sv1za
As filed with the Securities and Exchange Commission on
November 24, 2009.
Registration
No. 333-161632
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
GAIN CAPITAL HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
(State or other jurisdiction
of incorporation or organization)
|
|
6221
(Primary Standard Industrial
Classification Code Number)
|
|
20-4568600
(I.R.S. Employer
Identification Number)
|
550 Hills Drive
Bedminster, New Jersey 07921
(908) 731-0700
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Glenn H. Stevens
President and Chief Executive Officer
GAIN Capital Holdings, Inc.
550 Hills Drive
Bedminster, New Jersey 07921
(Name, address including zip
code and telephone number, including area code, of agent for
service)
Copies to:
|
|
|
Andrew P. Gilbert, Esq.
Morgan, Lewis & Bockius LLP
502 Carnegie Center
Princeton, New Jersey 08540
Tel:
(609) 919-6600
Fax:
(609) 919-6701
|
|
Joseph A. Hall, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Tel: (212) 450-4500
Fax: (212) 450-3500
|
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date hereof.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. 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. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not
permitted.
|
Subject
to Completion, Dated November 24, 2009
Shares
GAIN Capital Holdings,
Inc.
COMMON STOCK
This is our initial public offering of common stock. Our
stockholders are selling all of the shares of our common stock,
par value $0.00001 per share, offered by this prospectus. We are
not selling any shares in this offering and will not receive any
of the proceeds from the sale of shares by the selling
stockholders. Currently, no public market exists for our shares.
We anticipate that the initial public offering price will be
between $ and
$ per share.
We intend to list the common stock on the NASDAQ Global
Market under the symbol GCAP.
Investing in our common stock involves risks. See
Risk Factors beginning on page 16.
PRICE
$
PER
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
|
|
|
Proceeds to
|
|
|
|
Price to
|
|
|
Discounts and
|
|
|
Selling
|
|
|
|
Public
|
|
|
Commissions
|
|
|
Stockholders
|
|
|
Per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The selling stockholders have granted the underwriters the
right to purchase an additional shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock
to purchasers
on ,
2009.
|
|
MORGAN
STANLEY |
DEUTSCHE
BANK SECURITIES |
,
2009
TABLE OF
CONTENTS
|
|
|
|
|
Page
|
|
|
|
1
|
|
|
16
|
|
|
38
|
|
|
39
|
|
|
39
|
|
|
40
|
|
|
42
|
|
|
46
|
|
|
78
|
|
|
106
|
|
|
137
|
|
|
143
|
|
|
147
|
|
|
152
|
|
|
154
|
|
|
157
|
|
|
159
|
|
|
159
|
|
|
159
|
|
|
159
|
|
|
F-1
|
Ex-10.44 |
Ex-23.1 |
You should rely only on the information contained in this
prospectus. We, the selling stockholders and the underwriters
have not authorized any other person to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We, the
selling stockholders and the underwriters are not making an
offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the
information appearing in this prospectus or a free-writing
prospectus is accurate only as of its date, regardless of its
time of delivery or any sale of shares of our common stock. Our
business, financial condition, results of operations and
prospects may have changed since that date.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
Unless otherwise stated, all references to us,
our, GAIN, GAIN Capital,
we, the Company and similar designations
refer to GAIN Capital Holdings, Inc. and its subsidiaries. Our
logo, trademarks and service marks are the property of GAIN
Capital Holdings, Inc. Other trademarks or service marks
appearing in this prospectus are the property of their
respective holders.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus that we believe is important to understanding
how our business is currently being conducted. You should read
the entire prospectus carefully, including the Risk
Factors section, the Managements Discussion
and Analysis section, the consolidated financial
statements and related notes included in this prospectus and the
Prospectus Summary Recent Developments
section concerning our cessation of our operations in China
during 2008, before making an investment decision. As a result
of our review of our regulatory compliance in China during 2008,
we decided to terminate all service offerings to residents of
China and ceased our trading operations located in that country.
As of December 31, 2008, we no longer accept new customers
or maintain direct customer accounts from residents of China.
Therefore, we have presented certain historical information
throughout this prospectus that both includes and excludes
customer account activity from residents of China. We believe
reporting such information without our historical China
operations better assists the reader in evaluating our operating
performance for comparative purposes with subsequent periods. In
addition, you should also note that our preferred stock contains
a redemption feature which allows the holders of our preferred
stock to require us to repurchase the preferred stock at a fixed
price. Such repurchase right must be recorded by us at fair
value as a non-cash gain or loss from the recorded level in the
immediately prior period. This embedded derivative causes
fluctuation in our net income which is not reflective of our
operating performance and will no longer exist at and after our
initial public offering. As a result, we have presented adjusted
net income, a financial measure not calculated in accordance
with Generally Accepted Accounting Principles in the United
States, or GAAP, which represents our net income/(loss)
excluding the change in fair value of the embedded derivative in
our preferred stock. This non-GAAP financial measure has certain
limitations in that it does not have a standardized meaning and
thus our definition may be different from similar non-GAAP
financial measures used by other companies
and/or
analysts and may differ from period to period. As a result, it
may be difficult to compare our financial performance to that of
other companies.
Our
Company
We are an online provider of retail foreign exchange trading and
related services founded in 1999 by a group of experienced Wall
Street trading professionals. We offer our customers
24-hour
direct access to the global
over-the-counter,
or OTC, foreign exchange markets, where participants trade
directly with one another rather than through a central exchange
or clearing house. In a foreign exchange trade, participants buy
one currency and simultaneously sell another currency. Our
trading platform provides a wide array of information and
analytic tools that allow our customers to identify, analyze and
execute their trading strategies efficiently and
cost-effectively. We believe our proprietary technology,
multilingual customer service professionals and effective
educational programs provide a high degree of customer
satisfaction and loyalty. Furthermore, our scalable and flexible
technology infrastructure allows us to enhance our product
service offerings to meet the rapidly changing needs of the
marketplace.
Foreign exchange, or forex, trading is one of the fastest
growing areas of retail trading in the financial services
industry. According to its most recent report, the Aite Group, a
financial services industry market research firm, reported that
by the end of 2008, average daily trading volume in the retail
forex market reached approximately $100.0 billion, a 900%
increase from 2001. Our total annual customer trading volume,
which is based on the U.S. Dollar equivalent of notional
amounts traded, grew from $120.3 billion in 2004 to $1.50
trillion in 2008, representing a compounded annual growth rate
of 87.9%. Our annual customer trading volume from customers
residing outside of China grew from $114.3 billion in 2004
to $1.33 trillion in 2008, representing a compounded annual
growth rate of 84.7%.
Our annual net revenue grew from $22.2 million in 2004 to
$190.8 million in 2008, representing a compounded annual
growth rate of 71.2%. Our annual net revenue from customers
residing outside of China grew from $20.8 million in 2004
to $166.4 million in 2008, representing a compounded annual
growth rate of 68.2%. Our net income grew from $7.1 million
in 2004 to $231.4 million in 2008, representing a
compounded annual growth rate of 138.9%. Our adjusted net
income, a non-GAAP financial measure which represents our net
income/(loss) excluding the change in fair value of the embedded
derivative in our preferred stock, increased from
$7.1 million in 2004 to $49.6 million in 2008,
representing a compounded annual growth rate of 62.6%.
1
We believe customers residing outside the United States
represent a significant area of growth for our business. We have
a geographically diverse customer base and currently service
customers residing in over 140 countries worldwide. For the year
ended December 31, 2008, approximately 53.0% of our
customer base was located outside of the United States,
representing approximately 41.4% of our total trading volume.
Customers residing in China represented approximately 18.0% of
our customer base and approximately 11.5% of our total trading
volume for the year ended December 31, 2008.
We use financial metrics, including tradable accounts and traded
accounts, to measure our aggregate customer account activity.
Tradable accounts represent customers who maintain cash balances
with us that are sufficient to execute a trade in compliance
with our policies. As of September 30, 2009, we had 47,374
tradable accounts. The number of tradable accounts is an
important indicator of our ability to attract new customers that
can potentially lead to trading volume and revenue in the
future, although it does not represent actual trades executed.
We believe that the most relevant measurement which correlates
to volume and revenue is the number of traded accounts, because
this represents customers who executed a forex transaction with
us during a particular period. During the nine months ended
September 30, 2009, 43,565 traded accounts executed a forex
transaction with us compared to 45,001 traded accounts
(including 11,403 traded accounts from customers residing in
China) for the nine months ended September 30, 2008,
representing an overall decrease of 3.2%. Traded accounts from
customers residing outside of China increased 29.6% during the
nine months ended September 30, 2009, compared to the nine
months ended September 30, 2008. During the year ended
December 31, 2008, 52,555 traded accounts (including 11,647
traded accounts from customers residing in China) executed
trades with us, compared to 43,139 traded accounts (including
11,568 traded accounts from customers residing in China) in
2007, representing an increase of 21.8%. Traded accounts from
customers residing outside of China increased 29.6% for the year
ended December 31, 2008, compared to the year ended
December 31, 2007.
We seek to attract and support customers through direct and
indirect channels. Our primary direct channel is our retail
forex trading Internet website, FOREX.com, which is available in
English, traditional and simplified Chinese, Russian and Arabic.
It provides currency traders of all experience levels with full
trading capabilities, along with extensive educational and
support tools. In addition, we utilize our relationships with
retail financial services firms, such as broker-dealers and
Futures Commission Merchants, or FCMs, to attract additional
customers. These firms offer our forex trading services to their
existing customers under their own brand in exchange for a
revenue sharing arrangement with us. We refer to these firms as
our white label partners. We also have relationships with
introducing brokers who refer their customers to us for a fee.
Our customer base is comprised primarily of self-directed retail
traders who utilize our online platform and tools to trade forex
and certain other asset classes. Our customer base also includes
accounts managed by authorized intermediaries, such as money
managers, trading on behalf of a retail account holder, which we
refer to as managed accounts. For the nine months ended
September 30, 2009, self-directed investors represented
93.0% of our customer trading volume and managed accounts
represented the remaining 7.0% of our customer trading volume.
The majority of our revenue is derived from our activities as a
market-maker to our retail customers, where we act as the
counterparty to our customers trades. We provide both buy
and sell quotes for each of the 37 currency pairs we offer. We
have extensive experience in the forex market and have used this
experience to develop risk management systems and procedures
that allow us to manage market and credit risk in accordance
with pre-defined exposure limits in real-time. A key component
of our approach to managing risk is that we do not take
proprietary directional market positions where we would actively
initiate market positions in anticipation of future movements in
the prices of currencies. Instead, we continuously evaluate
market risk exposure, and we actively hedge a portion of our
customer transactions on our wholesale forex trading platform on
a continuous basis. As a result of our hedging activities, we
usually have open positions in various currencies at any given
time. We also maintain liquidity relationships with three
established, global prime brokers and at least six other
wholesale forex trading partners, which we believe provide us
with access to a deep forex liquidity pool. We maintain levels
of capital in excess of those currently required under
applicable regulations.
2
Our
Market Opportunity
Historically, participation in the forex trading market was only
available to commercial and investment banks and other large
institutional investors. We believe that the expansion of online
forex trading firms, such as our company, has led to reduced
trading costs and increased investor awareness of the forex
market, resulting in greater retail participation. We believe
that improved accessibility and convenience has spurred the
growth of our industry, similar to the impact online equity
brokers had on growth in the U.S. equities markets in the
late 1990s.
The forex market is one of the highest notional dollar volume
traded financial markets in the world, with daily trading
volumes growing at a compounded annual growth rate of 14.8% from
approximately $1.4 trillion per day in 2001 to approximately
$3.2 trillion per day by April 2007, as stated by the Bank for
International Settlements.
We believe retail forex trading is poised for continued, rapid
growth as a result of the following trends:
|
|
|
|
|
increasing recognition of currency trading as an alternative
investment and as a tool for portfolio diversification by retail
traders, authorized traders and investment professionals
globally;
|
|
|
|
improved access to the forex market, reduced transaction costs
and more efficient execution;
|
|
|
|
increased availability of investor education relating to the
forex market and trading opportunities;
|
|
|
|
expansion of marketing efforts by many leading firms in the
forex industry;
|
|
|
|
increasing media coverage of the forex market;
|
|
|
|
heightened domestic and international regulatory
oversight; and
|
|
|
|
rising global broadband and wireless penetration.
|
Our
Competitive Strengths
We believe that we have maintained and will continue to enhance
our strong position in the retail forex market by leveraging the
following competitive strengths:
Leading
FOREX.com brand name and strong global marketing
capability
We believe that we have developed FOREX.com into the
category-defining brand in the online forex trading industry.
For the nine months ended September 30, 2009, FOREX.com
averaged approximately 1.4 million unique
visitors per month and we currently service customers from over
140 countries. We calculate the number of unique visitors to
FOREX.com by monitoring the number of visitors (as tracked by
our website) over a specified period of time, and then
subtracting all repeat visits by each individual visitor over
such period.
Our sales and marketing strategy leverages the strength of the
FOREX.com brand name by employing a combination of direct
marketing techniques and focused branding programs. Through our
direct marketing efforts, in 2008 we generated 1,158,682
registered users of our demonstration trading accounts which
simulate live trading on our proprietary platform, referred to
as registered practice trading accounts (including 380,025
registered practice trading account users in China),
representing a compounded annual growth rate of 81.8% from
105,959 registered practice trading account users in 2004. For
the nine months ended September 30, 2009, we generated
675,658 registered practice trading account users. Complementing
our direct marketing strategy, we have assembled a multilingual,
102-person
retail sales force that utilizes a highly interactive approach
to convert registered practice trading accounts into tradable
accounts and manages ongoing customer retention efforts. We have
further leveraged the FOREX.com brand name to successfully forge
partnerships with white label partners and introducing brokers
to allow us to acquire customers that we believe we could not
otherwise efficiently attract.
We have achieved significant growth through the international
expansion of our customer base. We have grown our company
internationally through an efficient business model that
combines our centralized trading, middle- and back-office
functions located in the United States with direct and indirect
marketing techniques tailored for each local market. This
approach is designed to achieve a consistent brand experience
while minimizing overhead costs.
3
Superior
customer experience and service focus
We offer current and prospective customers a high level of
service and a wide range of customizable tools and resources to
assist them in learning about trading forex and certain other
asset classes and to prepare them for trading in the market. We
have a multilingual customer service staff located in the United
States that is available seven days a week to handle customer
inquiries via telephone, email and online chat, with continuous
coverage beginning Sunday at 10:00 a.m. through Friday at
5:00 p.m. and Saturday 9:00 a.m. to 5:00 p.m.
(Eastern Standard time). We also offer comprehensive education
and training programs, the majority of which are utilized by
prospective customers, which have been internally developed and
designed to accommodate a variety of experience levels and
learning preferences, from self-study to fully instructional
programs.
Our emphasis on providing a superior customer experience is
evidenced by our high customer satisfaction. In July 2007, we
conducted a customer survey to our English-speaking active
customers who executed a trade with us 90 days prior to the
survey, in which over 90.0% indicated they would recommend
FOREX.com to a friend or family member. When asked to rank their
reasons for choosing FOREX.com, the three most common responses
were execution quality, quality of the trading platform and
customer service.
Consistent
execution quality
We believe our customers choose us in part due to the consistent
quality of our trade execution capabilities, which is comprised
of three main aspects: timing, certainty of execution and
pricing. We believe that our proprietary rate engine provides
our customers with access to forex liquidity at competitive
market rates. We are able to provide our customers with a high
degree of certainty in the execution of their trades as a result
of our liquidity relationships with three established global
prime brokers, Deutsche Bank, The Royal Bank of Scotland plc, or
RBS, and UBS AG, or UBS, as well as relationships with at least
six other wholesale forex trading partners. Through these
relationships, our access to a deep pool of forex liquidity
assists in ensuring that we are able to execute our
customers trades in any of the 37 currency pairs and
notional amounts they desire.
Highly
scalable proprietary technology with a proven track record of
innovation
We believe that our proprietary technology provides us with
significant competitive advantages. Our scalable and flexible
technology infrastructure allows us to quickly adapt to meet the
rapidly changing needs of the marketplace. For example, in 2009
we introduced trading in the gold and silver spot market onto
our platform. In addition, our proprietary technology allows us
to quickly integrate other trading platforms that are attractive
to our customers and can benefit from our aggregation of retail
pricing received from our wholesale forex trading partners and
our offsite environmentally-controlled, secure facilities
housing our hardware and network connections. In 2007, we began
offering MetaTrader, an online trading platform popular with the
international retail trading community, which we license from a
third party. We believe that our integrated online trading
platform, including our proprietary rate engine which aggregates
the retail prices received from our wholesale forex partners and
publishes real-time quotes, offers our customers a consistent
level of trade execution and decision support for all products
we offer.
Extensive
risk management experience and capital position in excess of
current regulatory requirements
We have extensive experience in the forex market and have
leveraged this experience to develop proprietary risk management
systems and procedures that allow us to manage market and credit
risk in accordance with predefined exposure limits in real-time
and maintain a conservative capital position while taking into
account specific market events and market volatility. A key
component of our approach to managing risk is that we do not
take proprietary directional market positions where we would
actively initiate market positions in anticipation of future
movements in the prices of currencies. Instead, we continuously
evaluate market risk exposure, and we actively hedge customer
transactions with our wholesale forex trading platform on a
continuous basis. As a result of our hedging activities, we are
likely to have open positions in various currencies at any given
time.
As part of our risk management philosophy, we maintain capital
levels in excess of those required under applicable regulations
in multiple jurisdictions. We believe that our excess capital
position in the United States
4
compares favorably to that of many of our competitors that
operate primarily in forex trading and positions us favorably
for potential future increases in minimum capital requirements
domestically and abroad. Additionally, we believe that our
capital position enhances our access to foreign exchange
liquidity, thereby improving our ability to provide customers
with attractive pricing and facilitating our trading and hedging
activities. In addition, our capital position allows us to
provide capital to our affiliates as needed, to accommodate
their business growth and meet potential increases in minimum
capital requirements.
Experienced
management team
Our senior management team is comprised of experienced
executives with significant forex, financial services and
financial technology expertise. In addition, our senior
management team has extensive experience in many critical
aspects of our business, including trading and risk management,
retail brokerage operations, compliance, application development
and technology infrastructure. For example, prior to joining us
in 2000, Glenn Stevens, our President and Chief Executive
Officer, served for seven years as managing director and chief
forex dealer at Merrill Lynch & Co., Inc., and
Mr. OSullivan, our Chief Dealer, served for six years
as director of the New York sterling desk of Merrill
Lynch & Co., Inc., prior to his joining us in 2000. We
believe the experience of our senior management team, including
over 25 years of forex trading experience for our President
and Chief Executive Officer and over 20 years of forex
trading experience for our Chief Dealer, has been integral to
our success to date and will be critical to our successful
expansion into new markets and products in the future.
Risks
Associated with Our Business
An investment in our common stock involves substantial risks and
uncertainties that may adversely affect our business, financial
condition and results of operations and cash flows, including:
|
|
|
|
|
The retail forex market has only recently become accessible
to retail investors and, accordingly, we have a limited
operating history upon which to evaluate our
performance. Our prospects may be materially
adversely affected by the risks, expenses and difficulties
frequently encountered in the operation of a new business in a
rapidly evolving industry characterized by intense competition
and evolving regulatory oversight and rules.
|
|
|
|
The susceptibility of our revenue and profitability to
changes in domestic and international market and economic
conditions. Our revenue and profitability is
influenced by trading volume and currency volatility, which are
directly impacted by disruption and volatility in domestic and
international markets and economic conditions.
|
|
|
|
The risk that our risk management policies and procedures may
not be effective and may expose us to unidentified or
unanticipated risks. We depend upon our risk
management policies to identify, monitor and control a variety
of risks. Some of our methods for managing risk are
discretionary in nature and based upon internally developed
controls and observed historical market behaviors. Such policies
may not adequately prevent losses or anticipate changes in the
market.
|
|
|
|
The impact on our business from potential trading
losses. A substantial portion of our revenue and
operating profits is derived from our role as a market-maker. In
such role, we are exposed to significant pricing and liquidity
risks, as well as to risks relating to possible inaccuracies in
our proprietary pricing mechanism, which may result in trading
losses.
|
|
|
|
The risk of corruption or disruption of our proprietary
technology. Our success in the past has largely
been attributable to our proprietary technology. We rely on our
proprietary technology to receive and properly process internal
and external data in order to run our business. Any disruption
or corruption of our proprietary technology may result in
service interruptions or other negative consequences.
|
|
|
|
The loss of our key personnel. Our key
employees have significant experience in the forex industry and
have made significant contributions to our business and
operations. Our continued success is dependent upon the
retention of these employees.
|
|
|
|
Our dependence on wholesale forex trading partners and prime
brokers in order to continually provide our market-making
services. Given the level of our customers
trading volume, we depend upon third party financial
institutions to provide us with access to forex market liquidity
and competitive wholesale forex pricing spreads. In the event
that we no longer have access to the competitive wholesale forex
pricing spreads
|
5
|
|
|
|
|
and/or levels of liquidity that we currently have, we may be
unable to provide competitive forex trading services, which will
materially adversely affect our business, financial condition
and results of operations and cash flows.
|
|
|
|
|
|
A risk of default by financial institutions holding our funds
and other counterparties with whom we do
business. Our forex market-making operations
require a commitment of capital that involves risk of losses due
to the potential failure or default by the counterparties with
whom we do business.
|
|
|
|
The regulatory risks in jurisdictions where our operations
may be restricted by existing and evolving regulatory
requirements. We operate in a heavily regulated
environment that imposes significant compliance requirements
where failure to comply may result in regulatory actions and
sanctions against us. For example, we face the potential risk of
enforcement actions and sanctions for our prior operations in
China.
|
You should consider these risks and others described in this
prospectus before investing in our common stock. For a more
detailed discussion of these and other significant risks
associated with operating our business and investing in our
common stock, you should read the section entitled Risk
Factors beginning on page 16 of this prospectus.
Our
Growth Strategy
We intend to pursue the following strategies to continue to grow
our forex business and to continue to expand our product
offerings to our customers:
Increase
penetration in our existing markets
We plan to increase penetration in our existing markets by
continuing to focus on reaching the greatest number of
prospective customers who may open registered practice trading
accounts. We seek to accomplish this by employing a mixture of
on- and off-line advertising, search engine marketing, email
marketing, television and radio advertising, attendance at
industry trade shows and strategic and public media relations.
We intend to continue to focus on converting our registered
practice trading accounts into traded accounts in order to grow
our business and increase our market share. We believe we can
most effectively generate registered practice trading accounts
and convert them into traded accounts by continuing to tailor
our marketing strategy to each customer type we target and by
offering prospective customers training, educational tools and
superior customer service.
Continue
the international expansion of our customer base
We intend to enhance our growth through the continued expansion
of our international customer base into new markets and continue
to penetrate existing international markets. We believe owning
and operating a leading forex Internet domain name enhances our
ability to promote our advanced trading technology and tools, as
well as our market leading customer service, while also
generally building awareness of the forex market among retail
investors. In addition to leveraging the FOREX.com brand name
globally, we intend to grow internationally by continuing to
open offices in areas where a local presence is helpful to our
growth efforts and by selectively pursuing strategic
acquisitions. For example, we are currently seeking local
registration, licensing and authorization to conduct our forex
trading services in Australia and Singapore. To successfully
expand into other new international markets, we intend to employ
a strategy that centralizes brand management, trading, middle-
and back-office functions at our U.S. headquarters and
tailors marketing programs and sales and customer support to the
local market.
Expand
our product offering
We intend to grow our business by offering our customers
additional products which are complementary to our current
product offerings. Since customers who trade in forex often
trade in other financial products, we believe we have
significant growth opportunities to cross-sell complementary
products to these customers. Expanding our product offerings to
include other financial products will enable our customers to
execute diversified trading strategies across various products
from a single, integrated trading platform. We believe our
proprietary and scaleable technology infrastructure, along with
our extensive forex trading experience, will allow us to
introduce new products efficiently and cost effectively. As a
result, we believe the expansion of our product offerings will
allow us to attract and satisfy our customers increased
trading needs, which will in turn result in increased customer
6
trading volume with us. For example, we recently introduced spot
trading in gold and silver, and have also introduced GAIN
Capital Securities Inc., or GAIN Securities, a registered
broker-dealer, for trading of equity securities. Some other
products we intend to offer include:
We intend to offer additional forex trading products, including
more currency pairs, currency options and a range of other
currency-related investment products.
|
|
|
|
|
Contracts for difference
|
Outside the United States, we intend to expand on our contracts
for difference, or CFDs, offerings. CFDs are instruments linked
to the performance of the price of an underlying financial
instrument, including precious metals, energy products and other
commodities, as well as stock indices and government bonds.
Because CFDs are margin-based and are OTC traded, we believe
that we can effectively apply our market-making and risk
management expertise to these financial instruments.
|
|
|
|
|
Listed exchange products
|
Our status as an FCM provides us with the regulatory ability to
offer a variety of exchange-traded products, including futures
and options on equity and fixed income indices, and commodities,
to our customers in the United States. We also intend to expand
the offerings of GAIN Securities to include advanced options
trading, as well as fixed income and other equities products.
Increase
our partnerships with other financial services
firms
We intend to continue to develop relationships with white label
partners and introducing brokers which provide us with
additional channels to attract prospective customers that we
believe we could not otherwise efficiently solicit. These
prospective customers include individuals in jurisdictions where
we are not currently registered with the local regulator and
those customers who have demonstrated significant loyalty to
their existing financial services firm. In these circumstances,
the partnership arrangements are more profitable for us since
the customers provided through these partnerships generate
trading revenue for us, but generally do not require us to incur
any incremental direct marketing or regulatory compliance
expenses.
Pursue
strategic acquisitions and alliances to expand our product and
service offerings and geographic reach
We intend to continue to selectively pursue attractive
acquisition and alliance opportunities. In the past, we have
successfully expanded the breadth of our product and service
offerings by acquiring companies with complementary products and
services, such as our acquisition of the London-based RCG GAIN
Limited (now known as GAIN Capital-Forex.com U.K., Ltd.), our
purchase of a 51.0% interest, with rights to acquire up to a
95.0% interest, in Fortune Capital Co., Ltd. (now known as GAIN
Capital Japan, Co. Ltd.) and our acquisition of a registered
broker-dealer of equity securities (now known as Gain
Securities). Additionally, we will consider acquisitions and
alliances in key geographic markets to establish or increase our
presence and accelerate our growth. Following this offering, we
will have the ability to use our common stock as an additional
acquisition currency with which to pursue future acquisitions.
Recent
Developments
Termination
of service offerings in China
Since 2006, a significant portion of our trading volume, trading
revenue, net income and cash flow were generated from residents
of China. When we commenced offering our forex trading services
through our Chinese language website to residents of China in
October 2003, we believed that our operations were in compliance
with applicable Chinese regulations. However, as a result of our
review of our regulatory compliance in China during 2008, in May
2008 we became aware of a China Banking and Regulatory
Commission, or CBRC, prohibition on forex trading firms
providing retail forex trading services to Chinese residents
through the Internet without a CBRC permit. We do not have such
a permit and to our knowledge, no such permit exists. As a
result of this regulatory uncertainty, we decided to terminate
all service offerings to residents of China and ceased our
trading support
7
operations located in that country. As of December 31,
2008, we no longer accept new customers or maintain direct
customer accounts from residents of China. However, due to an
ongoing relationship with one of our introducing brokers, eight
immaterial legacy accounts (as of September 30,
2009) which were originally sourced through that
introducing broker prior to the termination of our service
offering in China, remained open. For the nine months ended
September 30, 2009, the trading activity by these legacy
accounts resulted in an immaterial amount of trading volume. We
have taken steps to close these accounts, and expect they will
be closed, by December 31, 2009. All references to
China refer to mainland China and exclude the Hong
Kong and Macau Special Administrative Regions.
We have become aware that the CBRC may, at a future date, issue
regulations by which certain institutions will be allowed to
engage in retail forex trading services. There is no assurance
as to when these clarifying regulations will be issued or, if
issued, whether we will be able to offer our trading services to
Chinese residents under such regulations. As a result, we do not
intend to offer our trading services and no longer accept or
maintain direct customer accounts from residents of China,
except as described above, until such time as we are able to
obtain the necessary permits, licenses or approvals from the
applicable Chinese regulators, in accordance with applicable
Chinese regulations. We will continue to monitor the regulatory
environment in China and, when possible, we will seek to obtain
the necessary permits, licenses or approvals from the applicable
Chinese regulators, or to partner with a firm with such
approval, to resume our retail forex trading services in China.
As our Chinese language website is also used by customers in
other countries, we will continue to use it as we offer our
services to Chinese-speaking customers who do not reside in
China. We cannot provide any assurance that we will not be
subject to fines or penalties, and if so in what amounts,
relating to the period in which we provided forex trading
services through the Internet to Chinese residents.
Corporate
Information
We were incorporated in Delaware in October 1999 as GAIN
Capital, Inc. In order to expand, either directly or through
wholly-owned subsidiaries, into business activities not
regulated by the Commodity Futures Trading Commission, or CFTC,
or National Futures Association, or NFA, on August 1, 2003,
all outstanding capital stock of GAIN Capital, Inc. was
converted into capital stock of GAIN Capital Group, Inc.
pursuant to an agreement and plan of merger by and among GAIN
Capital Group, Inc., GAIN Merger Sub Inc. (a wholly-owned
subsidiary of GAIN Capital Group, Inc.) and GAIN Capital, Inc.
Pursuant to such agreement and plan of merger, GAIN Merger Sub
Inc., merged with and into GAIN Capital, Inc., the surviving
entity, and the holders of capital stock, warrants and options
of GAIN Capital, Inc. received capital stock, warrants and
options of GAIN Capital Group, Inc. on a
one-for-one
basis, and GAIN Capital, Inc. continued to exist as a
wholly-owned subsidiary of GAIN Capital Group, Inc. The GAIN
Capital, Inc. stockholders before the merger were the same as
the GAIN Capital Group, Inc. stockholders after the merger.
As a condition to entering into a credit facility in 2006, the
lending banks required that we pledge the ownership interests in
certain of our operating subsidiaries as collateral. In order to
facilitate such pledge, on March 27, 2006, all outstanding
capital stock of GAIN Capital Group, Inc. was converted into
capital stock of GAIN Capital Holdings, Inc. pursuant to an
Agreement and Plan of Merger by and among GAIN Capital Group,
Inc., GH Formation, Inc. (a wholly-owned subsidiary of GAIN
Capital Group, Inc.) and GAIN Capital Holdings, Inc. Pursuant to
such agreement and plan of merger, GH Formation, Inc. merged
with and into GAIN Capital Group, Inc., the surviving entity,
and the holders of capital stock, warrants and options of GAIN
Capital Group, Inc. received capital stock, warrants and options
of GAIN Capital Holdings, Inc. on a
one-for-one
basis, and GAIN Capital Group, Inc. continued to exist as an
indirect wholly-owned subsidiary of GAIN Capital Holdings, Inc.
The GAIN Capital Group, Inc. stockholders before the merger were
the same as the GAIN Capital Holdings, Inc. stockholders after
the merger.
For tax planning purposes, contemporaneously with the foregoing
merger, on March 27, 2006, GAIN Capital Group, Inc. was
converted to a limited liability company, GAIN Capital Group,
LLC, and GAIN Capital, Inc. was converted to a limited liability
company, GAIN Capital, LLC, thereby allowing profits and losses
to pass through such entities. At the same time, GAIN Holdings,
LLC, a newly created holding company and wholly-owned subsidiary
of GAIN Capital Holdings, Inc., became the sole member and
holder of all of the membership interests of GAIN Capital Group,
LLC. On April 28, 2006, GAIN Capital, LLC merged with and
into GAIN Capital Group,
8
LLC and ceased to exist as a separate entity. The membership
interests of GAIN Holdings, LLC were pledged as collateral in
connection with the credit facility referenced above.
Our principal executive offices are located at 550 Hills Drive,
Bedminster, New Jersey 07921. Our telephone number is
(908) 731-0700.
On August 18, 2009, we entered into a lease agreement for
approximately 45,000 square feet of office space at 135
Route 202/206, Bedminster, New Jersey, which we intend to use as
our new principal executive offices. The term of the lease will
run from January 1, 2010 to December 1, 2025, and we
expect to move to our new facilities in the first quarter of
2010. We believe this new facility will accommodate our needs
for the foreseeable future. We operate our market-making
services out of our Bedminster (New Jersey), London and Tokyo
offices and our sales and support services out of our
Bedminster, New York City, Woodmere (Ohio), London, Tokyo and
Hong Kong offices. We have a representative office and a
technology development office in Shanghai. Consistent with the
termination of our business in China, we are in the process of
closing our Shanghai offices. Our corporate website address is
www.gaincapital.com. The information on our website is
not incorporated by reference into this prospectus and should
not be considered to be a part of this prospectus. We have
included our website address as an inactive textual reference
only. As of September 30, 2009, we employed 362 individuals
worldwide.
We are a registered FCM and Forex Dealer Merchant, or FDM, with
the Commodity Futures Trading Commission, or CFTC, and a member
of the National Futures Association, or NFA. In 2008, we
acquired a 51.0% interest, with rights to acquire up to a 95.0%
interest, in GAIN Capital Japan, Co. Ltd., a Tokyo-based
introducing broker regulated by the Financial Supervisory
Authority in Japan, or the Japan FSA. In October 2009, we
increased our ownership interest in GAIN Capital Japan, Co. Ltd.
to 70.0%. We also operate GAIN Securities, a registered
broker-dealer (which is registered with the Securities and
Exchange Commission, or SEC, and is a member of the Financial
Industry Regulatory Authority, or FINRA). We are authorized as
principal and counterparty to spot foreign currency trades, CFDs
and gold and silver spot contracts in the U.K. and Japan, and we
are seeking authorization in Singapore and Australia. We are
also registered as a Securities Arranger with the Cayman Islands
Monetary Authority, or CIMA, in the Cayman Islands and
registered with the Securities and Futures Commission, or SFC,
in Hong Kong to act as an introducer to Gain Capital Group, LLC
in the United States.
9
THE
OFFERING
|
|
|
Common Stock offered by the selling stockholders
|
|
shares |
|
Common stock to be outstanding immediately after this offering
|
|
shares |
|
Use of proceeds |
|
We will not receive any of the proceeds from the sale of shares
by the selling stockholders. See Use of Proceeds. |
|
Proposed NASDAQ Global Market symbol
|
|
GCAP |
|
Risk factors |
|
See Risk Factors beginning on page 16 of this
prospectus and the other information included in this prospectus
for a discussion of factors you should carefully consider before
deciding to invest in shares of our common stock. |
The number of shares of our common stock to be outstanding after
this offering is based on the number of shares outstanding as
of ,
2009. The number of shares of our common stock to be outstanding
after this offering does not take into account:
|
|
|
|
|
shares
of common stock issuable upon the exercise of outstanding stock
options as
of ,
2009 at a weighted average exercise price of
$ per share;
|
|
|
|
shares
of common stock issuable pursuant to outstanding restricted
stock units as
of ,
2009;
|
|
|
|
an aggregate
of shares
of common stock that will be reserved for future issuance under
our 2009 Omnibus Incentive Compensation Plan as of the closing
of this offering; and
|
|
|
|
an aggregate
of shares
of common stock that will be reserved for future issuance under
our 2009 Employee Stock Purchase Plan.
|
Unless otherwise noted, the information in this prospectus
assumes that the underwriters do not exercise their
over-allotment option granted by the selling stockholders, and
has been adjusted to reflect the -for-1 stock split of our
common stock effected immediately prior to the completion of
this offering, the conversion of all outstanding shares of our
preferred stock into an aggregate
of shares
of common stock upon the completion of this offering and the
filing of our amended and restated certificate of incorporation
and the adoption of our amended and restated by-laws upon the
completion of this offering.
