
Total
2009
2010
2011
2012
2013
Thereafter
All
Others
(In thousands of
dollars)
Operating leases (net
of sublease rental income)(1)
66,426
5,700
6,159
5,908
5,865
5,932
36,862
—
Partnership and
employee investment funds commitments(2)
1,400
1,400
—
—
—
—
—
—
Partnership transition
commitment(3)
10,000
10,000
—
—
—
—
—
—
Mandatory Redeemable
Preferred Stock(4)
37,484
2,500
2,500
2,500
29,984
—
—
—
Subordinated debt(5)
1,662
465
287
108
207
185
410
—
Liabilities from
unrecognized tax benefits(6)
3,600
—
—
—
—
—
—
3,600
Total
$
120,572
$
20,065
$
8,946
$
8,516
$
36,056
$
6,117
$
37,272
$
3,600
(1)
The Company’s headquarters and sales offices, and
certain office and communication equipment, are leased under
non-cancelable operating leases, certain of which contain escalation
clauses and which expire at various times through 2021(see Note 13 to
the Consolidated Financial Statements.)
(2)
The Company has a commitment to invest in FA Technology
Ventures L.P. (the “Partnership”) and an additional commitment to invest
in funds that invest in parallel with the Partnership (see “Note 13
to the Consolidated Financial Statements”).
(3)
In connection with the Transition Agreement the Company
entered into with FATV, FA Technology Holding, LLC, and the FATV
Principals, the Company has a commitment to invest $10 million in
Fund III, subject to certain conditions (see Note 13 to the
Consolidated Financial Statements).
(4)
In connection with the Series B Preferred Stock
Purchase Agreement on and effective June 27, 2008, the holders of
Series B Preferred Stock are entitled to receive cash dividend of
10 percent per annum, payable quarterly, as well as dividends at rate
of 4 percent per annum which accrue and are cumulative, if not
otherwise paid quarterly at the option of the Company. The Company is
required to redeem all of the Series B Preferred Stock on or before
June 27, 2012 at the Redemption Price. (see Note 14 to the
Consolidated Financial Statements.)
(5)
A select group of management and highly compensated
employees are eligible to participate in the Broadpoint Securities Group,
Inc. Deferred Compensation Plan for Key Employees (the “Key Employee
Plan”). The employees enter into subordinate loans with the Company to
provide for the deferral of compensation and employer allocations under
the Key Employee Plan. The accounts of the participants of the Key
Employee Plan are credited with earnings and/or losses based on the
performance of various investment benchmarks selected by the participants.
Maturities of the subordinated debt are based on the distribution election
made by each participant, which may be deferred to a later date by the
participant. As of February 28, 2007, the Company no longer permits
any new amounts to be deferred under the Key Employee
Plan.
40
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
(6)
At December 31, 2008, the Company had a reserve for
unrecognized tax benefits including related interest of $3.6 million.
The Company is unable at this time to estimate the periods in which
potential cash outflows relating to these liabilities would occur because
the timing of the cash flows are dependent upon audit by the relevant
taxing authorities. The Company presently has an ongoing audit with the
State of New York. Management does not expect any significant change in
unrecognized tax benefits in the next twelve months.
CRITICAL ACCOUNTING
POLICIES
The following is a summary of the Company’s critical accounting
policies. For a full description of these and other accounting policies, see
Note 1 of the Consolidated Financial Statements. The Company believes that
of its significant accounting policies, those described below involve a high
degree of judgment and complexity. These critical accounting policies require
estimates and assumptions that affect the amounts of assets, liabilities,
revenues and expenses reported in the consolidated financial statements. Due to
their nature, estimates involve judgment based upon available information.
Actual results or amounts could differ from estimates and the difference could
have a material impact on the consolidated financial statements. Therefore,
understanding these policies is important in understanding the reported results
of operations and the financial position of the Company.
Valuation of Securities and Other
Assets
Substantially all financial instruments are reflected in the
consolidated financial statements at fair value or amounts that approximate fair
value, including cash, securities purchased under agreements to resell,
securities owned, investments and securities sold but not yet purchased.
Unrealized gains and losses resulting from valuing investments at market value
or fair value as determined by management are included as revenues from
investment gains (losses). Proprietary securities transactions in regular-way
trades are recorded on the trade date, as if they had settled. Profit and loss
arising from all securities transactions entered into for the account and risk
of the Company are recorded on a trade date basis. Customers’ securities
transactions are reported on a settlement date basis with related commission
income and expenses reported on a trade date basis. Equity securities owned and
equity securities sold, but not yet purchased are comprised of United States
equity securities and are valued at market value based on quoted market prices.
Fixed income securities owned and fixed income securities sold but not yet
purchased, are valued using a variety of inputs, including observable market
inputs when available. The Company utilizes observable market factors in
determining fair value, Management also utilizes benchmark yields, reported
trades for comparable trade sizes, issuer spreads, two sided markets, benchmark
securities, bids and offers. These inputs relate either directly to the
financial asset being evaluated or indirectly to a similar security (for
example, another bond of the same issuer or a bond of a different issuer in the
same industry with similar maturity, terms and conditions). Additionally for
certain mortgage backed securities, management also considers various
characteristics such as issuer, underlying collateral, prepayment speeds, cash
flows and credit ratings. Management considers these pricing methodologies
consistent with the assumptions made by other market participants in valuing
similar financial assets. For investments in illiquid and privately held
securities that do not have readily determinable fair values, the Company’s
estimate of fair value is generally reflected as our original cost basis unless
the investee has raised additional debt or equity capital, and we believe that
such a transaction, taking into consideration differences in the terms of
securities, is a better indicator of fair value; or we believe the fair value is
less than our original cost basis. All of our investments are evaluated
quarterly for changes in fair value. Factors that have an impact on our analysis
include subjective assessments about a fair market valuation of the investee,
including but not limited to assumptions regarding the expected future financial
performance of the investee and our assessment of the future prospects of the
investee’s business model. Securities owned and investments
41
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
include, at December 31, 2008 and 2007, $15.4 million and
$16.9 million, respectively, of private equity securities related to the
venture capital funds managed by FATV.
Intangible Assets and
Goodwill
Intangible assets consist predominantly of customer related
intangibles and goodwill related to the acquisitions of Broadpoint Securities,
Broadpoint AmTech, and the Debt Capital Markets Group. These intangible assets
were allocated to the reporting units within Broadpoint Securities Group, Inc.
pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”
Goodwill represents the excess cost of a business acquisition over the fair
value of the net assets acquired. In accordance with SFAS No. 142,
indefinite-life intangible assets and goodwill are not amortized. The Company
reviews its goodwill in order to determine whether its value is impaired on an
annual basis. In addition to annual testing, goodwill is also tested for
impairment at the time of a triggering event requiring re-evaluation, if one
were to occur. Goodwill is impaired when the carrying amount of the reporting
unit exceeds the implied fair value of the reporting unit. When available, the
Company uses recent, comparable transactions to estimate the fair value of the
respective reporting units. The Company calculates an estimated fair value based
on multiples of revenues, earnings and book value of comparable transactions.
However, when such comparable transactions are not available or have become
outdated, the Company uses Income and Market approaches to determine fair value
of the reporting unit. The Income approach applies a discounted cash flow
analysis based on management’s projections, while the Market approach analyzes
and compares the operating performance and financial condition of the reporting
unit with those of a group of selected publicly-traded companies that can be
used for comparison. However, changes in current circumstances or business
conditions could result in an impairment of goodwill. As required the Company
will continue to perform impairment and goodwill testing on an annual basis or
when an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount Intangible
assets are tested for impairment whenever events or circumstance suggest that
the carrying amount of an asset is not recoverable and the carrying amount
exceeds the fair value of the intangible asset.
Contingent
Liabilities
The Company is subject to contingent liabilities, including judicial,
regulatory and arbitration proceedings, tax and other claims. The Company
records reserves related to legal and other claims in “accrued expenses.” The
determination of these reserve amounts requires significant judgment on the part
of management. Management considers many factors including, but not limited to:
the amount of the claim; the amount of the loss, if any incurred by the other
party, the basis and validity of the claim; the possibility of wrongdoing on the
part of the Company; likely insurance coverage; previous results in similar
cases; and legal precedents and case law. Each legal proceeding is reviewed with
counsel in each accounting period and the reserve is adjusted as deemed
appropriate by management. Any change in the reserve amount is recorded in the
consolidated financial statements and is recognized as a charge/credit to
earnings in that period. The assumptions of management in determining the
estimates of reserves may prove to be incorrect, which could materially affect
results in the period the claims are ultimately resolved.
Refer to Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital
Resources — Consideration” for details on the liability for contingent
consideration related to the acquisition of Descap and Broadpoint AmTech.
Risks and
Uncertainties
The Company also records reserves or allowances for doubtful accounts
related to receivables. Receivables at the broker/dealers are generally
collateralized by securities owned by the brokerage clients. Therefore,
42
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
when a receivable is considered to be impaired, the amount of the
impairment is generally measured based on the fair value of the securities
acting as collateral, which is measured based on current prices from independent
sources such as listed market prices or broker/dealer price quotations.
The Company also makes loans to employees for recruiting and
retention purposes. The Company provides for a specific reserve on these
receivables if the employee is no longer associated with the Company and it is
determined that it is probable the amount will not be collected. At
December 31, 2008, the receivable from employees for recruiting and
retention purposes was $3.9 million.
Income
Taxes
Income tax expense is recorded using the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between amounts reported for
income tax purposes and financial statement purposes, using current tax rates. A
valuation allowance is recognized if it is anticipated that some or all of a
deferred tax asset will not be realized.
The Company must assess the likelihood that its deferred tax assets
will be recovered from future taxable income and, to the extent that the Company
believes that recovery is not likely, it must establish a valuation allowance.
Significant management judgment is required in determining any valuation
allowance recorded against our net deferred tax assets. The Company has recorded
a valuation allowance as a result of uncertainties related to the realization of
its net deferred tax asset, at December 31, 2008, of approximately
$24.7 million.
Significant judgment is required in determining income tax provisions
under Statement of Financial Accounting Standards No. 109 “Accounting for
Income Taxes” (SFAS No. 109) and in evaluating uncertain tax
positions. The Company recognizes tax benefits from uncertain tax positions only
when positions meet the minimum probability threshold, as defined by FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes”
(FIN 48), which is a tax position that is more likely than not to be
sustained upon examination by the applicable taxing authority. In the normal
course of business, the Company and its subsidiaries are examined by various
federal, state and foreign tax authorities. The Company regularly assesses the
potential outcomes of these examinations and any future examinations for the
current or prior years in determining the adequacy of the Company’s provision
for income taxes. The Company presently has an ongoing audit with the State of
New York.
In the event actual results differ from these estimates or we adjust
these estimates in future periods, we may need to adjust our valuation allowance
which could materially impact our financial position and results of operations.
The Company’s continuing practice is to recognize interest and
penalties related to income tax matters as a component of income tax.
Securities Issued for
Services
Options: The
Company granted incentive and nonqualified stock options periodically to certain
employees. The options are granted at an exercise price equal to the fair value
of the underlying shares at the date of grant, they generally vest over a
maximum of 5 years following the date of grant, and they have a term of six
to ten years. Effective January 1, 2006, the Company adopted
FAS 123(R).
43
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
Additional information related to stock options is presented in
Note 16 in the Consolidated Financial Statements.
Restricted Stock
Awards/Restricted Stock Units: Restricted stock awards
under the plan have been valued at the market value of the Company’s common
stock as of the grant date and are amortized over the period in which the
restrictions are outstanding, which is typically 3-5 years. The Company’s
2007 Incentive Compensation Plan (the “Incentive Plan”) also allows for grants
of restricted stock units. Restricted stock units give a participant the right
to receive fully vested shares at the end of a specified deferral period.
Restricted stock units are generally subject to forfeiture conditions similar to
those of the Company’s restricted stock awards granted under its other stock
incentive plans historically. One advantage of restricted stock units, as
compared to restricted stock, is that the period during which the award is
deferred as to settlement can be extended past the date the award becomes
non-forfeitable, allowing a participant to hold an interest tied to common stock
on a tax deferred basis. Prior to settlement, restricted stock units carry no
voting or dividend rights associated with the stock ownership.
NEW ACCOUNTING
STANDARDS
In March 2008, the FASB issued FASB 161, “Disclosures about
Derivative Instruments and Hedging Activities” (“FASB 161”). FASB 161 amends and
expands the disclosure requirements of FASB 133, “Accounting for Derivative
Instruments and Hedging Activities”, and requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair values and amounts of gains and losses on derivative contracts and
disclosures about credit-risk-related contingent features in derivative
agreements. FASB 161 is effective for the fiscal years and interim periods
beginning after November 15, 2008. Since FASB 161 requires additional
disclosures concerning derivatives and hedging activities, the adoption of FASB
161 will not affect the Company’s consolidated statement of financial condition
and results of operations.
In April of 2008, the FASB issued FSP 142-3, “Determination of the Useful
Life of Intangible Assets” (FSP 142-3). FSP 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset. The
effective date for FSP 142-3 is
for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of FSP No. 142-3 on the consolidated statement
of financial condition and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (SFAS No. 162).
SFAS No. 162 sets forth the level authority attributed to a given
accounting pronouncement. SFAS No. 162 contains no specific disclosure
requirements. The effective date for implementation has yet to be determined.
In May 2008, the FASB issued SFAS No. 163, “Accounting for
Financial Guarantee Contracts” (SFAS No. 163). SFAS No. 163
requires disclosure of insurance enterprise’s risk-management activities. The
effective date for SFAS No. 163 is for fiscal years beginning after
December 15, 2008. SFAS No. 163 is not applicable to the Company.
In June 2008, FASB issued EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (EITF 03-06-1). EITF 03-06-1 applies to the calculation
of earnings per share under FASB No. 128 “Earnings Per Share” for
share-based payment awards with rights to dividends or dividend equivalents.
Unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The effective date for EITF 03-6-1 is for fiscal years
beginning after December 15, 2008. The Company is currently assessing the
impact of EITF 03-6-1 on the
consolidated statement of financial condition and results of operations.
44
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value
of a Financial Asset When the Market for that Asset is not Active” (“FSP FAS 157-3”). FSP FAS 157-3 is consistent with the joint
press release the FASB issued with the Securities and Exchange Commission on
September 30, 2008, which provides general clarification guidance on
determining fair value under FASB 157 when markets are inactive. FSP FAS 157-3 specifically addresses the use
of judgment in determining whether a transaction in a dislocated market
represents fair value, the inclusion of market participant risk adjustments when
an entity significantly adjusts observable market data based on unobservable
inputs, and the degree of reliance to be placed on broker quotes or pricing
services. FSP FAS 157-3 was
effective October 10, 2008 and is not expected to have a material affect on
our consolidated financial statements.
In December 2007, the FASB issued FASB 141 (revised 2007), Business
Combinations (“FASB 141R”). Under FASB 141R, an entity is required to recognize
the assets acquired, liabilities assumed, contractual contingencies and
contingent consideration measured at their fair value at the acquisition date
for any business combination consummated after the effective date. It further
requires that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008.
Accordingly, we will apply the provisions of FASB 141R to business combinations
occurring after January 1, 2009. Adoption of FASB 141R will not affect our
consolidated financial statements, but may have an effect on accounting for
future business combinations. One exception to the prospective application of
SFAS 141R relates to accounting for income taxes associated with business
combinations that closed prior to January 1, 2009. Once the purchase
accounting measurement period closes for these acquisitions, any further
adjustments to any valuation allowances or liabilities for uncertain tax
positions recorded as part of these business combinations will impact income tax
expense.
In December 2007, the FASB issued FASB 160, Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51
(“FASB 160”). FASB 160 requires an entity to clearly identify and present
ownership interests in subsidiaries held by parties other than the entity in the
consolidated financial statements within the equity section but separate from
the entity’s equity. It also requires the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the Consolidated Statement of Earnings;
changes in ownership interest be accounted for similarly, as equity
transactions; and when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary and the gain or loss
on the deconsolidation of the subsidiary be measured at fair value. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and shall be applied prospectively,
except for the presentation and disclosure requirements, which shall be applied
retrospectively for all periods presented and is not expected to have a material
affect on our consolidated financial statements.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). FSP
FAS 140-4 and FIN 46(R)-8
require public entities to provide additional disclosures about transfers of
financial assets and require public enterprises to provide additional
disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 were
adopted for our year end consolidated financial statements as of
December 31, 2008 and did not affect our financial condition, results of
operations or cash flows as they requires only additional disclosures.
Item 7A.
Quantitative and Qualitative
Disclosures about Market
Risk
MARKET RISK
Market risk generally represents the risk of loss that may result
from the potential change in the value of a financial instrument as a result of
fluctuations in interest rates and equity prices, changes in the implied
45
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
volatility of interest rates and equity prices and also changes in
the credit ratings of either the issuer or its related country of origin. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company’s market risk management procedures
extends beyond derivatives to include all market-risk-sensitive financial
instruments. The Company’s exposure to market risk is directly related to its
role as a financial intermediary in customer-related transactions and to its
proprietary trading.
The Company trades U.S. Treasury bills, notes, and bonds;
U.S. Government agency notes and bonds; mortgage-backed securities, and
corporate obligations. The Company is also an active market maker in the NASDAQ
equity markets. In connection with these activities, the Company may be required
to maintain inventories in order to facilitate customer transactions. In connection with
some of these activities, the Company attempts to mitigate its exposure to such
market risk by entering into economic hedging transactions, which may include
U.S. Government and federal agency securities and TBA’s.
The following table categorizes the Company’s market risk sensitive
financial instruments by type of security and maturity date, if applicable
(equity securities and other investments with no maturity are being shown in the
table under 2009). The fair value of securities are shown net of long and short
positions.
Fair value of interest
rate sensitive financial instruments and notional amount of derivatives
$
21,723
$
(2,947
)
$
7,203
$
3,649
$
386
$
442,570
$
472,584
(1)
Investments exclude the consolidation of the Employee
Investment Fund in the amount of $1.1 million (see Note 7 to the
Consolidated Financial Statements).
(2)
TBA contracts have a maturity of two to three months.
The underlying mortgage pools maturity is shown in the
table.
The following is a discussion of the Company’s primary market risk
exposures as of December 31, 2008, including a discussion of how those
exposures are currently managed.
Interest Rate
Risk
Interest rate risk is a consequence of maintaining inventory
positions and trading in interest-rate-sensitive financial instruments. These
financial instruments include corporate debt securities, mortgage-backed and
asset-backed securities, government securities and government agency securities.
In connection with trading
46
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
activities, the Company exposes itself to interest rate risk, arising
from changes in the level or volatility of interest rates or the shape and slope
of the yield curve. The Company’s fixed income activities also expose it to the
risk of loss related to changes in credit spreads. Our exposure to residential
mortgage-backed agency securities is reduced through the forward sale of such
TBA contracts as represented by the notional amount of derivatives.
A sensitivity analysis has been prepared to estimate the Company’s
exposure to interest rate risk of its net inventory positions. The fair market
value of these securities included in the Company’s inventory at
December 31, 2008 was $602.8 million and $111.2 million at
December 31, 2007. Interest rate risk is estimated as the potential loss in
fair value resulting from a hypothetical one-half percent increase in interest
rates. At December 31, 2008, the potential change in fair value using a
yield to maturity calculation and assuming this hypothetical change, was
$31.9 million and at December 31, 2007 it was $5.8 million. The
actual risks and results of such adverse effects may differ substantially.