10
SUMMARY
CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents our summary historical consolidated
financial data for the periods presented and should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto included
elsewhere in this prospectus. The consolidated statements of
operations data for the fiscal years ended December 31,
2006, 2007 and 2008 and the consolidated statements of financial
condition data as of December 31, 2007 and 2008 are derived
from our audited consolidated financial statements included
elsewhere in this prospectus. The consolidated statements of
operations data for the fiscal years ended December 31,
2004 and 2005 and the consolidated statements of financial
condition data as of December 31, 2004, 2005 and 2006 are
derived from our audited historical consolidated financial
statements not included in this prospectus.
The consolidated statements of income data for the nine-month
periods ended September 30, 2008 and 2009 and the
consolidated statement of financial condition data as of
September 30, 2009 are derived from our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus which have been prepared on the same basis as the
audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations
and financial position. The consolidated statements of financial
condition data as of September 30, 2008 are derived from
our unaudited consolidated financial statements not included in
this prospectus. The results of operations for the nine months
ended September 30, 2009 are not necessarily indicative of
the results to be expected for the full year ended
December 31, 2009.
As a result of the termination of our trading operations in
China, the historical financial information presented below is
not indicative of our future performance. For the year ended
December 31, 2008, net revenue associated with customers
residing in China was $24.4 million, compared to
$20.6 million for the year ended December 31, 2007.
Our total direct expenses attributable to our operations in
China were $5.9 million for the year ended
December 31, 2008, compared to $4.8 million for the
prior year. In addition, due to the non-cash impact of the
redemption feature contained in our preferred stock which
requires fair value accounting, there are fluctuations in our
net income which will cease upon our initial public offering and
which is not reflective of our operating performance.
The pro forma consolidated statement of financial condition data
as of September 30, 2009 gives effect to this offering
based on an assumed initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus. The
pro forma earnings per common share data for the year ended
December 31, 2008 and the nine months ended
September 30, 2009 reflect the sale by our selling
stockholders of shares of common stock pursuant to this offering
based on an assumed initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004(2)
|
|
|
2005(2)
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2008(1)
|
|
|
2009(1)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
21,257
|
|
|
$
|
36,249
|
|
|
$
|
69,471
|
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
|
$
|
129,331
|
|
|
$
|
113,797
|
|
Other revenue
|
|
|
665
|
|
|
|
223
|
|
|
|
242
|
|
|
|
437
|
|
|
|
2,366
|
|
|
|
1,984
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
21,922
|
|
|
|
36,472
|
|
|
|
69,713
|
|
|
|
118,613
|
|
|
|
188,370
|
|
|
|
131,315
|
|
|
|
115,451
|
|
Interest revenue
|
|
|
324
|
|
|
|
1,519
|
|
|
|
3,145
|
|
|
|
5,024
|
|
|
|
3,635
|
|
|
|
3,180
|
|
|
|
228
|
|
Interest expense
|
|
|
(33
|
)
|
|
|
(110
|
)
|
|
|
(356
|
)
|
|
|
(611
|
)
|
|
|
(1,208
|
)
|
|
|
(980
|
)
|
|
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue/(expense)
|
|
|
291
|
|
|
|
1,409
|
|
|
|
2,789
|
|
|
|
4,413
|
|
|
|
2,427
|
|
|
|
2,200
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
22,213
|
|
|
|
37,881
|
|
|
|
72,502
|
|
|
|
123,026
|
|
|
|
190,797
|
|
|
|
133,515
|
|
|
|
115,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
5,035
|
|
|
|
9,511
|
|
|
|
17,258
|
|
|
|
25,093
|
|
|
|
37,024
|
|
|
|
27,453
|
|
|
|
29,621
|
|
Selling and marketing
|
|
|
1,186
|
|
|
|
3,256
|
|
|
|
12,517
|
|
|
|
21,836
|
|
|
|
29,312
|
|
|
|
21,975
|
|
|
|
26,791
|
|
Trading expenses and commissions
|
|
|
2,973
|
|
|
|
7,279
|
|
|
|
10,321
|
|
|
|
10,436
|
|
|
|
16,310
|
|
|
|
12,992
|
|
|
|
10,431
|
|
Interest expense on notes payable
|
|
|
|
|
|
|
|
|
|
|
2,075
|
|
|
|
3,688
|
|
|
|
2,697
|
|
|
|
2,177
|
|
|
|
1,294
|
|
Bank fees
|
|
|
245
|
|
|
|
507
|
|
|
|
935
|
|
|
|
2,316
|
|
|
|
3,754
|
|
|
|
2,595
|
|
|
|
3,415
|
|
Depreciation and amortization
|
|
|
301
|
|
|
|
494
|
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
1,897
|
|
|
|
2,013
|
|
Communications and data processing
|
|
|
155
|
|
|
|
424
|
|
|
|
873
|
|
|
|
1,659
|
|
|
|
2,467
|
|
|
|
1,681
|
|
|
|
1,950
|
|
Occupancy and equipment
|
|
|
306
|
|
|
|
530
|
|
|
|
1,045
|
|
|
|
1,616
|
|
|
|
2,419
|
|
|
|
1,715
|
|
|
|
2,391
|
|
Bad debt provision/(recovery)
|
|
|
|
|
|
|
836
|
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
1,289
|
|
|
|
593
|
|
Professional fees
|
|
|
877
|
|
|
|
761
|
|
|
|
1,295
|
|
|
|
1,380
|
|
|
|
3,104
|
|
|
|
1,981
|
|
|
|
2,549
|
|
Software expense
|
|
|
11
|
|
|
|
21
|
|
|
|
78
|
|
|
|
123
|
|
|
|
888
|
|
|
|
541
|
|
|
|
712
|
|
Professional dues and memberships
|
|
|
15
|
|
|
|
15
|
|
|
|
48
|
|
|
|
187
|
|
|
|
773
|
|
|
|
566
|
|
|
|
565
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible preferred stock embedded
derivative(2)
|
|
|
|
|
|
|
|
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
477
|
|
|
|
155
|
|
|
|
3,085
|
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
1,041
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,581
|
|
|
|
23,789
|
|
|
|
112,898
|
|
|
|
236,062
|
|
|
|
(75,799
|
)
|
|
|
(92,376
|
)
|
|
|
124,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
10,632
|
|
|
|
14,092
|
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
225,891
|
|
|
|
(9,111
|
)
|
Income tax expense
|
|
|
3,504
|
|
|
|
5,881
|
|
|
|
9,063
|
|
|
|
21,615
|
|
|
|
34,977
|
|
|
|
24,040
|
|
|
|
11,423
|
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
(3
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
7,128
|
|
|
|
8,208
|
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
201,771
|
|
|
|
(20,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
7,128
|
|
|
$
|
8,208
|
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
201,771
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
|
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
(63,913
|
)
|
|
|
(63,913
|
)
|
|
|
|
|
Effect of preferred share accretion
|
|
|
(2,892
|
)
|
|
|
(63
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
4,236
|
|
|
$
|
8,145
|
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
137,858
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.95
|
|
|
$
|
1.96
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
107.06
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.49
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
9.18
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,445,869
|
|
|
|
4,157,464
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,287,650
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
15,838,150
|
|
|
|
16,634,016
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
15,019,396
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
(unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38.56
|
|
|
|
|
|
|
$
|
15.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.31
|
|
|
|
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in
computing pro forma earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287,360
|
|
|
|
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,002,277
|
|
|
|
|
|
|
|
14,932,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For each of the periods indicated,
in accordance with Statement of Financial Accounting Standards,
or SFAS, No. 133, we accounted for an embedded derivative
liability attributable to the redemption feature of our
outstanding preferred stock. This redemption feature and the
|
(footnotes continued on following page)
12
|
|
|
|
|
associated embedded derivative
liability will no longer be required to be recognized upon
conversion of our preferred stock in connection with the
completion of this offering. See Prospectus
Summary-Reconciliation of Net Income/(Loss) to Adjusted Net
Income.
|
|
(2)
|
|
These amounts do not include the
impact of the embedded derivative liability of approximately
$8.7 million (unaudited) and $37.6 million (unaudited)
as of December 31, 2004 and 2005, respectively, and the
change in fair value for the years ended December 31, 2004
and 2005 of $6.0 million (unaudited) and $28.8 million
(unaudited), respectively.
|
|
(3)
|
|
These amounts do not include the
impact of the change in fair value of our convertible,
redeemable preferred stock embedded derivative, the effect of
redemption of preferred shares and the effect of preferred share
accretion. For the year ended December 31, 2008, the change
in fair value resulted in a gain of $181.8 million and for
the nine months ended September 30, 2009 the change in fair
value resulted in a loss of $40.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,188
|
|
|
$
|
22,482
|
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
160,195
|
|
|
$
|
197,938
|
|
|
$
|
|
|
Receivables from brokers
|
|
$
|
36,383
|
|
|
$
|
59,080
|
|
|
$
|
71,750
|
|
|
$
|
74,630
|
|
|
$
|
75,817
|
|
|
$
|
94,196
|
|
|
$
|
100,171
|
|
|
$
|
|
|
Total assets
|
|
$
|
56,084
|
|
|
$
|
82,661
|
|
|
$
|
113,491
|
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
$
|
272,096
|
|
|
$
|
315,710
|
|
|
$
|
|
|
Payables to brokers, dealers, FCMs, and other regulated entities
|
|
$
|
6,037
|
|
|
$
|
4,577
|
|
|
$
|
5,248
|
|
|
$
|
2,163
|
|
|
$
|
1,679
|
|
|
$
|
1,560
|
|
|
$
|
1,732
|
|
|
$
|
|
|
Payables to customers
|
|
$
|
29,451
|
|
|
$
|
50,031
|
|
|
$
|
70,321
|
|
|
$
|
106,741
|
|
|
$
|
122,293
|
|
|
$
|
152,042
|
|
|
$
|
168,266
|
|
|
$
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
|
|
|
|
|
|
|
$
|
99,286
|
|
|
$
|
264,566
|
|
|
$
|
82,785
|
|
|
$
|
94,287
|
|
|
$
|
123,604
|
|
|
$
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
$
|
27,500
|
|
|
$
|
49,875
|
|
|
$
|
39,375
|
|
|
$
|
42,000
|
|
|
$
|
31,500
|
|
|
$
|
|
|
Total shareholders equity/(deficit)
|
|
$
|
15,305
|
|
|
$
|
23,605
|
|
|
$
|
(154,242
|
)
|
|
$
|
(316,340
|
)
|
|
$
|
(172,154
|
)
|
|
$
|
(204,362
|
)
|
|
$
|
(188,831
|
)
|
|
$
|
|
|
Selected
Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
($ in thousands unless otherwise stated)
|
|
|
Number of opened
accounts(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,572
|
|
|
|
30,626
|
|
|
|
63,576
|
|
|
|
105,924
|
|
|
|
154,190
|
|
|
|
142,555
|
|
|
|
195,559
|
|
China
|
|
|
751
|
|
|
|
3,202
|
|
|
|
8,395
|
|
|
|
19,869
|
|
|
|
27,358
|
|
|
|
27,309
|
|
|
|
27,362
|
|
Number of tradable accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,022
|
|
|
|
11,761
|
|
|
|
27,836
|
|
|
|
41,120
|
|
|
|
36,744
|
|
|
|
41,145
|
|
|
|
43,374
|
|
China
|
|
|
420
|
|
|
|
1,631
|
|
|
|
4,799
|
|
|
|
9,702
|
|
|
|
2,839
|
|
|
|
9,165
|
|
|
|
8
|
|
Adjusted net capital in excess of regulatory
requirements(5)
|
|
$
|
13,509
|
|
|
$
|
20,065
|
|
|
$
|
15,296
|
|
|
$
|
44,856
|
|
|
$
|
98,571
|
|
|
$
|
70,657
|
|
|
$
|
67,558
|
|
(footnotes continued on following page)
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Number of traded accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,432
|
|
|
|
13,896
|
|
|
|
28,270
|
|
|
|
43,139
|
|
|
|
52,555
|
|
|
|
45,001
|
|
|
|
43,565
|
|
China
|
|
|
642
|
|
|
|
2,416
|
|
|
|
5,533
|
|
|
|
11,568
|
|
|
|
11,647
|
|
|
|
11,403
|
|
|
|
6
|
|
Total trading volume (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120.3
|
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,124.4
|
|
|
$
|
928.3
|
|
China
|
|
$
|
6.0
|
|
|
$
|
24.4
|
|
|
$
|
50.8
|
|
|
$
|
103.4
|
|
|
$
|
172.4
|
|
|
$
|
143.8
|
|
|
$
|
0.2
|
|
Net deposits received from customers (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33.5
|
|
|
$
|
70.2
|
|
|
$
|
102.8
|
|
|
$
|
184.2
|
|
|
$
|
277.3
|
|
|
$
|
227.0
|
|
|
$
|
186.9
|
|
China
|
|
$
|
1.8
|
|
|
$
|
6.8
|
|
|
$
|
10.5
|
|
|
$
|
26.0
|
|
|
$
|
25.3
|
|
|
$
|
23.5
|
|
|
$
|
(1.3
|
)
|
Revenue per million traded
|
|
$
|
176.8
|
|
|
$
|
156.3
|
|
|
$
|
155.3
|
|
|
$
|
175.2
|
|
|
$
|
124.1
|
|
|
$
|
115.0
|
|
|
$
|
122.6
|
|
|
|
|
(4)
|
|
Opened customer accounts represent
accounts opened with us on a cumulative basis at any time since
we commenced operations.
|
|
(5)
|
|
Adjusted net capital in excess of
regulatory requirements represents the excess funds over the
regulatory minimum requirements as defined by the regulatory
bodies that regulate our operating subsidiaries.
|
Selected
Geographic Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
55.4
|
|
|
$
|
122.2
|
|
|
$
|
238.3
|
|
|
$
|
355.4
|
|
|
$
|
878.9
|
|
|
$
|
647.4
|
|
|
$
|
506.8
|
|
China(6)
|
|
|
6.0
|
|
|
|
24.4
|
|
|
|
50.8
|
|
|
|
103.4
|
|
|
|
172.4
|
|
|
|
143.8
|
|
|
|
0.2
|
(7)
|
Canada
|
|
|
4.3
|
|
|
|
9.6
|
|
|
|
29.2
|
|
|
|
58.6
|
|
|
|
122.9
|
|
|
|
91.8
|
|
|
|
122.2
|
|
Europe, Middle East and Africa
|
|
|
14.1
|
|
|
|
27.9
|
|
|
|
42.9
|
|
|
|
64.3
|
|
|
|
153.1
|
|
|
|
117.2
|
|
|
|
126.5
|
|
Asia (ex-China)
|
|
|
31.3
|
|
|
|
33.8
|
|
|
|
42.7
|
|
|
|
54.0
|
|
|
|
96.4
|
|
|
|
74.6
|
|
|
|
110.0
|
|
Rest of World
|
|
|
9.2
|
|
|
|
14.0
|
|
|
|
43.5
|
|
|
|
38.8
|
|
|
|
74.9
|
|
|
|
49.6
|
|
|
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120.3
|
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,124.4
|
|
|
$
|
928.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
As a result of our review of our
regulatory compliance in China, we decided to terminate our
service offerings to residents of China and ceased our trading
operations located in that country as of December 31, 2008.
Accordingly, we do not expect to generate significant trading
volume or related revenue from customers in China for the
foreseeable future. For further information, please see
Prospectus Summary Recent Developments.
|
|
(7)
|
|
For the nine months ended
September 30, 2009, a small number of existing customer
accounts, which were originally opened through our relationship
with one of our introducing brokers prior to the termination of
our service offering in China, continued to trade using our
platform. The trading activity by these residual accounts
resulted in the trading volume for the period. We have taken
steps to close these accounts, and expect that they will be
closed, by December 31, 2009.
|
Reconciliation
of Net Income/(Loss) to Adjusted Net Income
Our Convertible, Redeemable Preferred Stock Series A,
Series B, Series C, Series D, and Series E
contains a redemption feature which allows the holders of our
preferred stock at any time on or after March 31, 2011,
upon the written request of holders of at least a majority of
the outstanding shares of preferred stock voting together as a
single class, to require us to redeem all of the shares of
preferred stock then outstanding. We have determined that this
redemption feature effectively provides such holders with an
embedded option derivative meeting the definition of an
embedded derivative pursuant to Statement of
Financial Accounting Standards, or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Consequently, the embedded derivative must be
bifurcated and accounted for separately. Because the embedded
derivative in our preferred stock will no longer be applicable
following conversion of our preferred stock in connection with
this offering, there will be no further accounting adjustment
required for change in fair value of the embedded derivative in
our preferred stock. This
14
redemption feature and related accounting treatment will no
longer be applicable upon conversion of our preferred stock in
connection with our initial public offering. Historically, in
accordance with SFAS No. 133, we have adjusted the
carrying value of the embedded derivative to the fair value of
our company at each reporting date, based upon the Black-Scholes
options pricing model, and reported the preferred stock embedded
derivative liability on the Consolidated Statements of Financial
Condition with change in fair value recorded in our Consolidated
Statements of Operations and Comprehensive Income. This has
impacted our net income but has not affected our cash flow
generation or operating performance. This accounting treatment
causes our earnings to fluctuate, but in our view does not
reflect operating or future performance of our company. We
further discuss the accounting for the embedded derivative in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Fair Value
Derivative Liabilities.
To reconcile between our net income/(loss) and adjusted net
income, we use a financial measure not calculated in accordance
with GAAP. Adjusted net income is a non-GAAP financial measure
and represents our net income/(loss) excluding the change in
fair value of the embedded derivative in our preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Net (loss)/income applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
201,771
|
|
|
$
|
(20,519
|
)
|
Change in fair value of convertible preferred stock embedded
derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
12,230
|
|
|
$
|
30,629
|
|
|
$
|
49,644
|
|
|
$
|
31,492
|
|
|
$
|
20,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.38
|
|
|
$
|
16.13
|
|
|
$
|
38.56
|
|
|
$
|
24.46
|
|
|
$
|
15.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.79
|
|
|
$
|
2.05
|
|
|
$
|
3.31
|
|
|
$
|
2.10
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe our reporting of adjusted net income and adjusted
earnings per common share better assists investors in evaluating
our operating performance. We also believe adjusted net income
and adjusted earnings per common share give investors a
presentation of our operating performance in prior periods that
more accurately reflects how we will be reporting our operating
performance in future periods. However, adjusted net income and
adjusted earnings per common share are not a measure of
financial performance under GAAP and such measures should be
considered in addition to, but not as a substitute for, other
measures of financial performance reported in accordance with
GAAP, such as net income/(loss) and earnings per common share.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(in thousands)
|
|
|
Consolidated Statement of Financial Condition Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
197,938
|
|
|
|
|
|
Total assets
|
|
$
|
315,710
|
|
|
|
|
|
Notes payable
|
|
$
|
31,500
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
$
|
169,390
|
|
|
|
|
|
Total shareholders deficit
|
|
$
|
(188,831
|
)
|
|
|
|
|
The Pro Forma financial information gives effect to the -for-1
stock split of our common stock effected immediately prior to
the completion of this offering and the conversion of all of our
Series A, B, C, D, and E preferred stock into an aggregate
of shares
of common stock upon the closing of this offering.
Our stockholders are selling all of the shares of our common
stock offered by this prospectus. We are not selling any shares
in this offering and will not receive any of the proceeds from
the sale of shares by the selling stockholders.
15
RISK
FACTORS
Investing in our common stock involves a substantial risk.
You should consider carefully the following risks and other
information in this prospectus, including our consolidated
financial statements and related notes, before deciding whether
to invest in our common stock. If any of the events highlighted
in the following risks actually occurs, our business, results of
operations or financial condition would likely suffer. In such
an event, the trading price of our common stock could decline
and you could lose all or part of your investment.
Risks
Related to Our Business
The
retail foreign exchange, or forex, market has only recently
become accessible to retail investors and, accordingly, we have
a limited operating history upon which to evaluate our
performance.
The retail forex market has only recently become accessible to
retail investors. Prior to 1996, retail investors generally did
not directly trade in the forex market and, we believe most
current retail forex traders only recently viewed currency
trading as an alternative investment class. We commenced doing
business in October 1999. Our forex trading operations were
launched in June 2000, at which time we began offering forex
trading services domestically and internationally. Accordingly,
we have only a limited operating history in a relatively new
international retail forex trading market upon which you can
evaluate our prospects and future performance. Our prospects may
be materially adversely affected by the risks, expenses and
difficulties frequently encountered in the operation of a new
business in a rapidly evolving industry characterized by intense
competition and evolving regulatory oversight and rules.
Our
revenue and profitability are influenced by trading volume and
currency volatility, which are directly impacted by domestic and
international market and economic conditions that are beyond our
control.
In the past two years, there has been significant disruption and
volatility in the global financial markets and economic
conditions, and many countries, including the United States, are
currently in recession. Our revenue is influenced by the general
level of trading activity in the forex market. Our revenue and
operating results may vary significantly from period to period
due primarily to movements and trends in the worlds
currency markets and to fluctuations in trading levels. We have
generally experienced greater trading volume in periods of
volatile currency markets. In the event we experience lower
levels of currency volatility, our revenue and profitability
will likely be negatively affected. Like other financial
services firms, our business and profitability are directly
affected by elements that are beyond our control, such as
economic and political conditions, broad trends in business and
finance, changes in the volume of foreign currency transactions,
changes in supply and demand for currencies, movements in
currency exchange rates, changes in the financial strength of
market participants, legislative and regulatory changes, changes
in the markets in which such transactions occur, changes in how
such transactions are processed and disruptions due to
terrorism, war or extreme weather events. Any one or more of
these factors, or other factors, may adversely affect our
business and results of operations and cash flows. A weakness in
equity markets, such as the current economic slowdown causing a
reduction in trading volume in U.S. or foreign securities
and derivatives, could result in reduced trading activity in the
forex market and therefore could have a material adverse effect
on our business, financial condition and results of operations
and cash flows. As a result, period to period comparisons of our
operating results may not be meaningful and our future operating
results may be subject to significant fluctuations or declines.
Reduced
spreads in foreign currencies, levels of trading activity and
trading through alternative trading systems could harm our
business.
Computer-generated buy and sell programs and other technological
advances and regulatory changes in the forex market may continue
to tighten spreads on foreign currency transactions. Tighter
spreads and increased competition could make the execution of
trades and market-making activities less profitable. In
addition, new and enhanced alternative trading systems have
emerged as an option for individual and institutional investors
to avoid directing their trades through market-makers, which
could result in reduced revenue derived from our market-making
business.
16
Our
risk management policies and procedures may not be effective and
may leave us exposed to unidentified or unexpected
risks.
We are dependent on our risk management policies and the
adherence to such policies by our trading staff. Our policies,
procedures and practices used to identify, monitor and control a
variety of risks, including risks related to human error,
customer defaults, market movements, fraud and money-laundering,
are established and reviewed by the risk committee of our board
of directors. Some of our methods for managing risk are
discretionary by nature and are based on internally developed
controls and observed historical market behavior, and also
involve reliance on standard industry practices. These methods
may not adequately prevent losses, particularly as they relate
to extreme market movements, which may be significantly greater
than historical changes in market prices. Our risk management
methods also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not
effective in preventing software or hardware failures. In
addition, we may elect to adjust our risk management policies to
allow for an increase in risk tolerance, which could expose us
to the risk of greater losses. Our risk management methods rely
on a combination of technical and human controls and supervision
that are subject to error and failure. These methods may not
protect us against all risks or may protect us less than
anticipated, in which case our business, financial condition and
results of operations and cash flows may be materially adversely
affected.
We may
incur material trading losses from our market-making
activities.
A substantial portion of our revenue and operating profits is
derived from our role as a market-maker. In our role as a
market-maker, we attempt to derive a profit from the difference
between the prices at which we buy and sell, or sell and buy,
foreign currencies. Since these activities involve the purchase
or sale of foreign currencies for our own account, we may incur
trading losses for a variety of reasons, including:
|
|
|
|
|
price changes in foreign currencies;
|
|
|
|
lack of liquidity in foreign currencies in which we have
positions; and
|
|
|
|
inaccuracies in our proprietary pricing mechanism, or rate
engine, which evaluates, monitors and assimilates market data
and reevaluates our outstanding currency quotes, and is designed
to publish prices reflective of prevailing market conditions
throughout the trading day.
|
These risks may affect the prices at which we are able to sell
or buy foreign currencies, or may limit or restrict our ability
to either resell foreign currencies that we have purchased or
repurchase foreign currencies that we have sold.
In addition, competitive forces often require us to match the
breadth of quotes other market-makers display and to hold
varying amounts and types of foreign currencies at any given
time. By having to maintain positions in certain currencies, we
are subjected to a high degree of risk. We may not be able to
manage such risk successfully and may experience significant
losses from such activities, which could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
We are
exposed to losses due to lack of accurate or timely
information.
As a market-maker, we provide liquidity by buying from sellers
and selling to buyers. We may frequently trade with parties who
have different or more timely information than we do, and as a
result, we may accumulate unfavorable positions preceding price
movements in currency pairs in which we are a market-maker. We
refer to the two currencies that make up a forex exchange rate
as a currency pair. Should the frequency or magnitude of these
unfavorable positions increase, our business, financial
condition and results of operations and cash flows would be
materially adversely affected.
17
We
depend on our proprietary technology. Any disruption or
corruption of our proprietary technology or our inability to
maintain technological superiority in our industry could have a
material adverse effect on our business, financial condition and
results of operations and cash flows. We may experience failures
while developing our proprietary technology.
We rely on our proprietary technology to receive and properly
process internal and external data. Any disruption for any
reason in the proper functioning, or any corruption, of our
software or erroneous or corrupted data may cause us to make
erroneous trades, accept customers from jurisdictions where we
do not possess the proper licenses, authorizations or permits,
or require us to suspend our services and could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. In order to remain competitive,
our proprietary technology is under continuous development and
redesign. As we develop and redesign our proprietary technology,
there is an ongoing risk that failures may occur and result in
service interruptions or other negative consequences such as
slower quote aggregation, slower trade execution, erroneous
trades, or mistaken risk management information.
Our success in the past has largely been attributable to our
proprietary technology that has taken many years for us to
develop. We believe our proprietary technology has provided us
with a competitive advantage relative to many forex market
participants. If our competitors develop more advanced
technologies, we may be required to devote substantial resources
to the development of more advanced technology to remain
competitive. The forex market is characterized by rapidly
changing technology, evolving industry standards and changing
trading systems, practices and techniques. We may not be able to
keep up with these rapid changes in the future, develop new
technology, realize a return on amounts invested in developing
new technologies or remain competitive in the future.
Systems
failures could cause interruptions in our services or decreases
in the responsiveness of our services which could harm our
business.
If our systems fail to perform, we could experience disruptions
in operations, slower response times or decreased customer
service and customer satisfaction. Our ability to facilitate
transactions successfully and provide high quality customer
service depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems.
These systems have in the past experienced periodic
interruptions and disruptions in operations, which we believe
will continue to occur from time to time. Our systems also are
vulnerable to damage or interruption from human error, natural
disasters, power loss, telecommunication failures, break-ins,
sabotage, computer viruses, intentional acts of vandalism and
similar events. We do not have fully redundant capabilities.
While we currently maintain a disaster recovery plan, or DRP,
which is intended to minimize service interruptions and secure
data integrity, our DRP may not work effectively during an
emergency. Any systems failure that causes an interruption in
our services or decreases the responsiveness of our services
could impair our reputation, damage our brand name and
materially adversely affect our business, financial condition
and results of operations and cash flows.
Our
anticipated move to a new principal headquarters could be
disruptive to our business.
On August 18, 2009, we entered into a new lease agreement
for office space which we intend to use as our new corporate
headquarters. We expect to substantially move our operations
into the new facility in the first quarter of 2010. The
build-out of the new facility and the move may be disruptive to
our personnel and operations, and may require substantial
management time and attention. In addition, we could encounter
delays in executing our plans, which could entail further
disruption and associated costs. If these disruptions result in
a decline in productivity of our personnel, negative impacts on
operations such as service and support, or if the move is
delayed for any reason or we experience unanticipated expenses
associated with the move, our business and operating results may
be harmed.
We may
not be able to protect our intellectual property rights or may
be prevented from using intellectual property necessary for our
business.
We rely on a combination of trademark, copyright, trade secret
and fair business practice laws in the United States and
other jurisdictions to protect our proprietary technology,
intellectual property rights and our
18
brand. We also enter into confidentiality and invention
assignment agreements with our employees and consultants, and
confidentiality agreements with other third parties. We also
rigorously control access to proprietary technology. We do not
have any patents. It is possible that third parties may copy or
otherwise obtain and use our proprietary technology without
authorization or otherwise infringe on our rights. We may also
face claims of infringement that could interfere with our
ability to use technology that is material to our business
operations.
In the future, we may have to rely on litigation to enforce our
intellectual property rights, protect our trade secrets,
determine the validity and scope of the proprietary rights of
others or defend against claims of infringement or invalidity.
Any such litigation, whether successful or unsuccessful, could
result in substantial costs and the diversion of resources and
the attention of management, any of which could negatively
affect our business.
Attrition
of customer accounts and failure to attract new accounts could
have a material adverse effect on our business, financial
condition and results of operations and cash flows. Even if we
do attract new customers, we may fail to attract the customers
in a cost-effective manner, which could materially adversely
affect our profitability and growth.
Our customer base is primarily comprised of individual retail
customers who generally trade in the forex market with us for
short periods. Although we offer products and tailored services
designed to educate, support and retain our customers, our
efforts to attract new customers or reduce the attrition rate of
our existing customers may not be successful. If we are unable
to maintain or increase our customer retention rates or generate
a substantial number of new customers in a cost-effective
manner, our business, financial condition and results of
operations and cash flows would likely be adversely affected.
For the year ended December 31, 2008, we incurred sales and
marketing expenses of $29.3 million. Although we have spent
significant financial resources on sales and marketing expenses
and related expenses and plan to continue to do so, these
efforts may not be cost-effective at attracting new customers.
In particular, we believe that rates for desirable advertising
and marketing placements, including online, search engine, print
and television advertising, are likely to increase in the
foreseeable future, and we may be disadvantaged relative to our
larger competitors in our ability to expand or maintain our
advertising and marketing commitments. Additionally, our sales
and marketing methods are subject to regulation by the Commodity
Futures Trading Commission, or CFTC, and National Futures
Association, or NFA. The rules and regulations of these
organizations impose specific limitations on our sales methods,
advertising and marketing. If we do not achieve our advertising
objectives, our profitability and growth may be materially
adversely affected.
We are
subject to litigation risk which could adversely affect our
reputation, business, financial condition and results of
operations and cash flows.
Many aspects of our business involve risks that expose us to
liability under U.S. federal and state laws, as well as the
rules and enforcement efforts of our regulators and
self-regulatory organizations worldwide. These risks include,
among others, disputes over trade terms with customers and other
market participants, customer losses resulting from system delay
or failure and customer claims that we or our employees executed
unauthorized transactions, made materially false or misleading
statements or lost or diverted customer assets in our custody.
We may also be subject to regulatory investigation and
enforcement actions seeking to impose significant fines or other
sanctions, which in turn could trigger civil litigation for our
previous operations that may be deemed to have violated
applicable rules and regulations in various jurisdictions.
The volume of claims and the amount of damages and fines claimed
in litigation and regulatory proceedings against financial
services firms has been increasing, particularly in the current
environment. The amounts involved in the trades we execute,
together with rapid price movements in our currency pairs, can
result in potentially large damage claims in any litigation
resulting from such trades. Dissatisfied customers may make
claims against us regarding the quality of trade execution,
improperly settled trades, mismanagement or even fraud, and
these claims may increase as our business expands.
Litigation may also arise from disputes over the exercise of our
rights with respect to customer accounts and collateral.
Although our customer agreements generally provide that we may
exercise such rights with respect to customer accounts and
collateral as we deem reasonably necessary for our protection,
our exercise of these rights may lead to claims by customers
that we did so improperly.
19
Even if we prevail in any litigation or enforcement proceedings
against us, we could incur significant legal expenses defending
against the claims, even those without merit. Moreover, because
even claims without merit can damage our reputation or raise
concerns among our customers, we may feel compelled to settle
claims at significant cost. The initiation of any claim,
proceeding or investigation against us, or an adverse resolution
of any such matter could have a material adverse effect on our
reputation, business, financial condition and results of
operations and cash flows.
We may
be subject to customer litigation, financial losses, regulatory
sanctions and harm to our reputation as a result of employee
misconduct or errors that are difficult to detect and
deter.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees of financial services
firms in recent years. Our employees could execute unauthorized
transactions for our customers, use customer assets improperly
or without authorization, carry out improper activities on
behalf of customers or use confidential customer or company
information for personal or other improper purposes, as well as
misrecord or otherwise try to hide improper activities from us.
In addition, employee errors, including mistakes in executing,
recording or reporting transactions for customers, may cause us
to enter into transactions that customers disavow and refuse to
settle. Employee errors expose us to the risk of material losses
until the errors are detected and the transactions are unwound
or reversed. The risk of employee error or miscommunication may
be greater for products that are new or have non-standardized
terms. Further, such errors may be more likely to occur in the
aftermath of any acquisitions during the integration of or
migration from technological systems.
Misconduct by our employees or former employees could subject us
to financial losses or regulatory sanctions and seriously harm
our reputation. It may not be possible to deter or detect
employee misconduct and the precautions we take to prevent and
detect this activity may not be effective in all cases. Our
employees may also commit good faith errors that could subject
us to financial claims for negligence or otherwise, as well as
regulatory actions.
Misconduct by employees of our customers can also expose us to
claims for financial losses or regulatory proceedings when it is
alleged we or our employees knew or should have known that an
employee of our customer was not authorized to undertake certain
transactions. Dissatisfied customers can make claims against us,
including claims for negligence, fraud, unauthorized trading,
failure to supervise, breach of fiduciary duty, employee errors,
intentional misconduct, unauthorized transactions by associated
persons and failures in the processing of transactions.
Any
restriction in the availability of credit cards as a payment
option for our customers could adversely affect our business,
financial condition and results of operations and cash
flows.
We currently allow our customers to use credit cards to fund
their accounts with us and 78.5% of our customers elected to
fund their accounts in this manner during 2008. There is a risk
that in the future, new regulations or credit card issuing
institutions may restrict the use of credit and debit cards as a
means to fund accounts used to trade in investment products. The
elimination or a reduction in the availability of credit cards
as a means to fund customer accounts, particularly for our
customers outside the United States, could have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Our
customer accounts may be vulnerable to identity theft and credit
card fraud.
Credit card issuers have adopted credit card security guidelines
as part of their ongoing efforts to prevent identity theft and
credit card fraud. We continue to work with credit card issuers
to ensure that our services, including customer account
maintenance, comply with these rules. There can be no
assurances, however, that our services are fully protected from
unauthorized access or hacking. When there is unauthorized
access to credit card data that results in financial loss, there
is the potential that we could experience reputational damage
and parties could seek damages from us.
20
In the
current environment facing financial services firms, a
firms reputation is critically important. If our
reputation is harmed, or the reputation of the online financial
services industry as a whole is harmed, our business, financial
condition and results of operations and cash flows may be
materially adversely affected.
Our ability to attract and retain customers and employees may be
adversely affected if our reputation is damaged. If we fail, or
appear to fail, to deal with issues that may give rise to
reputation risk, we could harm our business prospects. These
issues include, but are not limited to, appropriately dealing
with potential conflicts of interest, legal and regulatory
requirements, ethical issues, money-laundering, privacy, client
data protection, record-keeping, sales and trading practices,
and the proper identification of the legal, credit, liquidity,
and market risks inherent in our business. Failure to
appropriately address these issues could also give rise to
additional legal risk to us, which could, in turn, increase the
size and number of claims and damages asserted against us or
subject us to regulatory enforcement actions, fines and
penalties. Any such sanction would materially adversely affect
our reputation, thereby reducing our ability to attract and
retain customers and employees.