Equity Price
Risk
The Company does not currently make markets in equity securities, but
is exposed to equity price risk to the extent it holds equity securities in
inventory. Equity price risk results from changes in the level or volatility of
equity prices, which affect the value of equity securities or instruments that
derive their value from a particular stock. The Company attempts to reduce the
risk of loss inherent in its inventory of equity securities by monitoring those
security positions throughout each day.
Marketable equity securities included in the Company’s inventory,
which were recorded at a fair value of $0.7 million in securities owned at
December 31, 2008 and $4.1 million in securities owned at
December 31, 2007, have exposure to equity price risk. This risk is
estimated as the potential loss in fair value resulting from a hypothetical
10 percent adverse change in prices quoted by stock exchanges and amounts
to $0.1 million at December 31, 2008 and $0.4 million at
December 31, 2007. The Company’s investment portfolio excluding the
consolidation of the Employee Investment Fund (see Note 7 to the
Consolidated Financial Statements) at December 31, 2008 and 2007, had a
fair market value of $14.3 million and $15.4 million, respectively.
Equity price risk is also estimated as the potential loss in fair value
resulting from a hypothetical 10 percent adverse change in equity security
prices or valuations and for the Company’s investment portfolio excluding the
consolidation of the Employee Investment Funds amounted to $1.4 million at
year-end 2008 and $1.5 million at year-end 2007. There can be no assurance
that the Company’s actual losses due to its equity price risk will not exceed
the amounts indicated above. The actual risks and results of such adverse
effects may differ substantially.
Prepayment
Risk
Prepayment risk, which is related to the interest rate risk, arises
from the possibility that the rate of principal repayment on mortgages will
fluctuate, affecting the value of mortgage-backed securities. Prepayments are
the full or partial repayment of principal prior to the original term to
maturity of a mortgage loan and typically occur due to refinancing of mortgage
loans. Prepayment rates on mortgage-related securities vary from time to time
and may cause changes in the amount of the Company’s net interest income and the
effectiveness of TBA economic hedging. Prepayments of adjustable-rate mortgage
loans usually can be expected to increase when mortgage interest rates fall
below the then-current interest rates on such loans and decrease when mortgage
interest rates exceed the then-current interest rate on such loans, although
such effects are not predictable. Prepayment experience also may be affected by
the conditions in the housing and financial markets, general economic conditions
and the relative interest rates on fixed-rate and adjustable-rate mortgage loans
underlying mortgage-backed securities. The purchase prices of mortgage-backed
securities are generally based upon assumptions regarding the expected amounts
and rates of prepayments.
47
BROADPOINT SECURITIES GROUP,
INC.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — (Continued)
CREDIT RISK
The Company is engaged in various trading and brokerage activities
whose counter parties primarily include broker-dealers, banks, and other
financial institutions. In the event counter parties do not fulfill their
obligations, the Company may be exposed to risk. The risk of default depends on
the credit worthiness of the counter party or issuer of the instrument. The
Company seeks to control credit risk by following an established credit approval
process, monitoring credit limits, and requiring collateral where it deems
appropriate.
The Company purchases debt securities and may have significant
positions in its inventory subject to market and credit risk. In order to
control these risks, security positions are monitored on at least a daily basis.
Should the Company find it necessary to sell such a security, it may not be able
to realize the full carrying value of the security due to the size of the
position sold.
The Company’s affiliates’ customers’ and principal securities
transactions are cleared through third party clearing agreements on a fully
disclosed basis. Under these agreements, the clearing agents settle these
transactions on a fully disclosed basis, collect margin receivables related to
these transactions, monitor the credit standing and required margin levels
related to these customers and, pursuant to margin guidelines, require the
customer to deposit additional collateral with them or to reduce positions, if
necessary.
In the normal course of business the Company guarantees certain
service providers, such as clearing and custody agents, trustees, and
administrators, against specified potential losses in connection with their
acting as an agent of, or providing services to, the Company or its affiliates.
The maximum potential amount of future payments that the Company could be
required to make under these indemnifications cannot be estimated. However, the
Company believes that it is unlikely it will have to make material payments
under these arrangements and has not recorded any contingent liability in the
consolidated financial statements for these indemnifications.
OPERATING RISK
Operating risk is the potential for loss arising from limitations in
the Company’s financial systems and controls, deficiencies in legal
documentation and the execution of legal and fiduciary responsibilities,
deficiencies in technology and the risk of loss attributable to operational
problems. These risks are less direct than credit and market risk, but managing
them is critical, particularly in a rapidly changing environment with increasing
transaction volumes. In order to reduce or mitigate these risks, the Company has
established and maintains an internal control environment that incorporates
various control mechanisms at different levels throughout the organization and
within such departments as Finance, Accounting, Operations, Legal, Compliance
and Internal Audit. These control mechanisms attempt to ensure that operational
policies and procedures are being followed and that the Company’s various
businesses are operating within established corporate policies and limits.
OTHER RISKS
Other risks encountered by the Company include political, regulatory
and tax risks. These risks reflect the potential impact that changes in local
laws, regulatory requirements or tax statutes have on the economics and
viability of current or future transactions. In an effort to mitigate these
risks, the Company seeks to review new and pending regulations and legislation
and their potential impact on its business. Refer to Item 1A for other risk
factors.
48
Item 8.
Financial Statements and
Supplementary Data
Index to Financial Statements and
Supplementary Data
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Stockholders of
Broadpoint Securities Group, Inc.:
In our opinion, the consolidated financial statements listed in the
index appearing under 15(a)(1) present fairly, in all material respects, the
financial position of Broadpoint Securities Group, Inc. at December 31,2008 and December 31, 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As disclosed in footnote 17 to the consolidated financial statements,
as of the beginning of 2007, the Company adopted Financial Accounting Standards
Board Interpretation No. 48 — Accounting for Uncertainty in Income
Taxes.
Securities sold, but not
yet purchased, at fair value
15,228
10,499
Accounts payable
2,172
2,918
Accrued compensation
31,939
13,214
Accrued expenses
6,178
6,013
Mandatory redeemable
preferred stock debt
24,187
—
Total Liabilities
594,319
184,184
Commitments and
Contingencies
Temporary capital
—
104
Subordinated debt
1,662
2,962
Stockholders’ Equity
Preferred stock;
$1.00 par value; authorized 1,500,000 shares as of
December 31, 2008; issued 1,000,000 (Mandatory Redeemable)
Common stock;
$.01 par value; authorized 100,000,000 shares as of
December 31, 2008, and December 31, 2007, respectively; issued
81,556,246 and 59,655,940 shares, respectively; and outstanding
79,829,492 and 57,898,259 shares, respectively
Net cash provided
by(used in) financing activities
42,431
(100,468
)
(43,087
)
(Decrease) increase in
cash and cash equivalents
$
(24,370
)
$
27,555
$
2,266
Cash and cash equivalents
at beginning of the year
31,747
4,192
1,926
Cash and cash equivalents
at the end of the year
$
7,377
$
31,747
$
4,192
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Cash paid (received) during
the year for:
Income tax payments
$
105
$
319
$
144
Interest payments
$
12,130
$
14,470
$
16,057
Acquisitions:
Fair value of assets
acquired, including goodwill and intangibles
$
21,555
$
—
$
—
Liabilities assumed
(6,710
)
—
—
Stock issued
(4,845
)
—
—
Fees incurred in
conjunction with acquisition
385
Cash paid for
acquisition
$
10,385
$
—
$
—
Cash acquired in
acquisition
(4,910
)
—
—
Net cash paid for
acquisition
$
5,475
$
—
$
—
NON CASH
INVESTING AND FINANCING ACTIVITIES
In 2008, 2007 and 2006, the Company entered into capital leases for
office and computer equipment totaling approximately $0.0 million,
$0.0 million and $0.2 million, respectively.
During the years ended December 31, 2008, 2007 and 2006, the
Company converted $0.0 million, $0.0 and $0.2 million, respectively of
accrued compensation to subordinated debt.
During the year ended December 31, 2008, Goodwill increased
$5.9 million and amortizable Intangible assets by $7.4 million for the
acquisition of American Technology Holdings, Inc.
During the years ended December 31, 2006, Intangible assets
increased $1.0 million, due to additional consideration payable at
December 31, 2006 to the sellers of Descap Securities, Inc.
As of December 31, 2008, 2007 and 2006, the Company acquired
$0.2 million, $0.1 million and $0.0 million in office equipment
and leasehold improvements where the obligation related to this acquisition is
included in accounts payable.
During the years ended December 31, 2008, 2007 and 2006, the
Company distributed $0.6 million, $1.0 million and $1.0 million,
respectively, of the Company’s stock from the employee stock trust to satisfy
deferred compensation liabilities payable to employees (see Note 16).
During the year ended December 31, 2006, the Company reversed a
$1.5 million rent accrual related to the surrender of one of its office
leases.
Refer to Note 18 for non-cash financing activities related to
restricted stock.
Refer to Note 7 for non-cash investing activities related to the
Employee Investment Fund.
The accompanying notes are an integral part of these consolidated
financial statements.
55
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1.
Significant Accounting
Policies
Organization and Nature of
Business
The consolidated financial statements include the accounts of
Broadpoint Securities Group, Inc., its wholly-owned subsidiaries (the
“Company”), and Employee Investment Funds (see Note 7). Broadpoint Capital
Inc. (“Broadpoint Capital”) is registered with the Securities and Exchange
Commission (“SEC”) and is a member of various exchanges and the Financial
Industry Regulatory Authority (“FINRA”). American Technology Research Holdings,
Inc. (“Broadpoint AmTech”), which was acquired by the Company in 2008, is the
parent company of American Technology Research, Inc., a broker-dealer registered
with the SEC and is a member of FINRA. The Company’s primary business is
securities brokerage for institutional customers primarily in the United States.
The Company also provides investment-banking services to corporations and
engages in market making and trading of corporate, government and asset backed
securities primarily in the United States. Another of the Company’s subsidiaries
is FA Technology Ventures Corporation (“FATV”) which manages private equity
funds, providing venture financing to emerging growth companies primarily in the
United States. All significant inter-company balances and transactions have been
eliminated in consolidation.
On October 16, 2008the Company completed the merger of two of
its principal broker-dealer subsidiaries, Broadpoint Capital and Broadpoint
Securities, Inc. The two firms were merged into a single broker-dealer under the
name Broadpoint Capital, Inc.
In March 2008, the Company and Broadpoint Capital completed its
hiring of 47 employees of the New Jersey-based Fixed Income division of BNY
Capital Markets, Inc. and the acquisition of certain related assets. The Company
has formed a new Debt Capital Markets group with the new employees that provide
sales and trading on a wide range of debt securities including bank debt,
investment grade debt, high-yield debt, treasuries, convertibles, distressed
debt, preferred debt and reo-org equity securities.
Liquidity and Net
Capital
On September 14, 2007, the Company completed the asset sale to
DEPFA Bank Plc (“DEPFA”) pursuant to which DEPFA acquired the Municipal Capital
Markets Group of the Company’s subsidiary, Broadpoint Capital, in connection
with which the Company recognized a pre-tax gain on sale in the amount of
$7.9 million. At December 31, 2007 the Municipal Capital Markets Group
is included in discontinued operations. (see Note 25)
On September 21, 2007, the Company also closed the investment
from an affiliate of MatlinPatterson Global Opportunities Partners II, L.P.
(“MatlinPatterson”) in which the Company received net proceeds from the sale of
the Company’s common stock of $45.8 million. Pursuant to the Investment
Agreement, MatlinPatterson purchased 41.5 million newly issued shares and
two co-investors received a total of 0.5 million newly issued shares which
represented approximately 71.7 percent and 0.8 percent, respectively,
of the issued and outstanding voting power of the Company immediately following
the closing on the investment transaction.
On March 4, 2008, the Company closed a $20 million private
placement whereby investors purchased approximately 11.6 million shares of
common stock of the Company at $1.70 per share. A fund managed by MAST Capital
Management, LLC, (“Mast”), a Boston-based investment manager that focuses on
special situations debt and equity investment opportunities, led the investment
purchasing 7.1 million of the approximately 11.6 million shares
issued.
On June 27, 2008, the Company entered into a Preferred Stock
Purchase Agreement with Mast for the issuance and sale of (i) 1,000,000
newly-issued unregistered shares of the Series B Preferred Stock (the
“Series B Preferred Stock”) and (ii) a warrant to purchase
1,000,000 shares of the Company’s common stock at an exercise price of
$3.00 per share, for an aggregate cash purchase price of $25 million. Cash
dividends of
56
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
10 percent per annum must be paid quarterly on the Series B
Preferred Stock, while an additional dividend of 4 percent per annum
accrues and is cumulative, if not otherwise paid quarterly at the option of the
Company. The Series B Preferred Stock must be redeemed on or before
June 27, 2012.
Use of
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Securities
Transactions
Proprietary securities transactions in regular-way trades are
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities transactions entered into for the account and risk of the Company
are recorded on a trade date basis. Customers’ securities transactions were
reported on a settlement date basis with related commission income and expenses
reported on a trade date basis in 2008.
Equity securities owned and equity securities sold but not yet
purchased are comprised of United States equity securities and are valued at
market value based on quoted market prices.
Fixed income securities owned and fixed income securities sold but
not yet purchased, are valued using a variety of inputs, including observable
market inputs when available. The Company utilizes observable market factors in
determining fair value, Management also utilizes benchmark yields, reported
trades for comparable trade sizes, issuer spreads, two sided markets, benchmark
securities, bids and offers. These inputs relate either directly to the
financial asset being evaluated or indirectly to a similar security (for
example, another bond of the same issuer or a bond of a different issuer in the
same industry with similar maturity, terms and conditions). Additionally for
certain mortgage backed securities, management also considers various
characteristics such as issuer, underlying collateral, prepayment speeds, cash
flows and credit ratings. Management considers these pricing methodologies
consistent with the assumptions made by other market participants in valuing
similar financial assets.
Investment
Banking
Investment banking revenues include gains, losses and fees, net of
transaction related expenses, arising from securities offerings in which the
Company acted as an underwriter or placement agent for debt, equity and
convertible securities offerings. Investment banking management fees are
recorded on offering date, sales concessions on trade date, and underwriting
fees at the time income is reasonably determinable. Investment banking revenues
also include fees earned from providing merger, acquisition, restructuring,
recapitalization and strategic alternative analysis services and are recognized
as services are provided. Unreimbursed expenses associated with private
placement and advisory transactions are recorded as non-compensation expenses.
Resale and Repurchase
Agreements
Transactions involving purchases of securities under agreements to
resell or sales of securities under agreements to repurchase are accounted for
as collateralized financing transactions and are recorded at their contracted
resale or repurchase amounts plus accrued interest. It is the policy of the
Company to obtain possession of collateral with a market value equal to or in
excess of the principal amount loaned plus accrued interest thereon, in order to
collateralize reverse repurchase agreements. Similarly, the Company is required
to provide securities to counterparties in order to collateralize repurchase
agreements. The Company’s agreements with counterparties generally contain
contractual provisions allowing for additional collateral to be obtained,
57
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
or excess collateral returned, when necessary. It is the Company’s
policy to value collateral daily and to obtain additional collateral, or to
retrieve excess collateral from counterparties, when appropriate.
Securities borrowed are generally reported as collateralized
financings and are recorded at the amount of cash collateral advanced.
Securities borrowed transactions require the Company to deposit cash or other
collateral with the lender. The Company monitors the market value of securities
borrowed on a daily basis, with additional collateral obtained or refunded as
necessary. The Company no longer engages in securities borrowing transactions.
Collateral
The Company has received collateral in connection with resale
agreements and securities borrowed transactions. Under many agreements, the
Company is permitted to sell or repledge these securities held as collateral and
use the securities to secure repurchase agreements or to deliver to
counterparties to cover short positions. The Company reported assets it had
pledged as collateral in secured borrowing transactions and other arrangements
when the secured party could not sell or repledge the assets and did not report
assets received as collateral in secured lending transactions and other
arrangements because the debtor typically has the right to redeem the collateral
on short notice. The Company no long engages in securities borrowing
transactions.
Intangible Assets and
Goodwill
The Company amortizes customer related intangible assets over their
estimate useful life, which is the period over which the assets are expect to
contribute directly or indirectly to the future cash flows of the Company.
Goodwill is not amortized; instead, it is reviewed on an annual basis for
impairment. Goodwill is impaired when the carrying amount of the reporting unit
exceeds the implied fair value of the reporting unit. A reporting unit is
defined by the Company as an operating segment or a component of an operating
segment provided that the component constitutes a business for which discrete
financial information is available and segment management regularly reviews the
operating results of that component. Goodwill and intangible assets are also
tested for impairment at the time of a triggering event requiring a
re-evaluation, if one were to occur.
Drafts Payable
The Company maintains a group of “zero-balance” bank accounts which
are included in payables to others on the Statements of Financial Condition. The
balances in the “zero-balance” accounts represent outstanding checks that have
not yet been presented for payment at the bank. The Company has sufficient funds
on deposit to clear these checks, and these funds will be transferred to the
“zero-balance” accounts upon presentment.
Statement of Cash
Flows
For purposes of the Statement of Cash Flows, the Company has defined
cash equivalents as highly liquid investments, with original maturities of less
than 90 days that are not segregated for regulatory purposes or held for
sale in the ordinary course of business.
Comprehensive
Income
The Company has no components of other comprehensive income;
therefore, comprehensive income equals net income.
58
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Derivative Financial
Instruments
Derivative financial instruments, recorded at fair value in the
Consolidated Statements of Financial Conditions as Securities owned and
Securities sold at fair value.
Derivatives entered into by the Company include purchase and sale
agreements on TBA mortgage-backed securities. When a forward contract exists for
a when-issued security, such as a TBA security that provides a choice of
settlement dates and delivery is made in the second nearest month or later, the
TBA forward contract is accounted for as a derivative under FASB 133. The
Company enters into derivatives to facilitate proprietary trading and to manage
its risk exposures arising from trading assets and liabilities. The settlement
of these transactions is not expected to have a material effect upon the
Company’s consolidated financial statements. Derivatives involve varying degrees
of off-balance sheet risk, whereby changes in the level or volatility of
interest rates, or market values of the underlying financial instruments may
result in changes in the value of a particular financial instrument in excess of
its carrying amount with realized and unrealized gains and losses recognized in
principal transactions in the Consolidated Statements of Operations on a trade
date basis.
Fair Value of Financial
Instruments
The financial instruments of the Company are reported on the
consolidated Statements of Financial Condition at market or fair value, or at
carrying amounts that approximate fair values, because of the short maturity of
the instruments, except subordinated debt. The estimated fair value of
subordinated debt at December 31, 2008, approximates its carrying value
based on current rates available (see Note 12).
Office Equipment and Leasehold
Improvements
Office equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization of $8.9 million at
December 31, 2008 and $27.0 million at December 31, 2007.