In addition, our ability to attract and retain customers may be
adversely affected if the reputation of the online financial
services industry as a whole or forex industry is damaged. In
recent years, a number of financial services firms have suffered
significant damage to their reputations from highly publicized
incidents that in turn resulted in significant and in some cases
irreparable harm to their business. The perception of
instability within the online financial services industry could
materially adversely affect our ability to attract and retain
customers.
The
loss of our key employees would materially adversely affect our
business, including our ability to grow our
business.
Our key employees, including Glenn Stevens, our chief executive
officer, and Alexander Bobinski, our executive vice president,
operations, have significant experience in the forex industry
and have made significant contributions to our business. Henry
Lyons, our chief financial officer, has significant experience
with publicly-traded companies and has made significant
contributions to our company. In addition, Timothy
OSullivan, our chief dealer, and Andrew Haines, our chief
information officer, have made significant contributions to our
business. Our continued success is dependent upon the retention
of these and other key executive officers and employees, as well
as the services provided by our trading staff, technology and
programming specialists and a number of other key managerial,
marketing, planning, financial, technical and operations
personnel. The loss of such key personnel could have a material
adverse effect on our business. In addition, our ability to grow
our business is dependent, to a large degree, on our ability to
retain such employees. Currently, we have entered into an
employment agreement with Mr. Stevens which will continue,
unless earlier terminated by the parties, until
December 31, 2009. The term of Mr. Stevens
agreement will be automatically extended for an additional
one-year period unless terminated. Our employment of
Mr. Lyons, Mr. Bobinski, Mr. OSullivan,
Mr. Haines and Ms. Roady is at will and
not for any specified period of time.
Any
future acquisitions may result in significant transaction
expenses, integration and consolidation risks and risks
associated with entering new markets, and we may be unable to
profitably operate our consolidated company.
Although our growth strategy has not focused historically on
acquisitions, we may in the future selectively pursue
acquisitions and new businesses. Any future acquisitions may
result in significant transaction expenses and present new risks
associated with entering additional markets or offering new
products and integrating the acquired companies. Because
acquisitions historically have not been a core part of our
growth strategy, we do not have significant experience in
successfully completing acquisitions. We may not have sufficient
management, financial and other resources to integrate companies
we acquire or to successfully operate new businesses and we may
be unable to profitably operate our expanded company.
Additionally, any new businesses that we may acquire, once
integrated with our existing operations, may not produce
expected or intended results.
21
The
planned expansion of our market-making and brokerage activities
into other financial products, including listed securities,
contracts for difference, or CFDs,
over-the-counter,
or OTC, currency derivatives and gold and silver spot trading
entails significant risk, and unforeseen events in such business
could have an adverse effect on our business, financial
condition and results of operation.
All of the risks that pertain to our market-making activities in
the forex market will also apply if we expand our product
offering to include listed securities, CFDs, OTC currency
derivatives market-making and gold and silver spot trading.
These risks include market risk, counterparty risk, liquidity
risk, technology risk, third party risk and risk of human error.
In addition, we have very little experience outside of the forex
market and even though we expect to ease into these activities
very slowly through internal growth or acquisition, any kind of
unexpected event can occur that can result in great financial
loss to us, including our inability to effectively integrate new
products into our existing trading platform or our failure to
properly manage the market risks associated with making-markets
for new products. With respect to CFDs, the volatility
characteristics of the CFD market may have an adverse impact on
our ability to maintain profit margins similar to the profit
margins we have realized with respect to forex trading. In
addition, by further expanding our listed securities offerings,
we are expanding from what is primarily a market-making business
model into a business model that includes brokerage activities
that require reliance upon third party clearing firms to hold
our customers funds and execute our customers
trades. The introduction of these and other potential financial
products also poses a risk that our risk management policies,
procedures and practices, and the technology that supports such
activities, will be unable to effectively manage these new risks
to our business. Failure to effectively manage such risks may
have a material adverse effect upon our business, financial
condition and results of operations and cash flows.
We may
be unable to effectively manage our rapid growth and retain our
customers.
The rapid growth of our business during our short history has
placed significant demands on our management and other
resources. If our business continues to grow at a rate
consistent with our historical growth, we may need to expand and
upgrade the reliability and scalability of our transaction
processing systems, network infrastructure and other aspects of
our proprietary technology. We may not be able to expand and
upgrade our technology systems and infrastructure to accommodate
increases in our business activity in a timely manner, which
could lead to operational breakdowns and delays, loss of
customers, a reduction in the growth of our customer base,
increased operating expenses, financial losses, increased
litigation or customer claims, regulatory sanctions or increased
regulatory scrutiny.
In addition, due to our rapid growth, we will need to continue
to attract, hire and retain highly skilled and motivated
officers and employees. We may not be able to attract or retain
the officers and employees necessary to manage this growth
effectively.
We may
be unable to respond to customers demands for new services
and products and our business, financial condition and results
of operations and cash flows may be materially adversely
affected.
The market for Internet-based forex trading is characterized by:
|
|
|
|
|
changing customer demands;
|
|
|
|
the need to enhance existing services and products or introduce
new services and products; and
|
|
|
|
evolving industry practices.
|
New services and products provided by our competitors may render
our existing services and products less competitive. Our future
success will depend, in part, on our ability to respond to
customers demands for new services and products on a
timely and cost-effective basis and to adapt to address the
increasingly sophisticated requirements and varied needs of our
customers and prospective customers. We may not be successful in
developing, introducing or marketing new services and products.
In addition, our new service and product enhancements may not
achieve market acceptance. Any failure on our part to anticipate
or respond adequately to customer requirements or changing
industry practices, or any significant delays in the
development, introduction or availability of new services,
products or service or product enhancements could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
22
We
face significant competition. Many of our competitors and
potential competitors have larger customer bases, more
established name recognition and greater financial, marketing,
technological and personnel resources than we do which could put
us at a competitive disadvantage. Additionally, some of our
competitors and many potential competitors are better
capitalized than we are, and able to obtain capital more easily
which could put us at a competitive disadvantage.
We compete in the forex market based on our ability to execute
our customers trades at competitive prices, to retain our
existing customers and to attract new customers. Our competitors
range from numerous sole proprietors with limited resources to a
few sophisticated institutions which have larger customer bases,
more established name recognition and substantially greater
financial, marketing, technological and personnel resources than
we do. These advantages may enable them, among other things, to:
|
|
|
|
|
develop products and services that are similar to ours, or that
are more attractive to customers than ours, in one or more of
our markets;
|
|
|
|
provide products and services we do not offer;
|
|
|
|
provide execution and clearing services that are more rapid,
reliable or efficient, or less expensive than ours;
|
|
|
|
offer products and services at prices below ours to gain market
share and to promote other businesses, such as forex options
listed securities, CFDs, spot-precious metals and OTC
derivatives;
|
|
|
|
adapt at a faster rate to market conditions, new technologies
and customer demands;
|
|
|
|
offer better, faster and more reliable technology;
|
|
|
|
outbid us for desirable acquisition targets;
|
|
|
|
more efficiently engage in and expand existing relationships
with strategic alliances;
|
|
|
|
market, promote and sell their products and services more
effectively; and
|
|
|
|
develop stronger relationships with customers.
|
These larger and better capitalized competitors, including
commercial and investment banking firms, may have access to
capital in greater amounts and at lower costs than we do and
thus, may be better able to respond to changes in the forex
industry, to compete for skilled professionals, to finance
acquisitions, to fund internal growth and to compete for market
share generally. Access to capital is critical to our business
to satisfy regulatory obligations and liquidity requirements.
Among other things, access to capital determines our
creditworthiness, which if perceived negatively in the market
could materially impair our ability to provide clearing services
and attract customer assets, both of which are important sources
of revenue. Access to capital also determines the degree to
which we can expand our operations. Thus, if we are unable to
maintain or increase our capital on competitive terms, we could
be at a significant competitive disadvantage, and our ability to
maintain or increase our revenue and earnings could be
materially impaired. Also, new or existing competitors in our
markets could make it difficult for us to maintain our current
market share or increase it in desirable markets. In addition,
our competitors could offer their services at lower prices, and
we may be required to reduce our fees significantly to remain
competitive. A fee reduction without a commensurate reduction in
expenses would decrease our profitability. We may not be able to
compete effectively against these firms, particularly those with
greater financial resources, and our failure to do so could
materially and adversely affect our business, financial
condition and results of operations and cash flows. We may in
the future face increased competition, resulting in narrowing
bid/offer spreads which could materially adversely affect our
business, financial condition and results of operations and cash
flows.
If we
are unable to effectively compete in emerging international
markets, either directly or through joint ventures with local
firms, the future growth of our business may be adversely
affected.
We regard emerging international markets as an important area of
potential growth for our business. Due to cultural, regulatory
and other factors relevant to those markets, however, we may be
at a competitive disadvantage in those regions relative to local
firms or to international firms that have a well established
local presence. In some regions, we may need to enter into joint
ventures with local firms in order to establish a presence in
the local market,
23
and we may face intense competition from other international
firms over relatively scarce opportunities for market entry.
Given the intense competition from other international brokers
that are also seeking to enter these fast-growing markets, we
may have difficulty finding suitable local firms willing to
enter into the kinds of relationships with us that we may need
to gain access to these markets. This competition could make it
difficult for us to expand our business internationally as
planned.
Our
international operations present special challenges and our
failure to adequately address such challenges could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
In 2008, we generated approximately 41.4% of our forex trading
volume from customers outside the United States, which
includes 11.5% from customers residing in China. Expanding our
business in other emerging markets is an important part of our
growth strategy. We face significant risks in doing business in
international markets, particularly in developing regions. These
business, legal and tax risks include:
|
|
|
|
|
less developed or mature local technological infrastructure and
higher costs, which could make our products and services less
attractive or accessible in emerging markets;
|
|
|
|
difficulty in complying with the diverse regulatory requirements
of multiple jurisdictions, which may be more burdensome, not
clearly defined, and subject to unexpected changes, potentially
exposing us to significant compliance costs and regulatory
penalties;
|
|
|
|
less developed and established local financial and banking
infrastructure, which could make our products and services less
accessible in emerging markets;
|
|
|
|
reduced protection of intellectual property rights;
|
|
|
|
inability to enforce contracts in some jurisdictions;
|
|
|
|
difficulties and costs associated with staffing and managing
foreign operations, including reliance on newly hired local
personnel;
|
|
|
|
tariffs and other trade barriers;
|
|
|
|
currency and tax laws that may prevent or restrict the transfer
of capital and profits among our various operations around the
world; and
|
|
|
|
time zone, language and cultural differences among personnel in
different areas of the world.
|
In addition, in order to be competitive in these local markets,
or in some cases because of restrictions on the ability of
foreign firms to do business locally, we may seek to operate
through joint ventures with local firms as we have done, for
example, in Japan. Doing business through joint ventures may
limit our ability to control the conduct of the business and
could expose us to reputational and greater operational risks.
As a
result of our review of our regulatory compliance in China, we
ceased offering our forex trading services to new and existing
China customers as of December 31, 2008. We cannot provide
any assurances that we will be able to resume providing our
trading services to China residents.
The China Banking Regulatory Commission, or CBRC, a Chinese
regulatory body, prohibits foreign firms and banking
institutions from providing forex trading services to residents
of China without a permit. We do not have, and may not be able
to obtain, such a permit. In light of these developments, we
ceased all service offerings to residents of China. We no longer
market to or accept new customers resident in China and no
longer provide forex trading services to pre-existing China
customers, except to eight immaterial legacy customer accounts
(as of September 30, 2009), which were originally opened
through our relationship with one of our introducing brokers
prior to the termination of our service offerings in China. We
have taken steps to close these accounts, and expect they will
be closed, by December 31, 2009. We cannot provide any
assurances that we will be able to resume our trading operations
in China. To our knowledge, the Chinese government has never
issued a permit to any foreign company to allow such foreign
company to conduct online forex trading services to residents of
China.
24
The
cessation of our trading operations in China and the termination
of our services to residents of China may have a negative impact
on our international expansion, which is one of our key growth
strategies.
Historically, a significant portion of our trading volume,
trading revenue, and net income in recent periods have been
generated from residents of China. As a result of the cessation
of our trading operations in China and the termination of our
services to residents of China, we will not generate any trading
volume or related revenue from customers in China until such
time that we obtain the necessary permits, licenses or approvals
from the applicable Chinese regulators. We cannot provide any
assurances as to whether, and if so, to what extent, these
developments would trigger investigations by regulatory bodies
in other jurisdictions where we operate. All of these issues,
individually or together may have a material adverse effect on
our business, financial condition and results of operations and
cash flows.
The
Canadian regulatory environment is complex and evolving, and our
forex trading services may not be compliant with the regulations
of all provinces and territories in Canada. If we are deemed to
have violated local regulations, or if local regulators so
require, we may need to register our business in one or more
provinces or territories, or offer our trading services through
white label partners. Any such new white label partnership could
negatively impact our profitability because we would have to
share a portion of our revenue with the white label
partner.
Approximately 13.2% of our customer trading volume for the nine
months ended September 30, 2009 was generated from
customers located in Canada, with more than half of such volume
generated from accounts in the Province of Ontario. In Canada,
the securities industry is governed locally by provincial or
territorial legislation, and there is no national regulator.
Local legislation differs from province to province and
territory to territory. We have previously determined that the
provincial laws of British Columbia would require us to register
as a dealer to offer our trading services directly, so we have
conducted our business in British Columbia through Questrade,
Inc., a registered investment dealer in Canada, since
December 1, 2004. In other provinces and territories in
Canada, where we conduct the bulk of our Canadian business, we
provide our services directly from our U.S. facilities,
without registering as a dealer.
The Canadian regulatory environment is complex and evolving, and
we cannot be certain that our forex trading services are
currently compliant with the regulations of each province and
territory outside British Columbia. Moreover, local regulators
in one or more provinces or territories may in the future
announce that forex trading services must be carried out through
a registered dealer. For example, on October 30, 2009, the
Ontario Securities Commission issued interim guidance pursuant
to a staff notice which took the position that rolling spot
foreign exchange contracts and similar
over-the-counter
derivative contracts fall under the definition of securities.
Accordingly, we have taken preliminary steps to seek exemptive
relief from the registration requirements of Ontario. If we are
unsuccessful, we may seek to offer our services in the affected
province or territory through a white label partnership with a
registered dealer, or seek to register as a dealer in order to
offer our trading services directly. In a province or territory
where we needed to enter into a white label partnership, our
profitability would be negatively impacted because we would have
to share a portion of the revenue generated from customers in
that province or territory with the white label partner. In
addition, we may also be subject to enforcement actions and
penalties or customer claims in any province or territory where
our forex trading operations are deemed to have violated local
regulations.
Gain
Capital Holdings, Inc. is a holding company and accordingly
depends on cash flow from its operating subsidiaries to meet our
obligations. If our operating subsidiaries are unable to pay us
dividends when needed, we may be unable to satisfy our
obligations when they arise.
As a holding company with no material assets other than the
stock of our operating subsidiaries, nearly all of our funds
generated from operations are generated by our operating
subsidiaries. Historically, we have accessed these funds through
receipt of dividends from these subsidiaries. Some of our
subsidiaries are subject to requirements of various regulatory
bodies, including the Commodity Futures Trading Commission, or
CFTC, and National Futures Association, or NFA, in the United
States, the Financial Services Authority in the United Kingdom,
the Financial Services Agency in Japan, the Securities and
Futures Commission in Hong Kong and the
25
Cayman Islands Monetary Authority in the Cayman Islands,
relating to liquidity and capital standards, which limit funds
available for the payment of dividends to the holding company.
Accordingly, if our operating subsidiaries are unable, due to
regulatory restrictions or otherwise, to pay us dividends and
make other payments to us when needed, we may be unable to
satisfy our obligations when they arise.
Risks
Related to the Global Economic Environment
Our
business could be adversely affected if global economic
conditions continue to negatively impact our customer
base.
Our customer base is primarily comprised of individual retail
customers who view foreign currency trading as an alternative
investment class. If global economic conditions continue to
negatively impact the forex market or adverse developments in
global economic conditions continue to limit the disposable
income of our customers, our business could be materially
adversely affected as our customers may choose to curtail their
trading in the forex market which could result in reduced
customer trading volume and trading revenue.
A
systemic market event that impacts the various market
participants with whom we interact could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
As a forex market-maker, we interact with various third parties
through our relationships with our prime brokers, wholesale
forex trading partners, white label partners and introducing
brokers. Some of these market participants could be
overleveraged. In the event of sudden, large market price
movements, such market participants may not be able to meet
their obligations to brokers who, in turn, may not be able to
meet their obligations to their counterparties. As a result, a
system collapse in the financial system could occur, which would
have a material adverse effect on our business, financial
condition and results of operations and cash flows.
A
further decline in short-term interest rates could have an
adverse effect on our interest income and
revenues.
A portion of our revenue is derived from interest income. Our
interest income is directly affected by the spread between the
short-term interest rates we pay our customers on their balances
and the short-term rates we earn from re-investing their cash.
These spreads can widen or narrow when interest rates change. In
addition, a portion of our interest income relates to customer
balances on which we do not pay interest and therefore is
directly affected by the absolute level of short-term interest
rates. As a result, a portion of our interest income will
decline if interest rates continue to fall, regardless of the
interest rate spreads that affect the remaining portion of our
interest income. Short-term interest rates are highly sensitive
to factors that are beyond our control, including general
economic conditions and the policies of various governmental and
regulatory authorities. For the nine months ended
September 30, 2009, our net interest revenue decreased
$2.5 million to a $0.3 million expense compared to
$2.2 million in revenue for the nine months ended
September 30, 2008. This decrease was primarily due to the
decline in the average effective interest rate earned on net
customer deposits and investments from 1.77% for the nine months
ended September 30, 2008, compared to 0.11% for the nine
months ended September 30, 2009. Our interest income and
revenue may be adversely affected if interest rates continue to
decline.
Our
operations in certain developing regions may be subject to the
risks associated with politically unstable and less economically
developed regions of the world. Trading in the currencies of
these developing regions may expose our clients and the third
parties with whom we interact to sudden and significant
financial loss as a result of exceptionally volatile and
unpredictable price movements and could negatively impact our
business.
Our operations in some emerging markets may be subject to the
political, legal and economic risks associated with politically
unstable and less economically developed regions of the world,
including the risks of war, insurgency, terrorism and government
appropriation. For example, we do business in countries whose
currencies may be less stable than those in our primary markets.
Currency instability or government imposition of currency
restrictions in these countries could impede our operations in
the forex markets in these countries. In addition, emerging
markets may be subject to exceptionally volatile and
unpredictable price movements that can expose
26
customers and brokers to sudden and significant financial loss.
Trading in these markets may be less liquid, market participants
may be less well capitalized and market oversight may be less
extensive, all of which can increase trading risk, particularly
in markets for derivatives, commodities and currencies.
Substantial trading losses by customers or customer or
counterparty defaults, or the prospect of them, in turn, can
drive down trading volume and market-making revenue in these
markets.
Risks
Related to Third Parties
We are
dependent on wholesale forex trading partners to continually
provide us with forex market liquidity. In the event that we no
longer have access to the prices and levels of liquidity that we
currently have, we may be unable to provide competitive forex
trading services, which will materially adversely affect our
business, financial condition and results of operations and cash
flows.
Given the level of our customers trading volume, in order
to continually provide our market-making services, we rely on
third party financial institutions to provide us with forex
market liquidity. As of September 30, 2009, we have
established trading relationships with at least nine financial
institutions, including Deutsche Bank, RBS, UBS, Barclays Bank
PLC, Merrill Lynch International Bank, Dresdner Bank AG, Goldman
Sachs & Co., Skandinaviska Enskilda Banken AB and Man
FX Clear LLC. These wholesale forex trading partners, although
under contract with us, have no obligation to provide us with
liquidity and may terminate our arrangements at any time. We
also rely upon these third party financial institutions to
provide us with competitive wholesale forex pricing spreads. In
the event that we no longer have access to the competitive
wholesale forex pricing spreads and/or levels of liquidity that
we currently have, we may be unable to provide competitive forex
trading services, which will materially adversely affect our
business, financial condition and results of operations and cash
flows.
We
depend on the services of prime brokers to assist in providing
us access to liquidity through our wholesale forex trading
partners. The loss of one or more of our prime brokerage
relationships could lead to increased transaction costs and
capital posting requirements, as well as having a negative
impact on our ability to verify our open positions, collateral
balances and trade confirmations.
We depend on the services of prime brokers to assist in
providing us access to liquidity through our wholesale forex
trading partners. We currently have established three prime
brokerage relationships with Deutsche Bank, RBS and UBS which
act as central hubs through which we are able to deal with our
existing wholesale forex trading partners. In return for paying
a transaction-based prime brokerage fee, we are able to
aggregate our customers and our trading positions, thereby
reducing our transaction costs and increasing the efficiency of
the capital we are required to post as collateral in order to
conduct our market-making trading activities. Since we trade
with our wholesale forex trading partners through our prime
brokers, they also serve as a third party check on our open
positions, collateral balances and trade confirmations. If we
were to lose one or more of our prime brokerage relationships,
we could lose this source of third party verification of our
trading activity, which could lead to an increased number of
record-keeping or documentation errors. Although we have
relationships with wholesale forex trading partners who could
provide clearing services as a
back-up for
our prime brokerage services, if we were to experience a
disruption in prime brokerage services due to a financial,
technical or other development adversely affecting any of our
current prime brokers, our business could be materially
adversely affected to the extent that we are unable to transfer
positions and margin balances to another financial institution
in a timely fashion. In the event of the insolvency of a prime
broker, we might not be able to fully recover the assets we have
deposited (and have deposited on behalf of our customers) with
the prime broker or our unrealized profits since we will be
among the prime brokers unsecured creditors.
We are
subject to risk of default by financial institutions that hold
our funds and our customers funds.
We have significant deposits with banks and other financial
institutions. Pursuant to current guidelines set forth by NFA
and CFTC for our
U.S.-regulated
subsidiaries, we are not required to segregate customer funds
from our own funds. As such, we aggregate our customers
funds and our funds and hold them in collateral and deposit
accounts at various financial institutions. In the event of
insolvency of one or more of the financial institutions with
whom we have deposited these funds, both us and our customers
may not be able to recover our funds. Because our
customers funds are aggregated with our own, they are not
insured by the Federal Deposit Insurance Corporation. In any
such insolvency we and our customers would rank as unsecured
creditors in respect of claims to funds
27
deposited with any such financial institution. As a result, we
may be subject to claims by customers due to the loss of such
funds and our business would be harmed by the loss of our funds.
We are
subject to counterparty risk whereby defaults by parties with
whom we do business can have an adverse effect on our business,
financial condition and results of operations and cash
flows.
Our forex market-making operations require a commitment of
capital and involve risks of losses due to the potential failure
of our customers to perform their obligations under these
transactions. Our margin policy allows customers to leverage
their account balances by trading notional amounts that may be
significantly larger than their cash balances. We mark our
customers accounts to market each time a currency price in
their portfolio changes. While this allows us to closely monitor
each customers exposure, it does not guarantee our ability
to eliminate negative customer account balances prior to an
adverse currency price change. Although we have the ability to
alter our margin requirements without prior notice to our
customers, this may not eliminate the risk that our access to
liquidity becomes limited or market conditions, including
currency price volatility and liquidity constraints, change
faster than our ability to modify our margin requirements. If
our customers default on their obligations, we remain
financially liable for such obligations, and although these
obligations are collateralized, since the value of our
customers forex positions is subject to fluctuation as
market prices change, we are subject to market risk in the
liquidation of customer collateral to satisfy such obligations.
In light of the current turbulence in the global economy, we
face increased risk of default by our customers and other
counterparties. For example, during the second half of 2008,
Lehman Brothers Holdings Inc. declared bankruptcy, and many
major U.S. financial institutions consolidated, were forced
to merge or were put into conservatorship by the
U.S. federal government, including The Bear Stearns
Companies, Inc. Any liability arising from our forex operations
could be significant and could have a material adverse effect on
our business, financial condition and results of operations and
cash flows.
Failure
of third-party systems or third-party service and software
providers upon which we rely could adversely affect our
business.
We rely on certain third party computer systems or third party
service and software providers, including trading platforms,
back-office systems, Internet service providers and
communications facilities. For example, for the nine months
ended September 30, 2009, 24.5% of our forex trading volume
was derived from trades utilizing our MetaTrader platform, a
third-party trading platform we license that is popular in the
international retail trading community and offers our customers
a choice in trading interfaces. Additionally, we also rely on an
agreement we entered into with Trading Central whereby Trading
Central will provide us with investment research that we
distribute to our customers. Any interruption in these third
party services, or deterioration in their performance or
quality, could adversely affect our business. If our arrangement
with any third party is terminated, we may not be able to find
an alternative systems or services provider on a timely basis or
on commercially reasonable terms. This could have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Our
computer infrastructure may be vulnerable to security breaches.
Any such problems could jeopardize confidential information
transmitted over the internet, cause interruptions in our
operations or give rise to liabilities to third
parties.
Our computer infrastructure is potentially vulnerable to
physical or electronic computer break-ins, viruses and similar
disruptive problems and security breaches. Any such problems or
security breaches could give rise to liabilities to one or more
third parties, including our customers, and disrupt our
operations. A party able to circumvent our security measures
could misappropriate proprietary information or customer
information, jeopardize the confidential nature of information
we transmit over the Internet or cause interruptions in our
operations. Concerns over the security of Internet transactions
and the safeguarding of confidential personal information could
also inhibit the use of our systems to conduct forex
transactions over the Internet. To the extent that our
activities involve the storage and transmission of proprietary
information and personal financial information, security
breaches could expose us to a risk of financial loss, litigation
and other liabilities. Our current insurance policies may not
protect us against all of such losses and liabilities. Any of
these events, particularly if they result in a loss of
confidence in our services, could have a material adverse effect
on our business, financial condition and results of operations
and cash flows.
28
We
have relationships with introducing brokers who direct new
customers to us. Failure to maintain these relationships could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
We have relationships with introducing brokers who direct new
customers to us and provide marketing and other services for
these customers. For example, for the nine months ended
September 30, 2009, approximately 10.7% our forex trading
volume was derived from Tradestation Securities, Inc., our
largest introducing broker. In certain jurisdictions, we are
only able to provide our services through white label
partnerships. Many of our relationships with introducing brokers
are non-exclusive or may be terminated by the brokers on short
notice. In addition, under our agreements with introducing
brokers, they have no obligation to provide us with new
customers or minimum levels of transaction volume. Our failure
to maintain our relationships with these introducing brokers,
the failure of the introducing brokers to provide us with
customers or our failure to create new relationships with
introducing brokers would result in a loss of revenue, which
could have a material adverse effect on our business, financial
condition and results of operations and cash flows. To the
extent any of our competitors offers more attractive
compensation terms to one of our introducing brokers, we could
lose the brokers services or be required to increase the
compensation we pay to retain the broker. In addition, we may
agree to set the compensation for one or more introducing
brokers at a level where, based on the transaction volume
generated by customers directed to us by such brokers, it would
have been more economically attractive to seek to acquire the
customers directly rather than through the introducing broker.
To the extent we do not enter into the most economically
attractive relationships with introducing brokers, our
introducing brokers terminate their relationship with us or our
introducing brokers fail to provide us with customers, our
business, financial condition and results of operations and cash
flows would be materially, adversely affected.
Our
relationships with our introducing brokers may also expose us to
significant regulatory, reputational and other risks as we could
be harmed by introducing broker misconduct or errors that are
difficult to detect and deter.
We could be held responsible for improper conduct by our
introducing brokers, even though we do not control their
activities. Introducing brokers maintain customer relationships
and delegate to us the responsibilities associated with forex
and back-office operations. Furthermore, many of our introducing
brokers operate websites, which they use to advertise our
services or direct customers to us. It is difficult for us to
closely monitor the contents of their websites to ensure that
the statements they make in relation to our services are
accurate and comply with applicable rules and regulations. Under
the rules of the NFA, we are responsible for the activities of
any party that solicits or introduces a customer to us unless
such party is a member or associate of the NFA. As many of our
introducing brokers are not members or associates of the NFA, we
are responsible for any misleading statements about us made on
their websites. If such misleading statements are made, we may
be subject to disciplinary action by the NFA. In 2006, the NFA
filed a complaint against us alleging, among other things that
the NFA found misleading statements on eight such third-party
websites that the NFA believed inflated the profit potential and
downplayed the risk of loss of forex trading. We contested the
complaint, but ultimately agreed in 2007 to settle the case with
the NFA. As part of the settlement, the NFA imposed a $100,000
fine on us in connection with the website statements as well as
with findings about our written procedures relating to our
anti-money laundering compliance program. Although we remediated
the issues identified by the NFA, we have received subsequent
correspondence from the NFA about our introducing brokers
websites and the NFA may find additional misleading statements
about us on our introducing brokers websites, which could
result in further disciplinary action by the NFA, including the
imposition of restrictions on our ability to use introducing
brokers. In addition to the regulations of the NFA, we may also
be held responsible for the activities of our introducing
brokers by international regulatory authorities in much the same
way as the NFA. Any disciplinary action taken against us or any
restrictions imposed on us on our ability to use introducing
brokers, as a result of our relationship with such introducing
brokers in the United States and abroad, could have a material
adverse effect on our reputation, damage our brand name and
materially adversely affect our business, financial condition
and results of operations and cash flows.
29
We
have relationships with white label partners who direct customer
trading volume to us. Failure to maintain these relationships or
develop new white label partner relationships could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
We have relationships with white label partners which provide
forex trading to their customers by using our trading platform
and other services and therefore provide us with an additional
source of revenue. Many of our relationships with white label
partners are non-exclusive or may be terminated by them on short
notice. In addition, our white label partners have no obligation
to provide us with minimum levels of transaction volume. Our
failure to maintain our relationships with these white label
partners, the failure of these white label partners to continue
to offer online forex trading services to their customers using
our trading platform, the loss of requisite licenses by our
white label partners or our inability to enter into new
relationships with white label partners would result in a loss
of revenue, which could have a material adverse effect on our
business, financial condition and results of operations and cash
flows. For the nine months ended September 30, 2009,
trading volume generated through Questrade, Inc. represented
approximately 1.9% of our total trading volume. Failure to
maintain these relationships or failure of these white label
partners to continue to offer online forex trading services
would result in a significant loss of revenue to us. To the
extent any of our competitors offers more attractive
compensation terms to one or more of our white label partners,
we could lose the white label partnership or be required to
increase the compensation we pay to retain the white label
partner. Our relationships with our white label partners also
may expose us to significant regulatory, reputational and other
risks as we could be harmed by white label partner misconduct or
errors that are difficult to detect and deter. If any of our
white label partners provided unsatisfactory service to their
customers or are deemed to have failed to comply with applicable
laws or regulations, our reputation may be harmed as a result of
our affiliation with such white label partner. Any such harm to
our reputation would have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
Risks
Related to Regulation
We
operate in a heavily regulated environment that imposes
significant compliance requirements and costs on us. Failure to
comply with the rapidly evolving laws and regulations governing
our forex and other business may result in regulatory agencies
taking action against us, which could significantly harm our
business.
In those jurisdictions in which we are regulated, including the
United States, the United Kingdom, Japan, Singapore, Australia,
Hong Kong and the Cayman Islands, we are regulated by
governmental bodies
and/or
self-regulatory
organizations. In Australia and Singapore, we are currently
seeking local registration, licensing and authorization to
conduct our forex trading services.
Many of the regulations we are governed by are intended to
protect the public, our customers and the integrity of the
markets, and not necessarily our shareholders. Substantially all
of our operations involving the execution and clearing of
transactions in foreign currencies, CFDs, gold and silver and
securities are conducted through subsidiaries that are regulated
by governmental bodies or self-regulatory organizations. In the
United States, we are principally regulated by the CFTC, SEC,
FINRA and NFA. We are also regulated in all regions by
applicable regulatory authorities and the various exchanges of
which we are members. For example, we are regulated by the
Financial Services Authority in the U.K., or FSA, the Monetary
Authority of Singapore, or MAS, the Australian Securities and
Investment Commission in Australia, or ASIC, and the Securities
and Futures Commission in Hong Kong, or SFC, among others. In
Australia and Singapore, we are currently seeking local
registration, licensing and authorization to conduct our forex
trading services. In addition, we have acquired a 70.0%
interest, with rights to acquire up to a 95.0% interest, in
Fortune Capital Co., Ltd. (now known as GAIN Capital Japan, Co.
Ltd.), a Tokyo based market maker authorized by the Financial
Supervisory Authority in Japan, or Japan FSA. These regulators
and self-regulatory organizations regulate the conduct of our
business in many ways and conduct regular examinations of our
business to monitor our compliance with these regulations. Among
other things, we are subject to regulation with regard to:
|
|
|
|
|
our sales practices, including our interaction with and
solicitation of customers and our marketing activities;
|
|
|
|
the custody, control and safeguarding of our customers
assets;
|
30
|
|
|
|
|
account statements, record keeping and retention;
|
|
|
|
maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
|
|
|
|
making regular financial and other reports to regulators;
|
|
|
|
anti-money laundering practices;
|
|
|
|
licensing for our operating subsidiaries and our employees;
|
|
|
|
the conduct of our directors, officers, employees and
affiliates; and
|
|
|
|
supervision of our business.
|
Compliance with these regulations is complicated, time consuming
and expensive. Even minor, inadvertent irregularities can
potentially give rise to claims that applicable laws and
regulations have been violated. Failure to comply with all
potentially applicable laws and regulations could lead to fines
and other penalties which could adversely affect our revenues
and our ability to conduct our business as planned.
As we
operate in many jurisdictions in a manner which does not require
local registration, licensing or authorization, our growth may
be limited by various restrictions and we remain at risk that we
may be required to cease operations if we become subject to
regulation by local government bodies.
In jurisdictions outside the United States in which we have no
permanent establishment (which in aggregate contributed about
41.4% of our total customer volume for 2008), we seek to operate
in a manner which enables us to deal with customers in the
relevant jurisdiction in compliance with applicable local law
but which does not require local registration, licensing or
authorization from local governmental agencies or self
regulatory organizations responsible for the regulation of forex
transactions. We determine the nature and extent of services we
can offer and the manner in which we conduct our business in
such jurisdictions based on a variety of factors.
In such jurisdictions, we are generally restricted from:
|
|
|
|
|
direct marketing to retail investors including the operation of
a website specifically targeted to investors in a particular
foreign jurisdiction;
|
|
|
|
dealing with retail customers unless they can be classified as
professional, sophisticated or high net worth investors; and
|
|
|
|
maintaining a presence in a foreign jurisdiction including
computer servers, bank accounts and the provision of local
account process services.
|
These restrictions may limit our ability to grow our business in
that jurisdiction or may result in increased overhead costs or
degradation in service provision to customers in that
jurisdiction. Accordingly, we currently have only a limited
presence in a number of significant markets and may not be able
to gain a significant presence there unless and until regulatory
barriers to international firms in certain of those markets are
modified. Consequently, we cannot assure you that our
international expansion will continue and that we will be able
to develop our business in emerging markets as we currently plan.
Furthermore, we are exposed to the risk that our regulatory
analysis is subsequently determined by a local regulatory agency
or other legitimate authority to be incorrect and that we have
not been in compliance with local law. In these circumstances we
are exposed to sanction by local enforcement agencies and our
contracts with customers may be unenforceable. We may also be
required to cease the conduct of our business with customers in
the relevant jurisdiction
and/or we
may determine that compliance with the regulatory requirements
for continuance of the business are too onerous to justify
making the necessary changes to continue that business.
31
Servicing
customers via the internet may require us to comply with the
laws and regulations of each country in which we are deemed to
conduct business. Failure to comply with such laws may
negatively impact our financial results.
Since our services are available over the Internet in foreign
countries and we have customers residing in foreign countries,
foreign jurisdictions may require us to qualify to do business
in their country. We believe that the number of our customers
residing outside of the United States will increase over time.
We are required to comply with the laws and regulations of each
country in which we conduct business, including laws and
regulations currently in place or which may be enacted related
to Internet services available to their citizens from service
providers located elsewhere. Any failure to develop effective
compliance and reporting systems could result in regulatory
penalties in the applicable jurisdiction, which could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
Our
failure to comply with regulatory requirements could subject us
to sanctions and could have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
Many of the laws and regulations by which we are governed grant
regulators broad powers to investigate and enforce compliance
with their rules and regulations and to impose penalties and
other sanctions for non-compliance. Our ability to comply with
all applicable laws and regulations is dependent in large part
on our internal compliance function as well as our ability to
attract and retain qualified compliance personnel, which we may
not be able to do. If a regulator finds that we have failed to
comply with applicable rules and regulations, we may be subject
to censure, fines,
cease-and-desist
orders, suspension of our business, removal of personnel, civil
litigation or other sanctions, including, in some cases,
increased reporting requirements or other undertakings,
revocation of our operating licenses or criminal conviction. The
ensuing negative publicity, potential litigation and loss of
customers could have a material adverse effect on our business,
financial condition and results of operations and cash flows.
The
regulatory environment in which we operate is subject to
continual change. Changes in the regulatory environment could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes in our industry. The financial
services industry in general has been subject to increasing
regulatory oversight in recent years. The governmental bodies
and self-regulatory organizations that regulate our business
have proposed and may consider additional legislative and
regulatory initiatives and may adopt new or revised laws and
regulations. As a result, in the future, we may become subject
to new regulations that may affect the way in which we conduct
our business and may make our business less profitable. For
example, a regulatory body may reduce the levels of leverage we
are allowed to offer to our customers, which may adversely
impact our business, financial condition and results of
operations and cash flows. Changes in the interpretation or
enforcement of existing laws and regulations by those entities
may also adversely affect our business. For example, the NFA
recently revised its rules and regulations such that, beginning
November 30, 2009, all Futures Dealer Merchants must,
depending upon the currencies being traded, maintain customer
security deposits in notional amounts equal to between 1% and 4%
of the notional amounts of currencies being traded.
In addition, the regulatory enforcement environment has created
uncertainty with respect to certain practices or types of
transactions that in the past were considered permissible and
appropriate among financial services firms, but that later have
been called into question or with respect to which additional
regulatory requirements have been imposed. Legal or regulatory
uncertainty and additional regulatory requirements could result
in a loss of business. Our business via our U.K. affiliate in
the European Economic Area, or EEA, is targeted for substantial
growth as part of our plan to expand our international customer
base. The regulation of the financial services industry in the
EEA has been the subject of recent regulatory expansion, most
notably the Markets in Financial Instruments Directive, or
MiFID, the implementation of which was required by EEA member
states by November 1, 2007. This directive extends the
coverage of the existing Investment Services Directive and
introduces new and more extensive requirements for most firms
engaged in financial services relating to the conduct of their
business and internal organization. Further regulatory measures
are expected both in relation to the conduct of the financial
services
32
industry and in relation to capital requirements. These measures
when implemented by EEA member states, including the U.K., may
result in an increase in our anticipated costs of conducting our
business with a corresponding reduction in anticipated
profitability of the businesses we plan to develop and grow in
the EEA.
We are
required to maintain high levels of capital, which could
constrain our growth and subject us to regulatory
sanctions.
The CFTC, SEC, FINRA, NFA and other U.S. and
non-U.S. regulators
have stringent rules requiring that we maintain specific minimum
levels of regulatory capital in our operating subsidiaries that
conduct our spot foreign exchange, CFDs, gold and silver spot
trading and securities business. As of December 31, 2008,
on a separate company basis, we would have been required to
maintain approximately $10.7 million minimum capital in the
aggregate across all jurisdictions, representing a 5.2% increase
from our minimum regulatory capital requirement at
December 31, 2007. Additionally, as a Futures Commission
Merchant and Forex Dealer Member, we are required to maintain a
security deposit minimum of $15.0 million in order to offer
our foreign exchange customers greater than 100:1 leverage.
Regulators continue to evaluate and modify regulatory capital
requirements from time to time in response to market events and
to improve the stability of the international financial system.
For example, NFA issued a notice to forex dealer members on
July 23, 2008 informing them that on July 17, 2008,
the NFAs executive committee recommended that the
NFAs board of directors approve revisions that increase
the current net capital and security deposit requirements. The
proposed increases to the net capital requirements would
increase to $10.0 million on October 31, 2008,
$15.0 million on January 17, 2009 and
$20.0 million on May 16, 2009. Additionally, the
proposed rule changes would require forex dealer members to
maintain a security deposit equal to or greater than 150.0% of
the then current net capital requirement to be exempt from
collecting minimum security deposits related to customer
transactions. These recommendations were approved and increased
our regulatory capital requirements by approximately
$13.3 million. This proposed increase largely results from
the perceived enhanced risk of acting as a dealer rather than as
an agent, as is the case in exchange traded futures. Additional
revisions to this framework or new capital adequacy rules
applicable to us may be proposed and ultimately adopted, which
could further increase our minimum capital requirements in the
future.
Even if regulators do not change existing regulations or adopt
new ones, our minimum capital requirements will generally
increase in proportion to the size of our business conducted by
our regulated subsidiaries. As a result, we will need to
increase our regulatory capital in order to expand our
operations and increase our revenue, and our inability to
increase our capital on a cost-efficient basis could constrain
our growth. In addition, in many cases, we are not permitted to
withdraw regulatory capital maintained by our subsidiaries
without prior regulatory approval or notice, which could
constrain our ability to allocate our capital resources most
efficiently throughout our global operations. In particular,
these restrictions could limit our ability to pay dividends or
make other distributions on our shares and, in some cases, could
adversely affect our ability to withdraw funds needed to satisfy
our ongoing operating expenses, debt service and other cash
needs.
Regulators monitor our levels of capital closely. We are
required to report the amount of regulatory capital we maintain
to our regulators on a regular basis, and we must report any
deficiencies or material declines promptly. While we expect that
our current amount of regulatory capital will be sufficient to
meet anticipated short-term increases in requirements, any
failure to maintain the required levels of regulatory capital,
or to report any capital deficiencies or material declines in
capital could result in severe sanctions, including fines,
censure, restrictions on our ability to conduct business and
revocation of our registrations. The imposition of one or more
of these sanctions could ultimately lead to our liquidation, or
the liquidation of one or more of our subsidiaries.
Procedures
and requirements of the Patriot Act may expose us to significant
costs or penalties.
As participants in the financial services industry, we are, and
our subsidiaries are, subject to laws and regulations, including
the Patriot Act of 2001, that require that they know their
customers and monitor transactions for suspicious financial
activities. The cost of complying with the Patriot Act and
related laws and regulations is significant. We face the risk
that our policies, procedures, technology and personnel directed
toward complying with the Patriot Act are insufficient and that
we could be subject to significant criminal and civil penalties
due to noncompliance. Such penalties could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. In 2006, the NFA filed a complaint
against us alleging, among other things, that we
33
had failed to develop and implement an adequate anti-money
laundering program and that the NFA had found misleading
statements on our introducing brokers websites. In our
answer to the complaint, we acknowledged the deficiencies in our
anti-money laundering compliance program, and we ultimately
agreed to settle the entire case in 2007. As part of the
settlement, the NFA imposed a $100,000 fine on us in connection
with our anti-money laundering procedures as well as the
NFAs findings of misleading statements on certain of our
introducing brokers websites. Although we remediated the
issues identified by the NFA, the NFA may find additional
deficiencies in our policies, procedures, technology and
personnel directed toward complying with the Patriot Act, which
could result in further disciplinary action by the NFA. In
addition, as an online broker with customers worldwide, we may
face particular difficulties in identifying our customers and
monitoring their activities.
We may
be subject to possible enforcement action and sanction for our
operations in various jurisdictions, including operations which
may be deemed to have violated regulations in those
jurisdictions, including China. In addition, we continue to
operate in certain jurisdictions where we are pursuing
applicable registration.
We currently do not offer forex trading services to or accept
new customers resident in China, except for a small number of
existing customer accounts which were originally opened through
our relationship with one of our introducing brokers prior to
the termination of our service offering in China that continue
to trade using our platform and have resulted in an immaterial
amount of trading volume for us. However, we may be subject to
possible enforcement action and sanction if we are determined to
have previously offered such services in violation of Chinese
regulations. In such a case, the CBRC may impose fines or other
penalties on us. To our knowledge, current Chinese law and
regulation does not specifically provide for any enforcement
processes or penalties in this context. As a result, we are
unable to estimate amounts of any potential fines or penalties.
Also, we currently provide our forex trading services through
our white label partnership in British Columbia and directly in
all other territories of Canada. Despite recent regulatory
changes in Canada, the regulatory treatment of retail forex
trading in provinces other than British Columbia and Ontario has
been, and continues to be, unclear. We cannot be certain that
our forex trading services are currently compliant with the
regulations of all provinces and territories in Canada. If our
forex trading services are deemed to have violated local
regulations, or if local regulators so require, we may need to
register our business in one or more provinces or territories or
offer our trading services through white label partners. We are
also currently seeking local registration, licensing or
authorization to conduct direct forex trading activities in
Australia and Singapore. We may be subject to possible
enforcement action and sanction from regulators in any or all of
those jurisdictions because our current and previous operations,
which involve us providing forex trading services directly to
customers without licenses or permits in those jurisdictions,
may have violated local rules and regulations. Such sanction
could be in the form of fines, suspension of business orders or
other penalties.
Due to
the evolving nature of financial regulations in certain
jurisdictions of the world, our operations may be disrupted if a
regulatory authority deems them inappropriate and requires us to
comply with additional regulatory requirements.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes affecting our industry. The
financial services industry in general has been subject to
increasing regulatory oversight in various jurisdictions
throughout the world. We have benefited from recent regulatory
liberalization in several emerging markets in developing regions
which has enabled us to increase our presence in those markets.
Our ability to continue to expand our presence in these regions,
however, will depend to an important extent upon continued
evolution of the regulatory environment in these several
markets, and there is no assurance that favorable regulatory
trends will continue. Moreover, we currently have only a limited
presence in a number of significant markets and may not be able
to gain a significant presence there unless and until regulatory
barriers to international firms in certain of those markets are
modified. Consequently, we cannot assure you that our recent
success in various regions will continue or that we will be able
to develop our business in emerging markets as we currently
plan. To the extent current activities are deemed inappropriate,
we may incur a disruption in services offered to current
customers as we are forced to comply with additional regulations.
34
We are
subject to risks relating to potential liability under
securities and commodity futures laws and may incur significant
legal expenses defending ourselves against or resolving any
actions or investigations relating to such laws. An adverse
resolution to any such action or investigation could have an
adverse effect on our business, financial condition and results
of operations and cash flows.
We are exposed to substantial risks of liability under federal
and state securities laws, federal commodity futures laws, other
federal and state laws and court decisions, as well as rules and
regulations promulgated by the Securities and Exchange
Commission, or SEC, the CFTC, the Federal Reserve, state
securities regulators, the self-regulatory organizations, or
SROs, such as NFA, and other foreign regulatory agencies. We
could incur significant legal expenses in defending ourselves
against and resolving actions or investigations by such
regulatory agencies. An adverse resolution of any future actions
or investigations by such regulatory agencies against us could
result in a negative perception of our company and cause the
market price of our common stock to decline or otherwise have an
adverse effect on our business, financial condition and results
of operations and cash flows.
Risks
Related to the Offering
An
active trading market for our common stock may not develop,
which may cause our common stock to trade at a discount from the
initial offering price and make it difficult for you to sell the
shares you purchase.
Prior to this offering, there has been no public trading market
for our common stock. We cannot predict the extent to which
investor interest in our company will lead to the development or
maintenance of an active trading market. The initial public
offering price per share of our common stock has been determined
by agreement among us and the underwriters and may not be
indicative of the price at which our common stock will trade in
the public trading market after this offering. If an active
trading market does not develop, you may have difficulty selling
any shares of our common stock that you buy.
The
market price of our common stock may be volatile, which could
cause the value of your investment to decline.
Securities markets worldwide experience significant price and
volume fluctuations. This market volatility, as well as the
factors listed below, some of which are beyond our control,
could affect the market price of our common stock:
|
|
|
|
|
quarterly variations in our results of operations and cash flows
or the results of operations and cash flows of our competitors;
|
|
|
|
future announcements concerning us or our competitors, including
the announcement of acquisitions;
|
|
|
|
changes in government regulations or in the status of our
regulatory approvals or licensure;
|
|
|
|
public perceptions of risks associated with our services or
operations;
|
|
|
|
developments in our industry; and
|
|
|
|
general economic, market and political conditions and other
factors that may be unrelated to our operating performance or
the operating performance of our competitors.
|
If
securities or industry analysts do not publish research or
reports about our business, if they change their recommendations
regarding our common stock adversely, or if we fail to achieve
analysts earnings estimates, the market price and trading
volume of our common stock could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts
who cover us or our industry make unfavorable comments about our
market opportunity or business, the market price of our common
stock would likely decline. If one or more of these analysts
ceases coverage of us or fails to regularly publish reports on
us, we could lose visibility in the financial markets, which
could cause the market price of our common stock or trading
35
volume to decline. On our part, if we fail to achieve
analysts earnings estimates, the market price of our
common stock would also likely decline.
Because
we do not intend to pay dividends for the foreseeable future,
investors in the offering will benefit from their investment in
shares only if our common stock appreciates in
value.
We currently intend to retain our future earnings, if any, to
finance the operation and growth of our business and do not
expect to pay any dividends in the foreseeable future. As a
result, the success of an investment in our common stock will
depend upon any future appreciation in its value. Our common
stock may not appreciate in value or even maintain the price at
which investors in this offering have purchased their shares.
Certain
provisions in our amended and restated certificate of
incorporation may prevent efforts by our stockholders to change
our direction or management.
Provisions contained in our amended and restated certificate of
incorporation could make it more difficult for a third party to
acquire us, even if doing so might be beneficial to our
stockholders. For example, our amended and restated certificate
of incorporation authorizes our board of directors to determine
the rights, preferences, privileges and restrictions of unissued
series of preferred stock, without any vote or action by our
stockholders. We could issue a series of preferred stock that
could impede the completion of a merger, tender offer or other
takeover attempt. These provisions may discourage potential
acquisition proposals and may delay, deter or prevent a change
of control of us, including through transactions, and, in
particular, unsolicited transactions, that some or all of our
stockholders might consider to be desirable. As a result,
efforts by our stockholders to change our direction or
management may be unsuccessful. See Description of Capital
Stock Section 203 of the General Corporation
Law of the State of Delaware.
We
cannot predict our future capital needs. As a result, we may
need to raise significant amounts of additional capital. There
can be no assurance that we will be able to obtain the necessary
capital when we need it, or on acceptable terms, if at
all.
Our business depends on the availability of adequate funding and
regulatory capital under applicable regulatory requirements.
Historically, we have satisfied these needs from internally
generated funds and from our preferred equity securities
financings. We currently anticipate that our available cash
resources will be sufficient to meet our presently anticipated
working capital and capital expenditure requirements for at
least the next 12 months. We may need to raise additional
funds to:
|
|
|
|
|
support more rapid expansion;
|
|
|
|
develop new or enhanced services and products;
|
|
|
|
respond to competitive pressures;
|
|
|
|
acquire complementary businesses, products or
technologies; or
|
|
|
|
respond to unanticipated requirements.
|
Additional financing may not be available when needed on terms
favorable to us.
Our
management and other affiliates have significant control of our
common stock and could control our actions in a manner that
conflicts with our interests and the interests of other
stockholders.
As of September 30, 2009, our executive officers, directors
and affiliated entities together beneficially own approximately
88.4% of the outstanding capital stock, assuming the exercise of
options, warrants and other common stock equivalents which are
currently exercisable, held by these stockholders. As a result,
these stockholders, acting together, will be able to exercise
considerable influence over matters requiring approval by our
stockholders, including the election of directors, and may not
always act in the best interests of other stockholders. Such a
concentration of ownership may have the effect of delaying or
preventing a change in our control, including transactions in
which our stockholders might otherwise receive a premium for
their shares over then current market prices.
36
Our
internal controls over financial reporting may not be effective
and our independent registered public accounting firm may not be
able to certify as to their effectiveness, which could have a
significant and adverse effect on our business and
reputation.
We are evaluating our internal controls over financial reporting
in order to allow management to report on, and our independent
registered public accounting firm to attest to, our internal
controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, as amended,
and rules and regulations of the SEC thereunder, which we refer
to as Section 404. We are in the process of documenting and
testing our internal control procedures in order to satisfy the
requirements of Section 404, which includes annual
management assessments of the effectiveness of our internal
controls over financial reporting and a report by our
independent registered public accounting firm that addresses the
effectiveness of internal controls.
As we continue our evaluation, we may identify material
weaknesses that we may not be able to remediate in time to meet
the deadline imposed by the Sarbanes-Oxley Act of 2002, as
amended, for compliance with the requirements of
Section 404. We will be required to comply with the
requirements of Section 404 for the year ending
December 31, 2010. In addition, if we fail to achieve and
maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404. We
cannot be certain as to the timing of completion of our
evaluation, testing and any remediation actions or the impact of
the same on our operations. If we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to opine as to the effectiveness
of our internal control over financial reporting and we may be
subject to sanctions or investigation by regulatory authorities,
such as the SEC. As a result, there could be a negative reaction
in the financial markets due to a loss of confidence in the
reliability of our financial statements. In addition, we may be
required to incur costs in improving our internal control system
and the hiring of additional personnel. Any such action could
negatively affect our results of operations and cash flows.
37
SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward looking statements. These
forward looking statements include, in particular, statements
about our plans, strategies and prospects under the headings
Prospectus Summary, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business. These statements are
based on our current expectations and projections about future
events and are identified by terminology such as
may, should, expect,
scheduled, plan, seek,
intend, anticipate, believe,
estimate, aim, potential, or
continue or the negative of those terms or other
comparable terminology. Although we believe that our plans,
intentions and expectations are reasonable, we may not achieve
our plans, intentions or expectations.
These forward-looking statements involve risks and
uncertainties. Important factors that could cause actual results
to differ materially from the forward looking statements we make
in this prospectus are set forth in Risk Factors and
elsewhere in this prospectus. We undertake no obligation to
update any of the forward looking statements after the date of
this prospectus to conform those statements to reflect the
occurrence of future events, except as required by applicable
law.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement on
Form S-1,
of which this prospectus forms a part, that we have filed with
the Securities and Exchange Commission, or SEC, completely and
with the understanding that our actual future results, levels of
activity, performance and achievements may be different from
what we expect and that these differences may be material. We
qualify all of our forward looking statements by these
cautionary statements.
38
USE OF
PROCEEDS
The selling stockholders are selling all of the shares of common
stock in this offering and we will not receive any proceeds from
the sale of such shares.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our common or
preferred stock. We currently intend to retain all available
funds and any future earnings for use in the operation of our
business and do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to declare cash
dividends will be made at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements, general business conditions
and other factors that our board of directors may deem relevant.
39
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2009:
|
|
|
|
|
on an actual basis; and
|
|
|
|
on a pro forma basis to give effect to the filing of our amended
and restated certificate of incorporation to reflect
the -for-1 stock split of our common stock effected
immediately prior to the completion of this offering and the
conversion of each share of our outstanding preferred stock into
an aggregate
of shares
of common stock prior to the completion of this offering (for
further information, please see Description of Capital
Stock).
|
You should read this table in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(in thousands, except share data)
|
|
|
Cash and cash equivalents
|
|
$
|
197,938
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
31,500
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.00001 par value; no shares
authorized, issued and outstanding, on an actual basis; no
shares authorized, no shares issued and outstanding, on a pro
forma basis
|
|
|
|
|
|
|
|
|
Series A convertible, redeemable preferred stock,
$0.00001 par value, 4,545,455 shares authorized and
865,154 shares issued and outstanding on an actual basis;
and no shares authorized, issued and outstanding on a pro forma
basis
|
|
|
2,009
|
|
|
|
|
|
Series B convertible, redeemable preferred stock,
$0.00001 par value, 7,000,000 shares authorized and
2,610,210 shares issued and outstanding on an actual basis;
and no shares authorized, issued and outstanding on a pro forma
basis
|
|
|
5,412
|
|
|
|
|
|
Series C convertible, redeemable preferred stock,
$0.00001 par value, 2,496,879 shares authorized and
1,055,739 shares issued and outstanding on an actual basis;
and no shares authorized, issued and outstanding on a pro forma
basis
|
|
|
5,319
|
|
|
|
|
|
Series D convertible, redeemable preferred stock,
$0.00001 par value, 3,254,678 shares authorized and
3,254,678 shares issued and outstanding on an actual basis;
and no shares authorized, issued and outstanding on a pro forma
basis
|
|
|
39,840
|
|
|
|
|
|
Series E preferred stock, $0.00001 par value,
3,738,688 shares authorized and 2,611,606 shares
issued and outstanding on an actual basis; and no shares
authorized, issued and outstanding on a pro forma basis
|
|
|
116,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
169,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value, 27,000,000 shares
authorized and 1,309,052 shares issued and outstanding on
an actual
basis; shares
authorized
and shares
issued and outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
(179,516
|
)
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
491
|
|
|
|
|
|
Accumulated deficit
|
|
|
(10,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
deficit(1)
|
|
|
(189,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
11,547
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Total shareholders deficit
does not include approximately $512,000 related to
noncontrolling interest.
|
40
The outstanding share information is based upon shares of our
common stock outstanding as
of ,
2009. This number excludes:
|
|
|
|
|
shares
of our common stock issuable upon the exercise of options that
were outstanding as
of ,
2009, with a weighted average exercise price of
$ per share;
|
|
|
|
shares
of common stock issuable pursuant to outstanding restricted
stock units as of , 2009;
|
|
|
|
shares
of common stock reserved for future issuance under our 2009
Omnibus Incentive Compensation Plan, which will become effective
on the date of this prospectus; and
|
|
|
|
shares
of common stock reserved for future issuance under our 2009
Employee Stock Purchase Plan, which will become effective on the
date of this prospectus.
|
Our stockholders are selling all of the shares of our common
stock offered by this prospectus. We are not selling any shares
in this offering and will not receive any of the proceeds from
the sale of shares by the selling stockholders.
41
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents our selected historical
consolidated financial data for the periods presented and should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
notes thereto included elsewhere in this prospectus. The
consolidated statements of operations data for the fiscal years
ended December 31, 2006, 2007 and 2008 and the consolidated
statements of financial condition data as of December 31,
2007 and 2008 are derived from our audited consolidated
financial statements included elsewhere in this prospectus. The
consolidated statements of operations data for the fiscal years
ended December 31, 2004 and 2005 and the consolidated
statements of financial condition data as of December 31,
2004, 2005 and 2006 are derived from our audited historical
consolidated financial statements not included in this
prospectus.
The consolidated statements of income data for the nine-month
periods ended September 30, 2008 and 2009 and the
consolidated statement of financial condition data as of
September 30, 2009 are derived from our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus which have been prepared on the same basis as the
audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations
and financial position. The consolidated statements of financial
condition data as of September 30, 2008 are derived from
our unaudited consolidated financial statements not included in
this prospectus. The results of operations for the nine months
ended September 30, 2009 are not necessarily indicative of
the results to be expected for the full year ended
December 31, 2009.
As a result of the termination of our trading operations in
China, the historical financial information presented below is
not indicative of our future performance. For the year ended
December 31, 2008, net revenue associated with customers
residing in China was $24.4 million, compared to
$20.6 million for the year ended December 31, 2007.
Our total direct expenses attributable to our operations in
China were $5.9 million for the year ended
December 31, 2008, compared to $4.8 million for the
prior year. In addition, due to the non-cash impact of the
redemption feature contained in our preferred stock which
requires fair value accounting, there are fluctuations in our
net income which will cease upon our initial public offering and
which is not reflective of our operating performance.
The pro forma consolidated statement of financial condition data
as of September 30, 2009 gives effect to this offering
based on an assumed initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus. The
pro forma earnings per common share data for the year ended
December 31, 2008 and the nine months ended
September 30, 2009 reflect the sale by our selling
stockholders
of shares
of common stock pursuant to this offering based on an assumed
initial public offering price of $
per share, which is the midpoint of the range listed on the
cover page of this prospectus.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2004(2)
|
|
|
2005(2)
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2008(1)
|
|
|
2009(1)
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
21,257
|
|
|
$
|
36,249
|
|
|
$
|
69,471
|
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
|
$
|
129,331
|
|
|
$
|
113,797
|
|
Other revenue
|
|
|
665
|
|
|
|
223
|
|
|
|
242
|
|
|
|
437
|
|
|
|
2,366
|
|
|
|
1,984
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
21,922
|
|
|
|
36,472
|
|
|
|
69,713
|
|
|
|
118,613
|
|
|
|
188,370
|
|
|
|
131,315
|
|
|
|
115,451
|
|
Interest revenue
|
|
|
324
|
|
|
|
1,519
|
|
|
|
3,145
|
|
|
|
5,024
|
|
|
|
3,635
|
|
|
|
3,180
|
|
|
|
228
|
|
Interest expense
|
|
|
(33
|
)
|
|
|
(110
|
)
|
|
|
(356
|
)
|
|
|
(611
|
)
|
|
|
(1,208
|
)
|
|
|
(980
|
)
|
|
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue/(expense)
|
|
|
291
|
|
|
|
1,409
|
|
|
|
2,789
|
|
|
|
4,413
|
|
|
|
2,427
|
|
|
|
2,200
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
22,213
|
|
|
|
37,881
|
|
|
|
72,502
|
|
|
|
123,026
|
|
|
|
190,797
|
|
|
|
133,515
|
|
|
|
115,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
5,035
|
|
|
|
9,511
|
|
|
|
17,258
|
|
|
|
25,093
|
|
|
|
37,024
|
|
|
|
27,453
|
|
|
|
29,621
|
|
Selling and marketing
|
|
|
1,186
|
|
|
|
3,256
|
|
|
|
12,517
|
|
|
|
21,836
|
|
|
|
29,312
|
|
|
|
21,975
|
|
|
|
26,791
|
|
Trading expenses and commissions
|
|
|
2,973
|
|
|
|
7,279
|
|
|
|
10,321
|
|
|
|
10,436
|
|
|
|
16,310
|
|
|
|
12,992
|
|
|
|
10,431
|
|
Interest expense on notes payable
|
|
|
|
|
|
|
|
|
|
|
2,075
|
|
|
|
3,688
|
|
|
|
2,697
|
|
|
|
2,177
|
|
|
|
1,294
|
|
Bank fees
|
|
|
245
|
|
|
|
507
|
|
|
|
935
|
|
|
|
2,316
|
|
|
|
3,754
|
|
|
|
2,595
|
|
|
|
3,415
|
|
Depreciation and amortization
|
|
|
301
|
|
|
|
494
|
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
1,897
|
|
|
|
2,013
|
|
Communications and data processing
|
|
|
155
|
|
|
|
424
|
|
|
|
873
|
|
|
|
1,659
|
|
|
|
2,467
|
|
|
|
1,681
|
|
|
|
1,950
|
|
Occupancy and equipment
|
|
|
306
|
|
|
|
530
|
|
|
|
1,045
|
|
|
|
1,616
|
|
|
|
2,419
|
|
|
|
1,715
|
|
|
|
2,391
|
|
Bad debt provision/(recovery)
|
|
|
|
|
|
|
836
|
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
1,289
|
|
|
|
593
|
|
Professional fees
|
|
|
877
|
|
|
|
761
|
|
|
|
1,295
|
|
|
|
1,380
|
|
|
|
3,104
|
|
|
|
1,981
|
|
|
|
2,549
|
|
Software expense
|
|
|
11
|
|
|
|
21
|
|
|
|
78
|
|
|
|
123
|
|
|
|
888
|
|
|
|
541
|
|
|
|
712
|
|
Professional dues and memberships
|
|
|
15
|
|
|
|
15
|
|
|
|
48
|
|
|
|
187
|
|
|
|
773
|
|
|
|
566
|
|
|
|
565
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible preferred stock embedded
derivative(2)
|
|
|
|
|
|
|
|
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
477
|
|
|
|
155
|
|
|
|
3,085
|
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
1,041
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
11,581
|
|
|
|
23,789
|
|
|
|
112,898
|
|
|
|
236,062
|
|
|
|
(75,799
|
)
|
|
|
(92,376
|
)
|
|
|
124,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
10,632
|
|
|
|
14,092
|
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
225,891
|
|
|
|
(9,111
|
)
|
Income tax expense
|
|
|
3,504
|
|
|
|
5,881
|
|
|
|
9,063
|
|
|
|
21,615
|
|
|
|
34,977
|
|
|
|
24,040
|
|
|
|
11,423
|
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
(3
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
7,128
|
|
|
|
8,208
|
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
201,771
|
|
|
|
(20,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
7,128
|
|
|
$
|
8,208
|
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
201,771
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
|
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
(63,913
|
)
|
|
|
(63,913
|
)
|
|
|
|
|
Effect of preferred share accretion
|
|
|
(2,892
|
)
|
|
|
(63
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
4,236
|
|
|
$
|
8,145
|
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
137,858
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.95
|
|
|
$
|
1.96
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
107.06
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.49
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
9.18
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,445,869
|
|
|
|
4,157,464
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,287,650
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
15,838,150
|
|
|
|
16,634,016
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
15,019,396
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
(unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38.56
|
|
|
|
|
|
|
$
|
15.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.31
|
|
|
|
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in
computing pro forma earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287,360
|
|
|
|
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,002,277
|
|
|
|
|
|
|
|
14,932,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes continued on following page)
43
|
|
|
(1)
|
|
For each of the periods indicated,
in accordance with SFAS No. 133, we accounted for an
embedded derivative liability attributable to the redemption
feature of our outstanding preferred stock. This redemption
feature and the associated embedded derivative liability will no
longer be required to be recognized upon conversion of our
preferred stock in connection with the completion of this
offering. See Prospectus Summary-Reconciliation of Net
Income/(Loss) to Adjusted Net Income.
|
|
(2)
|
|
These amounts do not include the
impact of the embedded derivative liability of approximately
$8.7 million (unaudited) and $37.6 million (unaudited)
as of December 31, 2004 and 2005, respectively, and the
change in fair value for the years ended December 31, 2004
and 2005 of $6.0 million (unaudited) and $28.8 million
(unaudited), respectively.
|
|
(3)
|
|
These amounts do not include the
impact of the change in fair value of our convertible,
redeemable preferred stock embedded derivative, the effect of
redemption of preferred shares and the effect of preferred share
accretion. For the year ended December 31, 2008, the change
in fair value resulted in a gain of $181.8 million and for
the nine months ended September 30, 2009 the change in fair
value resulted in a loss of $40.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,188
|
|
|
$
|
22,482
|
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
160,195
|
|
|
$
|
197,938
|
|
|
$
|
|
|
Receivables from brokers
|
|
$
|
36,383
|
|
|
$
|
59,080
|
|
|
$
|
71,750
|
|
|
$
|
74,630
|
|
|
$
|
75,817
|
|
|
$
|
94,196
|
|
|
$
|
100,171
|
|
|
$
|
|
|
Total assets
|
|
$
|
56,084
|
|
|
$
|
82,661
|
|
|
$
|
113,491
|
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
$
|
272,096
|
|
|
$
|
315,710
|
|
|
$
|
|
|
Payables to brokers, dealers, FCMs, and other regulated entities
|
|
$
|
6,037
|
|
|
$
|
4,577
|
|
|
$
|
5,248
|
|
|
$
|
2,163
|
|
|
$
|
1,679
|
|
|
$
|
1,560
|
|
|
$
|
1,732
|
|
|
$
|
|
|
Payables to customers
|
|
$
|
29,451
|
|
|
$
|
50,031
|
|
|
$
|
70,321
|
|
|
$
|
106,741
|
|
|
$
|
122,293
|
|
|
$
|
152,042
|
|
|
$
|
168,266
|
|
|
$
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
|
|
|
|
|
|
|
$
|
99,286
|
|
|
$
|
264,566
|
|
|
$
|
82,785
|
|
|
$
|
94,287
|
|
|
$
|
123,604
|
|
|
$
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
$
|
27,500
|
|
|
$
|
49,875
|
|
|
$
|
39,375
|
|
|
$
|
42,000
|
|
|
$
|
31,500
|
|
|
$
|
|
|
Total shareholders equity/(deficit)
|
|
$
|
15,305
|
|
|
$
|
23,605
|
|
|
$
|
(154,242
|
)
|
|
$
|
(316,340
|
)
|
|
$
|
(172,154
|
)
|
|
$
|
(204,362
|
)
|
|
$
|
(188,831
|
)
|
|
$
|
|
|
Selected
Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
($ in thousands unless otherwise stated)
|
|
|
Number of opened
accounts(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,572
|
|
|
|
30,626
|
|
|
|
63,576
|
|
|
|
105,924
|
|
|
|
154,190
|
|
|
|
142,555
|
|
|
|
195,559
|
|
China
|
|
|
751
|
|
|
|
3,202
|
|
|
|
8,395
|
|
|
|
19,869
|
|
|
|
27,358
|
|
|
|
27,309
|
|
|
|
27,362
|
|
Number of tradable accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,022
|
|
|
|
11,761
|
|
|
|
27,836
|
|
|
|
41,120
|
|
|
|
36,744
|
|
|
|
41,145
|
|
|
|
43,374
|
|
China
|
|
|
420
|
|
|
|
1,631
|
|
|
|
4,799
|
|
|
|
9,702
|
|
|
|
2,839
|
|
|
|
9,165
|
|
|
|
8
|
|
Adjusted net capital in excess of regulatory
requirements(5)
|
|
$
|
13,509
|
|
|
$
|
20,065
|
|
|
$
|
15,296
|
|
|
$
|
44,856
|
|
|
$
|
98,571
|
|
|
$
|
70,657
|
|
|
$
|
67,558
|
|
(footnotes continued on following page)
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Number of traded accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,432
|
|
|
|
13,896
|
|
|
|
28,270
|
|
|
|
43,139
|
|
|
|
52,555
|
|
|
|
45,001
|
|
|
|
43,565
|
|
China
|
|
|
642
|
|
|
|
2,416
|
|
|
|
5,533
|
|
|
|
11,568
|
|
|
|
11,647
|
|
|
|
11,403
|
|
|
|
6
|
|
Total trading volume (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120.3
|
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,124.4
|
|
|
$
|
928.3
|
|
China
|
|
$
|
6.0
|
|
|
$
|
24.4
|
|
|
$
|
50.8
|
|
|
$
|
103.4
|
|
|
$
|
172.4
|
|
|
$
|
143.8
|
|
|
$
|
0.2
|
|
Net deposits received from customers (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33.5
|
|
|
$
|
70.2
|
|
|
$
|
102.8
|
|
|
$
|
184.2
|
|
|
$
|
277.3
|
|
|
$
|
227.0
|
|
|
$
|
186.9
|
|
China
|
|
$
|
1.8
|
|
|
$
|
6.8
|
|
|
$
|
10.5
|
|
|
$
|
26.0
|
|
|
$
|
25.3
|
|
|
$
|
23.5
|
|
|
$
|
(1.3
|
)
|
Revenue per million traded
|
|
$
|
176.8
|
|
|
$
|
156.3
|
|
|
$
|
155.3
|
|
|
$
|
175.2
|
|
|
$
|
124.1
|
|
|
$
|
115.0
|
|
|
$
|
122.6
|
|
|
|
|
(4)
|
|
Opened customer accounts represent
accounts opened with us on a cumulative basis at any time since
we commenced operations.
|
|
(5)
|
|
Adjusted net capital in excess of
regulatory requirements represents the excess funds over the
regulatory minimum requirements as defined by the regulatory
bodies that regulate our operating subsidiaries.
|
Selected
Geographic Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
55.4
|
|
|
$
|
122.2
|
|
|
$
|
238.3
|
|
|
$
|
355.4
|
|
|
$
|
878.9
|
|
|
$
|
647.4
|
|
|
$
|
506.8
|
|
China(6)
|
|
|
6.0
|
|
|
|
24.4
|
|
|
|
50.8
|
|
|
|
103.4
|
|
|
|
172.4
|
|
|
|
143.8
|
|
|
|
0.2
|
(7)
|
Canada
|
|
|
4.3
|
|
|
|
9.6
|
|
|
|
29.2
|
|
|
|
58.6
|
|
|
|
122.9
|
|
|
|
91.8
|
|
|
|
122.2
|
|
Europe, Middle East and Africa
|
|
|
14.1
|
|
|
|
27.9
|
|
|
|
42.9
|
|
|
|
64.3
|
|
|
|
153.1
|
|
|
|
117.2
|
|
|
|
126.5
|
|
Asia (ex-China)
|
|
|
31.3
|
|
|
|
33.8
|
|
|
|
42.7
|
|
|
|
54.0
|
|
|
|
96.4
|
|
|
|
74.6
|
|
|
|
110.0
|
|
Rest of World
|
|
|
9.2
|
|
|
|
14.0
|
|
|
|
43.5
|
|
|
|
38.8
|
|
|
|
74.9
|
|
|
|
49.6
|
|
|
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120.3
|
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,124.4
|
|
|
$
|
928.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
As a result of our review of our
regulatory compliance in China, we decided to terminate our
service offerings to residents of China and ceased our trading
operations located in that country as of December 31, 2008.