Depreciation and amortization is provided on a straight-line basis over the
shorter of the estimated useful life of the asset (2 to 5 years) or the
initial term of the lease. Depreciation and amortization expense for the years
ended December 31, 2008, 2007 and 2006 was $1.1 million,
$2.2 million and $2.5 million, respectively.
Securities Issued for
Services
On January 1, 2006, the Company adopted FAS 123(R) “Share
Based Payments”. In adopting FAS 123(R), the Company applied the modified
prospective application transition method. Under the modified prospective
application method, prior period financial statements are not adjusted. Instead,
the Company will apply FAS 123(R) for new awards granted after
December 31, 2005, any portion of awards that were granted after
January 1, 1995 and have not vested by December 31, 2005 and any
outstanding liability awards. The impact of applying the nominal vesting period
approach for awards with vesting upon retirement eligibility, as compared to the
non-substantive vesting period approach was immaterial. Upon adoption of
FAS 123(R) on January 1, 2006, the Company recognized an after-tax
gain of approximately $0.4 million as the cumulative effect of a change in
accounting principle, primarily attributable to the requirement to estimate
forfeitures at the date of grant instead of as incurred.
Legal Fees
The Company accrues legal fees as they are incurred.
Income Taxes
Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable for future years to differences between
the financial statement basis and tax basis of existing assets and liabilities.
The effect of tax rate
59
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
changes on deferred taxes is recognized in the income tax provision
in the period that includes the enactment date.
On January 1, 2007, the Company adopted FASB Interpretation
(“FIN”) No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”).
The Company recognizes tax benefits from uncertain tax positions only when tax
positions meet the minimum probability threshold, as defined by FIN 48,
which is a tax position that is more likely than not to be sustained upon
examination by the applicable taxing authority. The Company’s continuing
practice is to recognize interest and penalties related to income tax matters as
a component of income tax.
Reclassification
Certain 2007 and 2006 amounts on the Consolidated Statements of
Operations have been reclassified to conform to the 2008 presentation due to the
Company discontinuing its Fixed Income Middle Markets and Municipal Capital
Markets Groups (see Note 25). Also, we have revised the prior period
consolidated statement of financial position at December 31, 2007 to
account for sale agreements entered into on TBA mortgage-backed securities.
These TBA’s were previously accounted for as short securities sales and are now
recorded as derivative transactions. This revision reduces securities owned by
$5 million, securities sold, not yet purchased, at fair value by
$65 million, increases Payables to brokers, dealers and clearing agencies
by $60 million. There is no impact to the consolidated statement of
operations. We do not believe this revision is material to any of the previously
issued financial statements, based on our assessment performed in accordance
with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99.
Earnings per Common
Share
The Company calculates its basic and diluted earnings per shares in
accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Basic earnings per share are computed based upon
weighted-average shares outstanding. Dilutive earnings per share is computed
consistently with basic while giving effect to all dilutive potential common
shares that were outstanding during the period. The Company uses the treasury
stock method to reflect the potential dilutive effect of unvested stock awards,
warrants, unexercised options and any contingently issued shares (see
Note 15). The weighted-average shares outstanding were calculated as
follows at December 31:
2008
2007
2006
(In thousands of
shares)
Weighted average shares
for basic earnings per share
69,296
27,555
15,155
Effect of dilutive
common equivalent shares
—
—
—
Weighted average shares
and dilutive common equivalent shares for dilutive earnings per share
69,296
27,555
15,155
The Company excluded approximately 3.1 million restricted stock
units for the twelve months ended 2008 in its computation of dilutive earnings
per share because they were anti-dilutive. There were no exclusions for the
twelve months ended 2007 and 2006, respectively. Had the Company been in a net
income situation for those periods such restricted stock units would have been
included in the computation. For the twelve months ended December 31, 2008,
2007, and 2006the Company excluded approximately 3.2 million,
0.3 million and 0.3 million of restricted stock awards, respectively,
in its computation of dilutive earnings per share because they were
anti-dilutive. Had the Company been in a net income situation for those periods
such restricted stock awards would have been included in the computation. For
the twelve months ended December 31, 2008, 2007, and 2006, the Company
excluded approximately 2.4 million, 0 million, and 0 million of
options respectively, in its computation of dilutive earnings per share because
they were anti-dilutive. Had the Company been in a net income situation for
those periods such options would have been
60
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
included in the computation. In addition, at December 31, 2008,
2007, and 2006the Company excluded approximately 7.0 million,
0.1 million and 1.8 million shares of restricted stock awards,
respectively from the basic earnings per share computation because they are not
vested.
NOTE 2.
Cash and Securities
Segregated for Regulatory Purposes
At December 31, 2008 and 2007, the Company segregated cash of
$0.5 million and $1.7 million respectively, in a special reserve bank
account for the exclusive benefit of customers under Rule 15c3-3 of the Securities and
Exchange Commission.
NOTE 3.
Receivables From and
Payables To Brokers, Dealers, and Clearing
Agencies
Amounts receivable from and payable to brokers, dealers and clearing
agencies consists of the following at December 31:
2008
2007
(In thousands of
dollars)
Adjustment to record
securities owned on a trade date basis, net
$
—
$
88
Commissions receivable
535
939
Securities failed to
deliver
—
142
Good faith deposits
1,121
—
Receivable from
clearing organizations
1,809
1,752
Total receivables
$
3,465
$
2,921
Payable to clearing
organizations
511,827
144,711
Securities failed to
receive
—
3,869
Total payables
$
511,827
$
148,580
Proprietary securities transactions are recorded on a trade date, as
if they had settled. The related amounts receivable and payable for unsettled
securities transactions are recorded net in receivables or payables to brokers,
dealers and clearing agencies on the Statements of Financial Condition.
The customers of the Company’s subsidiaries’ principal securities
transactions are cleared through third party clearing agreements on a fully
disclosed basis. Under these agreements, the clearing agents settle these
transactions on a fully disclosed basis, collect margin receivables related to
these transactions, monitor the credit standing and required margin levels
related to these customers and, pursuant to margin guidelines, require the
customer to deposit additional collateral with them or to reduce positions, if
necessary.
NOTE 4.
Receivables From and
Payables To Customers
At December 31, 2008, there were no significant receivables from
or payables to customers.
At December 31, 2007, receivables from and payables to customers
were mainly comprised of purchases or sales of securities by institutional
customers. Delivery or receipt of these securities is made only when the Company
is in receipt of the funds or securities from institutional customers.
The Company’s broker-dealer subsidiaries are parties to clearing
agreements with clearing agents in connection with their securities trading
activities. If the clearing agent incurs a loss, it has the right to pass the
loss through to such subsidiaries which, as a result, exposes the Company to
off-balance-sheet risk. The subsidiaries have retained the right to pursue
collection or performance from customers who do not perform under their
contractual obligations and monitors customer balances on a daily basis along
with the credit
61
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
standing of the clearing agent. As the potential amount of losses
during the term of this contract has no maximum, the Company believes there is
no maximum amount assignable to this indemnification.
During 2007 and through the second quarter of 2008, Broadpoint
Capital was self-clearing for transactions executed with institutional
customers. Broadpoint Capital’s non-institutional customer securities
transactions, including those of officers, directors, employees and related
individuals, were cleared through a third party under a clearing agreement.
Under this agreement, the clearing agent executed and settled customer
securities transactions, collected margin receivables related to these
transactions, monitored the credit standing and required margin levels related
to these customers and, pursuant to margin guidelines, required the customer to
deposit additional collateral with them or to reduce positions, if necessary. In
the event the customer was unable to fulfill its contractual obligations, the
clearing agent had the option of either purchasing or selling the financial
instrument underlying the contract, and as a result might have incurred a loss
for which the clearing agent would have indemnification from Broadpoint Capital
in the manner described in the prior paragraph.
NOTE 5.
Financial
Instruments
The Company adopted the provisions of SFAS No. 157 “Fair
Value Measurements” (“SFAS No. 157”) effective January 1, 2008.
Under this standard, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date.
SFAS No. 157 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions about the assumptions market participants
would use in pricing the asset or liability based on the best information
available in the circumstances. The hierarchy is broken down into three levels
based on the reliability of inputs as follows:
Level 1: Quoted prices in active markets that the reporting
entity has the ability to access at the reporting date, for identical assets or
liabilities. Prices are not adjusted for the effects, if any, of the reporting
entity holding a large block relative to the overall trading volume (referred to
as a “blockage factor”)
Level 2: Directly or indirectly observable prices in active
markets for similar assets or liabilities; quoted prices for identical or
similar items in markets that are not active; inputs other than quoted prices
(e.g., interest rates, yield curves, credit risks, volatilities); or “market
corroborated inputs”.
Level 3: Unobservable inputs that reflect management’s own
assumptions about the assumptions market participants would make.
The availability of observable inputs can vary from product to
product and is affected by a wide variety of factors, including, for example,
the type of product, whether the product is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by the Company in
determining fair value is greatest for instruments categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, for disclosure purposes the
level in the fair value hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that is significant
to the fair value measurement in its entirety.
62
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Fair Valuation
Methodology
Cash
Instruments — These financial assets represent cash in banks or cash
invested in liquid money market funds. These investments are valued at par,
which represent fair value, and are reported as Level 1.
Securities
Owned/Securities Sold But Not Yet Purchased — These financial assets
represent investments in fixed income and equity securities.
Fixed income securities which are traded in active markets include on
the run treasuries, investment grade debt, asset and mortgage backed securities
including TBAs, and corporate debt. The treasuries and TBAs are generally traded
in active, highly liquid markets. These assets are generally classified as
Level 1. As there is no quoted market for investment grade debt, asset and
mortgage backed securities, and corporate debt, the Company utilizes observable
market factors in determining fair value. These financial instruments are
reported as Level 2. In certain circumstances, the Company may utilize
unobservable inputs that reflect management’s own assumptions about the
assumptions market participants would make. These financial assets are reported
as Level 3.
In determining fair value for Level 2 financial instruments,
management utilizes benchmark yields, reported trades for comparable trade
sizes, issuer spreads, two sided markets, benchmark securities, bids and offers.
These inputs relate either directly to the financial asset being evaluated or
indirectly to a similar security (for example, another bond of the same issuer
or a bond of a different issuer in the same industry with similar maturity,
terms and conditions). Additionally for certain mortgage backed securities,
management also considers various characteristics such as issuer, underlying
collateral, prepayment speeds, cash flows and credit ratings.
In determining fair value for Level 3 financial instruments,
management maximizes the use of market observable inputs when available.
Management utilizes factors such as bids that were received, spreads to the
yield curve on similar offered financial assets, or comparing spreads to similar
financial assets that traded and had been priced through an independent pricing
source. Management considers these pricing methodologies consistent with
assumptions in how other market participants value certain financial assets.
These pricing methodologies involve management judgment and as a result, lead to
a Level 3 classification.
Management then evaluates the fair value against other factors and
valuation models it deems relevant. These factors may be a recent purchase or
sale of the financial asset at a price that differs from the fair value based
upon observable inputs or economic events that impact the value of the asset
such as liquidity in the market, political events or observations of equity
curves related to the issuer. These same factors are utilized to value
Level 3 financial assets where no observable inputs are available.
Equity securities are valued at quoted market prices. These financial
assets are reported as Level 1 when traded in active markets. When quoted
prices are not available, valuation models are applied to these financial
assets. These valuation techniques involve some level of management estimation
and judgment, the degree of which is dependent on the price transparency for the
instruments or market and the instruments’ complexity. Accordingly, these
financial assets are recorded as Level 3.
Derivatives — In
connection with mortgage-back securities trading, the Company economically
hedges its exposure through the use of TBAs. These derivatives are traded in an
active quoted market and therefore generally classified as Level 1.
Investments — These
financial assets represent investments in partnerships.
Valuation models are applied to the underlying investments of the
partnership which are important inputs into the valuation of the partnership
interests. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or
63
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
market and the instruments’ complexity. Accordingly, these
investments in partnerships are recorded as Level 3.
Transfers —
Assets will transfer in and out of Level 3 based upon widening and
tightening of spreads due to increased or decreased volumes and liquidity.
The following table summarizes the categorization of the financial
instruments within the fair value hierarchy at December 31, 2008:
Assets at Fair
Value
Level 1
Level 2
Level 3
Total
(In thousands of
dollars)
Cash Instruments(1)
$
7,847
$
—
$
—
$
7,847
Securities Owned(2)
13,070
581,360
24,381
618,811
Derivatives(2)
11
—
—
11
Investments
—
—
15,398
15,398
Total Financial Assets
At Fair Value
$
20,928
$
581,360
$
39,779
$
642,067
Liabilities at Fair
Value
Level 1
Level 2
Level 3
Total
(In thousands of
dollars)
Securities Sold But Not
Yet Purchased(2)
$
14,476
$
—
$
1
$
14,477
Derivatives(2)
751
—
—
751
Total Financial
Liabilities At Fair Value
$
15,227
$
—
$
1
$
15,228
(1)
Cash instruments includes Cash and cash equivalents of
$7,377 and Cash segregated for regulatory purposes of $470 in the
Consolidated Statements of Financial Condition.
(2)
Unrealized gains/(losses) relating to Derivatives are
reported in Securities owned and Securities sold, but not yet purchased,
at fair value in the Consolidated Statements of Financial
Condition.
The following tables summarize the changes in the Company’s
Level 3 financial instruments for the year ended December 31, 2008:
Unrealized gains
(losses) on level 3 assets still held at the reporting date
$
(4,837
)
$
3,110
$
(1,727
)
64
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
(1)
Realized and unrealized gains (losses) are reported in
Principal transactions in the Consolidated Statements of Operations.
(2)
The Company reviews which level financial instruments
are classified in on a quarterly basis. As the observability and strength
of valuation attributes changes, reclassifications of certain financial
assets or liabilities may occur between levels. The reporting of these
reclassifications results in a transfer in/out of Level 3 at fair
value in the quarter of the change. During the year there was a net
transfer out of approximately $3.3 million from Level 3. These
transfers were primarily investment grade performing mortgage and asset
backed securities.
NOTE 6.
Securities Owned and Sold,
but Not Yet Purchased
Securities owned and sold, but not yet purchased consisted of the
following at December 31:
2008
2007
Sold, but
Sold, but
not yet
not yet
Owned
Purchased
Owned
Purchased
(In thousands of
dollars)
Marketable Securities
U.S. Government and
federal agency obligations
$
546,436
$
14,476
$
133,068
$
10,076
State and municipal
bonds
5
—
6
1
Corporate obligations
71,581
—
48,481
—
Corporate stocks
739
1
3,249
98
Derivatives
11
751
37
324
Not Readily Marketable
Securities
Investment securities
with no publicly quoted market
50
—
659
—
Investment securities
subject to restrictions
—
—
290
—
Total
$
618,822
$
15,228
$
185,790
$
10,499
Securities not readily marketable include investment securities
(a) for which there is no market on a securities exchange or no independent
publicly quoted market, (b) that cannot be publicly offered or sold unless
registration has been effected under the Securities Act of 1933, or
(c) that cannot be offered or sold because of other arrangements,
restrictions or conditions applicable to the securities or to the Company.
NOTE 7.
Investments
The Company’s investment portfolio includes interests in publicly and
privately held companies. Information regarding these investments has been
aggregated and is presented below as of and for the years ended December 31:
2008
2007
2006
(In thousands of
dollars)
Carrying Value
Private
$
14,321
$
15,436
$
10,866
Consolidation of
Employee Investment Funds net of Company’s ownership interest, classified
as Private Investment
1,077
1,477
1,384
Total carrying value
$
15,398
$
16,913
$
12,250
65
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Investment gains and losses were comprised of the following:
2008
2007
2006
(In thousands of
dollars)
Public (realized and
unrealized gains and losses)
$
—
$
—
$
(12,865
)
Private (realized and
unrealized gains and losses)
(1,115
)
2,594
5,263
Investment gains
(losses)
$
(1,115
)
$
2,594
$
(7,602
)
During the year ended December 31, 2006, the Company sold its
remaining 1,116,040 shares of Mechanical Technology Incorporated (“MKTY”)
for proceeds of approximately $3.3 million. Also during the year ended
December 31, 2006, the Company sold its remaining 1,116,290 shares of
iRobot Corporation (Nasdaq: IRBT) for proceeds of approximately
$24.2 million.
Privately held investments include an investment of
$14.3 million in FA Technology Ventures Inc., L.P. (the “Partnership”),
which represented the Company’s maximum exposure to loss in the Partnership at
December 31, 2008. The Partnership’s primary purpose is to provide
investment returns consistent with the risk of investing in venture capital. At
December 31, 2008 total Partnership capital for all investors in the
Partnership equaled $54.9 million. The Partnership is considered a variable
interest entity. The Company is not the primary beneficiary, due to the levels
of other investors’ respective investments in the Partnership. Accordingly, the
Company has not consolidated the Partnership in these financial statements, but
has recorded the value of its investment. FATV, a wholly-owned subsidiary of the
Company, is the investment advisor for the Partnership. With respect to the
Partnership and any parallel funds, revenues derived from the management of this
investment and the Employee Investment Funds for the year ended
December 31, 2008, were $0.8 million in consolidation.
The Company has consolidated its Employee Investment Fund (EIF). The
EIF is a limited liability company, established by the Company for the purpose
of having select employees invest in private equity placements. The EIF is
managed by Broadpoint Management Corp., a wholly-owned subsidiary of the
Company, which has contracted with FATV to act as an investment advisor with
respect to funds invested in parallel with the Partnership. The Company’s
carrying value of this EIF is $0.1 million excluding the effects of
consolidation. The Company has outstanding loans of $0.3 million to the
EIF. The effect of consolidation was to increase Investments by
$1.1 million, decrease Receivable from Others by $0.3 million and
increase Payable to Others by $0.8 million. The amounts in Payable to
Others relates to the value of the EIF owned by employees.
66
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
NOTE 8.
Intangible Assets and
Goodwill
2008
2007
(In thousands of
dollars)
Intangible Assets
(amortizable):
Broadpoint Securities,
Inc. — Acquisition
$
$
Gross carrying amount
641
641
Accumulated amortization
(249
)
(196
)
Net carrying amount
392
445
Broadpoint Debt Capital
Markets — Customer Relationship
Gross carrying amount
795
—
Accumulated amortization
(134
)
—
Net carrying amount
661
—
American Technology
Research — Customer Relationship
Gross carrying amount
6,960
—
Accumulated amortization
(151
)
—
Net carrying amount
6,809
—
American Technology
Research — Covenant not to Compete
Gross carrying amount
330
—
Accumulated amortization
(28
)
—
Net carrying amount
302
—
American Technology
Research — Trademarks
Gross carrying amount
100
—
Accumulated amortization
(25
)
—
Net carrying amount
75
—
Institutional
convertible bond arbitrage group — Acquisition
Gross carrying amount
1,017
Accumulated amortization
—
(382
)
Impairment loss
—
(635
)
Net carrying amount
—
—
Total Intangible Assets
$
8,239
$
445
Goodwill (unamortizable):
Broadpoint Securities,
Inc. — Acquisition
Gross carrying amount
$
17,364
$
25,250
Impairment loss
—
(7,886
)
Net carrying amount
17,364
17,364
American Technology
Research — Acquisition
Gross carrying amount
5,919
—
Net carrying amount
5,919
—
Institutional
convertible bond arbitrage group — Acquisition
Gross carrying amount
—
964
Impairment
—
(964
)
Net carrying amount
—
—
Total Goodwill
$
23,283
$
17,364
Total Intangible Assets
and Goodwill
$
31,522
$
17,809
67
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Customer related intangible assets are being amortized from 5 to
12 years. Covenant not to compete assets are being amortized over
3 years and trademark assets are being amortized over 1 year.