Accordingly, we do not expect to generate significant trading
volume or related revenue from customers in China for the
foreseeable future. For further information, please see
Prospectus Summary Recent Developments.
|
|
(7)
|
|
For the nine months ended
September 30, 2009, a small number of existing customer
accounts, which were originally opened through our relationship
with one of our introducing brokers prior to the termination of
our service offering in China, continued to trade using our
platform. The trading activity by these residual accounts
resulted in the trading volume for the period. We have taken
steps to close these accounts, and expect that they will be
closed, by December 31, 2009.
|
45
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this discussion regarding the industry
outlook, our expectations regarding the future performance of
our business, and the other non-historical statements in this
discussion are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties
described in the Risk Factors section. You should
read the following discussion together with the section entitled
Risk Factors and our consolidated financial
statements and notes thereto included elsewhere in this
prospectus.
Overview
We are an online provider of retail forex trading and related
services founded in 1999 by a group of experienced Wall Street
trading professionals. We offer our customers a forex trading
platform that provides
24-hour
direct access to the global
over-the-counter
foreign exchange markets, where participants trade directly with
one another rather than through a central exchange or clearing
house. In a foreign exchange trade, participants buy one
currency and simultaneously sell another currency. We provide
this access through our proprietary trading platform and trade
management tools, educational services, research and dedicated
customer service. Our customer base is comprised primarily of
self-directed retail traders, representing approximately 93.0%
of our customers as of September 30, 2009. The remainder of
our customer base is comprised of customers with accounts that
have assigned trading authority to either third party authorized
traders, or to our wholly-owned subsidiary GCAM, LLC, or GCAM.
GCAM offers our managed account services whereby our
professional traders create and execute forex investment
strategies on behalf of institutional and individual customers.
We refer to customers who have assigned trading authority as
managed accounts, which represented approximately 7.0% of our
customers as of September 30, 2009.
We use financial metrics, including tradable accounts and traded
accounts, to measure our aggregate customer account activity.
Tradable accounts represent customers who maintain cash balances
with us that are sufficient to execute a trade in compliance
with our policies. Although tradable accounts are an important
indicator of our ability to attract new customers that can
potentially lead to volume and revenue in future periods, it
does not represent actual trades executed. We believe the most
relevant measurement which correlates to volume and revenue is
the number of traded accounts, because these represent customers
who executed a forex transaction with us during a particular
period. As of December 31, 2008, we had 36,744 tradable
accounts, which include 2,839 tradable accounts from customers
residing in China, and as of September 30, 2009, we had
47,374 tradable accounts. For the year ended December 31,
2008, we had 52,555 traded accounts, which include 11,647 traded
accounts from customers residing in China, and for the nine
months ended September 30, 2009, we had 43,565 traded
accounts.
We have experienced annual revenue growth in excess of 55.0%
since 2000 and a compounded annual revenue growth rate of 71.4%
from January 1, 2006 to December 31, 2008. Our annual
revenue from customers residing outside of China has grown in
excess of 59.0% since 2000, with a compounded annual growth rate
of 71.2% from January 1, 2006 to December 31, 2008. We
generated $115.1 million of total net revenue and a net
loss of $20.5 million for the nine months ended
September 30, 2009, including a loss of $40.8 million
relating to the change in fair value of our preferred stock
embedded derivative, and $190.8 million of total net
revenue, including $24.4 million in total net revenue
attributable to customers residing in China, and
$231.4 million of net income, including $11.1 million
in net income attributable to customers residing in China, in
the year ended December 31, 2008, including a
$181.8 million gain relating to the change in fair value of
our preferred stock embedded derivative and $1.9 million
write-off of deferred initial public offering costs, each of
which we believe to be non-operational in nature. The preferred
stock embedded derivative liability is attributable to the
redemption feature of our outstanding preferred stock which
allows the holders of our preferred stock at any time on or
after March 31, 2011, upon the written request of holders
of at least a majority of the outstanding shares of preferred
stock voting together as a single class, to require us to redeem
all of the shares of preferred stock then outstanding and is
non-cash and therefore causes net income to fluctuate and not
reflect our operating performance. This redemption provision and
the associated embedded derivative liability will no longer be
required to be recognized upon conversion of our preferred stock
in connection with this offering. Excluding the impact of a
$40.8 million loss relating to the change in fair market
value of our embedded derivative, our adjusted net income for
the nine months ended
46
September 30, 2009 was $20.3 million. We believe
our net capital position and customer assets help make us one of
the largest global retail foreign exchange services providers.
We believe the following operating measurements are the main
drivers of our revenue:
|
|
|
|
|
customer trading volume;
|
|
|
|
trading revenue per million traded;
|
|
|
|
net deposits received from customers; and
|
|
|
|
traded accounts.
|
Customer trading volume is the aggregate notional value of
trades our customers execute. Trading revenue per million traded
is the revenue we realize from our market-making activities
(including spread revenue) per one million of
U.S. dollar-equivalent trading volume, and is calculated as
trading revenue divided by the result obtained from dividing
trading volume by one million. Net deposits received from
customers represents customers deposits less withdrawals
for a given period, and correlates to our customers
ability to place additional trades, which potentially increases
our trading volumes. Traded accounts impact our revenue because
this represents the number of customers who executed trades
during a specific period, which impacts customer trading volume.
Our revenue performance for any one period is a function of
customer trading volume, impacted in part by the factors listed
above, and the profitability of these trades, as measured by
trading revenue per million traded. The profitability of our
customer trading volume is impacted by the following:
|
|
|
|
|
dealable spread that we charge our customers and pay to our
wholesale forex trading partners;
|
|
|
|
the mix of the currency pairs that our customers transacted
during the period; and
|
|
|
|
the performance of our managed flow portfolio.
|
As a market-maker, we act as counterparty to our customers when
executing a trade. We believe it is neither economically optimal
nor necessary from a risk perspective to hedge all of our
customers trades on a
one-to-one
basis. Instead, we hedge a select portion of these trades on an
aggregate basis in our managed flow portfolio. Our managed flow
portfolio is treated in the following manner:
|
|
|
|
|
Natural Hedging Many trades are naturally
hedged, where one customer executing a trade in a currency is
offset by a trade taken by another customer. When a transaction
within the portfolio is naturally hedged, we do not hedge our
exposure by entering into a transaction with our wholesale forex
trading partners. Accordingly, for naturally hedged transactions
we capture the entire bid/offer spread on the two offsetting
transactions while completely hedging our exposure and reducing
our overall risk.
|
|
|
|
Net Exposure Generally, there is also a
portion of our managed flow portfolio that is not naturally
hedged, which we refer to as our net exposure. We manage our net
exposure by applying position and exposure limits established
under our risk management policies and by continuous, active
monitoring by our traders. A portion of our net exposure may be
hedged with our wholesale forex trading partners based on our
risk management guidelines. We do not actively initiate market
positions in anticipation of future movements in the prices of
currencies in the market, referred to as proprietary directional
market positions. However, as a result of our hedging
activities, we are likely to have open positions in various
currencies at any given time. In the event of unfavorable market
movements, we may take a loss on such position.
|
|
|
|
Redirected Trades In certain cases, specific
trades from customers generally handled in our managed flow
portfolio may be redirected and offset with our wholesale forex
trading partners. These trades may be selected based on size,
and whether they relate to currencies that are experiencing
lower transaction volume or higher volatility in trading prices.
|
By directing a large portion of our customers trades into
our managed flow portfolio, which we refer to as our managed
flow trades, we have the opportunity to maximize trading revenue
by capturing the full spread on orders that naturally offset
each other within the managed flow portfolio. Factors that may
impact the rate of profitability of our managed flow portfolio
include currency price trends and the results of our hedging
strategies in accordance
47
with our risk management policies. Alternatively, we realize
lower trading revenue per million traded from those trades that
we immediately offset, which we refer to as offset flow trades,
because on such trades we receive the retail spread from our
customers and pay the wholesale spread to our wholesale forex
trading partners. In general, we make higher trading revenue per
million traded on our managed flow trades than we do on our
offset flow trades.
Our customer base resides in over 140 countries outside of the
United States and is comprised of two categories. The first are
direct customers sourced through our retail forex trading
website, FOREX.com (our flagship brand), which is a currency
trading Internet site that is available in English, traditional
and simplified Chinese, Russian and Arabic, and provides
currency traders of all experience levels with a full-service
trading platform, along with extensive educational and support
tools. The second are indirect customers sourced through either
retail financial services firms that provide customers to us,
which we refer to as introducing brokers, or financial
institutions which offer our currency trading services to their
existing client base under their own brand, which we refer to as
white label partners. For the nine months ended
September 30, 2009, 66.4% of customer trading volume was
generated from our direct customers and 33.6% was generated from
introducing brokers and white label partners. For the year ended
December 31, 2008, 67.3% of customer trading volume was
generated from our direct customers and 32.7% was generated from
introducing brokers and white label partners.
For the nine months ended September 30, 2009, the total
dollar value traded by our customers, or customer trading
volume, was $928.3 billion (including $0.2 billion
from customers residing in China), trading revenue per million
traded was $122.6, net deposits received from customers was
$186.9 million (including $1.3 million that was paid
to customers residing in China) and the number of traded
accounts was 43,565 (including six accounts from customers
residing in China, which were opened through one of our white
label partners prior to the termination of our operations in
China). For the year ended December 31, 2008, customer
trading volume was $1,498.6 billion (including
$172.4 billion from customers residing in China), trading
revenue per million traded was $124.1, net deposits received
from customers was $277.3 million (including
$25.3 million from customers residing in China) and the
number of traded accounts was 52,555 (including 11,647 from
customers residing in China).
Since 2006, a significant portion of our trading volume, trading
revenue, net income and cash flow were generated from residents
of China. When we commenced offering our forex trading services
through our Chinese language website to residents of China in
October 2003, we believed that our operations were in compliance
with applicable Chinese regulations. However, as a result of our
review of our regulatory compliance in China during 2008, in May
2008 we became aware of a China Banking and Regulatory
Commission, or CBRC, prohibition on forex trading firms
providing retail forex trading services to Chinese residents
through the Internet without a CBRC permit. We do not have such
a permit and to our knowledge, no such permit exists. As a
result of this regulatory uncertainty, we decided to terminate
all service offerings to residents of China and ceased our
trading support operations located in that country. As of
December 31, 2008, we no longer accept new customers or
maintain direct customer accounts from residents of China.
However, due to an ongoing relationship with one of our
introducing brokers, eight immaterial legacy accounts (as of
September 30, 2009), which were originally sourced through
that introducing broker prior to the termination of our service
offering in China, remained open. For the nine months ended
September 30, 2009, the trading activity by these legacy
accounts resulted in an immaterial amount of trading volume. We
have taken steps to close these accounts, and expect they will
be closed, by December 31, 2009. We are unable to predict
if we may be subject to fines or penalties, and if so in what
amounts, as a result of this insignificant trading activity on
our platform in China. Our customer trading volume, revenue and
net income related to our service offerings and trading services
to residents of mainland China was $172.4 billion,
$24.4 million and $11.1 million, respectively, for the
year ended December 31, 2008 and $103.4 million,
$20.6 million, and $9.2 million, respectively, for the
year ended December 31, 2007. All references to
China refer to mainland China and exclude the Hong
Kong and Macau Special Administrative Regions.
We have also become aware that the CBRC may, at a future date,
issue regulations by which certain institutions will be allowed
to engage in retail forex trading services. There is no
assurance as to when these clarifying regulations will be issued
or, if issued, whether we will be able to offer our trading
services to Chinese residents under such regulations. As a
result, we do not intend to offer our trading services and no
longer accept or maintain direct customer accounts from
residents of China, except as described above, until such time
as we are able to obtain the necessary permits, licenses or
approvals from the applicable Chinese regulators, in accordance
with applicable Chinese regulations. We will continue to monitor
the regulatory environment in China and, when possible, we will
48
seek to obtain the necessary permits, licenses or approvals from
the applicable Chinese regulators, or to partner with a firm
with such approval, to resume our retail forex trading services
in China. As our Chinese language website is also used by
customers in other countries, we will continue to use it as we
offer our services to Chinese-speaking customers who do not
reside in China. We cannot provide any assurance that we will
not be subject to fines or penalties relating to the period in
which we provided forex trading services through the Internet to
Chinese residents.
General
Market and Economic Conditions
In the past two years, the global market and general economic
conditions have experienced a significant downturn. In the
United States, market and economic conditions remain challenged
as credit remains contracted. U.S. equity markets were
adversely impacted by lower corporate earnings, the challenging
conditions in the credit markets and continued general
uncertainty. In addition, U.S. economic activity was
negatively impacted by declines in consumer spending, business
investment and the downturn in the commercial and residential
real estate markets. In Europe and Asia, market and economic
conditions continued to be challenged by adverse economic
developments. We believe that these conditions, together with
deterioration in the overall economy and increased unemployment
rates, impacted overall retail consumer spending, including the
discretionary funds and trading patterns of our customer base
during the nine months ended September 30, 2009. We are
unable to predict the degree and duration of the impact of the
current global market and general economic conditions on our
business.
Revenue
We generate revenue primarily from trading revenue, commissions
and interest income. Trading revenue is our largest source of
revenue and is derived from gains, offset by losses, from our
trading positions and our revenue resulting from dealing spreads
on customer transactions where we earn the difference between
the retail price quoted to our customers and the wholesale price
received from our wholesale forex trading partners. Any position
we take is a result of acting as counterparty to our
customers trades. We do not actively initiate market
positions in anticipation of future movements in the prices of
currencies, referred to as proprietary directional market
positions. However, as a result of our hedging activities, we
are likely to have open positions in various currencies at any
given time.
For the nine months ended September 30, 2009, approximately
91.9% of our customer trading volume was directed into our
managed flow portfolio, allowing us to keep part or all of the
dealable spread and resulting in daily
mark-to-market
gains or losses based on the performance of the managed flow
portfolio. During the same period we immediately offset the
remaining 8.1% of transaction volume from customers by executing
equal and offsetting trades with our wholesale forex trading
partners. On these trades we earn the difference between the
retail and wholesale spread while minimizing market risk.
Regardless of the routing of their trades, our customers
trading experience is identical with respect to trade execution.
For the year ended December 31, 2008, 87.0% of our customer
trade volume was directed into our managed flow portfolio and we
immediately offset the remaining 13.0%. Trading revenue
represented 98.8% of our total net revenue for the nine months
ended September 30, 2009, and 97.5% of our total net
revenue for the year ended December 31, 2008. We believe
that our customer trading volumes are driven by ten main
factors. Six of these factors are broad external factors outside
of our control which impact general forex market trading, as
well as our customer trading volumes, and include:
|
|
|
|
|
changes in the financial strength of market participants;
|
|
|
|
economic and political conditions;
|
|
|
|
trends in business and finance;
|
|
|
|
changes in the supply, demand and volume of foreign currency
transactions;
|
|
|
|
legislative changes; and
|
|
|
|
regulatory changes.
|
Many of the above factors impact the volatility of foreign
currency rates, which is in turn positively correlated with
forex trading volume. In general, an increase in our customer
trading volume results in an increase in our
49
trading revenue derived from spread capture, and an increase in
our strategic hedging activities. Our customer trading volume is
also affected by four other factors which we believe
differentiate us from our competitors:
|
|
|
|
|
the effectiveness of our sales activities;
|
|
|
|
the attractiveness of our superior website;
|
|
|
|
the effectiveness of our customer service team; and
|
|
|
|
the effectiveness of our marketing activities.
|
In order to increase customer trading volume, we focus our
marketing and our customer service and education activities on
attracting new customers, growing customer assets on deposit and
increasing overall customer trading activity.
Trading revenue is recorded on a trade date basis. Changes in
net unrealized gains or losses are recorded under trading
revenue on the Consolidated Statements of Income for a specified
period of time. For the nine months ended September 30,
2009, and for the year ended December 31, 2008, no single
customer accounted for more than 3.0% of our trading volume for
the period.
Other revenue is comprised of account management, transaction
and performance fees related to customers who have assigned
trading authority to GCAM, inactivity and training fees charged
to customer accounts, as well as other miscellaneous items. For
the nine months ended September 30, 2009, other revenue was
$1.7 million and for the year ended December 31, 2008,
other revenue was $2.4 million.
Net interest revenue consists primarily of the revenue generated
by our cash and customer cash held by us at banks, money market
funds and on deposit at our wholesale forex trading partners,
less interest paid to customers on their net liquidating account
value. A customers net liquidating account value equals
cash on deposit plus the marking to market of open positions as
of the measurement date. Our cash and customer cash is generally
invested in money market funds which primarily invest in
short-term U.S. government securities. Such deposits and
investments earned interest at an average effective rate of
0.11% for the nine months ended September 30, 2009, and
1.50% for the year ended December 31, 2008. Interest paid
to customers varies among customer accounts primarily due to the
net liquidating value of a customer account as well as interest
promotions that may be available from time to time. Interest
income and interest expense are recorded when earned and
incurred. Net interest expense was $0.3 million for the
nine months ended September 30, 2009 and net interest
revenue was $2.4 million for the year ended
December 31, 2008.
Although our revenue has grown at a compounded annual growth
rate of 62.2% from $72.5 million for the year ended
December 31, 2006 (including $8.7 million from
customers residing in China), to $190.8 million for the
year ended December 31, 2008 (including $24.4 million
from customers residing in China), management anticipates that
such continued growth may be negatively impacted in the future
by the duration of the recent downturn in the global economy,
continued contraction in the credit market and our termination
of services to residents of China. In addition, management
anticipates that historical growth patterns may not be
indicative of future growth levels, due in part to the increased
scale of our operations globally and the continued recent
challenges of the macroeconomic environment.
To determine our trading revenue generated from our customers
residing in China, we were required to make certain assumptions
because we did not account for our China business separately on
a historical basis. In order to calculate trading revenue
generated from customers residing in China, we removed the China
customer trading volume from our total volume and then applied
an assumed level of profitability based on the relative
profitability of the China customer transactions which we
historically strategically hedged.
Operating
Expenses
Employee
compensation and benefits
Our largest operating expense is employee compensation and
benefits, which includes salaries, bonuses, stock-based
compensation, group insurance, contributions to benefit programs
and other related employee costs. Due in part to the
efficiencies created by our proprietary technology and forex
trading platform, our compensation and
50
benefits as a percentage of net revenue has declined from 20.4%
for the year ended December 31, 2007 to 19.4% for the year
ended December 31, 2008. Compensation and benefits was
25.7% of net revenue for the nine months ended
September 30, 2009. The increase in employee compensation
and benefits as a percentage of revenue for the nine months
ended September 30, 2009 is primarily due to a decline in
revenue for the nine months ended September 30, 2009. The
revenue decline for the nine months ended September 30,
2009 is primarily due to overall economic conditions and our
termination of services in China. Bonus costs, which are
performance based and vary year to year, represented 19.0% of
our employee compensation and benefits for the nine months ended
September 30, 2009 compared to 26.4% for the year ended
December 31, 2008, 31.8% for the year ended
December 31, 2007 and 35.8% for the year ended
December 31, 2006.
Selling
and marketing
Our second largest expense item is selling and marketing
expense, which is primarily concentrated in online display and
search engine advertising, and to a lesser extent print and
television advertising. Our marketing strategy employs a
combination of direct marketing and focused branding programs,
with the goal of raising awareness of our retail forex trading
internet website, FOREX.com, and attracting customers in a
cost-efficient manner. As part of our strategy to increase
customer trading volume and attract new accounts, we have
increased selling and marketing expense from $12.5 million
for the year ended December 31, 2006 to $21.8 million
for the year ended December 31, 2007 to $29.3 million
for the year ended December 31, 2008. For the nine months
ended September 30, 2009 selling and marketing expense was
$26.8 million.
Trading
expense and commissions
Our third largest expense item is trading expense and
commissions. Trading expense and commissions consists primarily
of compensation paid to our white label partners and introducing
brokers. We generally provide white label partners with the
platform, systems and back-office services necessary for them to
offer forex trading services to their customers. We also
establish relationships with introducing brokers that identify
and direct potential forex trading customers to us. White label
partners and introducing brokers generally handle marketing and
the other expenses associated with attracting the customers they
direct to us. Accordingly, we do not incur any incremental sales
and marketing expense in connection with trading revenue
generated by customers provided through our white label partners
and introducing brokers. We do, however, pay a portion of the
forex trading revenue generated by the customers of our white
label partners and introducing brokers to our white label
partners and introducing broker partners and record this payment
under trading expense. These costs are largely variable and
fluctuate according to the trading volume produced by the
customers directed to us. During the nine months ended
September 30, 2009, we generated approximately 33.6% of our
trading volume through customers introduced to us by white label
partners and introducing brokers and paid approximately
$10.4 million in total trading expenses and commissions.
During the year ended December 31, 2008, we generated
approximately 32.7% of our trading volume through customers
introduced to us by white label partners and introducing brokers
and paid approximately $16.3 million in total trading
expenses and commissions compared to the year ended
December 31, 2007 when we generated approximately 33.8% of
our trading volume through customers introduced to us by white
label partners and introducing brokers and paid approximately
$10.4 million in total trading expense and commissions.
Other
expenses
Other expense categories separately disclosed in our results of
operations include interest expense on notes payable, bank fees,
depreciation and amortization, communications and data
processing, occupancy and equipment, bad debt provision,
professional fees and other miscellaneous expenses.
Change
in fair value of convertible preferred stock and embedded
derivative
Our Convertible, Redeemable Preferred Stock Series A,
Series B, Series C, Series D, and Series E
contains a redemption feature which allow the holders of our
preferred stock at any time on or after March 31, 2011,
upon the written request of holders of at least a majority of
the outstanding shares of preferred stock voting together as a
single class, to require us to redeem all of the shares of
preferred stock then outstanding. We have determined that this
redemption feature effectively provides such holders with an
embedded option derivative meeting the definition of an
51
embedded derivative pursuant to Statement of
Financial Accounting Standards or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Consequently, the embedded derivative must be
bifurcated and accounted for separately. This redemption feature
and related accounting treatment will no longer be required to
be recognized upon conversion of our preferred stock in
connection with our initial public offering. Historically, in
accordance with SFAS No. 133, we have adjusted the
carrying value of the embedded derivative to the fair value of
our Company at each reporting date, based upon the Black-Scholes
options pricing model, and reported the preferred stock embedded
derivative liability on the Consolidated Statements of Financial
Condition with change in fair value recorded in our Consolidated
Statements of Operations and Comprehensive Income. This has
impacted our net income but has not affected our cash flow
generation or operating performance. This accounting treatment
causes our earnings to fluctuate, but in our view does not
reflect operating or future performance of our company. We
further discuss the accounting for the embedded derivative in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Fair Value
Derivative Liabilities.
To reconcile between our net income/(loss) and adjusted net
income, we use a financial measure not calculated in accordance
with Generally Accepted Accounting Principles in the United
States, or GAAP. Adjusted net income is a non-GAAP financial
measure and represents our net income/(loss) excluding the
change in fair value of the embedded derivative in our preferred
stock. Because the embedded derivative in our preferred stock
will no longer be applicable following conversion of our
preferred stock in connection with this offering, there will be
no further accounting adjustment required for change in fair
value of the embedded derivative in our preferred stock
following this offering. This non-GAAP financial measures has
certain limitations in that it does not have a standardized
meaning and thus the Companys definition may be different
from similar non-GAAP financial measures used by other companies
and/or
analysts and may differ from period to period. Thus it may be
more difficult to compare the Companys financial
performance to that of other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
|
|
|
Net (loss)/income applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
201,771
|
|
|
$
|
(20,519
|
)
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
12,230
|
|
|
$
|
30,629
|
|
|
$
|
49,644
|
|
|
$
|
31,492
|
|
|
$
|
20,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.38
|
|
|
$
|
16.13
|
|
|
$
|
38.56
|
|
|
$
|
24.46
|
|
|
$
|
15.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
2.05
|
|
|
$
|
3.31
|
|
|
$
|
2.10
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
72,502
|
|
|
$
|
123,026
|
|
|
$
|
190,797
|
|
|
$
|
133,515
|
|
|
$
|
115,125
|
|
Total expenses
|
|
|
112,898
|
|
|
|
236,062
|
|
|
|
(75,799
|
)
|
|
|
(92,376
|
)
|
|
|
124,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income tax expense and equity in earnings
of equity method investment
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
225,891
|
|
|
|
(9,111
|
)
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income before income tax expense and equity in earnings
of equity method investment
|
|
$
|
21,336
|
|
|
$
|
52,244
|
|
|
$
|
84,814
|
|
|
$
|
55,612
|
|
|
$
|
31,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
9,063
|
|
|
$
|
21,615
|
|
|
$
|
34,977
|
|
|
$
|
24,040
|
|
|
$
|
11,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted effective tax rate
|
|
|
42.5
|
%
|
|
|
41.4
|
%
|
|
|
41.2
|
%
|
|
|
43.2
|
%
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
We believe our reporting of adjusted net income and adjusted
earnings per common share better assists investors in evaluating
our operating performance. We also believe adjusted net income
and adjusted earnings per common share give investors a
presentation of our operating performance in prior periods that
more accurately reflects how we will be reporting our operating
performance in future periods. However, adjusted net income and
adjusted earnings per common share are not a measure of
financial performance under GAAP and such measures should be
considered in addition to, but not as a substitute for, other
measures of financial performance reported in accordance with
GAAP, such as net income/(loss) and earnings/(loss) per common
share.
Write-off
of initial public offering costs
In December 2008, we wrote off $1.9 million of legal,
audit, tax, and other professional fees that were previously
capitalized in anticipation of an initial public offering in
2008.
Public
company expense
As a public company we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
and the other rules and regulations of the SEC, as well as the
requirements of the Sarbanes-Oxley Act of 2002. We expect these
rules and regulations to increase our legal, accounting,
auditing and other financial compliance costs and to make some
of our activities more time consuming and costly. As such, we
expect to incur significant expenditures in the near term to
expand our systems and hire and train personnel to assist us in
complying with these requirements.
53
Results
of Operations
Nine
months ended September 30, 2009 compared to nine months
ended September 30, 2008
The following table sets forth our Results of Operations for the
nine months ended September 30, 2009 and nine months ended
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
% of Net
|
|
|
September 30,
|
|
|
% of Net
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
129,331
|
|
|
|
96.9
|
%
|
|
$
|
113,797
|
|
|
|
98.8
|
%
|
|
$
|
(15,534
|
)
|
|
|
(12.0
|
)%
|
Other revenue
|
|
|
1,984
|
|
|
|
1.5
|
%
|
|
|
1,654
|
|
|
|
1.4
|
%
|
|
|
(330
|
)
|
|
|
(16.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
131,315
|
|
|
|
98.4
|
%
|
|
|
115,451
|
|
|
|
100.3
|
%
|
|
|
(15,864
|
)
|
|
|
(12.1
|
)%
|
Interest revenue
|
|
|
3,180
|
|
|
|
2.4
|
%
|
|
|
228
|
|
|
|
0.2
|
%
|
|
|
(2,952
|
)
|
|
|
(92.8
|
)%
|
Interest expense
|
|
|
(980
|
)
|
|
|
(0.7
|
)%
|
|
|
(554
|
)
|
|
|
(0.5
|
)%
|
|
|
426
|
|
|
|
(43.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
2,200
|
|
|
|
1.6
|
%
|
|
|
(326
|
)
|
|
|
(0.3
|
)%
|
|
|
(2,526
|
)
|
|
|
(114.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
133,515
|
|
|
|
100.0
|
%
|
|
|
115,125
|
|
|
|
100.0
|
%
|
|
|
(18,390
|
)
|
|
|
(13.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
27,453
|
|
|
|
20.6
|
%
|
|
|
29,621
|
|
|
|
25.7
|
%
|
|
|
2,168
|
|
|
|
7.9
|
%
|
Selling and marketing
|
|
|
21,975
|
|
|
|
16.5
|
%
|
|
|
26,791
|
|
|
|
23.3
|
%
|
|
|
4,816
|
|
|
|
21.9
|
%
|
Trading expenses and commissions
|
|
|
12,992
|
|
|
|
9.7
|
%
|
|
|
10,431
|
|
|
|
9.1
|
%
|
|
|
(2,561
|
)
|
|
|
(19.7
|
)%
|
Interest expense on notes payable
|
|
|
2,177
|
|
|
|
1.6
|
%
|
|
|
1,294
|
|
|
|
1.1
|
%
|
|
|
(883
|
)
|
|
|
(40.6
|
)%
|
Bank fees
|
|
|
2,595
|
|
|
|
1.9
|
%
|
|
|
3,415
|
|
|
|
3.0
|
%
|
|
|
820
|
|
|
|
31.6
|
%
|
Depreciation and amortization
|
|
|
1,897
|
|
|
|
1.4
|
%
|
|
|
2,013
|
|
|
|
1.7
|
%
|
|
|
116
|
|
|
|
6.1
|
%
|
Communications and data processing
|
|
|
1,681
|
|
|
|
1.3
|
%
|
|
|
1,950
|
|
|
|
1.7
|
%
|
|
|
269
|
|
|
|
16.0
|
%
|
Occupancy and equipment
|
|
|
1,715
|
|
|
|
1.3
|
%
|
|
|
2,391
|
|
|
|
2.1
|
%
|
|
|
676
|
|
|
|
39.4
|
%
|
Bad debt provision/(recovery)
|
|
|
1,289
|
|
|
|
1.0
|
%
|
|
|
593
|
|
|
|
0.5
|
%
|
|
|
(696
|
)
|
|
|
(54.0
|
)%
|
Professional fees
|
|
|
1,981
|
|
|
|
1.5
|
%
|
|
|
2,549
|
|
|
|
2.2
|
%
|
|
|
568
|
|
|
|
28.7
|
%
|
Software expense
|
|
|
541
|
|
|
|
0.4
|
%
|
|
|
712
|
|
|
|
0.6
|
%
|
|
|
171
|
|
|
|
31.6
|
%
|
Professional dues and memberships
|
|
|
566
|
|
|
|
0.4
|
%
|
|
|
565
|
|
|
|
0.5
|
%
|
|
|
(1
|
)
|
|
|
(0.2
|
)%
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
(170,279
|
)
|
|
|
(127.5
|
)%
|
|
|
40,820
|
|
|
|
35.5
|
%
|
|
|
211,099
|
|
|
|
(124.0
|
)%
|
Other
|
|
|
1,041
|
|
|
|
0.8
|
%
|
|
|
1,091
|
|
|
|
0.9
|
%
|
|
|
50
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(92,376
|
)
|
|
|
(69.2
|
)%
|
|
|
124,236
|
|
|
|
107.9
|
%
|
|
|
216,612
|
|
|
|
(234.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
225,891
|
|
|
|
169.2
|
%
|
|
|
(9,111
|
)
|
|
|
(7.9
|
)%
|
|
|
(235,002
|
)
|
|
|
(104.0
|
)%
|
Income tax expense
|
|
|
24,040
|
|
|
|
18.0
|
%
|
|
|
11,423
|
|
|
|
9.9
|
%
|
|
|
(12,617
|
)
|
|
|
(52.5
|
)%
|
Equity in earnings of equity method investment
|
|
|
(80
|
)
|
|
|
0.1
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
80
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
201,771
|
|
|
|
151.1
|
%
|
|
|
(20,534
|
)
|
|
|
(17.8
|
)%
|
|
|
(222,305
|
)
|
|
|
(110.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(15
|
)
|
|
|
(0.0
|
)%
|
|
|
(15
|
)
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
201,771
|
|
|
|
151.1
|
%
|
|
$
|
(20,519
|
)
|
|
|
(17.8
|
)%
|
|
$
|
(222,290
|
)
|
|
|
(110.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Overview
Our total net revenue for the nine months ended
September 30, 2009 was $115.1 million, a decrease of
$18.4 million, or approximately 13.8%, compared to the nine
months ended September 30, 2008. Our total net revenue
increased $1.2 million to $115.1 million for the nine
months ended September 30, 2009 compared to total net
revenue of $113.9 million associated with customers
residing outside of China for the nine months ended
September 30, 2008. For the nine months ended
September 30, 2009 we incurred a net loss of
$20.5 million, a decrease of $222.3 million, or
approximately 110.2% in performance, compared to the nine months
ended September 30, 2008. Our adjusted net income (a
non-GAAP measure which excludes the impact of the embedded
derivative liability) for the nine months ended
September 30, 2009 was $20.3 million, a decrease of
$11.2 million, or approximately 35.5%, compared to the nine
months ended September 30, 2008. Except where specifically
stated, our results for the nine months ended September 30,
2009 reflect the termination of our trading services to
customers residing in China as of December 31, 2008, the
impact of the embedded derivative liability associated with our
outstanding preferred stock and the following principal factors:
|
|
|
|
|
customer trading volume decreased by $196.1 billion to
$928.3 billion ($143.8 billion of trading volume was
attributable to customers residing in China for the comparable
2008 period);
|
|
|
|
trading revenue per million traded increased by $7.6 to $122.6,
or 6.6%;
|
|
|
|
net deposits received from customers decreased by
$40.1 million to $186.9 million ($23.5 million of
net deposits received was attributable to customers residing in
China during the comparable 2008 period); and
|
|
|
|
traded accounts decreased by 1,436 from 45,001 to 43,565 (11,403
traded accounts were attributable to customers residing in China
for the comparable 2008 period).
|
Revenue
Our total net revenue decreased $18.4 million to
$115.1 million for the nine months ended September 30,
2009 compared to $133.5 million for the nine months ended
September 30, 2008. Trading revenue decreased
$15.5 million to $113.8 million for the nine months
ended September 30, 2009 compared to $129.3 million
for the nine months ended September 30, 2008. The decrease
in trading revenue was primarily due to a decrease in customer
trading volume of $196.1 billion for the nine months ended
September 30, 2009 to $928.3 billion compared to
$1,124.4 billion for the nine months ended
September 30, 2008. Traded accounts decreased by 1,436
accounts, to 43,565, or 3.2% in the nine months ended
September 30, 2009. We believe our net revenue and trading
revenue declines were primarily the result of our termination of
our service offerings and trading services in China as of
December 31, 2008 and global economic conditions, partially
offset by increased trading revenue generated outside of China
resulting from our marketing efforts during the nine months
ended September 30, 2009.
During the nine months ended September 30, 2009 our net
revenue increased 1.0%, customer trading volume decreased 5.3%
and traded accounts increased 29.6% with respect to our
customers residing outside of China compared to the nine months
ended September 30, 2008. Our net deposits received from
customers residing outside of China decreased by
$15.2 million during that same period.
For the nine months ended September 30, 2008 net
revenue associated with customers residing in China was
$19.6 million. For the nine months ended September 30,
2008 customer trading volume was $143.8 billion from
customers residing in China, net deposits received from
customers was $23.5 million from customers residing in
China, and traded accounts from residents residing in China was
11,403. The revenue decline associated with global economic
conditions and our termination of our service offerings and
trading services in China was partially offset by our increased
marketing efforts, which resulted in increased enrollment in our
demonstration trading accounts which simulate live trading on
our proprietary platform, referred to as registered practice
trading accounts (and increased the number of tradable accounts
outside of China) and our continued international expansion,
which resulted in increased customers and customer trading
volume outside of China.
Trading revenue per million traded increased by $7.6, or 6.6%,
to $122.6 for the nine months ended September 30, 2009 and
net deposits received from customers decreased by
$40.1 million for the nine months ended September 30,
2009 to $186.9 million compared to $227.0 million for
the nine months ended September 30,
55
2008. We believe our trading revenue per million was not
materially affected by our termination of our service offerings
and trading services to residents of China as of
December 31, 2008. We believe the increase in trading
revenue per million was primarily due to the mix of currency
pairs and volume that our customers traded during the nine
months ended September 30, 2009 compared to the mix of
currency pairs and volume that our customers traded during the
same period in 2008.
Our other revenue decreased $0.3 million to
$1.7 million for the nine months ended September 30,
2009 compared to $2.0 million for the nine months ended
September 30, 2008, primarily due to a $0.4 million
increase in trading commissions received. We estimate that our
termination of our service offerings and trading services to
residents of China had no material impact on our other revenue
for the nine months ended September 30, 2008. Our net
interest revenue decreased $2.5 million to a
$0.3 million expense for the nine months ended
September 30, 2009 compared to $2.2 million in revenue
for the nine months ended September 30, 2008. This was
primarily due to the decline in the average effective interest
rate earned on net customer deposits and investments from 1.77%
for the nine months ended September 30, 2008, compared to
0.11% for the nine months ended September 30, 2009. We
estimate that our termination of our service offerings and
trading services to residents of China as of December 31,
2008 had no material impact on our net interest revenue for the
nine months ended September 30, 2009.
Total
expenses
Our total expenses increased $216.6 million to
$124.2 million for the nine months ended September 30,
2009 compared to $92.4 million of income for the nine
months ended September 30, 2008, the majority of which was
attributable to a $40.8 million loss relating to the change
in fair value of our preferred stock embedded derivative for the
nine months ended September 30, 2009 compared to a
$170.3 million gain for the nine months ended
September 30, 2008. Other changes in our expenses were
primarily due to a $2.2 million increase in employee
compensation and benefits, a $4.8 million increase in
selling and marketing, and a $2.6 million decrease in
trading expenses and commissions during the period. The
remaining increase of $1.1 million was due to spending
increases of $2.7 million, offset by $1.6 million of
decreases in each of our remaining expense categories with no
individual category representing more than $0.9 million.
For the nine months ended September 30, 2008, our total
direct expenses associated with our former operations in China
were $5.1 million.
Employee compensation and benefits expenses increased
$2.1 million, or 7.9%, to $29.6 million for the nine
months ended September 30, 2009 from $27.5 million for
the nine months ended September 30, 2008. Salaries
increased $3.5 million primarily due to headcount
increasing from 291 as of September 30, 2008 to 362 as of
September 30, 2009. These headcount increases were mainly
in the marketing and sales functions and were required to
support the overall growth in our business. Bonus expense for
the nine months ended September 30, 2009 decreased
$2.3 million as compared to the nine months ended
September 30, 2008, primarily due to less favorable
operating results of our business. The remaining increase in
employee compensation and benefits was due to stock-based
compensation expense. For the nine months ended
September 30, 2008, our total direct employee compensation
and benefits expenses associated with our former operations in
China were $1.1 million.
Selling and marketing expenses increased $4.8 million, or
21.9%, to $26.8 million for the nine months ended
September 30, 2009 compared to $22.0 million for the
nine months ended September 30, 2008. Increased sales and
marketing expenses were primarily due to increased online,
search engine and television advertising, and increased spending
to support our growth. For the nine months ended
September 30, 2008, our total direct selling and marketing
expenses associated with our former operations in China was
$2.7 million.
Trading expenses and commissions decreased $2.6 million to
$10.4 million for the nine months ended September 30,
2009 compared to $13.0 million for the nine months ended
September 30, 2008, primarily due to a decrease of
$64.2 billion in customer trading volume directed to us
from our white label partners and introducing brokers to
$312.2 billion for the nine months ended September 30,
2009 compared to $376.4 billion for the nine months ended
September 30, 2008. This expense is largely variable and is
directly associated with customer trading volume directed to us
from our white label partners and introducing brokers. We
estimate that trading expenses were not materially impacted by
our termination of our service offerings and trading services to
residents of China as of December 31, 2008. For the nine
months ended September 30, 2008, our total direct trading
expenses and commissions associated with our former operations
in China were $0.6 million.
56
Other expense increased $0.1 million, depreciation and
amortization increased $0.1 million, communication and data
processing increased $0.2 million, professional fees
increased $0.6 million, occupancy and equipment increased
$0.7 million, bad debt provision decreased
$0.7 million and professional dues and memberships
decreased by less than $0.1 million compared to the nine
months ended September 30, 2008. These changes in expenses
were required to support the overall growth of our business.
Bank fees increased $0.8 million compared to the nine
months ended September 30, 2008 primarily due to an
increase in credit card processing fees as a result of an
increase of $36.9 million in total net deposits received
from customers funded through the use of customer credit cards
compared to the nine months ended September 30, 2008.
Interest expense on notes payable decreased $0.9 million
compared to the nine months ended September 30, 2008. The
changes in other expense, communication and data processing,
depreciation and amortization, professional fees, bad debt
provision and occupancy and equipment were impacted by the
termination of our service offerings and trading services to
residents of China as of December 31, 2008. For the nine
months ended September 30, 2008, our total direct other
expenses related to our former operations in China were
$0.5 million.
Income
taxes
Income tax expense decreased $12.6 million to
$11.4 million for the nine months ended September 30,
2009 compared to $24.0 million for the nine months ended
September 30, 2008. Our effective tax rate was 125.4% for
the nine months ended September 30, 2009 and 10.6% for the
nine months ended September 30, 2008. Our adjusted
effective tax rate was 36.0% for the nine months ended
September 30, 2009 compared to 43.2% for the nine months
ended September 30, 2008. This non-GAAP financial measure
has certain limitations in that it does not have a standardized
meaning and thus our definition may be different from similar
non-GAAP financial measures used by other companies
and/or
analysts and may differ from period to period. Thus it may be
more difficult to compare our financial performance to that of
other companies. For the nine months ended September 30,
2008, the total income tax expense related to our operations in
China was $6.3 million. The difference between our
effective tax rate and adjusted tax rate is due to the lack of
impact on our income tax expense from the change in fair value
of our convertible preferred stock embedded derivative.
57
Year End
Results
The following table sets forth our Results of Operations for the
three years ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
2007 Over
|
|
|
2008 Over
|
|
|
|
2006
|
|
|
Revenue
|
|
|
2007
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
69,471
|
|
|
|
95.8
|
%
|
|
$
|
118,176
|
|
|
|
96.1
|
%
|
|
$
|
186,004
|
|
|
|
97.5
|
%
|
|
|
70.1
|
%
|
|
|
57.4
|
%
|
Other revenue
|
|
|
242
|
|
|
|
0.3
|
%
|
|
|
437
|
|
|
|
0.4
|
%
|
|
|
2,366
|
|
|
|
1.2
|
%
|
|
|
80.6
|
%
|
|
|
441.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
69,713
|
|
|
|
96.2
|
%
|
|
|
118,613
|
|
|
|
96.4
|
%
|
|
|
188,370
|
|
|
|
98.7
|
%
|
|
|
70.1
|
%
|
|
|
58.8
|
%
|
Interest revenue
|
|
|
3,145
|
|
|
|
4.3
|
%
|
|
|
5,024
|
|
|
|
4.1
|
%
|
|
|
3,635
|
|
|
|
1.9
|
%
|
|
|
59.7
|
%
|
|
|
(27.6
|
)%
|
Interest expense
|
|
|
(356
|
)
|
|
|
0.5
|
%
|
|
|
(611
|
)
|
|
|
0.5
|
%
|
|
|
(1,208
|
)
|
|
|
0.6
|
%
|
|
|
71.6
|
%
|
|
|
97.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue
|
|
|
2,789
|
|
|
|
3.8
|
%
|
|
|
4,413
|
|
|
|
3.6
|
%
|
|
|
2,427
|
|
|
|
1.3
|
%
|
|
|
58.2
|
%
|
|
|
(45.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
72,502
|
|
|
|
100.0
|
%
|
|
|
123,026
|
|
|
|
100.0
|
%
|
|
|
190,797
|
|
|
|
100.0
|
%
|
|
|
69.7
|
%
|
|
|
55.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
17,258
|
|
|
|
23.8
|
%
|
|
|
25,093
|
|
|
|
20.4
|
%
|
|
|
37,024
|
|
|
|
19.4
|
%
|
|
|
45.4
|
%
|
|
|
47.5
|
%
|
Selling and marketing
|
|
|
12,517
|
|
|
|
17.3
|
%
|
|
|
21,836
|
|
|
|
17.7
|
%
|
|
|
29,312
|
|
|
|
15.4
|
%
|
|
|
74.5
|
%
|
|
|
34.2
|
%
|
Trading expenses and commissions
|
|
|
10,321
|
|
|
|
14.2
|
%
|
|
|
10,436
|
|
|
|
8.5
|
%
|
|
|
16,310
|
|
|
|
8.5
|
%
|
|
|
1.1
|
%
|
|
|
56.3
|
%
|
Interest expense on notes payable
|
|
|
2,075
|
|
|
|
2.9
|
%
|
|
|
3,688
|
|
|
|
3.0
|
%
|
|
|
2,697
|
|
|
|
1.4
|
%
|
|
|
77.7
|
%
|
|
|
(26.9
|
)%
|
Bank fees
|
|
|
935
|
|
|
|
1.3
|
%
|
|
|
2,316
|
|
|
|
1.9
|
%
|
|
|
3,754
|
|
|
|
2.0
|
%
|
|
|
147.7
|
%
|
|
|
62.1
|
%
|
Depreciation and amortization
|
|
|
897
|
|
|
|
1.2
|
%
|
|
|
1,911
|
|
|
|
1.6
|
%
|
|
|
2,496
|
|
|
|
1.3
|
%
|
|
|
113.0
|
%
|
|
|
30.6
|
%
|
Communications and data processing
|
|
|
873
|
|
|
|
1.2
|
%
|
|
|
1,659
|
|
|
|
1.3
|
%
|
|
|
2,467
|
|
|
|
1.3
|
%
|
|
|
90.0
|
%
|
|
|
48.7
|
%
|
Occupancy and equipment
|
|
|
1,045
|
|
|
|
1.4
|
%
|
|
|
1,616
|
|
|
|
1.3
|
%
|
|
|
2,419
|
|
|
|
1.3
|
%
|
|
|
54.6
|
%
|
|
|
49.7
|
%
|
Bad debt provision
|
|
|
574
|
|
|
|
0.8
|
%
|
|
|
1,164
|
|
|
|
0.9
|
%
|
|
|
1,418
|
|
|
|
0.7
|
%
|
|
|
102.8
|
%
|
|
|
21.8
|
%
|
Professional fees
|
|
|
1,295
|
|
|
|
1.8
|
%
|
|
|
1,380
|
|
|
|
1.1
|
%
|
|
|
3,104
|
|
|
|
1.6
|
%
|
|
|
6.6
|
%
|
|
|
124.9
|
%
|
Software expense
|
|
|
78
|
|
|
|
0.1
|
%
|
|
|
123
|
|
|
|
0.1
|
%
|
|
|
888
|
|
|
|
0.5
|
%
|
|
|
57.7
|
%
|
|
|
622.0
|
%
|
Professional dues and membership
|
|
|
48
|
|
|
|
0.1
|
%
|
|
|
187
|
|
|
|
0.2
|
%
|
|
|
773
|
|
|
|
0.4
|
%
|
|
|
289.6
|
%
|
|
|
313.4
|
%
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1,897
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
Change in fair value of convertible preferred stock embedded
derivative
|
|
|
61,732
|
|
|
|
85.1
|
%
|
|
|
165,280
|
|
|
|
134.3
|
%
|
|
|
(181,782
|
)
|
|
|
(95.3
|
)%
|
|
|
167.7
|
%
|
|
|
(210.0
|
)%
|
Impairment of intangible assets
|
|
|
165
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(100.0
|
)%
|
|
|
|
|
Other
|
|
|
3,085
|
|
|
|
4.3
|
%
|
|
|
(627
|
)
|
|
|
(0.5
|
)%
|
|
|
1,424
|
|
|
|
0.7
|
%
|
|
|
(120.3
|
)%
|
|
|
(327.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
112,898
|
|
|
|
155.7
|
%
|
|
|
236,062
|
|
|
|
191.9
|
%
|
|
|
(75,799
|
)
|
|
|
(39.7
|
)%
|
|
|
109.1
|
%
|
|
|
(132.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
(40,396
|
)
|
|
|
(55.7
|
)%
|
|
|
(113,036
|
)
|
|
|
(91.9
|
)%
|
|
|
266,596
|
|
|
|
139.7
|
%
|
|
|
179.8
|
%
|
|
|
(335.9
|
)%
|
Income tax expense
|
|
|
9,063
|
|
|
|
12.5
|
%
|
|
|
21,615
|
|
|
|
17.6
|
%
|
|
|
34,977
|
|
|
|
18.3
|
%
|
|
|
138.5
|
%
|
|
|
61.8
|
%
|
Equity in earnings of equity method investment
|
|
|
(43
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(214
|
)
|
|
|
(0.1
|
)%
|
|
|
(100.0
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
(49,502
|
)
|
|
|
(68.3
|
)%
|
|
|
(134,651
|
)
|
|
|
(109.4
|
)%
|
|
|
231,405
|
|
|
|
121.3
|
%
|
|
|
172.0
|
%
|
|
|
(271.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(21
|
)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(49,502
|
)
|
|
|
(68.3
|
)%
|
|
$
|
(134,651
|
)
|
|
|
(109.4
|
)%
|
|
$
|
231,426
|
|
|
|
121.3
|
%
|
|
|
172.0
|
%
|
|
|
(271.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Overview
Our total net revenue increased $67.8 million, or 55.1%, to
$190.8 million for the year ended December 31, 2008,
compared to $123.0 million for the year ended
December 31, 2007. Our total net income increased by
$366.1 million to $231.4 million for the year ended
December 31, 2008, compared to a loss of
$134.7 million for the year ended December 31, 2007.
Our adjusted net income (a non-GAAP measure which excludes the
impact of the embedded derivative liability) increased
$19.0 million, or approximately 62.1%, to
$49.6 million for the year ended December 31, 2008,
compared to $30.6 million for the year ended
December 31, 2007. Our results for the year ended
December 31, 2008 reflect the impact of the embedded
derivative liability associated with our outstanding preferred
stock and the following principal factors:
|
|
|
|
|
customer trading volume increased by $824.0 billion to
$1,498.6 billion, or 122.2% ($172.4 billion of trading
volume was attributable to customers residing in China for the
2008 period);
|
|
|
|
trading revenue per million traded decreased by $51.1 to $124.1,
or 29.2%;
|
|
|
|
net deposits received from customers increased by
$93.1 million to $277.3 million, or 50.5%
($25.3 million of net deposits received was attributable to
customers residing in China during the 2008 period); and
|
|
|
|
traded accounts increased from 43,139 to 52,555, or 21.8%
(11,647 traded accounts were attributable to customers residing
in China for the 2008 period).
|
Revenue
Our total net revenue increased $67.8 million, or 55.1%, to
$190.8 million for the year ended December 31, 2008,
compared to $123.0 million for the year ended
December 31, 2007. Trading revenue increased
$67.8 million to $186.0 million for the year ended
December 31, 2008, compared to $118.2 million for the
year ended December 31, 2007. The increase in trading
revenue was primarily due to an increase in customer trading
volume for the year ended December 31, 2008 of
$824.0 billion, or 122.2%, to $1,498.6 billion,
compared to $674.5 billion for the year ended
December 31, 2007. In addition, traded accounts for the
year ended December 31, 2008, increased by 9,416 to 52,555,
or 21.8%. We believe our revenue growth was primarily the result
of increased currency volatility in 2008 which increased our
customer trading volumes and our trading revenue, our increased
marketing efforts which resulted in increased enrollment in our
registered practice trading accounts and increased the number of
tradable accounts, and our continued international expansion,
which resulted in increased customers and customer trading
volume.
For the year ended December 31, 2008 net revenue
associated with customers residing in China was
$24.4 million, compared to $20.6 million for the year
ended December 31, 2007. For the year ended
December 31, 2008 customers residing in China represented
$172.4 billion of our customer trading volume,
$25.3 million of our net deposits and 11,647 of our traded
accounts, compared to $103.4 billion of our customer
trading volume, $26.0 million of our net deposits and
11,568 of our traded accounts for the year ended
December 31, 2007.
Trading revenue per million traded decreased by $51.1, or 29.2%,
to $124.1 and net deposits received from customers increased for
the year ended December 31, 2008 by $93.1 million, or
50.5%, to $277.3 million compared to $184.2 million
for the year ended December 31, 2007. We believe the
decline in trading revenue per million traded was primarily due
to the reduction in the wholesale forex pricing spreads that we
receive from our wholesale forex trading partners and our
reaction to increased market pressure on pricing among our
competitors during the year ended December 31, 2008
compared to the year ended December 31, 2007. We believe
that the reduction during 2008 in the wholesale forex pricing
spreads that we receive from our wholesale forex trading
partners was a result of increased competition among financial
institutions that supply wholesale forex pricing and an increase
in the demand from retail forex traders. As a result of this
increased competition among wholesale forex trading partners and
increased demand from retail forex traders, we believe tighter
forex pricing spreads were offered industry wide. In order to
remain competitive, we in turn offered tighter forex pricing
spreads to our customers. We do not believe that our trading
revenue per million traded results were materially impacted by
our termination of our business with customers residing in China.
59
Our other revenue increased $2.0 million to
$2.4 million for the year ended December 31, 2008 from
$0.4 million for the year ended December 31, 2007. The
increase was primarily due to a $1.3 million increase in
trading commissions related to the introduction in 2008 of our
Forex Pro trading program which allows selected clients to
receive tighter spreads on trades in return for a commission fee
paid to us. The additional $0.7 million increase was the
result of customer inactivity fees received by us from customers
who maintain accounts that have not executed a trade and have
not maintained the required minimum account balance during the
year ended December 31, 2008. The increase in customer
inactivity fees is primarily due to our increased customer base.
Our net interest revenue decreased $2.0 million to
$2.4 million for the year ended December 31, 2008
compared to $4.4 million for the year ended
December 31, 2007 due to a decrease in the average
effective interest rate earned on our deposits and investments
which was 1.5% for the year ended December 31, 2008
compared to 3.8% for the year ended December 31, 2007.
Total
expenses
Our total expenses decreased $311.9 million, or 132.1%, to
a net gain of $75.8 million for the year ended
December 31, 2008, including a gain of $181.8 million
relating to the change in fair value of our preferred stock
embedded derivative and a $1.9 million loss relating to the
write-off of our deferred initial public offering costs,
compared to $236.1 million, including $165.3 million
relating to the change in fair value of our preferred stock
embedded derivative, for the year ended December 31, 2007.
Other changes in our expenses were primarily due to a
$11.9 million increase in employee compensation and
benefits, a $7.5 million increase in selling and marketing,
a $5.9 million increase in trading expenses, a
$2.1 million increase in other expense, $1.7 million
increase in professional fees and a $1.4 million increase
in bank fees, partially offset by a $1.0 million decrease
in interest expense on notes payable. The remaining increase of
$3.8 million was due to spending increases in each of our
remaining expense categories with no individual category
increasing more than $0.8 million. For the year ended
December 31, 2008, our total direct expenses associated
with our operations in China were $5.9 million compared to
$4.8 million for the year ended December 31, 2007.
Employee compensation and benefits expenses increased
$11.9 million, or 47.5%, to $37.0 million for the year
ended December 31, 2008, from $25.1 million for the
year ended December 31, 2007. Salaries and benefits
(excluding bonus and stock compensation) increased
$7.3 million primarily due to increases in headcount from
299 at December 31, 2007 to 336 at December 31, 2008.
The increase in the headcount was primarily in the marketing and
sales functions and was required to support the overall growth
in our business. Stock compensation expense increased
$2.8 million due to increased grants distributed in 2008.
Bonus expense increased $1.8 million primarily due to the
favorable operating results of our business. For the year ended
December 31, 2008, our total direct employee compensation
and benefits expenses associated with our operations in China
were $1.4 million compared to $0.7 million for the
year ended December 31, 2007.
Selling and marketing expenses increased $7.5 million, or
34.2%, to $29.3 million for the year ended
December 31, 2008 from $21.8 million for the year
ended December 31, 2007. Increased sales and marketing
expenses were primarily due to increased online, search engine,
consulting, print and television advertising. For the year ended
December 31, 2008, our total direct selling and marketing
expenses associated with our operations in China were
$3.1 million compared to $2.5 million for the year
ended December 31, 2007, an increase of $0.6 million,
or approximately 24.3%.
Trading expenses and commissions increased $5.9 million to
$16.3 million for the year ended December 31, 2008
compared to $10.4 million for the year ended
December 31, 2007, primarily due to an increase in customer
trading volume directed to us from our white label partners and
introducing brokers of $257.4 billion to
$484.5 billion for the year ended December 31, 2008,
compared to $227.1 billion for the year ended
December 31, 2007. This expense is largely variable and is
directly associated with customer trading volume directed to us
from our white label partners and introducing brokers. For the
year ended December 31, 2008, our total direct trading
expenses and commissions from our operations in China were
$0.7 million compared to $1.0 million for the year
ended December 31, 2007.
Other expense increased $2.1 million to $1.5 million
for the year ended December 31, 2008 compared to a gain of
$0.6 million for the year ended December 31, 2007,
primarily due to a $1.5 million recovery that was
originally reserved in 2006 relating to the bankruptcy of one of
our wholesale forex trading partners. We incurred
$0.1 million
60
in expense related to the closure of our China office. Software
expense increased $0.8 million, professional dues and
membership expense increased $0.6 million, and travel
expense increased $0.2 million. These increased expenses
were required to support the overall growth of our business. For
the year ended December 31, 2008, our total other direct
expense and commissions from our operations in China was
$0.2 million compared to $0.2 million for the year
ended December 31, 2007.
Professional fee expense increased $1.7 million to
$3.1 million for the year ended December 31, 2008
compared to $1.4 million for the year ended
December 31, 2007 due to a $1.0 million increase in
legal expenses, $0.5 million increase in consulting expense
and $0.2 million increase in audit fees. These increased
expenses were required to support the overall growth of our
business. For the years ended December 31, 2008 and 2007,
we believe that total other direct expenses related to our
operations in China were not material.
Bank fees increased $1.4 million to $3.7 million for
the year ended December 31, 2008 from $2.3 million for
the year ended December 31, 2007. Increased bank fees were
primarily due to an increase in credit card processing fees as a
result of an increase of $51.7 million in the total net
deposits received from customers funded through the use of
customer credit cards. For the years ended December 31,
2008 and 2007, we believe that our total direct bank fees
related to our operations in China were not material.
Interest expense on notes payable decreased $1.0 million,
or 26.9%, to $2.7 million for the year ended
December 31, 2008 from $3.7 million for the year ended
December 31, 2007. Interest expense on notes payable
primarily relates to an increase of $30.0 million in long
term debt in June 2007. The average interest rate paid on notes
payable was 5.9% as of December 31, 2008 and 8.8% as of
December 31, 2007. The interest rate on long term debt is
the prime rate plus 0.75% and the decrease in rates above
correlates to a decrease in the prime rate. The proceeds from
the increased long-term debt were used to repurchase stock from
our founder. See Certain Relationships and Related
Transactions Transactions with Mark E. Galant.
Communications and data processing expenses increased
$0.8 million, occupancy and equipment expenses increased
$0.8 million, depreciation and amortization expense
increased $0.6 million and bad debt provision increased
$0.3 million. These increased expenses were required to
support the overall growth of our business. For the year ended
December 31, 2008, our total direct communications and data
processing expenses from our operations in China were
$0.1 million compared to $0.1 million for the year
ended December 31, 2007.
In December 2008, we wrote off $1.9 million of legal,
audit, tax, and other professional fees that were previously
capitalized in anticipation of an initial public offering in
2008. The change in fair value of the preferred stock embedded
derivative amounted to a gain of $181.8 million for the
year ended December 31, 2008 compared to a loss of
$165.3 million for the year ended December 31, 2007.
We have determined that the convertible feature in the
Companys Convertible, Redeemable Preferred Stock
Series A, Series B, Series C, Series D and
Series E meets the definition of an embedded
derivative in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Based on the Black Scholes options pricing model the embedded
derivative is recorded at fair value and reported in the
preferred stock embedded derivative liability on the
Consolidated Statements of Financial Condition with change in
fair value recorded to our Consolidated Statements of Operations
and Comprehensive Income.
Income
taxes
Income taxes increased $13.4 million to $35.0 million
for the year ended December 31, 2008 from
$21.6 million for the year ended December 31, 2007.
Our effective tax rate was 13.1% for year ended
December 31, 2008 and 19.1% for the year ended
December 31, 2007. Our adjusted effective tax rate was
41.2% for the year ended December 31, 2008 compared to
41.4% for the year ended December 31, 2007. This non-GAAP
financial measure has certain limitations in that it does not
have a standardized meaning and thus our definition may be
different from similar non-GAAP financial measures used by other
companies
and/or
analysts and may differ from period to period. Thus, it may be
more difficult to compare our financial performance to that of
other companies. For the year ended December 31, 2008, our
income tax expense related to our operations in China was
$7.5 million compared to $6.5 million for the year
ended December 31, 2007. The difference between our
effective tax rate and adjusted tax rate is due to the fact that
our income tax expense is not affected by the change in fair
value of our convertible, redeemable preferred stock embedded
derivative from prior periods.
61
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Overview
Our total net revenue increased $50.5 million, or 69.7%, to
$123.0 million for the year ended December 31, 2007,
compared to $72.5 million for the year ended
December 31, 2006. Our total net income decreased
$85.1 million to a $134.7 million loss for the year
ended December 31, 2007, compared to a $49.5 million
loss for the year ended December 31, 2006. Our adjusted net
income (a non-GAAP measure which excludes the impact of the
embedded derivative liability) increased $18.4 million, or
approximately 150.4%, to $30.6 million for the year ended
December 31, 2007, compared to $12.2 million for the
year ended December 31, 2006. Our results for the year
ended December 31, 2007 reflect the impact of the embedded
derivative liability associated with our outstanding preferred
stock and the following principal factors:
|
|
|
|
|
customer trading volume increased by $227.1 billion to
$674.5 billion, or 50.8% ($103.4 billion of trading
volume was attributable to customers residing in China for the
2007 period);
|
|
|
|
trading revenue per million traded increased by $19.9 to $175.2,
or 12.8%;
|
|
|
|
net deposits received from customers increased by
$81.4 million to $184.2 million, or 79.1%
($26.0 million of net deposits received was attributable to
customers residing in China during the 2007 period); and
|
|
|
|
traded accounts increased from 28,270 to 43,139, or 52.6%
(11,568 traded accounts were attributable to customers residing
in China for the 2007 period).
|
Revenue
Our total net revenue increased $50.5 million, or 69.7%, to
$123.0 million for the year ended December 31, 2007,
compared to $72.5 million for the year ended
December 31, 2006. Trading revenue increased
$48.7 million to $118.2 million for the year ended
December 31, 2007, compared to $69.5 million for the
year ended December 31, 2006. The increase in trading
revenue was primarily due to an increase in customer trading
volume for the year ended December 31, 2007 of
$227.1 billion, or 50.8%, to $674.5 billion, compared
to $447.4 billion for the year ended December 31,
2006. Traded accounts increased by 14,869 accounts, to 43,139,
or 52.6% for the year ended December 31, 2007. We believe
our revenue growth was primarily the result of: increased
currency volatility in 2007 which increased our customer trading
volumes and our trading revenue; our increased marketing efforts
which resulted in increased enrollment in our registered
practice trading accounts and increased the number of tradable
accounts; and our continued international expansion, which
resulted in increased customers and customer trading volume.
For the year ended December 31, 2007 net revenue
associated with customers residing in China was
$20.6 million, compared to $8.7 million for the year
ended December 31, 2006. For the year ended
December 31, 2007 customers residing in China represented
$103.4 billion of our customer trading volume,
$26.0 million of our net deposits and 11,568 of our traded
accounts, compared to $50.8 billion of our customer trading
volume, $10.5 million of our net deposits and 5,533 of our
traded accounts for the year ended December 31, 2006.
Trading revenue per million traded increased by $19.9, or 12.8%,
to $175.2 and net deposits received from customers increased for
the year ended December 31, 2007 by $81.4 million, or
79.1%, to $184.2 million compared to $102.8 million
for the year ended December 31, 2006. We believe the
increase in trading revenue per million was primarily due to
increased currency volatility during the year ended
December 31, 2007 compared to the year ended
December 31, 2006.
Our other revenue increased to $0.4 million for the year
ended December 31, 2007 from $0.2 million for the year
ended December 31, 2006 primarily due to a
$0.2 million increase in customer inactivity fees received
by us from customers who maintain accounts that have not
executed a trade and have not maintained the required minimum
account balance during the year ended December 31, 2007.
The increase in customer inactivity fees is primarily due to our
increased customer base.
Our net interest revenue increased $1.6 million to
$4.4 million for the year ended December 31, 2007
compared to $2.8 million for the year ended
December 31, 2006 due to increased net customer deposits,
which
62
increased from $102.8 million to $184.2 million during
the period and an increase in the average effective interest
rate earned on our deposits and investments which was 3.8% for
the year ended December 31, 2007 and 3.3% for the year
ended December 31, 2006.
Total
expenses
Our total expenses increased $123.2 million, or 109.1%, to
$236.1 million, including $165.3 million relating to
the change in fair value of our preferred stock embedded
derivative, for the year ended December 31, 2007 compared
to $112.9 million, including $61.7 million relating to
the change in fair value of our preferred stock embedded
derivative, for the year ended December 31, 2006. Other
changes in our expenses were primarily due to a
$9.3 million increase in selling and marketing, a
$7.8 million increase in employee compensation and
benefits, a $1.6 million increase in interest on notes
payable and a $1.4 million increase in bank fees, partially
offset by a $3.7 million decrease in other expense. The
remaining increase of $3.2 million was due to spending
increases in each of our remaining expense categories with no
individual category increasing more than $1.0 million. For
the year ended December 31, 2007, our total direct expenses
associated with our China operations were $4.8 million
compared to $2.8 million for the year ended
December 31, 2006.
Selling and marketing expenses increased $9.3 million, or
74.5%, to $21.8 million for the year ended
December 31, 2007 from $12.5 million for the year
ended December 31, 2006. Increased sales and marketing
expenses were primarily due to increased online, search engine,
print and television advertising. For the year ended
December 31, 2007, our total direct selling and marketing
expenses associated with our China operations were
$2.5 million compared to $1.2 million for the year
ended December 31, 2006.
Employee compensation and benefits expenses increased
$7.8 million, or 45.4%, to $25.1 million for the year
ended December 31, 2007, from $17.3 million for the
year ended December 31, 2006. Salaries and benefits
(excluding bonus and stock compensation) increased
$4.6 million primarily due to headcount increasing from 241
at December 31, 2006 to 299 at December 31, 2007.
These headcount increases were primarily in the marketing and
sales functions and were required to support the overall growth
in our business. Bonus expense increased $1.8 million
primarily due to the favorable operating results of our
business. The remaining increase in employee compensation and
benefits was due to stock compensation expense. For the year
ended December 31, 2007, our total direct employee
compensation and benefits expenses associated with our China
operations were $0.7 million compared to $0.3 million
for the year ended December 31, 2006.
Interest expense on notes payable increased $1.6 million,
or 77.7%, to $3.7 million for the year ended
December 31, 2007 from $2.1 million for the year ended
December 31, 2006. Increased interest expense on notes
payable primarily relates to an increase of $30.0 million
in long term debt in June 2007. The average interest rate paid
on notes payable was 8.8% as of December 31, 2007 and 8.7%
as of December 31, 2006. The interest rate on long term
debt is the prime rate plus 0.75% and the increase in rates
above correlates to an increase in the prime rate. The proceeds
from the increased long-term debt were used to repurchase stock
from our founder. See Certain Relationships and Related
Transactions Transactions with Mark E. Galant.
Bank fees increased $1.4 million to $2.3 million for
the year ended December 31, 2007 from $0.9 million for
the year ended December 31, 2006. Increased bank fees were
primarily due to an increase in credit card processing fees as a
result of an increase of $46.5 million in the total net
deposits received from customers funded through the use of
customer credit cards. For the years ended December 31,
2007 and 2006, we believe that our total bank fees related to
our operations in China were not material.
Other expense decreased $3.7 million to a gain of
$0.6 million for the year ended December 31, 2007 from
$3.1 million for the year ended December 31, 2006. In
2006, we fully reserved $2.3 million due to the bankruptcy
of one of our wholesale forex trading partners. We settled the
bankruptcy claim by the Refco Trustee for $0.8 million in
2007 which resulted in a credit to other expense of
$1.5 million. Depreciation and amortization expenses
increased $1.0 million, communications and data processing
expenses increased $0.8 million, occupancy and equipment
expenses increased $0.6 million, bad debt provision
increased $0.6 million, and professional fee expense
increased $0.1 million. These increased expenses were
required to support the overall growth of our business.
Impairment of intangible assets decreased by $0.2 million
due to a non-recurring charge related to the purchase of a
marketing list from a wholesale forex trading partner. Trading
expenses and commissions increased $0.1 million. This
expense is
63
largely variable and is directly associated with the customer
trading volume related to our white label partners and
introducing brokers. For the year ended December 31, 2007
our total other direct expenses associated with our China
operations were $0.2 million compared to $0.1 million
for the year ended December 31, 2006.