Amortization expense for intangible assets for the years ended December 31,2008, 2007, and 2006 was $0.4 million, $0.1 million, and
$0.8 million, respectively. Future amortization expense is estimated as
follows:
(In thousands of
dollars)
Estimated Amortization
Expense
(Year Ended
December 31)
2009
$
1,002
2010
927
2011
900
2012
817
2013
685
Thereafter
3,908
Total
$
8,239
Intangible assets increased due to the acquisition of Broadpoint
AmTech during the year ended December 31, 2008.
The carrying amount of goodwill for the Broadpoint Securities, Inc.
acquisition increased by $1.5 million during the year ended
December 31, 2006, related primarily to additional consideration pursuant
to the acquisition agreement (see Note 13). As a result of annual
impairment testing, the goodwill related to the acquisition of Broadpoint
Securities was determined to be impaired as of December 31, 2006. Fair
value of the Broadpoint Securities reporting unit was determined using both the
income and market approaches. The income approach determines fair value using a
discounted cash flow analysis based on management’s projections. The market
approach analyzes and compares the operations performance and financial
conditions of the reporting unit with those of a group of selected
publicly-traded companies that can be used for comparison. The valuation gives
equal weight to the two approaches to arrive at the fair value of the reporting
unit. As a result of the valuation, as of December 31, 2006, the carrying
value of goodwill was greater than its implied value resulting in a goodwill
impairment loss of $7.9 million recognized in the caption “Impairment” on
the Statements of Operations for the year ended December 31, 2006. The
Company performed its annual impairment testing and as a result determined the
fair value of the unit exceeded the carrying value of the unit resulting in no
impairment charge in 2007 or 2008.
A plan approved by the Board of Directors on September 28, 2006
to discontinue operations of the Institutional Convertible Bond Arbitrage
Advisory Group (the “Group”) triggered an impairment test in the third quarter
of 2006 in accordance with SFAS No. 142 Goodwill and Other Intangible
Assets. The value of the Group was more dependent on their ability to
generate earnings than on the value of the assets used in operations, therefore
fair value of the Group was determined using the income approach. The income
approach determines fair value using a discounted cash flow analysis based on
management’s projections. Based on the impairment test, a goodwill impairment
loss of $1.0 million was recognized in discontinued operations for the year
ended December 31, 2006. As a result of impairment testing of the disposal
group in accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, it was determined that amortizable
customer related intangibles were also impaired. An impairment loss of
$0.6 million was recognized related to amortizable intangible assets in
discontinued operations for the year ended December 31, 2006. The Group
ceased operations in April 2007.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
During the year ended December 31, 2007, the Company paid the
remaining balance of the term loan of $12.7 million related to the
acquisition of Broadpoint Securities pursuant to an agreement (the “Agreement”)
entered into on August 6, 2007, with the Company’s lender. The Agreement
stated that the lender and the Company acknowledged that they did not agree on
the interpretation and/or enforcement
of each of the parties respective rights under the Loan Agreement and/or the Lease, therefore, the parties
acknowledged and agreed that neither the lender nor the Company had waived or
was waiving any of its rights under the Loan Agreement and or the Lease except
for the waivers and or modifications. The Agreement also amended the Company’s
obligations under the Loan Agreement with respect to the DEPFA transaction and
MatlinPatterson investment transaction. The Company agreed to repay, upon
closing of the DEPFA transaction, Loan Agreement obligations equal to
75 percent of the net proceeds received by the Company and upon closing of
the MatlinPatterson investment transaction to pay in full the remaining balance
of the loan. On September 14, 2007, upon the close of the DEPFA
transaction, the Company made a principal payment of $0.8 million pursuant
to the Agreement. On September 21, 2007, upon the close of the
MatlinPatterson investment transaction, the Company paid the remaining
$9.8 million balance of the term loan.
NOTE 10.
Obligations Under
Capitalized Leases
Pursuant to the Agreement entered into between the Company and its
lessor on August 6, 2007, the Company amended its lease obligations under
the lease agreements with respect to the MatlinPatterson investment transaction.
On September 21, 2007, the MatlinPatterson investment transaction closed
and pursuant to the Agreement all capital leases with the lender were paid in
full. The Company had no capital lease obligations at December 31, 2008.
NOTE 11.
Payables To
Others
Amounts payable to others consists of the following at December 31:
2008
2007
(In thousands of
dollars)
Draft payables
$
327
$
173
Net Payable to
Employees for the Employee Investment Fund (see Note 7)
797
1,158
Payable to Sellers of Descap Securities,
Inc. (see “Commitments and Contingencies” footnote)
—
1,036
Payable to former
Shareholders of American Technology Holdings, Inc.
546
—
Payable to sellers of
American Technology Holdings, Inc.
819
—
Others
299
570
Total
$
2,788
$
2,937
The Company maintains a group of “zero balance” bank accounts which
are included in payable to others on the Statement of Financial Condition.
Drafts payable represent the balance in these accounts related to outstanding
checks that have not yet been presented for payment at the bank. The Company has
sufficient funds on deposit to clear these checks, and these funds will be
transferred to the “zero-balance” accounts upon presentment. The Company
maintained one “zero balance” account which was used as a cash management
technique, permitted under Rule 15c3-3 of the Securities and
Exchange Commission, to obtain federal funds for a fee, which is lower than
prevailing interest rates, in amounts equivalent to amounts in customers’
segregated funds accounts with a bank. This cash management technique was
discontinued in September 2007.
NOTE 12.
Subordinated
Debt
A select group of management and highly compensated employees are
eligible to participate in the Broadpoint Securities Group, Inc. Deferred
Compensation Plan for Key Employees (the “Key Employee
69
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Plan”). The employees enter into subordinated loans with Broadpoint
Capital to provide for the deferral of compensation and employer allocations
under the Key Employee Plan. The New York Stock Exchange has approved Broadpoint
Capital’s subordinated debt agreements related to the Key Employee Plan.
Pursuant to these approvals, these amounts are allowable in Broadpoint Capital’s
computation of net capital. The accounts of the participants of the Key Employee
Plan are credited with earnings and/or
losses based on the performance of various investment benchmarks selected by the
participants. Maturities of the subordinated debt are based on the distribution
election made by each participant, which may be deferred to a later date by the
participant. As of February 28, 2007, the Company no longer permits any new
amounts to be deferred under the Key Employee Plan.
Principal debt repayment requirements, which occur on about
April 15th of each year, as of December 31, 2008, are as follows:
(In thousands of
dollars)
2009
$
465
2010
287
2011
108
2012
207
2013
185
2014 to 2016
410
Total
$
1,662
NOTE 13.
Commitments and
Contingencies
FA Technology
Ventures
As of December 31, 2008, the Company had a commitment to invest
up to an additional $1.3 million in the Partnership. The investment period
expired in July 2006, however, the general partner of the Partnership, FATV GP
LLC (the “General Partner”), may continue to make capital calls up through July
2011 for additional investments in portfolio companies and for the payment of
management fees. The Company intends to fund this commitment from operating cash
flow. The Partnership’s primary purpose is to provide investment returns
consistent with risks of investing in venture capital. In addition to the
Company, certain other limited partners of the Partnership are officers or
directors of the Company. The majority of the commitments to the Partnership are
from non-affiliates of the Company.
The General Partner is responsible for the management of the
Partnership, including among other things, making investments for the
Partnership. The members of the General Partner are George McNamee, a Director
of the Company, Broadpoint Enterprise Funding, Inc., a wholly-owned subsidiary
of the Company, and certain other employees of FATV. Subject to the terms of the
partnership agreement, under certain conditions, the General Partner is entitled
to share in the gains received by the Partnership in respect of its investment
in a portfolio company.
As of December 31, 2008, the Company had an additional
commitment to invest up to $0.1 million in EIF. The investment period
expired in July 2006, but the General Partner may continue to make capital calls
up through July 2011 for additional investments in portfolio companies and for
the payment of management fees. The Company anticipates that this will be funded
by the Company through operating cash flow.
70
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
On April 30, 2008, the Company entered into a Transition
Agreement (the “Transition Agreement”) with FATV, FA Technology Holding, LLC
(“NewCo”), Mr. McNamee, and certain other employees of FATV (such
individuals, collectively, the “FATV Principals”), to effect a restructuring of
the investment management arrangements relating to the Partnership, and the
formation of FA Technology Ventures III, L.P., a new venture capital fund
(“Fund III”). This restructuring will result in FATV ceasing to advise the
Partnership and the creation of a new investment advisory company (“NewCo”).
Fund III will be sponsored and managed by NewCo (which is independent of
the Company and owned by certain of the FATV Principals) and its subsidiaries.
The Company’s Audit Committee approved of the transactions pursuant to its
Related Party Transactions Policy.
Concurrent with the first closing of Fund III (the “Trigger
Date”), FATV will assign all of its rights, interests, obligations and
liabilities as investment advisor to the Partnership to NewCo. FATV will
continue to operate consistent with current practice (operations, staffing and
expenses) for the purpose of performing its duties to the Partnership, and the
Company will provide funding for such operations through the date that is the
earlier to occur of (i) the Trigger Date and (ii) December 31,2008.
Pursuant to the Transition Agreement, and subject to certain
conditions, the Company will make a capital commitment of $10 million to
Fund III (the “Broadpoint Commitment”) at the first closing of
Fund III at which the total commitments to Fund III (excluding the
Broadpoint Commitment) exceed a threshold amount. If such threshold is not met
at the first closing, the Broadpoint commitment shall be made at the closing at
which the threshold is met; provided that if such threshold is not reached by
June 30, 2009, the Company’s obligation to make the Broadpoint Commitment
shall terminate. The Company will also receive an equity interest in the general
partner of Fund III, subject to the making of the Broadpoint Commitment. In
addition, the Company will have the right to receive additional compensation for
capital commitments made to Fund III from certain investors introduced by
its affiliates.
It is also contemplated that, on the Trigger Date, each of the FATV
Principals will resign from FATV and/or
the Company, as the case may be. The Company has also agreed to assign to NewCo
the name “FA Technology.”
Although the Transition Agreement provides that the Company was no
longer obligated, as of January 1, 2009, to fund expenses related to
operations and staffing of the existing fund, or expenses related to
organization and marketing of Fund III, the Company has continued to fund
such expenses. The Transition Agreement provides that if the first closing of
Fund III does not occur on or before March 31, 2009, the parties’
rights and obligations under the Transition Agreement shall automatically
terminate, except as follows: (a) certain non-solicitation obligations of
the FATV Principals shall continue and (b) upon the initial closing of any
subsequent venture capital fund sponsored by NewCo or any 4 of the 6 FATV
Principals before June 30, 2009, NewCo or such FATV Principals shall cause
NewCo or such subsequent fund to reimburse the Company for any expenses related
to the organization and marketing of Fund III funded by the Company.
Mandatory Redeemable Preferred
Stock
On June 27, 2008the Company entered into a Preferred Stock
Purchase Agreement (the “Preferred Stock Purchase Agreement”) with Mast for the
issuance and sale of (i) 1,000,000 newly-issued unregistered shares of
Series B Preferred Stock and (ii) warrant to purchase
1,000,000 shares of the Company’s common stock, at an exercise price of
$3.00 per share, for an aggregate cash purchase price of $25 million. Cash
dividends of 10 percent per annum must be paid quarterly on the
Series B Preferred Stock, while an additional dividend of 4 percent
per annum accrues and is cumulative, if not otherwise paid quarterly at the
option of the Company. The Series B Preferred Stock must be redeemed on or
before June 27, 2012. (See “Mandatory Redeemable Preferred Stock,”
Note 14.)
71
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Contingent
Consideration: On May 14, 2004, the Company
acquired 100 percent of the outstanding common shares of Descap Securities
Inc., subsequently known as Broadpoint Securities. Per the stock purchase
agreement, the sellers were to receive future contingent consideration based on
the following: For each of the three years ending May 31, 2005,
May 31, 2006 and May 31, 2007, if Broadpoint Securities’ Pre-Tax Net
Income (exclusive of certain intercompany charges, as defined) (i) is
greater than $10 million, the Company was to pay to the sellers an
aggregate amount equal to fifty percent (50%) of Broadpoint Securities’ Pre-Tax
Net Income for such period or (ii) is equal to or less than
$10 million, the Company was to pay them an aggregate amount equal to forty
percent (40%) of Broadpoint Securities’ Pre-Tax Net Income for such period.
Based upon Broadpoint Securities’ Pre-Tax Net Income from June 1, 2004
through May 31, 2005, $2.2 million on contingent consideration was
paid to the Sellers and from June 1, 2005 through May 31, 2006,
$1.0 million of contingent consideration was paid to the Sellers on
May 29, 2008. Based upon Broadpoint Securities’ Pre-Tax Net Income from
June 1, 2006 to May 31, 2007, no contingent consideration was payable
to the Sellers for this period.
On October 2, 2008, the Company acquired 100 percent of the
outstanding common shares of American Technology Research Holdings, Inc.
(“AmTech”), subsequently known as Broadpoint AmTech. Per the stock purchase
agreement, the sellers were to receive future contingent consideration
consisting of approximately 100 percent of the profits earned by Broadpoint
AmTech in the fourth quarter of fiscal year 2008 and all of fiscal years 2009,
2010 and 2011, up to an aggregate of $15 million in profits. The Sellers
also will have the right to receive earn-out payments consisting of 50 percent
of such profits in excess of $15 million. All such earn-out payments will
be paid 50 percent in cash and, depending on the recipient thereof, either
50 percent in Company common stock, which will be subject to transfer
restrictions that will lapse ratably over the three years following issuance, or
50 percent in restricted stock from the Incentive Plan, subject to vesting
based on continued employment with Broadpoint AmTech. Based on the profits
earned by Broadpoint AmTech in the fourth quarter of fiscal year 2008,
$0.9 million of contingent consideration has been accrued at
December 31, 2008.
On September 14, 2007, the Company consummated the sale of the
Municipal Capital Market Group of its subsidiary, Broadpoint Capital to DEPFA.
In connection with such sale, the Company recognized a pre-tax gain on sale in
the amount of $7.9 million. Pursuant to the asset purchase agreement, the
Company was required to deliver an estimate of the accrued bonuses at closing
and a final accrued bonus calculation thirty days following closing. The Company
accrued the bonus consistent with the asset purchase agreement. All items
arising from the sale of the Municipal Capital Markets Group were reflected in
the Gain on Sale of Discontinued Operations. This includes the closing bonuses
paid to employees and the reversal of restricted stock and deferred cash
amortization as a result of the employees’ termination of employment. On
October 30, 2007, DEPFA provided the Company notice that it was exercising
its option pursuant to the agreement to appoint an independent accounting firm
to conduct a special audit of the final accrued bonus amount. On June 26,2008, DEPFA provided the Company notice that it was withdrawing its dispute of
the final accrued bonus amount.
72
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Leases: The
Company’s headquarters and sales offices, and certain office and communication
equipment, are leased under non-cancelable operating leases, certain of which
contain renewal options and escalation clauses, and which expire at various
times through 2021. To the extent the Company is provided tenant improvement
allowances funded by the lessor, they are amortized over the initial lease
period and serve to reduce rent expense. To the extent the Company is provided
free rent periods, the Company recognizes the rent expense over the entire lease
term on a straightline basis.
On November 2, 2007, the Company entered into a Fifth Amendment
to Sub-Lease Agreement (the “Albany Fifth Amendment”) with Columbia 677, L.L.C.
(the “Albany Landlord”) pursuant to which the Company’s Sub-lease-Agreement with
the Landlord dated August 12, 2003 concerning the lease of certain space in
the building located at 677 Broadway, Albany, New York (the “Albany Premises”)
was amended. The Amendment provided that the Company was to surrender a total of
15,358 square feet (the “Surrender Premises”) of the Albany Premises, a
portion at a time, on or before three surrender dates: November 15, 2007,
December 15, 2007 and April 1, 2008. If the Company failed to vacate
the portion of the Surrender Premises on the applicable surrender dates, it
would owe the Landlord $1,667 for each day of such failure. The Company failed
to vacate 1,398 square feet of the Surrender Premises by April 1, 2008
and as a result began to incur the daily fee on such date. The Company vacated
such portion of the Surrender Premises on April 25, 2008, and paid the
Albany Landlord approximately $42,000. In consideration of the Landlord agreeing
to the surrender of the Surrender Premises, the Amendment provided that the
Company shall pay the Landlord a surrender fee equal to $1,050,000 payable in
three installments, all of which were paid as of June 30, 2008.
On June 19, 2008, the Company entered into a Sixth Amendment to
Sub-Lease Agreement amending a Sub-Lease Agreement dated August 12, 2003,
as previously amended, by and between the Company and the Albany Landlord.
Pursuant thereto and on certain conditions specified therein, the parties agreed
that Tenant shall be entitled to surrender the entire 12th floor of the
Building consisting of 6,805 square feet of space (the “12th Floor
Surrender Premises”), reducing Tenant’s rentable square footage of leased
property in the Building to 2,953 square feet. The Company vacated the
12th Floor Surrender Premises by June 30, 2008. In consideration
therefore the Company paid the Landlord $388,703. This amount is included in
Restructuring in the Company’s Statement of Operations.
On June 23, 2008, the Company entered into a Seventh Amendment
of Lease (the “NYC Amendment”), amending the Agreement of Lease dated
March 21,1996, as previously amended, by and between the Company and One
Penn Plaza LLC (“NYC Landlord”), a New York limited liability company, for the
lease of certain property located at One Penn Plaza, New York, New York.
Pursuant thereto and on certain conditions specified therein, the parties agree
that the term of the Lease for all of the premises currently leased by the
Company on the 41st Floor and a portion of the premises on the
40th Floor expired on October 31, 2008, as provided under existing
lease terms, but that the term of the Company’s lease of the entire
42nd Floor and the remaining premises on the 40th Floor shall be
extended until March 31, 2021, subject to further renewal. Under the NYC
Amendment, the NYC Landlord will perform certain base building work, and will
also provide a cash contribution of up to $1,582,848 towards the Company’s
improvements. At the Company’s election, and pursuant to certain conditions, the
Company may elect to convert a portion of such cash contribution (up to
$1,000,000) to a rent credit equal to 90 percent of the amount so
converted. In connection with the execution and delivery of the Amendment, the
Company is required to provide to NYC Landlord a security deposit in the amount
of $2,107,490, either as cash or a letter of credit, to secure the performance
of the Company’s obligations under the Lease. Under certain conditions, the
Company is entitled to reduce the security deposit to $1,208,708 on
April 1, 2014. An irrevocable standby letter of credit in favor of the NYC
Landlord was issued in the amount of $2,107,490 by the Bank of New York Mellon
on behalf of the Company.