Income
taxes
Income taxes increased $12.6 million to $21.6 million
for the year ended December 31, 2007 from $9.1 million
for the year ended December 31, 2006. Our effective tax
rate was 19.1% for year ended December 31, 2007 and 22.4%
for the year ended December 31, 2006. Our adjusted
effective tax was 41.4% for the year ended December 31,
2007 compared to 42.5% for the year ended December 31,
2006. This non-GAAP financial measure has certain limitations in
that it does not have a standardized meaning and thus our
definition may be different from similar non-GAAP financial
measures used by other companies
and/or
analysts and may differ from period to period. Thus, it may be
more difficult to compare our financial performance to that of
other companies. The decrease in our effective tax rate was
primarily due to the reduced effect of state and local income
taxes and other permanent items in relation to the increase of
income before taxes. The difference between our effective tax
rate and adjusted tax rate is due to the lack of impact on our
income tax expense from the change in fair value on our
convertible preferred stock embedded derivative. For the year
ended December 31, 2007, our total income tax expense
related to our China operations was $6.5 million compared
to $2.5 million for the year ended December 31, 2006.
Quarterly
results of operations for the three-month periods ended
September 30, 2007 through September 30,
2009
The following table sets forth our unaudited quarterly Results
of Operations for the three-month periods ended
September 30, 2007 through September 30, 2009. The
unaudited quarterly consolidated information has been prepared
on the same basis as our audited consolidated financial
statements, and, in the opinion of management, the statement of
operations data includes all adjustments, consisting of normal
recurring adjustments, necessary for the fair statements of the
results of operations for these periods. You should read this
table in conjunction with our financial statements and the
related notes located elsewhere in this prospectus. The results
of operations for any quarter are not necessarily indicative of
the results of operations for any future periods.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009(1)
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
33,009
|
|
|
$
|
39,243
|
|
|
$
|
47,432
|
|
|
$
|
38,978
|
|
|
$
|
42,921
|
|
|
$
|
56,673
|
|
|
$
|
31,885
|
|
|
$
|
45,107
|
|
|
$
|
36,805
|
|
Other Revenue
|
|
|
49
|
|
|
|
199
|
|
|
|
520
|
|
|
|
237
|
|
|
|
1,226
|
|
|
|
383
|
|
|
|
710
|
|
|
|
358
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
33,058
|
|
|
|
39,442
|
|
|
|
47,952
|
|
|
|
39,215
|
|
|
|
44,147
|
|
|
|
57,056
|
|
|
|
32,595
|
|
|
|
45,465
|
|
|
|
37,391
|
|
Interest revenue
|
|
|
1,299
|
|
|
|
1,267
|
|
|
|
1,176
|
|
|
|
996
|
|
|
|
1,008
|
|
|
|
455
|
|
|
|
91
|
|
|
|
79
|
|
|
|
57
|
|
Interest expense
|
|
|
(156
|
)
|
|
|
(142
|
)
|
|
|
(289
|
)
|
|
|
(332
|
)
|
|
|
(360
|
)
|
|
|
(227
|
)
|
|
|
(173
|
)
|
|
|
(182
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
1,143
|
|
|
|
1,125
|
|
|
|
887
|
|
|
|
664
|
|
|
|
648
|
|
|
|
228
|
|
|
|
(82
|
)
|
|
|
(103
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
34,201
|
|
|
|
40,567
|
|
|
|
48,839
|
|
|
|
39,879
|
|
|
|
44,795
|
|
|
|
57,284
|
|
|
|
32,513
|
|
|
|
45,362
|
|
|
|
37,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
6,405
|
|
|
|
8,264
|
|
|
|
8,571
|
|
|
|
8,856
|
|
|
|
10,026
|
|
|
|
9,571
|
|
|
|
9,350
|
|
|
|
10,232
|
|
|
|
10,038
|
|
Selling and marketing
|
|
|
5,158
|
|
|
|
6,715
|
|
|
|
7,526
|
|
|
|
7,975
|
|
|
|
6,474
|
|
|
|
7,337
|
|
|
|
8,539
|
|
|
|
9,407
|
|
|
|
8,845
|
|
Trading expenses and commissions
|
|
|
2,415
|
|
|
|
2,969
|
|
|
|
4,798
|
|
|
|
4,151
|
|
|
|
4,042
|
|
|
|
3,319
|
|
|
|
2,729
|
|
|
|
3,702
|
|
|
|
4,000
|
|
Interest expense on notes payable
|
|
|
1,553
|
|
|
|
1,006
|
|
|
|
858
|
|
|
|
680
|
|
|
|
639
|
|
|
|
520
|
|
|
|
458
|
|
|
|
432
|
|
|
|
404
|
|
Bank fees
|
|
|
638
|
|
|
|
694
|
|
|
|
889
|
|
|
|
832
|
|
|
|
874
|
|
|
|
1,159
|
|
|
|
1,082
|
|
|
|
1,115
|
|
|
|
1,218
|
|
Depreciation and amortization
|
|
|
514
|
|
|
|
547
|
|
|
|
581
|
|
|
|
605
|
|
|
|
711
|
|
|
|
599
|
|
|
|
651
|
|
|
|
699
|
|
|
|
662
|
|
Communications and data processing
|
|
|
482
|
|
|
|
474
|
|
|
|
542
|
|
|
|
563
|
|
|
|
576
|
|
|
|
786
|
|
|
|
652
|
|
|
|
629
|
|
|
|
669
|
|
Occupancy and equipment
|
|
|
424
|
|
|
|
414
|
|
|
|
537
|
|
|
|
464
|
|
|
|
714
|
|
|
|
704
|
|
|
|
729
|
|
|
|
779
|
|
|
|
883
|
|
Bad debt provision/(recovery)
|
|
|
500
|
|
|
|
462
|
|
|
|
182
|
|
|
|
190
|
|
|
|
917
|
|
|
|
129
|
|
|
|
(167
|
)
|
|
|
156
|
|
|
|
603
|
|
Professional fees
|
|
|
251
|
|
|
|
595
|
|
|
|
404
|
|
|
|
458
|
|
|
|
1,119
|
|
|
|
1,123
|
|
|
|
736
|
|
|
|
920
|
|
|
|
892
|
|
Software expense
|
|
|
39
|
|
|
|
29
|
|
|
|
56
|
|
|
|
202
|
|
|
|
283
|
|
|
|
347
|
|
|
|
284
|
|
|
|
250
|
|
|
|
177
|
|
Professional dues and memberships
|
|
|
31
|
|
|
|
130
|
|
|
|
161
|
|
|
|
168
|
|
|
|
237
|
|
|
|
207
|
|
|
|
181
|
|
|
|
207
|
|
|
|
177
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible preferred stock embedded
derivative
|
|
|
93,061
|
|
|
|
(132,647
|
)
|
|
|
(25,397
|
)
|
|
|
(87,939
|
)
|
|
|
(56,944
|
)
|
|
|
(11,502
|
)
|
|
|
4,303
|
|
|
|
57,654
|
|
|
|
(21,137
|
)
|
Other
|
|
|
243
|
|
|
|
(1,163
|
)
|
|
|
300
|
|
|
|
325
|
|
|
|
417
|
|
|
|
382
|
|
|
|
179
|
|
|
|
560
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
111,714
|
|
|
|
(111,511
|
)
|
|
|
8
|
|
|
|
(62,470
|
)
|
|
|
(29,915
|
)
|
|
|
16,578
|
|
|
|
29,706
|
|
|
|
86,742
|
|
|
|
7,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
(77,513
|
)
|
|
|
152,078
|
|
|
|
48,831
|
|
|
|
102,349
|
|
|
|
74,710
|
|
|
|
40,706
|
|
|
|
2,807
|
|
|
|
(41,380
|
)
|
|
|
29,466
|
|
Income tax expense
|
|
|
5,051
|
|
|
|
8,957
|
|
|
|
9,611
|
|
|
|
6,263
|
|
|
|
8,167
|
|
|
|
10,935
|
|
|
|
2,948
|
|
|
|
7,198
|
|
|
|
1,277
|
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
(44
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
(82,564
|
)
|
|
|
143,121
|
|
|
|
39,220
|
|
|
|
96,050
|
|
|
|
66,499
|
|
|
|
29,637
|
|
|
|
(141
|
)
|
|
|
(48,578
|
)
|
|
|
28,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to non-controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(45
|
)
|
|
|
34
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(82,564
|
)
|
|
$
|
143,121
|
|
|
$
|
39,220
|
|
|
$
|
96,050
|
|
|
$
|
66,499
|
|
|
$
|
29,658
|
|
|
$
|
(96
|
)
|
|
$
|
(48,612
|
)
|
|
$
|
28,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2008, we
terminated our service offerings to residents of China and
ceased our trading operations located in that country.
|
Liquidity
and Capital Resources
We have historically financed our liquidity and capital needs
primarily through the use of funds generated from operations,
the issuance of preferred stock and access to secured lines of
credit for general corporate purposes. We plan to finance our
future operating liquidity and regulatory capital needs from our
operations. Following this offering, although we have no current
plans to do so, we may issue equity or debt securities or enter
into secured
65
lines of credit from time to time. With the exception of
approximately $4.0 million to $5.0 million which we
anticipate spending for our corporate relocation and future
infrastructure investment related to our corporate relocation,
we expect that our capital expenditures for the next
12 months will be consistent with historical annual spend.
We primarily hold and invest our cash at various financial
institutions and in various investments, including cash held at
banks, deposits at our wholesale forex trading partners and
money market funds which invest in short-term
U.S. government securities. In general, we believe all of
our investments and deposits are of high credit quality and we
have more than adequate liquidity to conduct our businesses.
As a holding company, nearly all of our funds generated from
operations are generated by our operating subsidiaries.
Historically, we have accessed these funds through receipt of
dividends from these subsidiaries. Some of our operating
subsidiaries are subject to requirements of various regulatory
bodies, including the Commodity Futures Trading Commission, or
CFTC, and National Futures Association, or NFA in the United
States, the Financial Services Authority in the United Kingdom,
the Financial Services Agency in Japan, the Securities and
Futures Commission in Hong Kong and the Cayman Islands Monetary
Authority in the Cayman Islands, relating to liquidity and
capital standards, which limit funds available for the payment
of dividends to the holding company. As a result, we may be
unable to access funds which are generated by our operating
subsidiaries when we need them. In accordance with CFTC
regulation 1.12 and NFA Financial Requirements
Section 1, a 20.0% decrease in GAIN Capital Group,
LLCs net capital and a 30.0% decrease in excess net
capital due to a planned equity withdrawal requires regulatory
notification
and/or
approval.
The following table illustrates the minimum regulatory capital
our subsidiaries were required to maintain as of
September 30, 2009 and the actual amounts of capital that
were maintained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Regulatory
|
|
Capital Levels
|
|
Excess Net
|
Entity Name
|
|
Capital Requirements
|
|
Maintained
|
|
Capital
|
|
GAIN Capital Group, LLC
|
|
$
|
20.0 million
|
|
|
$
|
85.5 million
|
|
|
$
|
65.5 million
|
|
GAIN Capital Securities, Inc.
|
|
$
|
0.05 million
|
|
|
$
|
0.16 million
|
|
|
$
|
0.11 million
|
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
$
|
1.5 million
|
|
|
$
|
2.8 million
|
|
|
$
|
1.3 million
|
|
GAIN Capital Japan, Co. Ltd.
|
|
$
|
0.7 million
|
|
|
$
|
1.1 million
|
|
|
$
|
0.4 million
|
|
GAIN Capital-Forex.com Singapore, Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital-Forex.com Australia, Pty. Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Global Markets, Inc.
|
|
$
|
0.1 million
|
|
|
$
|
0.3 million
|
|
|
$
|
0.2 million
|
|
Our futures commission merchant and forex dealer subsidiary,
GAIN Capital Group, LLC, is subject to the Commodity Futures
Trading Commission Net Capital Rule (Rule 1.17) and NFA
Financial Requirements Sections 11 and 12. Under applicable
provisions of these rules, GAIN Capital Group, LLC is required
to maintain adjusted net capital equal to or greater than the
greater of $20.0 million or 5.0% of the total payables to
customers, as these terms are defined under applicable rules. In
addition, because we offer greater than 1.0% leverage to our
customers, we are required to maintain a security deposit equal
to or greater than one and one half times (1.5x) our required
net capital. Net capital represents our current assets less
total liabilities as defined by CFTC Rule 1.17. Our current
assets consist primarily of cash and cash equivalents reported
on our balance sheet as cash, receivables from brokers and money
market funds which primarily invest in short term
U.S. government securities. Our total liabilities include
payables to customers, accrued expenses, accounts payable, sales
and marketing expense payable, introducing broker fees payable
and other liabilities. From net capital we take certain
percentage deductions against assets held based on factors
required by the Commodity Exchange Act to calculate adjusted net
capital. Our net capital and adjusted net capital changes from
day to day. As of September 30, 2009, GAIN Capital Group,
LLC had net capital of approximately $108.7 million,
adjusted net capital of $85.5 million and net capital
requirements of $20.0 million. As of September 30,
2009, our excess net capital was $65.5 million. We believe
that we currently have sufficient capital to satisfy these
on-going minimum net capital requirements.
66
We are required to maintain cash on deposit with our wholesale
forex trading partners in order to conduct our hedging
activities. As of September 30, 2009, we posted
$100.2 million in cash with wholesale forex trading
partners, of which $18.1 million was required as collateral
pursuant to our agreements for holding spot foreign exchange
positions with such institutions, and the remaining
$82.1 million represented available cash in excess of
required collateral. As of September 30, 2009, total
customer assets on deposit were $170.0 million. Total
customer assets on deposit represent the net amount we may be
obligated to pay if all of our customers were liquidated at that
point in time.
We intend to relocate our corporate headquarters between the
fourth quarter of fiscal year 2009 and first quarter of fiscal
year 2010. In addition to our corporate relocation, we intend to
make significant investments in our business continuity and
disaster recovery infrastructure during this same time period.
We anticipate capital expenditures for our corporate relocation
to be $3.0 million to $4.0 million and capital
expenditures for our infrastructure investment to be
$1.0 million to $2.0 million.
We expect to incur increased costs as a result of having
publicly traded common stock. Prior to this offering, we have
not been subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, or the other rules and
regulations of the Securities and Exchange Commission, or SEC,
or any securities exchange relating to public companies. We are
working with our independent legal, accounting and financial
advisors to identify those areas in which changes should be made
to our financial and management control systems to manage our
growth and our obligations as a public company. These areas
include corporate control, internal audit, disclosure controls
and procedures and financial reporting and accounting systems.
We also anticipate that we will incur costs associated with
corporate governance requirements, including requirements under
the Sarbanes-Oxley Act of 2002, as amended, as well as rules
implemented by the SEC and the NASDAQ Stock Market, LLC. We
anticipate annual legal and financial compliance expenditures of
$3.0 million to $4.5 million in connection with our
having publicly traded common stock.
Credit
Facility
We have a $52.5 million term loan and a $20.0 million
revolving line of credit through a loan and security agreement
with Silicon Valley Bank and JPMorgan Chase Bank. The term loan
is payable in 20 quarterly installments of principal and the
payments commenced on October 1, 2007. Interest is paid
monthly and is based upon the prime rate of interest plus 0.75%.
Under the terms of the term loan, when the total funded debt
drops below earnings before income tax expense, interest
expense, and depreciation and amortization expense, or EBITDA,
the interest rate will decline by 0.5%. The interest rate as of
September 30, 2009 was 4.0%. The term loan is secured by
certain of our assets, a pledge of our membership interests in
our wholly-owned subsidiary GAIN Holdings, LLC and a guarantee
by GAIN Holdings, LLC. The term loan maturity date is
July 1, 2012. Interest for the revolving line of credit
accrues at a floating per annum rate equal to the greater of
either 4.75% or the prime rate of interest plus 0.75%. The
amount of availability under the revolving line of credit is
determined by subtracting from $20.0 million the amount
outstanding under the revolving line of credit. The revolving
line of credit maturity date is June 17, 2010. We intend to
renew the revolving line of credit upon maturity. As of
September 30, 2009, we had $31.5 million outstanding
under the term loan and no amounts were outstanding under the
revolving line of credit. In accordance with the provisions of
our term loan and revolving line of credit as outlined in the
loan and security agreement and subsequent modifications, we are
required to adhere to various financial, regulatory, operational
and reporting covenants. As of September 30, 2009 and
during the entire term of such loan, we were in compliance with
such covenants.
67
Cash
Flow
The following table sets forth a summary of our cash flow for
the three years ended December 31, 2008 and the nine months
ended September 30, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Cash provided by operating activities
|
|
$
|
20,803
|
|
|
$
|
77,774
|
|
|
$
|
69,320
|
|
|
$
|
51,205
|
|
|
$
|
37,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
$
|
(2,592
|
)
|
|
$
|
(2,528
|
)
|
|
$
|
(3,792
|
)
|
|
$
|
(2,260
|
)
|
|
$
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
$
|
(9,217
|
)
|
|
$
|
(7,828
|
)
|
|
$
|
12,062
|
|
|
$
|
12,705
|
|
|
$
|
(8,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(53
|
)
|
|
$
|
(349
|
)
|
|
$
|
(4,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
160,195
|
|
|
$
|
197,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary drivers of our cash flow provided by operating
activities are net deposits received from customers, amounts
posted as collateral with wholesale forex trading partners, and
amounts paid to fund the operations of our business.
Net deposits received from customers represent customer deposits
less withdrawals for a given period. These amounts correlate to
our customers ability to place additional trades, which
potentially increases our trading volume, and include the impact
of realized gains and losses on customer accounts. Net deposits
received from customers increase when we receive initial
deposits from new customers or additional deposits from existing
customers. Net deposits received from customers decrease when a
customer withdraws funds in partial or full. To some extent our
net deposit activity is influenced by our customers trading
positions as our customers may be required to post additional
funds to maintain open positions or may choose to withdraw
excess funds on open positions. We consider net deposits
received from customers to be a key measurement as to the
success of our growth strategies that we intend to implement to
continue to grow our business.
Amounts posted as collateral with brokers are classified on our
balance sheet as receivables from brokers and represent
collateral as required by agreements with our wholesale forex
trading partners for holding spot foreign exchange positions and
cash posted with wholesale forex trading partners in excess of
required collateral. We post cash with wholesale forex trading
partners in excess of required collateral to accommodate for
adverse currency price moves relative to our positions, which
would raise our level of required collateral. We receive
interest on amounts we have posted as collateral with wholesale
forex trading partners. The amount of collateral required by our
wholesale forex trading partners in the future will be
commensurate with the amount of spot foreign exchange positions
that are held on our behalf. The amount of cash posted with
wholesale forex trading partners in excess of required
collateral is discretionary and may increase or decrease in
future periods as we determine the most efficient uses of our
cash.
Our largest spending categories to support the operations of our
business are employee compensation and benefits, selling and
marketing, trading expenses and commissions, and income taxes.
Employee compensation and benefits include salaries, bonuses,
and other employee related costs. Selling and marketing expenses
include online and search engine advertising, and print and
television advertising. Trading expenses and commissions consist
primarily of compensation paid to our white label partners and
introducing brokers. Income taxes are variable based on our
taxable income. Other cash expense categories include interest
expense on notes payable, bank fees, communications and data
processing, occupancy and equipment, professional fees, and
other miscellaneous expenses. We believe our operating expenses
will increase in future periods as required to support the
overall growth of our business and to support the requirements
associated with being a publicly traded company.
Unrealized gains and losses on cash positions revalued at
prevailing foreign currency exchange rates are included in
trading revenue but have no direct impact on cash flow from
operations. Gains and losses become realized and impact cash
flow from operations when customer transactions are liquidated.
To some extent, however,
68
our net deposit activity is influenced by unrealized gains and
losses because our customers trading positions are
impacted by unrealized gains and losses and our customers may be
required to post additional funds to maintain open positions or
may choose to withdraw excess funds on open positions.
In December 2008, we terminated our service offerings and
trading services to residents of China. Management estimates
that cash flow from operations related to our service offerings
and trading services to residents of China was $6.0 million
for the year ended December 31, 2008 and $10.1 million
for the year ended December 31, 2007.
The embedded derivative is recorded at fair value and changes in
the fair value are reflected in other expenses, but the change
in fair value of preferred stock embedded derivative has no
direct impact on cash flow from operations. The redemption
feature enables the holder to elect a net cash settlement at
date of redemption. Thus, there would be no effect on cash flow
from operations until the redemption date.
Nine
months ended September 30, 2009 compared to nine months
ended September 30, 2008
Cash provided by operating activities was $37.2 million for
the nine months ended September 30, 2009, compared to
$51.2 million for the nine months ended September 30,
2008. Net income decreased $222.3 million for the nine
months ended September 30, 2009 compared to the nine months
ended September 30, 2008 and was offset by a
$211.1 million increase of the change in fair value of
preferred stock embedded derivative. The primary reason for the
decrease in cash provided by operating activities was a
$5.1 million increase in receivables from brokers and a
$6.0 million increase in accrued expenses and other
liabilities and was offset by a $3.4 million decrease in
net taxes payable and a $10.4 million decrease in amounts
payable to customers.
The primary driver of our cash flow from investing activities is
capital expenditures, which primarily relate to spending on
computers, software and developing our trading platform. We
believe that our capital expenditures will increase in future
periods to support our growth strategies and the overall growth
of our business.
Cash used in investing activities was $2.7 million for the
nine months ended September 30, 2009, compared to
$2.3 million for the nine months ended September 30,
2008. This increase is primarily due to spending on computers,
software and the development of our trading platform.
Our cash provided by/(used for) financing activities has
historically been driven by the impact of our preferred share
offerings and liquidity events for our shareholders. In future
periods, we believe our financing activities will be driven by
the funding requirements of our growth strategies and the
overall growth of our business.
Cash used for financing activities was $8.6 million for the
nine months ended September 30, 2009, compared to cash
provided by financing activities of $12.7 million for the
nine months ended September 30, 2008. Cash used for
financing activities for the nine months ended
September 30, 2009 was primarily due to payments on notes
payable of $7.9 million. Cash provided by financing
activities for the nine months ended September 30, 2008
included the net proceeds from our Series E preferred stock
offering of $116.8 million partially offset by the net
impact of our repurchase of common and preferred stock
associated with our Series E preferred stock offering of
$94.4 million, payments on notes payable of
$7.9 million and $1.9 million spend related to an
initial public offering that was anticipated to occur in 2008.
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Cash provided by operating activities was $69.3 million for
the year ended December 31, 2008, compared to
$77.8 million for the year ended December 31, 2007.
Net income increased $366.1 million for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 and was offset by a $347.1 million
decrease of the change in fair value of preferred stock embedded
derivative. The primary reason for the decrease in cash provided
by operating activities was a $2.8 million increase in
stock compensation expense which was offset by a
$19.3 million decrease in amounts payable to customers,
brokers, dealers, Futures Commission Merchants, or FCMs,
and other regulated entities and an $11.2 million decrease
in net taxes receivable and payable.
Cash used in investing activities was $3.8 million for the
year ended December 31, 2008, compared to $2.5 million
for the year ended December 31, 2007. The increase in cash
used in investing activities was primarily
69
due to acquisition of and investment in Fortune Capital Co.,
Ltd. (now known as GAIN Capital Japan, Co. Ltd.), GAIN Capital
Securities, Inc. (doing business as GAIN Securities) and RCG
GAIN Limited in 2008 of $1.1 million, net of cash acquired.
Cash provided by financing activities was $12.1 million for
the year ended December 31, 2008, compared to cash used for
financing activities of $7.8 million for the year ended
December 31, 2007. The increase in cash provided was
primarily due to the net proceeds from our Series E
preferred stock offering of $116.8 million partially offset
by net proceeds from and payments on notes payable of
$32.9 million, the net impact of our repurchase of common
and preferred stock associated with our Series E preferred
stock offering of $94.2 million. In addition, we
repurchased $30.0 million of common stock from our founder,
Mark E. Galant, in 2007 with no comparable transaction in 2008.
See Certain Relationships and Related
Transactions Transactions with Mark E. Galant.
Capital
expenditures
Capital expenditures were $2.7 million for the years ended
December 31, 2008 and 2007. Capital expenditures for the
years ended December 31, 2008 and 2007 were primarily
related to the development of our trading platforms, websites
and associated infrastructure.
Year
ended December 31, 2007 compared to the year ended
December 31, 2006
Cash provided by operating activities was $77.8 million for
the year ended December 31, 2007, compared to
$20.8 million for the year ended December 31, 2006.
Net income decreased $85.1 million for the year ended
December 31, 2007 compared to the year ended
December 31, 2006 and was offset by a $103.5 million
increase of the change in fair value of preferred stock embedded
derivative. The primary reason for the increase in cash provided
by operating activities was an $8.3 million increase in
unrealized forex gains, a $7.9 million increase in amounts
receivable from brokers, and a net increase of
$20.4 million in income taxes receivable and payable. Cash
used in investing activities was $2.5 million for the year
ended December 31, 2007, compared to $2.6 million for
the year ended December 31, 2006. In 2007 cash used in
investing activities was primarily related to spending on
computers and software and the development of our trading
platform. In 2006, cash used in investing activities was
primarily related to spending on computers and software and the
development of our trading platform and also included the
purchase of a marketing list.
Cash used for financing activities was $7.8 million for the
year ended December 31, 2007, compared to cash used for
financing activities of $9.2 million for the year ended
December 31, 2006. In 2007, our net cash used for financing
activities was primarily due to payments on notes payable of
$7.6 million associated with the $30.0 million
increase in debt incurred for the repurchase of
$30.0 million of common stock from our founder, Mark E.
Galant. See Certain Relationships and Related
Transactions Transactions with Mark E. Galant.
In 2006 our net cash used for financing activities was primarily
due to the net impact of proceeds, repurchases of common and
preferred stock, option exercises and proceeds from notes
payable associated with our Series D preferred stock
offering of $6.7 million and payments on notes payable of
$2.5 million.
Capital
expenditures
Capital expenditures were $2.7 million for the year ended
December 31, 2007, compared to $1.8 million for the
year ended December 31, 2006. Capital expenditures for the
years ended December 31, 2007 and 2006 were primarily
related to the development of our trading platforms, websites
and associated infrastructure.
70
Summary
disclosures about contractual obligations and commercial
commitments
The following table reflects a summary of our contractual cash
obligations and other commercial commitments at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual
Obligations
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Lease obligations
|
|
$
|
2,014
|
|
|
$
|
1,567
|
|
|
$
|
447
|
|
|
$
|
|
|
|
$
|
|
|
Long term debt
|
|
|
39,375
|
|
|
|
10,500
|
|
|
|
21,000
|
|
|
|
7,875
|
|
|
|
|
|
Long term debt interest
|
|
|
2,849
|
|
|
|
1,404
|
|
|
|
1,366
|
|
|
|
79
|
|
|
|
|
|
Vendor obligations
|
|
|
2,016
|
|
|
|
1,284
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
325
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,579
|
|
|
$
|
15,080
|
|
|
$
|
23,545
|
|
|
$
|
7,954
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
At September 30, 2009, December 31, 2008 and 2007, we
did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Critical
Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes
have been prepared in accordance with GAAP applied on a
consistent basis. The preparation of these financial statements
requires us to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the periods presented. We evaluate these
estimates and assumptions on an ongoing basis. We base our
estimates on the information currently available to us and on
various other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made; if different estimates reasonably could have been used; or
if changes in the estimate that are reasonably likely to occur
periodically could materially impact the financial statements.
While our significant accounting policies are described in more
detail in the notes to our consolidated financial statements
included in this prospectus, we believe the following accounting
policies to be critical to the estimates and assumptions used in
the preparation of our consolidated financial statements.
Revenue
recognition
Foreign exchange contracts generally involve the exchange of two
currencies at market rates on a specified date; spot contracts
usually require the exchange of currencies to occur within two
business days of the contract date. Customer transactions and
related revenue and expenses are recorded on a trade date basis.
Gains or losses are realized when customer transactions are
liquidated. Unrealized gains or losses on cash positions
revalued at prevailing foreign currency exchange rates (the
difference between contract price and market price) at the date
of the statement of financial condition are included in
Receivables from brokers, Payables to customers and
Payables to brokers, dealers, FCMs and other regulated
entities on the Consolidated Statements of Financial
Condition. Changes in net unrealized gains or losses are
recorded in Trading revenue on the Consolidated
Statements of Operations and Comprehensive Income.
71
We earn fees on customer-managed foreign exchange accounts. Fees
are comprised of account management, transaction fees and
performance fees, all payable monthly. We reported managed
account fees of $30,544 in Other revenue for the year
ended December 31, 2006, and managed account fees of
$93,418, with $17,174 from GAIN Capital Group, LLC and $76,244
from GCAM, LLC for the year ended December 31, 2007. We
reported managed account fees of $26,097 in Other revenue
for the year ended December 31, 2008, with $8,942 from
Group, LLC and $17,155 from GCAM, LLC.
Allowance
for doubtful accounts
We must make estimates of the uncollectibility of accounts
receivable. The allowance for doubtful accounts, which is netted
against other assets on our condensed consolidated statements of
financial condition, totaled approximately $1.8 million at
September 30, 2009 and $2.2 million at
December 31, 2008. We record an increase in the allowance
for doubtful accounts when the prospect of collecting a specific
account balance becomes doubtful. Management specifically
analyzes accounts receivable and historical bad debt experience
when evaluating the adequacy of the allowance for doubtful
accounts. Should any of these factors change, the estimates made
by management will also change, which could affect the level of
our future provision for doubtful accounts. Specifically, if the
financial condition of our customers were to deteriorate,
affecting their ability to make payments, an additional
provision for doubtful accounts may be required, and such
provision may be material.
Income
taxes
GAIN Capital Holdings, Inc. prepares and files the income taxes
due as the consolidated legal entity. We account for income
taxes in accordance with Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes. Income tax
expenses are provided using the asset and liability method,
under which deferred tax assets and liabilities are determined
based upon the temporary differences between the consolidated
financial statements and the income tax basis, using currently
enacted tax rates. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations
in the period of enactment. We would routinely evaluate all
deferred tax assets to determine the likelihood of their
realization. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax
benefit will not be realized. We recorded a valuation allowance
of $284,000 as of December 31, 2008.
Effective December 2007, we use estimates in determining income
tax positions under Financial Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income
Taxes. Although we believe that our tax estimates are
reasonable, the ultimate tax determination involves significant
judgment and is subject to audit by tax authorities in the
ordinary course of business.
Although management believes that the judgments and estimates
discussed in this prospectus are reasonable, actual results
could differ, and we may be exposed to losses or gains that
could be material. To the extent we are required to pay amounts
in excess of our reserves, our effective income tax rate in a
given financial statement period could be materially affected.
An unfavorable tax settlement could require use of our cash and
result in an increase in our effective income tax rate in the
period of resolution.
Impairment
of long-lived assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we periodically
evaluate the carrying value of long-lived assets when events and
circumstances warrant such review. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such an asset is separately
identifiable and is less than the carrying value. In that event,
a loss is recognized in the amount by which the carrying value
exceeds the fair market value of the long-lived asset. We have
identified no such impairment losses.
Goodwill
and intangible assets
The Financial Accounting Standards Board, or FASB, issued
SFAS No. 142, Goodwill and Other Intangible
Assets, which requires purchased intangible assets other
than goodwill to be amortized over their useful lives unless
these lives are determined to be indefinite. If the assets are
determined to have a finite life in the future, we will amortize
the carrying value over the remaining useful life at that time.
In accordance with SFAS No. 142, our URLs
72
(foreignexchange.com and forex.com) are indefinite life
intangible assets and are therefore not amortized. We compare
the recorded value of its indefinite life intangible assets to
their fair value on an annual basis and whenever circumstances
arise that indicates that an impairment may have occurred.
Accrued
compensation
We make significant estimates in determining our quarterly and
annual accrued non-stock based compensation. A significant
portion of our employee incentive compensation programs are
discretionary. Each quarter and year-end we determine the amount
of discretionary cash bonus pools. We also review compensation
throughout the year to determine how overall performance
compares to managements expectations. We take these and
other factors, including historical performance and our
performance relative to budget, into account in reviewing
accrued discretionary cash compensation estimates quarterly and
adjusting accrual rates as appropriate. Changes to these factors
could cause a material increase or decrease in the amount of
expense that we report in a particular period. Accrued
compensation and benefits as of September 30, 2009 was
$3.2 million.
Fair
value of derivative liabilities
SFAS No. 133, Accounting for Derivatives and
Hedging Activities, as amended, establishes accounting and
reporting standards for derivative instruments. We have
determined that the redemption feature contained in our
Convertible, Redeemable Preferred Stock Series A,
Series B, Series C, Series D, and Series E,
which allows the holders of our preferred stock at any time on
or after March 31, 2011, upon the written request of at
least a majority of the outstanding shares of preferred stock
voting together as a single class, to require us to redeem all
of the shares of preferred stock then outstanding, are
considered derivative instruments which must be bifurcated and
accounted for separately. The embedded derivative is recorded at
fair value and changes in the fair value are reflected in
earnings.
The redemption feature contained in our preferred stock enables
the holder to elect a net cash settlement at date of redemption.
This event is deemed to be outside of our control. These
provisions require that these instruments be bifurcated such
that the embedded conversion option is separated from the host
contract, and accounted for as a derivative liability in
accordance with paragraph 8 of Emerging Issues Task Force ,
or EITF,
00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
The embedded derivative is recorded at fair value and reported
in convertible preferred stock embedded derivative on the
Consolidated Statements of Financial Condition with change in
fair value recorded in our Consolidated Statements of Operations
and Comprehensive Income. The loss on the change in fair value
of preferred stock embedded derivative amounted to
$165.3 million at December 31, 2007, and the gain on
the change in fair value of the preferred stock embedded
derivative amounted to $181.8 million at December 31,
2008. As of December 31, 2008, the derivative liabilities
had a fair value of $82.8 million, compared to a fair value
of $264.6 million for the conversion as of
December 31, 2008.
Stock-based
compensation
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (SFAS No. 123R).
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, which supersedes
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees.
Generally, the approach to accounting for share-based payments
under SFAS No. 123R is similar to the approach
described in SFAS No. 123. However,
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statements of operations and comprehensive
income based on their fair values. Pro forma disclosure is no
longer an alternative. The Company adopted the provisions of
SFAS No. 123R, effective January 1, 2006.
SFAS No. 123R permits companies to adopt its
requirements using either the prospective transition
method or modified retrospective method. Under the
prospective transition method, compensation cost is
recognized, beginning with the effective date based on the
requirements of SFAS No. 123R for all share-based
payments granted after the effective date. The Company adopted
SFAS No. 123R using the prospective
transition method.
SFAS No. 123R requires measurement of compensation
cost for equity-based awards at fair value and recognition of
compensation cost over the service period, net of estimated
forfeitures.
73
We measure the fair value of stock options on the date of grant
using the Black-Scholes option pricing model which requires the
use of several estimates, including:
|
|
|
|
|
The volatility of our stock price;
|
|
|
|
The expected life of the option;
|
|
|
|
Risk free interest rates; and
|
|
|
|
Expected dividend yield.
|
The use of different assumptions in the Black-Scholes pricing
model would result in different amounts of stock-based
compensation expense. Furthermore, if different assumptions are
used in future periods, stock-based compensation expense could
be materially impacted in the future.
The expected volatility was calculated based upon the volatility
of public companies in similar industries or financial service
companies. The average risk free rate is based upon the five
year bond rate converted to a continuously compounded interest
rate.
Recent
accounting pronouncements
On June 30 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, or the Codification.
SFAS 168 replaces SFAS 162 and establishes the
Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements, as required by ASC 105, U.S. Generally Accepted
Accounting Principles, or GAAP. The Codification is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. The adoption of this
pronouncement in the third quarter of 2009 did not have a
material impact on the financial statements and references to
both current GAAP and the Codification are included herein.
In June 2009, the FASB issued FASB ASC 810, Consolidation, or
SFAS No. 167, Amendments to FASB Interpretation
No. 46R, or SFAS No. 167.