73
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
On November 18, 2008, the Company entered into a Sublease (the
“SF Sublease”), by and between the Company and Jefferies & Company,
Inc. (“Subtenant”), a Delaware corporation, for the lease of 19,620 square
feet on the 24th floor at the building known as Post Montgomery Center, One
Montgomery Tower, San Francisco, California. The subleased premises were
originally leased by the Company from Post-Montgomery Associates (the “Master
Landlord”) pursuant to an Office Lease dated as of March 31, 2005. The term
of the SF Sublease commences on the earlier of (i) April 1, 2009 or
(ii) the date Subtenant opens for business in the subleased premises and
expires July 30, 2015; however, Subtenant’s obligation to pay rent does not
commence until July 1, 2009. Subtenant does not have any right to renew the
term of the SF Sublease. In connection with the execution and delivery of the SF
Sublease, and pursuant to the terms of a Consent to Sublease, Recognition
Agreement and Amendment to Lease, the Company is required to provide to Master
Landlord a security deposit in the amount of $338,981 in the form of an
irrevocable letter of credit (the “LOC”). Under certain conditions, the Company
has the right to reduce the LOC through January 1, 2015. The Company
arranged for such a letter of credit in favor of Landlord in the amount of
$338,981 issued by The Bank of New York Mellon.
On October 31, 2008, the Company entered into an Office Lease
(the “Tower 49 Lease”), by and between the Company and Kato International LLC,
(“KATO”) for the lease of 16,000 rental square feet consisting of the
31st floor of 12 East 49th Street, New York, New York10017. The term
of the Lease is for a term of ten years and two months, commencing on
November 1, 2008; however, the obligation to pay rent did not commence
until January 14, 2009. The Company has a one time right of early
termination as of December 31, 2013, upon the payment of a $900,000 early
termination fee and notice provided to the KATO not less than fifteen
(15) months prior to December 31, 2013. KATO will endeavor to provide
notice to the Company if any full floor above the 24th floor becomes
available for leasing until September 30, 2012. However, the Company has no
option, right of first refusal or other right as to same. In connection with the
execution and delivery of the Lease, the Company provided to KATO a security
deposit in the amount of $1,324,000.00 in the form of an irrevocable letter of
credit. Under certain conditions, the Company has the right to reduce the
security deposit by $220,667 on each of July 1, 2010, January 1, 2012
and July 1, 2013, but in no event shall the security deposit be reduced
below $662,000. The Company arranged for such a letter of credit in favor of
Landlord in the amount of $1,324,000 issued by The Bank of New York Mellon.
Future minimum annual lease payments, and sublease rental income, are
as follows:
Future
Minimum
Sublease
Lease
Rental
Net Lease
Payments
Income
Payments
(In thousands of
dollars)
2009
6,877
1,177
5,700
2010
7,695
1,536
6,159
2011
7,385
1,477
5,908
2012
7,342
1,477
5,865
2013
7,351
1,419
5,932
Thereafter
38,105
1,243
36,862
Total
$
74,755
$
8,329
$
66,426
Annual rental expense, net of sublease rental income, for the years
ended December 31, 2008, 2007 and 2006 approximated $4.5 million,
$4.9 million, and $4.8 million, respectively.
74
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Litigation
In 1998, the Company was named in lawsuits by Lawrence Group, Inc.
and certain related entities (the “Lawrence Parties”) in connection with a
private sale of Mechanical Technology Inc. stock from the Lawrence Parties that
was approved by the United States Bankruptcy Court for the Northern District of
New York (the “Bankruptcy Court”). The Company acted as placement agent in that
sale, and a number of persons who were employees and officers of the Company at
that time, who have also been named as defendants, purchased shares in the sale.
The complaints alleged that the defendants did not disclose certain information
to the sellers and that the price approved by the court was therefore not
proper. The cases were initially filed in the Bankruptcy Court and the United
States District Court for the Northern District of New York (the “District
Court”), and were subsequently consolidated in the District Court. The District
Court dismissed the cases, and that decision was subsequently vacated by the
United States Court of Appeals for the Second Circuit, which remanded the cases
for consideration of the plaintiffs’ claims as motions to modify the Bankruptcy
Court sale order. The plaintiffs’ claims were referred back to the Bankruptcy
Court for such consideration. In February 2009, the Bankruptcy Court dismissed
the motions in their entirety. Plaintiffs have filed a notice of appeal, which
would be heard by the District Court. The Company believes that it has strong
defenses and intends to vigorously defend itself against the plaintiffs’ claims,
and believes the claims lack merit. However, an unfavorable resolution could
have a material adverse effect on the Company’s financial position, results of
operations and cash flows in the period which resolved.
In early 2008, Broadpoint Capital hired Tim O’Connor and 9 other
individuals to form a new restructuring and recapitalization group within
Broadpoint Capital’s Investment Banking segment. Mr. O’Connor, the new head
of Broadpoint Capital’s Investment Banking Division, and each of the other
employees are former employees of Imperial Capital, LLC (“Imperial”). Upon
Broadpoint Capital’s hiring of these employees, Imperial commenced an
arbitration proceeding against Broadpoint Capital, Mr. O’Connor, another
employee hired by Broadpoint Capital and a former employee of Imperial who is
not employed by Broadpoint Capital before the Financial Industry Regulatory
Authority (“FINRA”). In the arbitration, Imperial alleged various causes of
action against Broadpoint Capital as well as the individuals based upon alleged
violations of restrictive covenants in employee contracts relating to the
non-solicitation of employees and clients. Imperial claimed damages in excess of
$100 million. Concurrently with the filing of the arbitration proceeding,
Imperial sought and obtained a temporary restraining order in New York State
Supreme Court, pending the conclusion of the FINRA arbitration hearing,
enjoining Broadpoint from disclosing or making use of any confidential
information of Imperial, recruiting or hiring any employees of Imperial and
seeking or accepting as a client any client of Imperial, except those clients
for whom any of the hired individuals had provided services as a registered
representative while employed by Imperial. On April 17, 2008, Broadpoint
Capital, the other respondents, and Imperial entered into a Partial Settlement
whereby Imperial’s claims for injunctive relief were withdrawn and it was agreed
the temporary restraining order would be vacated. Imperial’s remaining claim for
damages arbitrated before FINRA at a hearing in September 2008. The Partial
Settlement provides, among other things, for the potential future payment of
amounts from Broadpoint to Imperial contingent upon the successful consummation
of, or receipt of fees in connection with, certain transactions. On
September 16, 2008, the Company agreed to a Settlement resolving all
remaining claims among the parties. In particular, in exchange for a $500,000
payment from Broadpoint Capital, Imperial released its claims against the
respondents. In addition, the respondents released the claims and defenses
raised by them against Imperial (including third-party claims asserted against
Imperial by Tim O’Connor), and the FINRA case was dismissed. The terms and
conditions of the Partial Settlement remain in effect.
Due to the nature of the Company’s business, the Company and its
subsidiaries are now, and likely in the future will be, involved in a variety of
legal proceedings, including the matters described above. These include
litigation, arbitrations and other proceedings initiated by private parties and
arising from our underwriting, financial advisory or other transactional
activities, client account activities and employment matters. Third parties who
assert claims may do so for monetary damages that are substantial, particularly
relative to the
75
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Company’s financial position. In addition, the securities industry is
highly regulated. The Company and its subsidiaries are subject to both routine
and unscheduled regulatory examinations of its business and investigations of
securities industry practices by governmental agencies and self-regulatory
organizations. In recent years securities firms have been subject to increased
scrutiny and regulatory enforcement activity. Regulatory investigations can
result in substantial fines being imposed on the Company and/or its subsidiaries. Periodically the
Company and its subsidiaries receive inquiries and subpoenas from the SEC, state
securities regulators and self-regulatory organizations. The Company does not
always know the purpose behind these communications or the status or target of
any related investigation. The responses to these communications have in the
past resulted in the Company and/or its
subsidiaries being cited for regulatory deficiencies, although to date these
communications have not had a material adverse effect on the Company’s business.
The Company has taken reserves in its financial statements with
respect to legal proceedings to the extent it believes appropriate. However,
accurately predicting the timing and outcome of legal proceedings, including the
amounts of any settlements, judgments or fines, is inherently difficult insofar
as it depends on obtaining all of the relevant facts (which is sometimes not
feasible) and applying to them often-complex legal principles. Based on
currently available information, the Company does not believe that any
litigation, proceeding or other matter to which it is are a party or otherwise
involved will have a material adverse effect on its financial position, results
of operations and cash flows although an adverse development, or an increase in
associated legal fees, could be material in a particular period, depending in
part on the Company’s operating results in that period.
The Company is contingently liable under bank stand-by letter of
credit agreements, executed in connection with office leases, totaling
$4.0 million at December 31, 2008. The letter of credit agreements
were collateralized by cash of $4.0 million at December 31, 2008.
Other
The Company utilizes various economic hedging strategies to actively
manage its market, credit and liquidity exposures. The Company also may purchase
and sell securities on a when-issued basis. At December 31, 2008, the
Company had no outstanding underwriting commitments, had not purchased or sold
any securities on a when-issued basis, and had entered into sale agreements on
TBA mortgage-backed securities in the amount of $151.2 million and purchase
agreements in the amount of $5.1 million.
NOTE 14.
Mandatory Redeemable
Preferred Stock
On June 27, 2008the Company entered into the Preferred Stock
Purchase Agreement with Mast for the issuance and sale of (i) 1,000,000
newly-issued unregistered shares of Series B Preferred Stock and
(ii) a warrant to purchase 1,000,000 shares of the Company’s common
stock, at an exercise price of $3.00 per share (the “Warrant”), for an aggregate
cash purchase price of $25 million. The Series B Preferred Stock is
recorded as a liability per SFAS No. 150, Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
The Preferred Stock Purchase Agreement and the Series B
Preferred Stock include, among other things, certain negative covenants and
other rights with respect to the operations, actions and financial condition of
the Company and its subsidiaries so long as the Series B Preferred Stock
remains outstanding. Cash dividends of 10 percent per annum must be paid on
the Series B Preferred Stock quarterly, while an additional dividend
76
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of 4 percent per annum accrues and is cumulative, if not
otherwise paid quarterly at the option of the Company. The Series B
Preferred Stock must be redeemed on or before June 27, 2012.
The Warrant is subject to customary anti-dilution provisions and
expires June 27, 2012. Concurrently with the execution of the Preferred
Stock Purchase Agreement, the Company and Mast entered into a Registration
Rights Agreement, dated as of June 27, 2008 (the “Registration Rights
Agreement”), with respect to the shares of Common Stock that are issuable to
Mast pursuant to the Warrant (the “Warrant Shares”). Pursuant to the
Registration Rights Agreement, Mast has the right to request registration of the
Warrant Shares if at any time the Company proposes to register common stock for
its own account or for another, subject to certain exceptions for underwriting
requirements. In addition, under certain circumstances Mast may demand a
registration of no less than 300,000 Warrant Shares. The Company must register
such Warrant Shares as soon as practicable and in any event within forty-five
(45) days after the demand. The Company will bear all of the costs of all
such registrations other than underwriting discounts and commissions and certain
other expenses.
Concurrently with the execution of the Preferred Stock Purchase
Agreement, the Company and Mast entered into a Preemptive Rights Agreement (the
“Preemptive Rights Agreement”). The Preemptive Rights Agreement provides that in
the event that the Company proposes to offer or sell any equity securities of
the Company below the current market price, the Company shall first offer such
securities to Mast to purchase; provided, however, that in the case of equity
securities being offered to MatlinPatterson, Mast shall only have the right to
purchase its pro rata share of such securities (based upon common stock
ownership on a fully diluted basis). If Mast exercises such right to purchase
the offered securities, Mast must purchase all (but not a portion) of such
securities for the price, terms and conditions so proposed. The preemptive
rights do not extend to (i) common stock issued to employees or directors
pursuant to a plan or agreement approved by the Board of Directors,
(ii) issuance of securities pursuant to a conversion of convertible
securities, (iii) stock splits or stock dividends or (iv) issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or exchange of
stock or otherwise.
The Black-Scholes option pricing model is used to determine the fair
value of Warrant.
NOTE 15.
Temporary
Capital
In connection with the Company’s acquisition of Broadpoint
Securities, the Company issued 549,476 shares of stock which provided the
Sellers the right (the “put right”) to require the Company to purchase back the
shares issued, at a price of $6.14 per share. Accordingly, the Company has
previously recognized as temporary capital the amount that it would have been
required to pay under the agreement. The Company also had the right to purchase
back these shares from the Sellers at a price of $14.46 (the “call right”). As a
result, the Company had classified the shares relating to the put and call
rights as temporary capital. The put and call rights were to expire on the date
upon which the final earn-out payment in connection with the acquisition was
required to be made. The earn-out period ended on May 31, 2007 and the
final earn-out payment was made on May 29, 2008. In June 2006, certain of
the Sellers of Broadpoint Securities exercised their put rights and the Company
repurchased 532,484 shares at $6.14 per share for the total amount
77
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of $3.3 million. The remaining put rights expired as of
May 29, 2008. Subsequently, the Company reclassified the temporary capital
to stockholders’ equity.
NOTE 16.
Stockholders’
Equity
MatlinPatterson
Transaction
On September 21, 2007, the Company closed the investment from an
affiliate of MatlinPatterson in which the Company received net proceeds from the
sale of common stock of $45.8 million. Pursuant to the Investment
Agreement, MatlinPatterson, received 41.5 million newly issued shares and
two co-investors received a total of 0.5 million newly issued shares which
represent approximately 71.7 percent and 0.8 percent, respectively, of
the issued and outstanding voting power of the Company immediately following the
closing of the investment transactions. The number of shares issued to
MatlinPatterson and its co-investors were subject to upward adjustment within
60 days of the Closing in accordance with the terms of the Investment
Agreement based on final calculations of the Company’s net tangible book value
per share. Included in the 42 million newly issued shares above, are
additional shares of common stock of the Company which were issued pursuant to
the upward adjustment in the amount 3.6 million, of which approximately
3.59 million shares are allocated to MatlinPatterson and approximately
0.04 million shares are allocated to the co-investors.
Dividends
In May 2005, the Board of Directors suspended the $0.05 per share
dividend.
Acquisition — Broadpoint
Securities, Inc.
In connection with the Company’s acquisition of Broadpoint
Securities, the Company issued 549,476 shares of stock which provided the
Sellers the right (the “put right”) to require the Company to purchase back the
shares issued, at a price of $6.14 per share. Accordingly, the Company has
previously recognized as temporary capital the amount that it would have been
required to pay under the agreement. The Company also had the right to purchase
back these shares from the Sellers at a price of $14.46 (the “call right”). As a
result, the Company had classified the shares relating to the put and call
rights as temporary capital. The put and call rights were to expire on the date
upon which the final earn-out payment in connection with the acquisition was
required to be made. The earn-out period ended on May 31, 2007 and the
final earn-out payment was made on May 29, 2008. In June 2006, certain of
the Sellers of Broadpoint Securities exercised their put rights and the Company
repurchased 532,484 shares at $6.14 per share for the total amount of
$3.3 million. The remaining put rights expired as of May 29, 2008.
Subsequently, the Company reclassified the temporary capital to stockholders’
equity.
Rights
Plan
On March 27, 1998, the Board of Directors adopted a Shareholder
Rights Plan. The rights were distributed as a dividend of one right for each
share of Broadpoint Securities Group, Inc common stock outstanding, with a
record date of March 30, 1998. Management believes the Shareholder Rights
Plan is intended to deter coercive takeover tactics and strengthen the Company’s
ability to deal with an unsolicited takeover proposal.
On May 14th, 2007, in connection
with the MatlinPatterson investment transaction, the Company amended the Rights
Agreement. Pursuant to the Rights Amendment, the definition of an “Acquiring
Person”, as defined in the Rights Agreement, was amended to provide that
MatlinPatterson, its affiliates or any group (as defined in Section 13(d)
of the Exchange Act) in which it is a member would not become an Acquiring
Person as a result of the execution and delivery of the Voting Agreements (as
defined in the Investment Agreement) and the consummation of the transactions
contemplated by the Investment Agreement. In addition, the definitions
78
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of “Distribution Date” and “Shares Acquisition Date”, as defined in
the Rights Agreement, were amended to provide that the execution and delivery of
the Voting Agreements and the Investment Agreement and the consummation of the
investment transaction contemplated by the Investment Agreement would not result
in the occurrence of a Distribution Date or a Shares Acquisition Date.
In 2003, the Company issued a Senior Note dated June 13, 2003
for $10 million with a fixed interest rate of 8.5%, payable semiannually
and maturing on June 30, 2010. After adjustments related to anti-dilutive
provisions stemming from the MatlinPatterson and Mast investments there were
483,601 warrants issued to the purchasers of the Senior Note, which are
exercisable between $9.10 and $10.42 per share through June 13, 2010. The
Senior Note was paid in full in March 2006, while the warrants are still
outstanding.
Deferred Compensation and Employee
Stock Trust
The Company has adopted or may hereafter adopt various nonqualified
deferred compensation plans (the “Deferred Plans”) for the benefit of a select
group of highly compensated employees who contribute significantly to the
continued growth and development and future business success of the Company.
Deferred Plan participants may elect under the Deferred Plans to have the value
of their Deferred Plans Accounts track the performance of one or more investment
benchmarks available under the Deferred Plans, including Broadpoint Securities
Group Common Stock Investment Benchmark, which tracks the performance of the
Company’s common stock. With respect to the Broadpoint Securities Group Common
Stock Investment Benchmark, the Company contributes Company Stock to a rabbi
trust (the “Trust”) it has established in connection with meeting its related
liability under the Deferred Plans. As of February 28, 2007, the Company no
longer permits any new amounts to be deferred under its current Deferred Plans.
Assets of the Trust have been consolidated with those of the Company.
The value of the Company’s common stock at the time contributed to the Trust has
been classified in stockholders’ equity and generally accounted for in a manner
similar to treasury stock.
The deferred compensation arrangement requires the related liability
to be settled by delivery of a fixed number of shares of Company common stock.
Accordingly, the related liability is classified in equity under deferred
compensation and changes in the fair market value of the amount owed to the
participant in the Deferred Plan is not recognized.
Mast Private
Placement
On March 4, 2008the Company entered into a stock purchase
agreement (the “Stock Purchase Agreement”) with MatlinPatterson, Mast and
certain Individual Investors listed on the signature pages to the Stock Purchase
Agreement (the “Individual Investors”, and together with the MatlinPatterson and
Mast, the “Investors”) for the issuance and sale of 11,579,592 newly-issued
unregistered shares of common stock of the Company, for an aggregate cash
purchase price of approximately $19.7 million.
Concurrently with the execution of the Stock Purchase Agreement, the
Company entered into a Registration Rights Agreement, dated as of March 4,2008 (the “Mast Registration Rights Agreement”), with Mast with respect to the
shares that Mast purchased in the Private Placement (the “Mast Shares”).
Pursuant to the Mast Registration Rights Agreement, the Company was required to
file a registration statement within 30 days following March 4, 2008
with the Securities and Exchange Commission for the registration resale of the
Mast Shares in an offering on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act (the “Mast Shelf Registration”). The
Company agreed to bear all of the costs of the Mast Shelf Registration other
than underwriting discounts and commissions and certain other expenses. On
April 1, 2008, the
79
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Company filed a registration statement on Form S-3 for the registration resale of
the Mast Shares and, on April 29, 2008, the Company’s registration
statement was declared effective.
Mast
Warrant
On June 27, 2008, the Company entered into the Preferred Stock
Purchase Agreement with Mast for the issuance and sale of (i) 1,000,000
newly-issued unregistered shares of Series B Preferred Stock and
(ii) a warrant to purchase 1,000,000 shares of the Company’s common
stock, at an exercise price of $3.00 per share (the “Warrant”), for an aggregate
cash purchase price of $25 million.
The Warrant is subject to customary anti-dilution provisions and
expires June 27, 2012. Concurrently with the execution of the Preferred
Stock Purchase Agreement, the Company and Mast entered into a Registration
Rights Agreement, dated as of June 27, 2008 (the “Registration Rights
Agreement”), with respect to the shares of Common Stock that are issuable to
Mast pursuant to the Warrant (the “Warrant Shares”). Pursuant to the
Registration Rights Agreement, Mast has the right to request registration of the
Warrant Shares if at any time the Company proposes to register common stock for
its own account or for another, subject to certain exceptions for underwriting
requirements. In addition, under certain circumstances Mast may demand a
registration of no less than 300,000 Warrant Shares. The Company must register
such Warrant Shares as soon as practicable and in any event within forty-five
(45) days after the demand. The Company will bear all of the costs of all
such registrations other than underwriting discounts and commissions and certain
other expenses.
Concurrently with the execution of the Preferred Stock Purchase
Agreement, the Company and Mast entered into a Preemptive Rights Agreement (the
“Preemptive Rights Agreement”). The Preemptive Rights Agreement provides that in
the event that the Company proposes to offer or sell any equity securities of
the Company below the current market price, the Company shall first offer such
securities to Mast to purchase; provided, however, that in the case of equity
securities being offered to MatlinPatterson, Mast shall only have the right to
purchase its pro rata share of such securities (based upon common stock
ownership on a fully diluted basis). If Mast exercises such right to purchase
the offered securities, Mast must purchase all (but not a portion) of such
securities for the price, terms and conditions so proposed. The preemptive
rights do not extend to (i) common stock issued to employees or directors
pursuant to a plan or agreement approved by the Board of Directors,
(ii) issuance of securities pursuant to a conversion of convertible
securities, (iii) stock splits or stock dividends or (iv) issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or exchange of
stock or otherwise.
Acquisition — American
Technologies Research Holdings, Inc.
In connection with the Company’s acquisition of American Technology
Research Holdings, Inc. (“AmTech”) the Company purchased the AmTech common stock
for a purchase price of $10.0 million in cash, an aggregate of
2,676,437 shares of common stock, par value $0.01 per share, of the
Company, which are subject to transfer restrictions that will lapse ratably over
the three years following the closing, and an aggregate of 323,563 shares
of restricted stock (the “Restricted Stock Consideration”) from the Incentive
Plan, subject to vesting over a three year period based on continued employment
with Broadpoint AmTech. The Restricted Stock Consideration was paid on
January 2, 2009, pursuant to the terms of the agreement. The Sellers will
also have the right to receive certain earn-out payments, consisting of
approximately 100 percent of the profits earned by Broadpoint AmTech in the
fourth quarter of fiscal year 2008 and all of fiscal years 2009, 2010 and 2011,
up to an aggregate of $15 million in profits. The Sellers also will have
the right to receive earn-out payments consisting of 50 percent of such
profits in excess of $15 million. All such earn-out payments will be paid
50 percent in cash and, depending on the recipient thereof, either
50 percent in Company common stock, which will be subject to transfer
restrictions that will lapse ratably over the three years following issuance, or
50 percent in restricted stock from the Incentive Plan, subject to vesting
based on
80
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
continued employment with Broadpoint AmTech. At December 31,2008the Company had accrued $0.9 million for contingent consideration.
NOTE 17.
Income
Taxes
The components of Income (loss) from continuing operations before
income taxes follow:
2008
2007
2006
(In thousands of
dollars)
U.S
$
(17,278
)
$
(19,191
)
$
(43,813
)
Foreign
(22
)
(186
)
(158
)
Total
$
(17,300
)
$
(19,377
)
$
(43,971
)
The income tax provision was allocated as follows for the years ended
December 31:
2008
2007
2006
(In thousands of
dollars)
Loss from continuing
operation
$
2,424
$
(4,703
)
$
(828
)
Income from
discontinued operations
—
4,747
959
Stockholders’ equity (additional paid-in
capital)
—
(122
)
—
Total
$
2,424
$
(78
)
$
131
Pursuant to the intraperiod allocation rules in FASB Statement
No. 109, the Company recorded an income tax benefit in continuing
operations to offset tax expense recorded in discontinued operations in 2007 and
2006, despite the valuation allowance position. The gains in discontinued
operations for the years ended December 31, 2007 and 2006 were due to the
sale and related discontinuance of the Municipal Capital Markets division.
The components of income taxes attributable to loss from continuing
operations, net of valuation allowance, consisted of the following for the years
ended December 31:
2008
2007
2006
(In thousands of
dollars)
Federal
Current
$
—
$
(3,524
)
$
(501
)
Deferred
—
—
—
State and local
Current
2,424
(861
)
(327
)
Deferred
—
(318
)
—
Total income tax
expense (benefit)
$
2,424
$
(4,703
)
$
(828
)
81
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The expected income tax expense (benefit) using the federal statutory
rate differs from income tax benefit pertaining to pretax loss from continuing
operations as a result of the following for the years ended December 31:
2008
2007
2006
(In thousands of
dollars)
Income taxes at federal
statutory rate @ 35%
$
(5,174
)
$
(11,069
)
$
(16,604
)
Graduated tax rates
148
316
475
State and local income
taxes, net of federal income taxes and state valuation allowance
(1,205
)
(756
)
(201
)
Meals and entertainment
156
106
134
Other compensation
281
883
365
Preferred stock
dividends
676
—
Uncertain tax positions
2,424
—
—
Goodwill impairment
—
—
2,682
Appreciated stock
contribution
—
—
—
Other, including
reserve adjustments
(52
)
1
436
Alternative minimum tax
—
47
21
Change in federal and
foreign valuation allowance
5,170
5,769
11,864
Total income tax
expense (benefit)
$
2,424
$
(4,703
)
$
(828
)
The deferred tax assets and liabilities consisted of the following at
December 31:
2008
2007
(In thousands of
dollars)
Securities held for
investment
$
(732
)
$
(1,550
)
Fixed assets
2,830
1,685
Deferred compensation
5,581
4,460
Accrued liabilities
(40
)
639
Deferred revenue
(196
)
(430
)
Net operating loss
carryforwards
19,172
21,342
Intangible assets
(3,009
)
83
Deferred tax assets
under FIN 48
1,190
366
Other
229
726
Total net deferred tax
asset before valuation allowance
25,025
27,321
Less valuation
allowance
24,707
27,003
Total net deferred tax
asset
$
318
$
318
The Company maintains a valuation allowance at December 31, 2008
and 2007 as a result of uncertainties related to the realization of its net
deferred tax asset. The valuation allowance was established as a result of
weighing all positive and negative evidence, including the Company’s history of
cumulative losses over the past three years and the difficulty of forecasting
future taxable income. The valuation allowance reflects the conclusion of
management that is more likely than not that the benefit of the deferred tax
assets will not be realized. The Company recorded a net decrease in its deferred
tax valuation allowance in 2008 of $2.3 million and an increase in 2007 of
$5.2 million.
82
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
At December 31, 2008, the Company had available approximately
$0.6 million of foreign net operating loss carryforwards with indefinite
expiration dates and state and local net operating loss carryforwards that are
subject to various business apportionment factors and multiple jurisdictional
requirements when utilized that have expiration periods of between 5 and
20 years.
At December 31, 2008, the Company had federal net operating loss
carryforwards of $50.4 million, which expire between 2023 and 2028. These
net operating loss carryforwards have been reduced by the estimated impact of an
annual limitation described in IRC Section 382. In general, IRC
Section 382 places an annual limitation on the use of certain tax
attributes such as net operating losses. The annual limitation arose as a result
of an ownership change of the Company’s parent which occurred on
September 21, 2007. The Company is engaged in a study to finalize this
estimate, and any difference is not expected to have a material impact on the
financial statements because of the current valuation allowance.
As of January 1, 2007, the Company adopted the provisions of
FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). As a result of the implementation of FIN 48,
the Company recorded an increase in tax reserves of $0.7 million. The
increase in tax reserves had two components, $0.6 million of which was
accounted for as a reduction to the January 1, 2007 balance of retained
earnings and $0.1 million which was accounted for as a reduction to the
valuation allowance. Upon adoption and at December 31, 2007, the liability
for unrecognized tax benefits, including applicable interest and penalties, was
$1.0 million and $1.1 million, respectively.
The following table summarizes the activity related to our
unrecognized tax benefits:
At adoption, January 1, 2007, the amount of unrecognized tax
benefits that, if recognized, would favorably impact the effective tax rate is
$0.6 million if the Company is in a full valuation allowance when the
benefit is recognized and $0.5 million if the Company has no valuation
allowance at the time that the benefit is recognized. The corresponding amounts
are $0.7 million and $3.1 million at December 31, 2007 and
December 31, 2008, respectively, if the Company maintains a full valuation
allowance and $0.6 million and $2.3 million at December 31, 2007
and December 31, 2008, respectively, if the Company has no valuation
allowance at the time that the benefit is recognized. The difference between the
amounts of the corresponding benefits with versus without a valuation allowance
is the result of the indirect tax effects of the benefit in other jurisdictions.
The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of multiple state and local jurisdictions. As
of January 1, 2007 and December 31, 2007, with few exceptions, the
Company and its subsidiaries were no longer subject to U.S. federal tax or
state and local income tax examinations for years before 2003 and 2004,
respectively. The Company presently has an ongoing audit with the State of New
York.
The Company’s continuing practice is to recognize interest and
penalties related to income tax matters as a component of income tax. As of
December 31, 2008 and December 31, 2007, the Company had accrued
approximately $0.2 million and $0.3 million, respectively, of interest
and penalties included as a component of
83
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
the unrecognized tax benefit. During the year ended December 31,2008, $0.1 million of interest and penalties has been recognized as a
component of income tax.
NOTE 18.
Benefit
Plans
The Company has established several stock incentive plans through
which employees of the Company have been awarded stock options, restricted
stock, and restricted stock units, which expire at various times through
April 25, 2017. The following is a recap of all plans as of
December 31, 2008:
Shares authorized for
issuance
30,632,373
Share awards used:
Stock options granted
and outstanding
7,390,996
Restricted stock awards
granted and unvested
7,337,546
Restricted stock units
granted and unvested
6,303,214
Restricted stock units
granted and vested
1,882,500
Restricted stock units
committed not yet granted
1,125,000
Total share awards used
24,039,256
Shares available for
future awards
6,593,117
For the twelve-month period ended December 31, 2008 and
December 31, 2007, total compensation expense for share based payment
arrangements was $8.3 million and $5.6 million, respectively and the
related tax benefit was $0.0 for both periods. At December 31, 2008, the
total compensation expense related to non-vested awards, which are expected to
vest, not yet recognized is $25.3 million, which is expected to be
recognized over the remaining weighted average vesting period of 3.5 years.
At December 31, 2007, the total compensation expense related to non-vested
awards not yet recognized was $7.8 million.
The Incentive Plan allows awards in the form of incentive stock
options (within the meaning of Section 422 of the Internal Revenue Code),
nonqualified stock options, performance awards, or other stock based awards. The
Incentive Plan imposes a limit on the number of shares of the Company’s common
stock that may be subject to awards. On February 6, 2008, the Company’s
Board of Directors authorized, and on June 5, 2008, the Company’s
shareholders approved, an additional 10,675,000 shares for issuance
pursuant to the Plan. An award relating to shares may be granted if the
aggregate number of shares subject to then-outstanding awards, under the plan
and under the pre-existing plans, plus the number of shares subject to the award
being granted do not exceed the sum of (A) 25 percent of the number of
shares of common stock issued and outstanding immediately prior to the grant
plus (B) 10.675 million shares.
The restricted stock units committed but not yet granted are based on
employment agreements for the Chairman and Chief Executive Officer and the
President and Chief Operating Officer. The employment agreements include a set
vesting schedule and performance targets as determined by the Board of Directors
in consultation with such officer.
Cumulative Effect of
Accounting Change: Upon adoption of FAS 123(R) Share-Based Payment
on January 1, 2006, the Company recognized an after-tax gain of
approximately $0.4 million as the cumulative effect of a change in
accounting principle, primarily attributable to the requirement to estimate
forfeitures at the date of grant instead of recognizing them as incurred.
Options: Options
granted under the plans established by the Company have been granted at not less
than fair market value, vest over a maximum of five years, and expire six to ten
years after grant date.
84
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Unvested options are typically forfeited upon termination. Option
transactions for the three year period ended December 31, 2008, under the
plans were as follows:
At December 31, 2008, the stock options that were exercisable,
1,479,330, had a remaining average contractual term of 2.28 years. At
December 31, 2007, 1,035,962 options with an average exercise price of
$8.24 were exercisable; and at December 31, 2006, 1,804,056 options with an
average exercise price of $8.40 were exercisable. At December 31, 2008,
7,390,996 options outstanding had an intrinsic value of $1,969,334.
The following table summarizes information about stock options
outstanding under the plans at December 31, 2008:
Outstanding
Exercisable
Exercise
Average
Average
Price
Average Life
Exercise
Exercise
Range
Shares
(Years)
Price
Shares
Price
$1.43 — $1.64
3,850,000
3.24
$
1.44
1,283,334
$
1.44
$3.00 — $4.00
3,345,000
5.96
3.48
3,345,000
3.48
$4.61 — $5.80
98,359
3.70
5.59
98,359
5.59
$6.00 — $7.17
12,666
4.50
6.47
12,666
6.47
$8.23 — $14.98
84,971
0.63
9.02
84,971
9.02
7,390,996
4.45
$
2.51
4,824,330
$
3.08
The Black-Scholes option pricing model is used to determine the fair
value of options granted. For the twelve-month period ended December 31,2008, significant assumptions used to estimate the fair value of share based
compensation awards include the following:
2008
2007
2006
Expected term-option
6.00
6.00
—
Expected volatility
54
%
44
%
—
Expected dividends
—
—
—
Risk-free interest rate
2.1
%
4.9
%
—
85
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Since no options were granted during 2006, the above assumptions were
not established for 2006.
Restricted Stock
Awards/Restricted Stock Units: Restricted stock awards
under the plans have been valued at the market value of the Company’s common
stock as of the grant date and are amortized over the period in which the
restrictions are outstanding, which is typically 3-5 years. The Incentive
Plan also allows for grants of restricted stock units. Restricted stock units
give a participant the right to receive fully vested shares at the end of a
specified deferral period. Restricted stock units are generally subject to
forfeiture conditions similar to those of the Company’s restricted stock awards
granted under its other stock incentive plans historically. One advantage of
restricted stock units, as compared to restricted stock, is that the period
during which the award is deferred as to settlement can be extended past the
date the award becomes non-forfeitable, allowing a participant to hold an
interest tied to common stock on a tax deferred basis. Prior to settlement,
restricted stock units carry no voting or dividend rights associated with the
stock ownership.
Restricted stock awards/Restricted stock units for the three year
period ended December 31, 2008, under the plans were as follows:
The total fair value of awards vested, based on the market value of
the stock on the vest date, during the twelve-month periods ending
December 31, 2008 and 2007 was $4.4 million and $1.9 million,
respectively.
Stock Based Compensation
Awards: On January 20, 2007, the Company announced
an offer to eligible employees of the opportunity to rescind certain restricted
stock award agreements held by such eligible employees in return for an award of
stock appreciation rights. On May 17, 2007, the Company announced its
determination to amend and terminate this offer. Such actions, together with the
termination of the Company’s previously announced plan to reprice outstanding
employee stock options, had been agreed to by the Company as part of the
Company’s agreement with MatlinPatterson in connection with their investment in
the Company, pursuant to which the Company agreed to terminate the offer and its
previously announced plans to reprice outstanding employee stock options. The
offer terminated at 11:59 p.m. EDT, May 23, 2007. As a result of
this termination, the Company did not accept any tendered eligible restricted
shares and all such shares remained outstanding pursuant to their original terms
and conditions, including their vesting schedule.
86
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Other
The Company also maintains a tax deferred profit sharing plan
(Internal Revenue Code Section 401(k) Plan), which permits eligible
employees to defer a percentage of their compensation. Company contributions to
eligible participants may be made at the discretion of the Board of Directors of
the Company. The Company expensed $0.4 million, $0.1 million, and
$0.2 million in each of the years ended December 31, 2008, 2007, and
2006 respectively.
The Company has various other cash and benefit programs that are
offered to eligible employees. Amounts awarded vest over periods ranging up to
five years. Costs are amortized over the vesting period, and approximated to be
$1.3 million in 2008, $0.6 million in 2007, and $2.6 million in
2006. In conjunction with the sale of the Municipal Capital Markets Group,
approximately $0.01 million in deferred compensation was forfeited in 2007.
Also, due to the changes in control which occurred on September 21, 2007 as
a result of the MatlinPatterson investment transaction, $0.04 million in
expense was recognized as accelerated vesting under the Plans.
At December 31, 2008 and December 31, 2007, there was
approximately $1.3 million and $2.9 million, respectively, of accrued
compensation on the Statements of Financial Condition related to deferred
compensation plans provided by the Company, which will be paid out between 2009
and 2016. As of February 28, 2007, the Company no longer permits any new
amounts to be deferred under these plans.
The Company has elected to apply the alternative transition method to
calculate the historical pool of windfall tax benefits available as of the date
of adoption of FAS 123(R) as described in FASB Staff Position
No. FAS 123(R)-3.
Deferred tax assets relating to tax benefits of employee stock option
grants have been reduced to reflect exercises for the year ended
December 31, 2008. Some exercises resulted in tax deductions in excess of
previously recorded benefits based on the option value at the time of grant
(“windfalls’). Although these additional tax benefits or “windfalls” are
reflected in net operating tax loss carryforwards, pursuant to SFAS 123(R),
the additional tax benefit associated with the “windfall” is not recognized
until the deduction reduces taxes payable. Accordingly, since the tax benefit
does not reduce our current taxes payable for the year ended December 31,2008 due to net operating loss carryforwards, these “windfall” tax benefits are
not reflected in our net operating losses in deferred tax assets for the year
ended December 31, 2008. “Windfalls” included in net operating loss
carryforwards but not reflected in deferred tax assets for the year ended
December 31, 2008 are $0.1 million.
NOTE 19.
Net Capital
Requirements
Broadpoint Capital is subject to the net capital requirements of
Rule 15c3-1 of the Securities and
Exchange Act of 1934 as amended (the “Net Capital Rule”), which requires the
maintenance of a minimum net capital. Broadpoint Capital has elected to use the
alternative method permitted by the rule, which requires it to maintain a
minimum net capital amount of 2 percent of aggregate debit balances arising
from customer transactions as defined or $0.25 million, whichever is
greater. As of December 31, 2008, Broadpoint Capital had net capital, as
defined, of $26.3 million and $26.1 million in excess of the
$0.25 million required minimum net capital.
Broadpoint AmTech is also subject to the Net Capital Rule which
requires the maintenance of minimum net capital of $100,000 or 62/3 percent of aggregate indebtedness,
whichever is greater. Aggregate indebtedness to net capital shall not exceed
15:1. At December 31, 2008, Broadpoint AmTech had net capital, as defined,
of $1.1 million, which was $1.2 million in excess of its required
minimum net capital of $0.2 million. Broadpoint AmTech ratio of aggregate
indebtedness to net capital was 2.5:1.
87
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
NOTE 20.
Trading
Activities
As part of its trading activities, the Company provides brokerage and
underwriting services to its institutional clients. While trading activities are
primarily generated by client order flow, the Company also takes selective
proprietary positions based on expectations of future market movements and
conditions and to facilitate institutional client transactions. Interest revenue
and expense are integral components of trading activities. In assessing the
profitability of trading activities, the Company views net interest and
principal transactions revenues in the aggregate. Certain trading activities
expose the Company to market and credit risks.
Market Risk
As of December 31, 2008, the Company had approximately
$8.5 million of securities owned which were considered non-investment
grade. Non-investment grade securities are defined as debt and preferred equity
securities rated as BB+ or lower or equivalent ratings by recognized credit
rating agencies. These securities have different risks than investment grade
rated investments because the companies are typically more highly leveraged and
therefore more sensitive to adverse economic conditions and the securities may
be more thinly traded or not traded at all.
Market risk is the potential change in an instrument’s value caused
by fluctuations in interest rates, equity prices, prepayment risk, or other
risks. The level of market risk is influenced by the volatility and the
liquidity in the markets in which financial instruments are traded. The
following discussion describes the types of market risk faced by the Company:
Interest Rate
Risk: Interest rate risk arises from the possibility that
changes in interest rates will affect the value of financial instruments.
Equity Price
Risk: Equity price risk arises from the possibility that
equity security prices will fluctuate, affecting the value of equity securities.
Prepayment
Risk: Prepayment risk, which is related to the interest rate
risk, arises from the possibility that the rate of principal repayment on
mortgages will fluctuate, affecting the value of mortgage-backed securities.
The Company also has sold securities that it does not currently own
and will therefore be obligated to purchase such securities at a future date.
The Company has recorded these obligations in the financial statements at
December 31, 2008 at market values of the related securities and will incur
a loss if the market value of the securities increases subsequent to
December 31, 2008.
Concentrations of Credit
Risk
The Company’s exposure to credit risk associated with its trading and
other activities is measured on an individual counter party basis, as well as by
groups of counter parties that share similar attributes. Concentrations of
credit risk can be affected by changes in political, industry, or economic
factors. The Company’s most significant industry credit concentration is with
financial institutions. Financial institutions include other brokers and
dealers, commercial banks, finance companies, insurance companies and investment
companies. This concentration arises in the normal course of the Company’s
brokerage, trading, financing, and underwriting activities. To reduce the
potential for concentration of risk, credit limits are established and monitored
in light of changing counter party and market conditions. The Company also
purchases securities and may have significant positions in its inventory subject
to market and credit risk. Should the Company find it necessary to sell such a
security, it may not be able to realize the full carrying value of the security
due to the significance of the position sold.
88
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Securities transactions of the customers’ of the Company’s
broker-dealer subsidiaries’, Broadpoint Capital and Broadpoint AmTech are
cleared through third parties under clearing agreements. Under these agreements,
the clearing agents execute and settle customer securities transactions, collect
margin receivables related to these transactions, monitor the credit standing
and required margin levels related to these customers and, pursuant to margin
guidelines, require the customer to deposit additional collateral with them or
to reduce positions, if necessary.
In the normal course of business, Broadpoint Capital guarantees
certain service providers, such as clearing and custody agents, trustees, and
administrators, against specified potential losses in connection with their
acting as an agent of, or providing services to, the Company or its affiliates.
The Company also indemnifies some clients against potential losses incurred in
the event specified third-party service providers, including subcustodians and
third-party transactions. The maximum potential amount of future payments that
the Company could be required to make under these indemnifications cannot be
estimated. However, the Company believes that it is unlikely it will have to
make material payments under these arrangements and has not recorded any
contingent liability in the consolidated financial statements for these
indemnifications.
NOTE 21.
Derivative Financial
Instruments
Market
Risk
Derivative financial instruments involve varying degrees of
off-balance-sheet market risk, whereby changes in the level or volatility of
interest rates, or market values of the underlying financial instruments may
result in changes in the value of a particular financial instrument in excess of
the amounts currently reflected in the Consolidated Statements of Financial
Condition as Securities owned and Securities sold but not yet purchased at fair
value, with realized and unrealized gains and losses recognized in principal
transactions in the Consolidated Statements of Operations on a trade date basis.
Derivatives entered into by the Company include sale agreements on
TBA mortgage-backed securities. The Company enters into derivatives to
facilitate proprietary trading and to manage its risk exposures arising from
trading assets and liabilities. The settlement of these transactions is not
expected to have a material effect upon the Company’s consolidated financial
statements.
Derivative Financial
Instruments
The Company accounts for certain financial assets and liabilities at
fair value in accordance with Statement of Financial Accounting Standards,
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities”. A derivative is an instrument whose value is derived from an
underlying instrument or index. Acting in a trading capacity, the Company may
enter into derivative transactions to satisfy the needs of its clients and to
manage its own exposure to market and credit risks resulting from its trading
activities.
NOTE 22.
Segment
Analysis
In an effort to reflect the Company’s segments in a manner more
consistent with the way in which they are currently managed, the Company is
reflecting five business segments rather than the previously reported three
business segments. Beginning in the third quarter of 2008, the Equities segment
is now reported as two segments, Equities and Investment Banking and the Fixed
Income segment is now reported as two segments, Broadpoint Descap and Debt
Capital Markets. Prior periods disclosures have been adjusted to conform to the
current periods’ presentation.
The Company evaluates the performance of its segments and allocates
resources to them based on various factors, including prospects for growth,
return on investment, and return on revenue.
89
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Investment Banking segment provides capital raising and advisory
services to corporations and institutional investors. The Debt Capital Markets
segment provides sales and trading in a broad range of debt securities and
generates revenues primarily through commissions on the sales of these
securities. The Broadpoint DESCAP segment provides sales and trading in mortgage
and asset-backed securities and generates revenues primarily through principal
transactions and other trading activities associated with these securities. The
Equities segment provides sales, trading and research in equity securities
primarily through one of the Company’s broker-dealer subsidiaries, Broadpoint
AmTech, generating revenues through cash commissions on customer trades, hard
dollar fees for services and cash commissions on corporate repurchase
activities. The Other segment generates revenue from unrealized gains and losses
as a result of changes in the value of the firm’s investments and realized gains
and losses as a result of sales of equity holdings, and through the management
and investment of venture capital funds, this segment also includes the costs
related to corporate overhead and support including various fees associated with
legal and settlement expenses. Other also includes Restructuring expenses from
the Company’s plan announced on October 17, 2007 whereby the Company
determined that it would outsource certain administrative functions, consolidate
certain of such administrative functions in its New York City location, and
reduce staff in order to properly size its business consistent with its then
current level of activity. The Company has completed its restructuring plan to
properly size its infrastructure.
During 2007, the Company discontinued its Municipal Capital Markets
and Taxable Municipal Groups, which were previously included in the Fixed Income
segment. Also in 2007, the Company discontinued the Fixed Income Middle Markets
Group, which was previously included in the Fixed Income Other segment.
Sales and Trading net revenues consist of revenues derived from
commissions, principal transactions, net interest, and other fee related
revenues. Certain expenses not directly associated with specific reportable
business segments were not allocated during 2008 to each reportable business
segment’s net revenues, these expenses are reflected in the Other segment.
90
C:
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Information concerning operations in these segments is as follows:
for the year ended December 31:
2008
2007
2006
(In thousands of
dollars)
Net revenue (including net
interest income)
Equities
Sales and Trading
$
10,541
$
11,998
$
33,622
Investment Banking
434
1,039
4,817
Total Equities
10,975
13,037
38,439
Broadpoint Descap
Sales and Trading
50,806
14,534
17,338
Investment Banking
110
730
223
Total Broadpoint Descap
50,916
15,264
17,561
Debt Capital Markets
Sales and Trading
56,044
—
—
Investment Banking
3,297
—
—
Total Debt Capital
Markets
59,341
—
—
Investment Banking
12,855
6,287
21,610
Other
214
5,496
(4,722
)
Total Net Revenue
$
134,301
$
40,084
$
72,888
Income (Loss) before income
taxes and discontinued operations
Equities
$
(8,997
)
$
(12,286
)
$
(8,640
)
Descap
21,076
2,757
(922
)
Debt Capital Markets
5,887
—
—
Investment Banking
171
(1,391
)
12,199
Other
(32,943
)
(20,705
)
(50,078
)
Loss before income
taxes and discontinued operations
$
(14,806
)
$
(31,625
)
$
(47,441
)
The Company’s segments financial policies are the same as those
described in Note 1. All assets are located in the United States of
America. Prior periods’ financial information has been reclassified to conform
to the current presentation.
NOTE 23.
New Accounting
Standards
In March 2008, the FASB issued FASB 161, “Disclosures about
Derivative Instruments and Hedging Activities” (“FASB 161”). FASB 161 amends and
expands the disclosure requirements of FASB 133, “Accounting for Derivative
Instruments and Hedging Activities”, and requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair values and amounts of gains and losses on derivative contracts and
disclosures about credit-risk-related contingent features in derivative
agreements. FASB 161 is effective for the fiscal years and interim periods
beginning after November 15, 2008. Since FASB 161 requires additional
disclosures concerning derivatives and hedging activities, the adoption of FASB
161 will not affect the Company’s consolidated statement of financial condition
and results of operations.
91
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In April of 2008, the FASB issued FSP 142-3, “Determination of the Useful
Life of Intangible Assets” (FSP 142-3). FSP 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset. The
effective date for FSP 142-3 is
for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of FSP No. 142-3 on the consolidated statement
of financial condition and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (SFAS No. 162).
SFAS No. 162 sets forth the level authority attributed to a given
accounting pronouncement. SFAS No. 162 contains no specific disclosure
requirements. The effective date for implementation has yet to be determined.
In May 2008, the FASB issued SFAS No. 163, “Accounting for
Financial Guarantee Contracts” (SFAS No. 163). SFAS No. 163
requires disclosure of insurance enterprise’s risk-management activities. The
effective date for SFAS No. 163 is for fiscal years beginning after
December 15, 2008. SFAS No. 163 is not applicable to the Company.
In June 2008, FASB issued EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (EITF 03-06-1). EITF 03-06-1 applies to the calculation
of earnings per share under FASB No. 128 “Earnings Per Share” for
share-based payment awards with rights to dividends or dividend equivalents.
Unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The effective date for EITF 03-6-1 is for fiscal years
beginning after December 15, 2008. The Company is currently assessing the
impact of EITF 03-6-1 on the
consolidated statement of financial condition and results of operations.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value
of a Financial Asset When the Market for that Asset is not Active” (“FSP FAS 157-3”). FSP FAS 157-3 is consistent with the joint
press release the FASB issued with the Securities and Exchange Commission on
September 30, 2008, which provides general clarification guidance on
determining fair value under FASB 157 when markets are inactive. FSP FAS 157-3 specifically addresses the use
of judgment in determining whether a transaction in a dislocated market
represents fair value, the inclusion of market participant risk adjustments when
an entity significantly adjusts observable market data based on unobservable
inputs, and the degree of reliance to be placed on broker quotes or pricing
services. FSP FAS 157-3 is
effective October 10, 2008 and did not have a material affect on our
consolidated financial statements.
In December 2007, the FASB issued FASB 141 (revised 2007), Business
Combinations (“FASB 141R”). Under FASB 141R, an entity is required to recognize
the assets acquired, liabilities assumed, contractual contingencies and
contingent consideration measured at their fair value at the acquisition date
for any business combination consummated after the effective date. It further
requires that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008.
Accordingly, we will apply the provisions of FASB 141R to business combinations
occurring after January 1, 2009. Adoption of FASB 141R will not affect our
consolidated financial statements, but may have an effect on accounting for
future business combinations.
In December 2007, the FASB issued FASB 160, Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51
(“FASB 160”). FASB 160 requires an entity to clearly identify and present
ownership interests in subsidiaries held by parties other than the entity in the
consolidated financial statements within the equity section but separate from
the entity’s equity. It also requires the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the Consolidated Statement of Earnings;
changes in ownership interest be accounted for similarly, as equity
transactions; and when a subsidiary is deconsolidated, any retained
92
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
noncontrolling equity investment in the former subsidiary and the
gain or loss on the deconsolidation of the subsidiary be measured at fair value.
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and shall be applied prospectively,
except for the presentation and disclosure requirements, which shall be applied
retrospectively for all periods presented and is not expected to have a material
affect on our consolidated financial statements.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). FSP
FAS 140-4 and FIN 46(R)-8
require public entities to provide additional disclosures about transfers of
financial assets and require public enterprises to provide additional
disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 were
adopted for our year end consolidated financial statements as of
December 31, 2008 and did not affect our financial condition, results of
operations or cash flows as they require only additional disclosures.
NOTE 24.
Related Party
Transactions
Investment banking revenue from related parties disclosed on the
Consolidated Statement Of Operations represents $8.4 million of fees
received for the year ended December 31, 2008 for advisory engagements
performed for the majority shareholder of the Company.
In addition, from time to time, Broadpoint Capital provides brokerage
services to MatlinPatterson or its affiliated entities, which services are
provided by Broadpoint Capital in the ordinary course of its business. In 2008,
MatlinPatterson paid $0.3 million to Broadpoint Capital for such services.
NOTE 25.
Discontinued
Operations
In September 2007, the Company completed the asset sale agreement
with DEPFA for the sale of the Municipal Capital Markets Group in connection
with which the Company recognized a pre-tax gain on sale in the amount of
$7.9 million. In June 2007, the Company closed its Fixed Income Middle
Markets Group following the departure of the employees of the group. In April
2007, the Company closed its Institutional Convertible Bond Arbitrage Advisory
Group after committing to a plan to dispose of the group in September 2006.
Additionally, in May 2006, the Company closed its Taxable Fixed
Income corporate bond division. In February 2005, the Company sold its asset
management operations, other than its institutional convertible arbitrage group,
and, in 2000 sold its Private Client Group. The Company continues to report the
receipt and settlement of pending contractual obligations related to these
transactions as discontinued operations.
93
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Amounts reflected in the Consolidated Statements of Operations are
presented in the following table:
Years Ended
December 31
2008
2007
2006
(In thousands of
dollars)
Net revenues
Municipal Capital
Markets
$
156
$
22,259
$
36,724
Gain on Sale of
Municipal Capital Markets
—
7,944
—
Fixed Income Middle
Markets
—
1,160
5,175
Convertible Bond
Arbitrage
—
128
444
Taxable Fixed Income
—
94
3,083
Asset Management
Business
—
—
—
Private Client Group
—
—
—
Total net revenues
156
31,585
45,426
Expenses
Municipal Capital
Markets
133
17,717
30,837
Fixed Income Middle
Markets
5
955
2,892
Convertible Bond
Arbitrage
8
523
1,315
Convertible Bond
Arbitrage-Impairment Loss
—
—
1,534
Taxable Fixed Income
—
103
5,586
Asset Management
Business
—
—
14
Private Client Group
142
80
84
Total expenses
288
19,378
42,262
Income (loss) before
income taxes
(132
)
12,207
3,164
Income tax expense
—
4,747
959
Income (loss) from
discontinued operations, net of tax
$
(132
)
$
7,460
$
2,205
Municipal Capital
Markets
The revenue and expenses for the Municipal Capital Markets division
of the periods above reflect the activity of that operation through
September 14, 2007. The carrying value of assets of the division at
December 31, 2006 was approximately $156 million. The Company
allocated interest expense to the division for the years ended December 31,2007 and 2006 based on the level of securities owned, attributable to this
division. The Company had allocated interest expense to this division in the
amounts of $5.5 million and $7.5 million for the years ended
December 31, 2007 and 2006 based on the debt identified as being
specifically attributed to these operations. For the year ended
December 31, 2008 no interest has been allocated to Municipal Capital
Markets since this division was closed.
Fixed Income Middle
Markets
The revenues and expenses for the Fixed Income Middle Market division
reflect the activity of that operation through June 22, 2007. The Company
allocated interest expense to the division for the years ended December 31,2007 and 2006 based on the level of securities owned, attributable to this
division. The Company had allocated interest expense to this division in the
amounts of $1.3 million and $2.9 million for the years ended
December 31, 2007 and 2006 based on debt identified as being specifically
attributed to those operations. Such amounts are included net of interest income
and included in total net revenues. For the year
94
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
ended December 31, 2008 no interest has been allocated to Fixed
Income Middle Markets since this division was closed.
Convertible Bond Arbitrage
Advisory Group
The revenues and expenses for the Institutional Convertible Bond
Arbitrage Advisory Group (the “Group”) reflect the activity of that operation
prior to being disposed of in April 2007. The Company had allocated interest
expense to the Group operation in the amounts of $0.0 million and
$0.1 million for the years ended December 31, 2007 and 2006,
respectively, based on debt identified as being specifically attributed to those
operations. For information on the impairment loss for the year ended
December 31, 2006 related to the disposition of the group, see the
Note 8. Interest is allocated primarily based on intercompany
receivable/payables.
Taxable Fixed
Income
The revenues and expenses of the Taxable Fixed Income Corporate Bond
division for the year ended December 31, 2007 and 2006, include the
activity of the operation, including $1.7 million of costs related to
closing of this division, all of which was paid prior to December 31, 2006,
as well as other various residual activity in 2007 and 2006. No interest has
been allocated to Taxable Fixed Income since this division was closed. Prior to
closing this division, interest was allocated primarily based on the level of
securities owned attributable to this division.
Asset Management
Operations
The revenue and expense of the Asset Management operations for the
year ended December 31, 2007 and 2006 relates primarily to write-downs of
receivables related to this operation following its sale. The Company had
allocated interest expense to the asset management. Interest is allocated
primarily based on intercompany receivables/payables.
Private Client
Group
The Private Client Group’s expense for the year ended
December 31, 2008, 2007, and 2006 relates primarily to legal matters which
were related to the operations prior to its disposal. For the periods presented,
interest was not allocated to the Private Client Group.
NOTE 26.
Restructuring
On October 17, 2007, the Company announced a plan whereby the
Company determined that it would outsource certain of its administrative
functions, consolidate certain of such functions in its New York City location,
and reduce staff in order to properly size its business consistent with its then
current levels of activity. In connection with the plan, the Company recognized
approximately $4.3 million of expense in the period ended December 31,2008, of which $1.1 million relates to termination benefits and
$3.2 million is related to occupancy and other expenses. The Company
completed its restructuring plan to properly size its infrastructure in the
third quarter of 2008.
95
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table summarizes the restructuring charges incurred by
the Company for the years ended December 31, 2008 and 2007 follows:
Years Ended
December 31
2008
2007
(In thousands of
dollars)
Severance
$
1,056
$
1,108
Real Estate Exit Costs
2,104
1,019
Asset Impairments
1,146
538
Other
9
33
Total Restructuring
Charges
$
4,315
$
2,698
In connection with the plan, the Company has recorded a liability of
approximately $1.4 million at December 31, 2008 most of which relates
to real estate exit/impairment costs. These real estate leases will expire in
2013.
The following tables summarize the changes in the Company’s liability
relating to the plan for the year ended December 31, 2008:
On October 2, 2008, pursuant to the terms of the stock purchase
agreement, dated as of September 2, 2008 by and among the Company, American
Technology Research Holdings, Inc. (“AmTech”) and the shareholders of AmTech
(the “Sellers”), the Company completed its acquisition of all of the issued and
outstanding shares of common stock of AmTech and the cancellation of all
outstanding options to purchase AmTech Common Stock held by the Sellers.
AmTech, a broker-dealer specializing in institutional research, sales
and trading in the information technology, cleantech and defense areas, was
founded in 2002 by a team of professionals formerly with SoundView Technology
Group, Inc.
96
BROADPOINT SECURITIES GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Under the terms of the agreement, the Company purchased the AmTech
common stock for a purchase price of $10.0 million in cash, an aggregate of
2,676,437 shares of common stock, par value $0.01 per share, of the
Company, which are subject to transfer restrictions that will lapse ratably over
the three years following the closing, and an aggregate of 323,563 shares
of restricted stock (the “Restricted Stock Consideration”) from the Incentive
Plan, subject to vesting over a three year period based on continued employment
with Broadpoint AmTech. The Restricted Stock Consideration was paid on
January 2, 2009, pursuant to the terms of the agreement. The Sellers will
also have the right to receive certain earn-out payments, consisting of
approximately 100 percent of the profits earned by Broadpoint AmTech in the
fourth quarter of fiscal year 2008 and all of fiscal years 2009, 2010 and 2011,
up to an aggregate of $15 million in profits. The Sellers also will have
the right to receive earn-out payments consisting of 50 percent of such
profits in excess of $15 million. All such earn-out payments will be paid
50 percent in cash and, depending on the recipient thereof, either
50 percent in Company common stock, which will be subject to transfer
restrictions that will lapse ratably over the three years following issuance, or
50 percent in restricted stock from the Incentive Plan, subject to vesting
based on continued employment with Broadpoint AmTech. At December 31, 2008the Company had accrued $0.9 million for contingent consideration. (see
Note 13)
The following table summarizes the estimated fair value of assets
acquired and liabilities assumed at the date of the acquisition:
On March 3, 2009, the Company announced that it agreed to
acquire Gleacher Partners, an internationally recognized financial advisory
boutique best known for advising major corporations in mergers and acquisitions.
Under the terms of the merger agreement, Broadpoint will pay the selling
stockholders of Gleacher Partners, $20 million in cash and issue
23 million shares of common stock subject to resale restrictions.
MatlinPatterson FA Acquisition LLC, Broadpoint’s majority shareholder, has
approved the issuance of the shares of Broadpoint common stock in the
transaction. At closing, the Company will change its name to Broadpoint Gleacher
Securities Group, Inc.
97
BROADPOINT SECURITIES GROUP,
INC.
SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL
DATA (Unaudited) (In thousands of dollars, except per share
data)
2008 Quarters
Ended
Mar 31
Jun 30
Sep 30
Dec 31
Total revenues
$
20,162
$
35,089
$
34,991
$
54,772
Interest expense
2,819
1,009
2,671
4,213
Net revenues
17,343
34,080
32,320
50,559
Total expenses
(excluding interest)
25,818
34,333
40,241
48,715
(Loss) income before
income taxes
(8,475
)
(253
)
(7,921
)
1,844
Income tax expense
773
763
870
19
(Loss) income from
continuing operations
(9,248
)
(1,016
)
(8,791
)
1,825
Income (loss) from
discontinued operations, net of taxes
5
(79
)
(47
)
(11
)
Net income (loss)
$
(9,243
)
$
(1,095
)
$
(8,838
)
$
1,814
Net income (loss) per
common and common equivalent share
Basic
Continuing operations
$
(0.15
)
$
(0.02
)
$
(0.13
)
$
0.02
Discontinued operations
—
—
—
—
Net income (loss)
$
(0.15
)
$
(0.02
)
$
(0.13
)
$
0.02
Dilutive
Continuing operations
$
(0.15
)
$
(0.02
)
$
(0.13
)
$
0.02
Discontinued operations
—
—
—
—
Net income (loss)
$
(0.15
)
$
(0.02
)
$
(0.13
)
$
0.02
The sum of the quarter earnings per share amount does not always
equal the full fiscal year’s amount due to the effect of averaging the number of
shares of common stock and common stock equivalents throughout the year.
98
BROADPOINT SECURITIES GROUP,
INC.
SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL
DATA (Unaudited) — (Continued) (In thousands of dollars, except
per share data)
2007 Quarters
Ended
Mar 31
Jun 30
Sep 30
Dec 31
Total revenues
$
12,084
$
11,411
$
10,453
$
13,162
Interest expense
1,062
1,610
1,770
2,584
Net revenues
11,022
9,801
8,683
10,578
Total expenses
(excluding interest)
17,437
15,578
18,548
20,146
Loss before income
taxes
(6,415
)
(5,777
)
(9,865
)
(9,568
)
Income tax expense
(benefit)
(357
)
(146
)
(2,966
)
(1,234
)
Loss from continuing
operations
(6,058
)
(5,631
)
(6,899
)
(8,334
)
Income (loss) from
discontinued operations, net of taxes
1,596
654
5,224
(14
)
Loss before cumulative
effect of an accounting change
(4,462
)
(4,977
)
(1,675
)
(8,348
)
Net loss
$
(4,462
)
$
(4,977
)
$
(1,675
)
$
(8,348
)
Net income (loss) per
common and common equivalent share
Basic
Continuing operations
$
(0.39
)
$
(0.36
)
$
(0.34
)
$
(0.14
)
Discontinued operations
0.10
0.04
0.26
0.00
Net income (loss)
$
(0.29
)
$
(0.32
)
$
(0.08
)
$
(0.14
)
Dilutive
Continuing operations
$
(0.39
)
$
(0.36
)
$
(0.34
)
$
(0.14
)
Discontinued operations
0.10
0.04
0.26
0.00
Net income (loss)
$
(0.29
)
$
(0.32
)
$
(0.08
)
$
(0.14
)
The sum of the quarter earnings per share amount does not always
equal the full fiscal year’s amount due to the effect of averaging the number of
shares of common stock and common stock equivalents throughout the year.
99
Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
None.
Item 9A.
Controls and
Procedures
As of the end of the period covered by this Annual Report on Form 10-K, the Company’s management,
with the participation of the Chief Executive Officer and the Principal
Financial Officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, the Company’s management,
including the Chief Executive Officer and the Principal Financial Officer,
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by this report. In addition, no changes in
the Company’s internal control over financial reporting occurred during the
fourth quarter of the Company’s fiscal year ended December 31, 2008 that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting
Management of Broadpoint Securities Group, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. Pursuant to the rules and regulations of the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company;
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Management has evaluated the effectiveness of its internal control
over financial reporting as of December 31, 2008 based on the control
criteria established in a report entitled Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on such evaluation we have concluded that Broadpoint
Securities Group, Inc.’s internal control over financial reporting was effective
as of December 31, 2008.
The Company has excluded Broadpoint AmTech from our assessment of
internal controls over financial reporting as of December 31, 2008, because
it was acquired in the fourth quarter of 2008. Broadpoint AmTech is a
consolidated subsidiary of Broadpoint Securities Group Inc. whose total assets
and net revenues comprise 1 percent and 5 percent respectively, of the
related consolidated financial statement amounts as of and for the year ended
December 31, 2008.
This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
100
Item 9B.
Other
Information
On March 3, 2009, the Company announced that it agreed to
acquire Gleacher Partners, an internationally recognized financial advisory
boutique best known for advising major corporations in mergers and acquisitions.
Under the terms of the merger agreement, Broadpoint will pay the selling
stockholders of Gleacher Partners, $20 million in cash and issue
23 million shares of common stock subject to resale restrictions.
MatlinPatterson FA Acquisition LLC, Broadpoint’s majority shareholder, has
approved the issuance of the shares of Broadpoint common stock in the
transaction. At closing, the Company will change its name to Broadpoint Gleacher
Securities Group, Inc.
The information required by this item with respect to our directors,
our executive officers, our Audit Committee and Audit Committee financial
expert, our compliance with Section 16(a) of the Securities Exchange Act of
1934 and our code of ethics for senior officers will be contained in the
Company’s definitive proxy statement for the Annual Meeting of Shareholders to
be held May 14, 2009. Such information is incorporated herein by reference.
Our Code of Business Conduct and Ethics applies to all directors,
officers and employees, including our Chief Executive Officer, our Chief
Financial Officer and Principal Accounting Officer. You can find our Code of
Business Conduct and Ethics on our internet site, www.bpsg.com. We will
post any amendments to the Code of Business Conduct and Ethics and waivers that
are required to be disclosed by the rules of either the SEC or The NASDAQ Global
Market on our internet site.
Item 11.
Executive
Compensation
The information required by this item will be contained under the
caption “Compensation of Executive Officers”, “Director Compensation For Fiscal
Year 2008”, “Compensation Committee Interlocks and Insider Participation” and
“Executive Compensation Committee Report” in the Company’s definitive proxy
statement for the Annual Meeting of Shareholders to be held May 14, 2009.
Such information is incorporated herein by reference.
Item 12.
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item will be contained under the
caption “Stock Ownership of Principal Owners and Management” and “Equity
Compensation Plan Information” in the Company’s definitive proxy statement for
the Annual Meeting of Shareholders to be held May 14, 2009. Such
information is incorporated herein by reference.
Item 13.
Certain Relationships and
Related Transactions, and Directory
Independence
The information required by this item will be contained under the
caption “Certain Relationships and Related Transactions” in the Company’s
definitive proxy statement for the Annual Meeting of Shareholders to be held
May 14, 2009. Such information is incorporated herein by reference.
Item 14.
Principal Accountant Fees
and Services
Information with respect to fees and services related to the
Company’s independent registered public accounting firm, PricewaterhouseCoopers
LLP, and the disclosure of the Audit Committee’s pre-approved policies and
procedures are contained in the definitive Proxy Statement for the Annual
Meeting of Shareholders of Broadpoint Securities Group, Inc. to be held
May 14, 2009, and are incorporated herein by reference.
101
Part IV
Item 15.
Exhibits, Financial
Statement Schedule
(a) (1) The following financial statements are included in
Part II, Item 8:
Specimen Certificate of Common Stock, par value
$.01 per share (filed as Exhibit No. 4 to Registration Statement
No. 33-1353 and incorporated
herein by reference thereto).
First Albany Companies Inc. 2003 Non-Employee
Directors Stock Plan effective March 10, 2003 (filed as
Exhibit 10 to the Company’s Registration Statement on Form S-8 filed June 2, 2003
(File No. 333-105772) to
Form S-8) and incorporated
herein by reference thereto).
Form of Restricted Stock Agreement — Cliff
Vesting — pursuant to the First Albany Companies Inc. 1999 Long-Term
Incentive Plan (filed as Exhibit 10.20 to the Company’s Quarterly
Report on Form 10-Q filed
November 09, 2004 and incorporated herein by reference thereto).
10
.10†
Form of Restricted Stock Agreement —
3 Year Vesting — pursuant to the First Albany Companies Inc.
1999 Long-Term Incentive Plan (filed as Exhibit 10.21 to the
Company’s Quarterly Report on Form 10-Q filed November 09,2004 and incorporated herein by reference thereto).
10
.11†
Form of Restricted Stock Agreement pursuant to
the First Albany Companies Inc. 1999 Long-Term Incentive Plan (filed as
Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2006
and incorporated herein by reference thereto).
First Albany Companies Inc. 2005 Deferred
Compensation Plan for Professional and Other Highly Compensated Employees
effective January 1, 2005 (filed as Exhibit 4(f) to the
Company’s Registration Statement on Form S-8 filed January 10,2005 (File No. 333-121928)
and incorporated herein by reference thereto).
Form of Restricted Stock Agreement pursuant to
the First Albany Companies Inc. 2003 Non-Employee Directors’ Stock Plan
(filed as Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q filed August 4,2006 and incorporated herein by reference thereto).
Stock Purchase Agreement dated March 4,2008 among the Company, MAST Credit Opportunities I Master
Fund Limited, MatlinPatterson FA Acquisition LLC and MAST Capital
Management LLC and certain individual investors (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 6, 2008
and incorporated herein by reference thereto).
Severance Agreement dated as of March 14,2008 by and between Broadpoint Securities Group, Inc. and C. Brian Coad
(filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 14, 2008
and incorporated therein by reference thereto).
Amendment to Fully Disclosed Clearing Agreement
dated April 10, 2008 by and between Broadpoint Securities, Inc. and
Ridge Clearing & Outsourcing Solutions, Inc. (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 16, 2008
and incorporated herein by reference thereto).
Transition Agreement, dated April 30, 2008,
by and among Broadpoint Securities Group, Inc., FA Technology Ventures
Corporation, FA Technology Holding, LLC, George C. McNamee, Gregory A.
Hulecki, Kenneth A. Mabbs, Giri C. Sekhar, John A. Cococcia and Claire
Wadlington (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed May 6,2008 and incorporated herein by reference thereto).
Form of Consent, Assignment and Assumption
Agreement, to be entered into by FA Technology Ventures Corporation, FA
Technology Holding, LLC and FATV GP LLC. (filed as Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed May 6, 2008
and incorporated herein by reference thereto).
10
.57
Sixth Amendment to Sub-Lease Agreement amending
a Sub-Lease Agreement dated August 12, 2003, as previously amended,
by and between Broadpoint Securities Group, Inc. and Columbia 677, L.L.C.
(“Landlord”), dated June 19, 2008 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed June 25, 2008
and incorporated herein by reference thereto).
10
.58
Seventh Amendment of Lease amending the
Agreement of Lease dated March 21,1996, as previously amended, by and
between Broadpoint Securities Group, Inc. and One Penn Plaza LLC
(“Landlord”), dated June 23, 2008 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed June 25, 2008
and incorporated herein by reference thereto).
10
.59
Letter of Credit, by and between Broadpoint
Securities Group, Inc. and One Penn Plaza LLC to be issued by The Bank of
New York Mellon dated (filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed
June 25, 2008 and incorporated herein by reference thereto).
10
.60
Preferred Stock Purchase Agreement with Mast
Credit Opportunities I Master Fund Limited by and between Broadpoint
Securities Group, Inc. and Mast Credit Opportunities I Master
Fund Limited dated June 27, 2008 (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed July 1, 2008
and incorporated herein by reference thereto).
10
.61
Common Stock Purchase Warrant, by and between
Broadpoint Securities Group, Inc. and Mast Credit Opportunities I Master
Fund Limited dated June 27, 2008 (filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed July 1, 2008
and incorporated herein by reference thereto).
Stock Purchase Agreement by and among Broadpoint
Securities Group, Inc., American Technology Research Holdings, Inc.,
Richard J.Prati, Curtis L. Snyder, Richard Brown, Robert Sanderson and
Bradley Gastwirth, dated as of September 2, 2008 (filed as
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 5,2008 and incorporated herein by reference thereto).
Letter of Credit, by and between Broadpoint
Securities Group, Inc. and Kato International LLC to be issued by The Bank
of New York Mellon dated (filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K
filed November 6, 2008 and incorporated herein by reference thereto).
Letter of Credit, by and between Broadpoint
Securities Group, Inc. and Post-Montgomery Associates to be issued by The
Bank of New York Mellon dated (filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K
filed November 24, 2008 and incorporated herein by reference
thereto).
10
.71
Consent to Sublease, Recognition Agreement, and
Amendment to Lease Agreement, by and among Broadpoint Securities Group,
Inc., Post-Montgomery Associates, and Jefferies &Company, Inc.,
dated November 18, (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K
November 24, 2008 and incorporated herein by reference thereto).
Agreement and Plan of Merger by and among
Broadpoint Securities Group, Inc., Magnolia Advisory LLC, Gleacher
Partners Inc., certain stockholders of Gleacher Partners Inc. and each of
the holders of interests in Gleacher Holdings LLC, dated as of
March 2, 2009 (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed
March 4, 2009 and incorporated herein by reference thereto).
10
.75†
Stock Option Agreement ($3.00 exercise price)
dated December 18, 2008 by and between Broadpoint Securities Group,
Inc. and Lee Fensterstock, filed herewith.
10
.76†
Stock Option Agreement ($4.00 exercise price)
dated December 18, 2008 by and between Broadpoint Securities Group,
Inc. and Lee Fensterstock, filed herewith.
10
.77†
Stock Option Agreement ($3.00 exercise price)
dated December 18, 2008 by and between Broadpoint Securities Group,
Inc. and Peter McNierney, filed herewith.
10
.78†
Stock Option Agreement ($4.00 exercise price)
dated December 18, 2008 by and between Broadpoint Securities Group,
Inc. and Peter McNierney, filed herewith.
10
.79†
Restricted Stock Units Agreement dated
January 1, 2009 by and between Broadpoint Securities Group, Inc. and
Peter McNierney, filed herewith.
10
.80†
Restricted Stock Units Agreement dated
January 1, 2009 by and between Broadpoint Securities Group, Inc. and
Lee Fensterstock, filed herewith.
10
.81†
Restricted Stock Units Agreement dated
February 13, 2009 by and between Broadpoint Securities Group, Inc.
and Lee Fensterstock, filed herewith.
10
.82†
Restricted Stock Units Agreement dated
February 13, 2009 by and between Broadpoint Securities Group, Inc.
and Peter McNierney, filed herewith.
10
.83†
Restricted Stock Units Agreement dated
February 13, 2009 by and between Broadpoint Securities Group, Inc.
and Robert Turner, filed herewith.
10
.84†
Restricted Stock Units Agreement dated
February 13, 2009 by and between Broadpoint Securities Group, Inc.
and Patricia Arciero-Craig, filed herewith.
11
Statement Re: Computation of Per Share Earnings
(the calculation of per share earnings is in Part II, Item 8 and
is omitted in accordance with Section(b)(11) of Item 601 of Regulation S-K).
14
Amended and Restated Code of Business Conduct
and Ethics, (filed as Exhibit 14 to the Company’s Annual Report on
Form 10-K filed March 28, 2008 and incorporated herein by
reference thereto).
Allowance for doubtful
accounts — deducted from receivables from customers and receivable
from others
Calendar Year 2008
$
112,000
$
—
$
64,000
$
48,000
Calendar Year 2007
$
153,000
$
—
$
41,000
$
112,000
Calendar Year 2006
$
11,000
$
153,000
$
11,000
$
153,000
Net deferred tax asset
valuation allowance
Calendar Year 2008
$
27,003,000
$
—
$
2,296,000
$
24,707,000
Calendar Year 2007
$
21,766,000
$
5,237,000
$
—
$
27,003,000
Calendar Year 2006
$
9,233,000
$
12,533,000
$
—
$
21,766,000
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
We, the undersigned, hereby severally constitute Lee Fensterstock and
Peter J. McNierney, and each of them singly, our true and lawful attorneys with
full power to them and each of them to sign for us, and in our names in the
capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys to any and all amendments to said Annual Report
on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