SFAS No. 167 amends FASB Interpretation No. 46,
as revised, or FIN 46R, Consolidation of Variable
Interest Entities and changes how a reporting entity
determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a reporting entity is
required to consolidate another entity is based on, among other
things, the other entitys purpose and design and the
reporting entitys ability to direct the activities of the
other entity that most significantly impact the other
entitys economic performance. SFAS No. 167 will
be effective for the Company on January 1, 2010. We are
currently evaluating the potential impact that adopting
SFAS No. 167 will have on our financial statements.
In May 2009, the FASB issued FASB ASC 855, Subsequent Events,
or SFAS No. 165. SFAS 165 is intended to
establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
It requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for selecting that
date, that is, whether that date represents the date the
financial statements were issued or were available to be issued.
SFAS 165 is effective for interim or annual financial
periods ending after June 15, 2009. We have adopted
SFAS No. 165 in the second quarter of 2009. The
adoption of SFAS No. 165 did not have a material
impact on our consolidated financial statements.
In March 2008, the FASB issued FASB ASC 815, Derivatives and
Hedging (Disclosures about Derivative Instruments and
Hedging Activities, or SFAS No. 161).
SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and requires
entities to provide enhanced 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. We have adopted
SFAS No. 161 in the first quarter of 2009. The
adoption of SFAS No. 161 did not have a material
impact on our consolidated financial statements.
On December 4, 2007, the FASB issued FASB ASC
810-10-65
(Noncontrolling Interests in Consolidated Financial
Statements, or SFAS 160). SFAS 160 clarifies that
a noncontrolling or minority interest in a subsidiary is
considered an ownership interest and accordingly, requires all
entities to report such interests in subsidiaries as
74
equity in the consolidated financial statements. SFAS 160
is effective for fiscal years beginning after December 15,
2008 and early adoption is prohibited. SFAS No. 160 is
required to be adopted prospectively, with the exception of
certain presentation and disclosure requirements (e.g.,
reclassifying noncontrolling interests to appear in equity),
which are required to be adopted retrospectively. We have
adopted SFAS No. 160 in the first quarter of 2009. The
adoption of this pronouncement did not have a material impact on
our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, or SFAS No. 141R.
SFAS 141R requires the acquiring entity in a business
combination to recognize the full fair value of assets acquired
and liabilities assumed in the transaction (whether a full or
partial acquisition); establishes the acquisition-date fair
value as the measurement objective for all assets acquired and
liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose to
investors and other users all of the information needed to
evaluate and understand the nature and financial effect of the
business combination. SFAS No. 141R applies to all
transactions or other events in which the Company obtains
control of one or more businesses, including those sometimes
referred to as true mergers or mergers of
equals and combinations achieved without the transfer of
consideration, for example, by contract alone or through the
lapse of minority veto rights. SFAS No. 141R applies
prospectively to business combinations for which the acquisition
date is on or after December 15, 2008. We expect
SFAS No. 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent
upon acquisitions at that time.
Quantitative
and Qualitative Disclosure About Market Risk
Currency
risk
Currency risk arises from the possibility that fluctuations in
foreign exchange rates will impact the value of our assets
denominated in foreign currencies as well as our earnings due to
the translation of our balance sheet and income statement from
local currencies to United States dollars. We currently have
limited exposure to currency risk and as of September 30,
2009, 92.4% of our assets, 95.1% of our liabilities, 97.2% of
our revenue, and 96.0% of our expenses were denominated in
U.S. Dollars. We currently do not take proprietary
directional positions to mitigate our exposure to foreign
currency exchange rates. However, as a result of our hedging
activities, we are likely to have open positions in various
currencies at any given time. As we implement our growth
strategies, our exposure to foreign currency exchange rates may
increase and we may consider entering into hedging transactions
to mitigate our exposure to foreign currency exchange rates.
These hedging transactions may not be successful.
Interest
rate risk
Interest rate risk arises from the possibility that changes in
interest rates will impact our financial statements. Our net
interest revenue is directly affected by the spread between the
short-term interest rates we pay our customers on their balances
and the short-term interest rates we earn from re-investing
their cash. These spreads can widen or narrow when interest
rates change. In addition, a portion of our interest income
relates to customer balances on which we do not pay interest and
therefore is directly affected by the absolute level of
short-term interest rates. As a result, a portion of our
interest income will decline if interest rates fall, regardless
of the interest rate spreads that effect the remaining portion
of our interest income. Short-term interest rates are highly
sensitive to factors that are beyond our control, including
general economic conditions and the policies of various
governmental and regulatory authorities. Our cash and customer
cash held is held in cash and cash equivalents including: cash
at banks, deposits at wholesale forex trading partners and in
money market funds which invest in short-term
U.S. government securities. The interest rates earned on
these deposits and investments affects our interest revenue. In
addition, the interest we pay on our notes payable is based on
the prime rate plus interest of 0.75%. We estimate that as of
September 30, 2009, an immediate 100 basis point
increase in short time interest rates would result in
approximately $2.5 million less in annual pre-tax income,
respectively.
Credit
risk
Credit risk relates to the possibility that we may suffer a loss
from the failure of our customers or counterparties to meet
their financial obligations at all or in a timely manner. Each
customer is required to have minimum funds in their account for
opening positions, which we refer to as the initial margin, and
for maintaining positions, which we refer to as maintenance
margin, depending on the currency pair being traded. Margin
requirements are expressed as a percentage of the
customers total position in that currency, and the
customers total margin requirement is based
75
on the aggregated margin requirement across all of the positions
that a customer holds at any one moment in time. Each net
position in a particular currency pair is margined separately.
Accordingly, we do not net across different currency pairs,
thereby producing a fairly conservative margin policy. Our
systems automatically monitor each customers margin
requirements in real-time and we confirm that each of our
customers have sufficient cash collateral in their account
before we execute their trades. If at any point in time a
customers trading position does not comply with the
applicable margin requirement because our pre-determined
liquidation thresholds have been exceeded, the position may be
automatically partially or entirely liquidated in accordance
with our margin policies and procedures documented in our
customer agreement. If our policies or systems do not operate
effectively, we are exposed to credit risk if a customers
cash collateral may drop below the applicable margin requirement
and create a negative equity situation. We are also exposed to
potential credit risk arising from our exposure to
counterparties with which we hedge and financial institutions
with whom we deposit cash. By transacting with several of the
largest financial institutions in the market, we have limited
our exposure to any one institution. In the event that our
access to one or more banks becomes limited, our ability to
hedge may be impaired.
Market
risk management
We are exposed to market risk in connection with our
market-making activities. When acting as a market-maker, we act
as counterparty to our customers when consummating a trade. As a
result, we are exposed to a degree of risk on each trade that
the market price of our position will decline or the market will
move against us. Accurate and efficient management of our risk
exposure is a high priority and as such we have developed both
proprietary automated and manual policies and procedures to
manage our exposure. Our risk management policies are
established and reviewed regularly by the risk committee of our
board of directors. These policies require quantitative analyses
by currency pair, as well as assessment of a range of market
inputs, including trade size, dealing rate, customer margin and
market liquidity. Our risk management procedures require our
team of senior traders to monitor risk exposure on a continuous
basis and update senior management both informally over the
course of the trading day and formally through intraday and end
of day reporting. These procedures require our senior traders to
manage risk by closely monitoring our net exposure to any
currency, as well as by allocating trade volume between our
managed flow and offset flow portfolios. In addition, our chief
dealer and his team of senior traders, assisted by our
proprietary risk management systems, determine which hedging
strategies are appropriate in order to maximize revenue and
minimize risk based on our risk management policies.
Historically, approximately 89.2% of all proposed trades have
fallen within our risk management policies and have been
automatically executed.
Cash
liquidity risk
In normal conditions, our market-making business of providing
online forex trading and related services is self financing as
we generate sufficient cash flows to pay our expenses as they
become due. As a result, we generally do not face the risk that
we will be unable to raise cash quickly enough to meet our
payment obligations as they arise. Our cash flows, however, are
influenced by customer trading volume, currency volatility and
liquidity in foreign currencies pairs in which we have
positions. These factors are directly impacted by domestic and
international market and economic conditions that are beyond our
control. In an effort to manage this risk, we have secured a
substantial liquidity pool by establishing trading relationships
with nine financial institutions. These relationships provide us
with sufficient access to liquidity to allow us to consistently
execute significant trades in varying market conditions at the
notional amounts our customers desire by providing us with as
much as 50:1 leverage on the notional amounts of our available
collateral we have on deposit with such financial institutions.
We generally maintain collateral on deposit, which includes our
funds and our customers funds, with our wholesale forex
trading partners ranging from $75 million to
$100 million in the aggregate.
Additionally, we do not actively initiate market positions in
anticipation of future movements in the prices of currencies,
referred to as proprietary directional market positions.
However, as a result of our hedging activities, we are likely to
have open positions in various currencies at any given time.
Similarly, we do not take proprietary directional positions with
respect to the future movements in the prices of contracts for
difference, or CFDs, and gold and silver spot markets. As a
market maker, we stand ready to make simultaneous bids/offers
for transactions in any of our 37 currency pairs, CFD contracts
and gold and silver contracts. We treat trade requests from our
customers in two distinct ways, we immediately hedge the trade
through the execution of an equal and offsetting trade with our
wholesale forex trading partners or we direct the trade into our
managed flow portfolio. We believe
76
the combination of our managed flow portfolio and immediately
offset trades provides a certain level of protection from cash
liquidity risk.
However, our forex market-making operations require a commitment
of capital and involve risks of losses due to the potential
failure of our customers to perform their obligations under
these transactions which heightens our exposure to cash
liquidity risk. To reduce this risk, we have created a margin
policy which allows customers to leverage their account balances
by trading notional amounts that may be significantly larger
than their cash balances. We mark our customers accounts
to market each time a currency price in their portfolio changes.
While our margin policy allows us to closely monitor each
customers exposure and thereby reduces our exposure to
cash liquidity risk, it does not guarantee our ability to
eliminate negative customer account balances prior to an adverse
currency price change.
Operational
risk
Our operations are subject to a broad and various risks
resulting from technological interruptions, failures, or
capacity constraints in addition to risks involving human error
or misconduct. Regarding technological risks, we are heavily
dependent on the capacity and reliability of the computer and
communications systems supporting our operations. We have
established a program to monitor our computer systems, platforms
and related technologies and to address issues that arise
promptly. We have also established disaster recovery facilities
in strategic locations to ensure that we can continue to operate
with limited interruptions in the event that our primary systems
are damaged. As with our technological systems, we have
established policies and procedures designed to monitor and
prevent both human errors, such as clerical mistakes and
incorrectly placed trades, as well as human misconduct, such as
unauthorized trading, fraud, and negligence. In addition we seek
to mitigate the impact of any operational issues by maintaining
insurance coverage for various contingencies.
Regulatory
capital risk
Various domestic and foreign government bodies and self
regulatory organizations responsible for overseeing our business
activities require that we maintain specified minimum levels of
regulatory capital in our operating subsidiaries. If not
properly monitored or adjusted, our regulatory capital levels
could fall below the required minimum amounts set by our
regulators, which could expose us to various sanctions ranging
from fines and censure to imposing partial or complete
restrictions on our ability to conduct business. To mitigate
this risk, we continuously evaluation the levels of regulatory
capital at each of our operating subsidiaries and adjust the
amounts of regulatory capital in each operating subsidiary as
necessary to ensure compliance with all regulatory capital
requirements. These may increase or decrease as required by
regulatory authorities from time to time. We also maintain
excess regulatory capital to provide liquidity during periods of
unusual or unforeseen market volatility, and we intend to
continue to follow this policy. In addition, we monitor
regulatory development regarding capital requirements and are
prepared for increases in the required minimum levels of
regulatory capital that may occur from time to time in the
future.
Regulatory
risk
We operate in a highly regulated industry and are subject to the
risk of sanctions from U.S., federal and state, and
international authorities if we fail to comply adequately with
regulatory requirements. Failure to comply with applicable
regulations could result in financial, structural, and
operational penalties. In addition, efforts to comply with
applicable regulations may increase our costs and, or limit our
ability to pursue certain business opportunities. Federal and
state regulations significantly limit the types of activities in
which we may engage. U.S. and international legislative and
regulatory authorities occasionally consider changing these
regulations.
Legal
Proceedings
As of September 30, 2009, we know of no material, existing
or pending legal proceedings against our company, nor are we
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our
directors, executive officers or affiliates, or any registered
or beneficial stockholder, is an adverse party or has a material
interest adverse to our interest. From time to time, we may be
subject to various claims and legal actions arising in the
ordinary course of business.
77
BUSINESS
Overview
We are an online provider of retail foreign exchange trading and
related services founded in 1999 by a group of experienced Wall
Street trading professionals. We offer our customers
24-hour
direct access to the global
over-the-counter,
or OTC, foreign exchange markets, where participants trade
directly with one another rather than through a central exchange
or clearing house. In a foreign exchange trade, participants buy
one currency and simultaneously sell another currency. Our
innovative proprietary trading technology allows our customers
to identify, analyze and execute their trading strategies
efficiently and cost-effectively. We provide both buy and sell
quotes for each of the 37 currency pairs we offer. We refer to
the two currencies that make up a foreign exchange rate as a
currency pair. We act as the counterparty to our customers
trades, selling to and buying from these customers. We actively
manage the trading risk associated with our business in
real-time through our hedging and trading activities. We believe
our proprietary trading technology, multilingual customer
service professionals and effective educational programs provide
a high degree of customer satisfaction and loyalty. Furthermore,
our scalable and flexible technology infrastructure allows us to
innovate to meet the rapidly changing needs of the marketplace.
The foreign exchange, or forex, market is one of the highest
notional dollar volume traded financial markets in the world,
with daily volumes growing at a compounded annual growth rate of
14.8% from approximately $1.4 trillion per day in 2001 to
approximately $3.2 trillion per day by April 2007, according to
the Bank for International Settlements. We believe interest in
currency trading as an additional investment class has been
increasing among retail investors over the past several years
due, in part, to globalization and increased coverage by media
outlets relating to currency tradings role in cross border
economic relationships. We believe this growing interest has led
to increased currency trading by retail investors. Our total
annual customer trading volume, which is based on the
U.S. Dollar equivalent of notional amounts traded, grew
from $120.3 billion in 2004 to $1.50 trillion in 2008,
representing a compounded annual growth rate of 87.6%. Our
annual customer trading volume from customers residing outside
of China grew from $114.3 billion in 2004 to $1.33 trillion
in 2008, representing a compounded annual growth rate of 84.7%.
For the nine months ended September 30, 2009, our customer
trading volume was $928.3 billion.
Our annual net revenue grew from $22.2 million to
$190.8 million over the same period, representing a
compounded annual growth rate of 71.2%. Our annual net revenue
from customers residing outside of China grew from
$20.8 million in 2004 to $166.4 million in 2008,
representing a compounded annual growth rate of 68.2%. For the
nine months ended September 30, 2009, our net revenue was
$115.1 million. Our net income grew from $7.1 million
in 2004 to $231.4 million in 2008, representing a
compounded annual growth rate of 138.9%. For the nine months
ended September 30, 2009 we incurred a net loss of
$20.5 million. Our adjusted net income, a non-GAAP
financial measure which represents our net income/(loss)
excluding the change in fair value of the embedded derivative in
our preferred stock, increased from $7.1 million in 2004 to
$49.6 million in 2008, representing a compounded annual
growth rate of 62.6%. For the nine months ended
September 30, 2009, our adjusted net income, a non-GAAP
financial measure which represents our net income/(loss)
excluding the change in fair value of the embedded derivative in
our preferred stock, was $20.3 million.
We believe customers residing outside the United States
represent a significant area of growth for our business. We have
a geographically diverse customer base and currently service
customers residing in over 140 countries worldwide. For the year
ended December 31, 2008, approximately 53.0% of our
customer base was located outside of the United States,
representing approximately 41.4% of our total trading volume.
Customers residing in China represented approximately 18.0% of
our customer base and approximately 11.5% of our total trading
volume for the year ended December 31, 2008. As of
September 30, 2009, we had 47,374 tradable accounts.
Tradable accounts are accounts with cash balances sufficient to
execute a trade in compliance with our policies. We believe the
number of tradable accounts is an important indicator of our
ability to attract new customers that can potentially lead to
trading volume and revenue in the future, although it does not
represent actual trades executed. We believe that the most
relevant measurement which correlates to volume and revenue is
the number of traded accounts, because these represent customers
who executed a forex transaction with us during a particular
period. Traded accounts from customers residing outside of China
increased 29.6% during the nine months ended September 30,
2009, compared to the nine months ended September 30, 2008
and increased 29.6% for the year ended December 31, 2008,
78
compared to December 31, 2007. During the nine months ended
September 30, 2009, 43,565 traded accounts executed a forex
transaction with us compared to 45,001 traded accounts,
including, 11,403 traded accounts from customers residing in
China, for the same period in the prior year, representing an
overall decrease of 3.2%. During the year ended
December 31, 2008, 52,555 traded accounts (including 11,647
traded accounts from customers residing in China) executed
trades with us, compared to 43,139 traded accounts (including
11,568 traded accounts from customers residing in China) in the
prior year, representing an increase of 21.8%.
We seek to attract and support customers through direct and
indirect channels. Our primary direct channel is our retail
forex trading Internet website, FOREX.com. FOREX.com is a
currency trading Internet site that is available in English,
traditional and simplified Chinese, Russian and Arabic, and
provides currency traders of all experience levels with a
full-service trading platform, along with extensive educational
and support tools. We also license a third-party trading
platform, MetaTrader, provided by MetaQuotes Software Corp.,
which is a popular trading platform in the international retail
trading community and offers our customers a choice in trading
interfaces. In addition, we utilize our relationships with
retail financial services firms, such as broker-dealers and
Futures Commission Merchants, or FCMs, to attract additional
customers. These firms offer our forex trading services to their
existing customers under their own brand in exchange for a
revenue sharing arrangement with us. We refer to these firms as
our white label partners. We also have relationships with
introducing brokers who refer their customers to us for a fee.
Our customer base is comprised of retail traders who are either
self-directed or have their accounts managed by an authorized
intermediary. Self-directed investors, which represented 93.0%
of our customer trading volume for the nine months ended
September 30, 2009, make their own currency trading
decisions, utilizing our online platform and tools to identify
trading opportunities and execute their trades. Customers with
accounts managed by an authorized intermediary, which we refer
to as managed accounts, represented 7.0% of our customer trading
volume for the nine months ended September 30, 2009. These
customers have assigned trading authority to either third party
authorized traders or to our wholly-owned subsidiary GCAM, LLC,
or GCAM. GCAM offers our managed account services whereby our
professional traders create and execute forex investment
strategies on behalf of institutional and individual customers.
We offer tools and services, such as eMac, our proprietary
web-based tool used to manage pooled customer funds and track
trading performance, to authorized intermediaries, to encourage
them to trade through our platform. We also offer additional
tools and platforms to support third party authorized traders
who trade multiple accounts.
Since 2006, a significant portion of our trading volumes,
trading revenue, net income and cash flow have been generated
from residents of China. When we commenced offering our forex
trading services through our Chinese language website to
residents of China in October 2003, we believed that our
operations were in compliance with applicable Chinese
regulations. However, as a result of regulatory developments in
China, which has been described in more detail in the Summary
section of this prospectus under the caption Recent
Developments, as of December 31, 2008, we have ceased
our trading support operations located in China as of
December 31, 2008 and no longer accept new customers or
maintain direct customer accounts from residents of China.
However, due to an ongoing relationship with one of our
introducing brokers, eight immaterial legacy accounts (as of
September 30, 2009), which were originally sourced through
that introducing broker prior to the termination of our service
offering in China, remained open. For the nine months ended
September 30, 2009, the trading activity by these legacy
accounts resulted in an immaterial amount of trading volume. We
have taken steps to close these accounts, and expect they will
be closed, by December 31, 2009. We are unable to predict
if we may be subject to fines or penalties, and if so in what
amounts, as a result of this insignificant trading activity on
our platform in China. As a result, the historical financial
information presented is not indicative of our future
performance. All references to China pertain to
China and exclude the Hong Kong and Macau Special Administrative
Regions.
Our principal executive offices are located in Bedminster, New
Jersey. We operate our market-making services out of our
Bedminster, London and Tokyo offices and our sales and support
services out of our Bedminster, New York City, Woodmere,
London, Tokyo and Hong Kong offices. We also operate a
representative office and a technology development office in
Shanghai. Consistent with the termination of our business in
China, we are in the
79
process of closing our Shanghai offices. As of
September 30, 2009, the following companies were our
principal operating subsidiaries and intermediate holding
companies.
|
|
|
|
|
Entity Name
|
|
Business/Services
|
|
Applicable Regulator
|
|
GAIN Capital Holdings, Inc.
|
|
Parent holding company.
|
|
N/A
|
GCAM, LLC
|
|
Managed account forex trading services.
|
|
N/A
|
GAIN Holdings, LLC
|
|
Holding company, U.S. operating entities.
|
|
N/A
|
GAIN Capital Group, LLC
|
|
A registered FCM and Forex Dealer Merchant, or FDM, engaging in
forex trading services and precious metals spot trading services.
|
|
CFTC and National Futures Association, or NFA.
|
S.L. Bruce Financial Corporation
|
|
Holding company, U.S. broker-dealer.
|
|
N/A
|
GAIN Capital Securities, Inc.
|
|
Registered U.S. broker-dealer.
|
|
SEC and FINRA.
|
Jia Shen Forex Technology, LLC
|
|
Technology support services.
|
|
N/A
|
GAIN Capital Holdings International, LLC
|
|
Holding company, international operating entities.
|
|
N/A
|
GAIN Global Markets, Inc.
|
|
Forex trading services and CFD trading services.
|
|
Cayman Islands Monetary Authority (Cayman Islands).
|
Island Traders (Cayman), Limited
|
|
Forex trading services corporate funds.
|
|
N/A
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
Forex trading services and precious metals spot trading services.
|
|
Hong Kong Securities and Futures Commission.
|
GAIN Capital Japan, Co. Ltd.
|
|
Forex trading services and CFD trading services.
|
|
Japan Financial Supervisory Authority.
|
GAIN Capital-Forex.com Australia, Pty, Ltd.
|
|
Pending application for forex trading services and CFD trading
services.
|
|
Australian Securities and Investments Commission.
|
GAIN Capital-Forex.com Singapore, Ltd.
|
|
Pending application for forex trading services and CFD trading
services.
|
|
Monetary Authority of Singapore.
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
Forex trading services and CFD trading services.
|
|
U.K. Financial Services Authority.
|
Market
Opportunity
The foreign exchange, or forex, market is one of the highest
notional dollar volume traded financial market in the world,
with daily notional dollar volumes growing at a compounded
annual growth rate of 14.8% from approximately $1.4 trillion per
day in 2001 to approximately $3.2 trillion per day by April
2007, as stated by the Bank for International Settlements. The
Bank for International Settlements has cited the increased use
of electronic platforms and automated trading models, as well as
the significant expansion in the trading activity of hedge funds
and retail investors, as the key drivers of the increase in
forex customer trading volume in recent years.
Historically, participation in the forex market was only
available to commercial banks and other large financial
institutions. We believe the recent advent of online forex
trading firms, including our firm, has elicited greater retail
80
participation in the forex market through reduced trading costs
and increased investor awareness. We believe this improved
market access to the forex market has spurred industry growth,
similar to how the growth in the U.S. equities markets was
generated by the development of online securities brokers
offering lowered trading commissions to their customers relative
to what was offered by traditional brokers in the late 1990s.
We believe that increased oversight of the global retail forex
market by regulatory bodies such as the CFTC and NFA in the
United States, the Financial Services Authority in the United
Kingdom, or FSA, and the Financial Supervisory Authority in
Japan, or the Japan FSA, has helped forex trading firms increase
the perception among individual investors that forex is an
accessible and reliable asset class for the retail customer.
According to its most recent report, the Aite Group reported
that by the end of 2008, average daily trading volume in the
retail forex market reached approximately $100.0 billion, a
900% increase from 2001. In its January 2009 report entitled
The Next Challenge in FX: Creating a New Post-Trade
Paradigm in an Electronic Reality, the Aite Group
estimates that retail forex average daily trading volume will
reach over $120.0 billion by the end of 2009.
Estimated
Average
Daily Trading Volume
in Retail Forex
We believe retail forex trading is poised for continued, rapid
growth as a result of the following trends evident in the market:
|
|
|
|
|
increasing recognition of currency trading as an alternative
investment, and as a tool for portfolio diversification by
retail traders, authorized traders and investment professionals
globally;
|
|
|
|
improved market access, reduced transaction costs, and more
efficient execution;
|
|
|
|
further improvement and availability of investor education
relating to the forex market and trading opportunities;
|
|
|
|
expansion of marketing efforts by industry leading firms;
|
|
|
|
increasing media coverage of the forex market;
|
|
|
|
heightened domestic and international regulatory
oversight; and
|
|
|
|
rising global broadband and wireless penetration.
|
81
Our
Competitive Strengths
We believe we have maintained and will continue to enhance our
strong position in the retail forex market by leveraging the
following competitive strengths:
Leading
FOREX.com brand name and strong global marketing
capability
We believe we have developed FOREX.com to be the
category-defining brand in the online forex industry. For the
nine months ended September 30, 2009, FOREX.com averaged
approximately 1.4 million unique visitors per month and
today services customers from over 140 countries. We calculate
the number of unique visitors to FOREX.com by monitoring the
number of visitors (as tracked by our website) over a specified
period of time, and then subtracting all repeat visits by each
individual visitor over such period.
Our sales and marketing strategy leverages the strength of the
FOREX.com brand name by employing a combination of direct
marketing techniques and focused branding programs. Through our
direct marketing efforts, in 2008 we generated 1,158,682
registered users of our demonstration trading accounts which
simulate live trading on our proprietary platform, referred to
as registered practice trading accounts (including 380,025
registered practice trading account users in China),
representing a compounded annual growth rate of 81.8% from
105,959 registered practice trading account users in 2004. For
the nine months ended September 30, 2009, we generated
675,658 registered practice trading account users. Our
registered practice trading accounts provide our existing
customers and potential customers with an opportunity to learn
more about the forex market, our platform and our product and
service offerings without risking personal funds. In addition,
existing customers may maintain a registered practice trading
account in order to test trading strategies, try our new product
and service offerings or simply further familiarize themselves
with our platform. We believe our registered practice trading
accounts help attract and retain current and prospective
customers. Complementing our direct marketing strategy, we have
built a multilingual,
102-person
retail sales force that utilizes a highly interactive approach
to convert registered practice trading accounts into tradable
accounts, and manages ongoing customer retention efforts.
Superior
customer experience and service focus
We offer current and prospective customers a high level of
service and a wide range of customizable tools and resources to
assist them in learning about trading forex and certain other
assets classes and to prepare them for trading in the market. We
have a multilingual customer service staff located in the United
States that is available seven days a week, with continuous
coverage during forex market trading hours, to handle customer
inquiries via telephone, email and online chat. We also offer
comprehensive education and training programs, the majority of
which are utilized by prospective customers, which have been
internally developed and designed to accommodate a variety of
experience levels and learning preferences, from self-study to
fully instructional programs.
Our emphasis on providing a superior customer experience is
evidenced by our high customer satisfaction. In July 2007, we
conducted a customer survey to our English-speaking active
customers who executed a trade with us 90 days prior to the
survey, in which over 90.0% indicated they would recommend
FOREX.com to a friend or family member. When asked to rank their
reasons for choosing FOREX.com, the three most common responses
were execution quality, quality of the trading platform and
customer service.
Consistent
execution quality
We believe our customers choose us in part for the consistent
quality of execution of trade orders which is comprised of three
main aspects: timing, certainty of execution and pricing. We
believe that our proprietary rate engine provides our customers
with access to forex liquidity at the most competitive market
rates. We are able to provide our customers with a high degree
of certainty in the execution of their trades as a result of our
liquidity relationships with three established, global prime
brokers, Deutsche Bank, The Royal Bank of Scotland plc, or RBS,
and UBS AG, or UBS, as well as our relationships with at least
six other wholesale forex trading partners. Through these
relationships, our access to a deep pool of forex liquidity
assists us in ensuring that we are able to execute our
customers trades in the 37 currency pairs and notional
amounts they desire. In addition, the number and depth of our
liquidity sources allows us to provide our customers with
competitive pricing.
82
Highly
scalable proprietary technology with a proven track record of
innovation
We believe that our proprietary technology provides us with a
significant competitive advantage. Our scalable and flexible
technology infrastructure allows us to quickly and efficiently
innovate to meet the rapidly changing needs of the marketplace.
For example, in 2009 we introduced trading in the gold and
silver spot market onto our platform. In addition, our
proprietary technology allows us to quickly integrate other
trading platforms that are attractive to our customers and can
benefit from our aggregation of retail pricing received from our
wholesale forex trading partners and our offsite
environmentally-controlled, secure facilities housing our
hardware and network connections. In 2007, we began offering
MetaTrader, an online trading platform popular with a segment of
the international retail trading community, which we license
from a third party. We believe our integrated trading platform
offers our customers consistent levels of trade execution and
decision support for all products we offer. Our trading platform
also includes a proprietary pricing mechanism, which we refer to
as our rate engine, which aggregates the retail prices we
receive from our wholesale forex trading partners and publishes
real-time quotes to our customers.
We believe our focus on developing superior technology has
positioned us as a market-leading innovator of forex products
and services. In 2000, we believe we were one of the first
online forex trading firms to offer instantaneous execution from
live, streaming quotes. To facilitate faster, more efficient
trade execution, we pioneered software that enables our
customers to open forex positions with one click of the mouse,
one click trading. We also launched wireless account
access in 2002 and are committed to leading our industry with
fully functional wireless trading services for our customers.
Through these innovations, we have lowered transaction costs,
improved price discovery and enabled equal access to market
information for our customers. We believe our ability to
innovate allows us to rapidly increase the range of products and
services we offer.
Extensive
risk management experience and capital position in excess of
current regulatory requirements
We have extensive experience in the forex market and have
leveraged this experience to develop proprietary risk management
systems and procedures that allow us to manage market and credit
risk in accordance with predefined exposure limits in real-time
and maintain a conservative capital position while taking into
account specific market events and market volatility. A key
component of our approach to managing risk is that we do not
take proprietary directional market positions where we would
actively initiate market positions in anticipation of future
movements in the prices of currencies. Instead, we continuously
evaluate market risk exposure, and we actively hedge a portion
of our customer transactions on our wholesale forex trading
platform on a continuous basis. We actively hedge customer
transactions with our wholesale forex trading partners based on
pre-defined exposure limits. We also benefit from the natural
hedging which arises when our customers trades take
offsetting currency positions, effectively reducing our net
unhedged exposure. As a result of our hedging activities, we are
likely to have open positions in various currencies at any given
time.
As part of our risk management philosophy, we maintain capital
levels in excess of those required under applicable regulations
in multiple jurisdictions. The following table illustrates the
excess capital levels we maintained as of September 30,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Regulatory
|
|
|
Capital Levels
|
|
|
Excess Net
|
|
Entity Name
|
|
Capital Requirements
|
|
|
Maintained
|
|
|
Capital
|
|
|
GAIN Capital Group, LLC
|
|
$
|
20.0 million
|
|
|
$
|
85.5 million
|
|
|
$
|
65.5 million
|
|
GAIN Capital Securities, Inc.
|
|
$
|
0.05 million
|
|
|
$
|
0.16 million
|
|
|
$
|
0.11 million
|
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
$
|
1.5 million
|
|
|
$
|
2.8 million
|
|
|
$
|
1.3 million
|
|
GAIN Capital Japan, Co. Ltd.
|
|
$
|
0.7 million
|
|
|
$
|
1.1 million
|
|
|
$
|
0.4 million
|
|
GAIN Capital-Forex.com Singapore, Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital-Forex.com Australia, Pty. Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Global Markets, Inc.
|
|
$
|
0.1 million
|
|
|
$
|
0.3 million
|
|
|
$
|
0.2 million
|
|
83
We believe that our excess capital position in the United
States, and our international operating subsidiaries, compares
positively to that of many of our competitors that operate
primarily in forex trading and positions us favorably for
potential future increases in minimum capital requirements
domestically and abroad. Additionally, we believe that our
capital position enhances our access to foreign exchange
liquidity, thereby improving our ability to provide customers
with attractive pricing and facilitating our trading and hedging
activities. In addition, our capital position allows us to
provide capital to our affiliates as needed, to accommodate
their business growth and meet potential increases in minimum
capital requirements.
Global
distribution
We have achieved significant growth through the international
expansion of our customer base, and we currently service
customers residing in over 140 countries worldwide. We have
grown our business internationally through an efficient business
model that combines centralized processes with brand
localization. Through this model, we leverage our centralized
U.S. trading, middle- and back-office functions with direct
marketing techniques tailored for each local market. This
approach is designed to achieve a consistent brand experience
while minimizing overhead costs. In addition, our retail forex
trading internet website, FOREX.com, is available in six
languages, including English, traditional and simplified
Chinese, Russian, Arabic and Japanese, and currently our
customer support services are currently offered in fourteen
languages, including English, French, Spanish, German, Polish,
Russian, Japanese, Chinese (Mandarin and Cantonese), Korean,
Moroccan, Portuguese, Hindi and Arabic. For the year ended
December 31, 2008, customers in the United States
represented approximately 66.3% of our total customer trading
volume from customers residing outside of China and all other
customers residing in other parts of the world represented
approximately 33.7% of our total customer trading volume, with
residents in no single country representing customer trading
volume in excess of 9.3%. For the nine months ended
September 30, 2009, customers in the United States
represented approximately 54.6% of our total customer trading
volume from customers residing outside of China and all other
customers residing in other parts of the world represented
approximately 45.4% of our total customer trading volume, with
residents in no single country representing customer trading
volume in excess of 13.2%
Trading
Volume
|
|
|
For the year ended December 31, 2008
|
|
For the nine months ended September 30, 2009
|
Experienced
management team
Our senior management team is comprised of experienced
executives with significant forex, financial services and
financial technology expertise. In addition, our senior
management team has extensive experience in many critical
aspects of our business, including trading and risk management,
retail brokerage operations, compliance, application development
and technology infrastructure. For example, prior to joining us
in 2000, Glenn Stevens, our
84
President and Chief Executive Officer, served for seven years as
managing director and chief forex dealer at Merrill
Lynch & Co., Inc., and Mr. OSullivan, our
Chief Dealer, served for six years as director of the New York
sterling desk of Merrill Lynch & Co., Inc., prior to
his joining us in 2000. We believe the experience of our senior
management team, including over 25 years of forex trading
experience for our President and Chief Executive Officer and
over 20 years of forex trading experience for our Chief
Dealer, has been integral to our success to date and will be
critical to our successful expansion into new markets and
products in the future
Growth
Strategies
We intend to leverage our expertise in online retail forex
trading to grow our business by expanding into new international
markets, customer classes and products. As we implement our
growth strategies, we believe we can evolve into a global
provider of retail multi-product trading and related services.
We intend to implement the following strategies to continue to
grow our forex business and expand our product offerings to
customers:
Increase
penetration in our existing markets
We plan to increase penetration in our existing markets by
continuing to focus on reaching a large number of prospective
customers who open registered practice trading accounts. We seek
to accomplish this by employing a mixture of on- and off- line
advertising, search engine marketing, email marketing,
television and radio advertising, attendance at industry trade
shows and strategic and public media relations. In 2008, we
generated more than 1.1 million registered practice trading
account users, which included approximately 380,000 users
resident in China. We intend to continue to focus on converting
our registered practice trading account users into tradable
accounts in order to grow our business and increase our market
share. We believe we can most effectively generate registered
practice trading accounts and convert them into tradable
accounts by continuing to tailor our marketing strategy to each
experience level of the customers we target, and by offering
prospective customers training and educational tools and
customer service to support their transition to tradable account
user.
Continue
the international expansion of our customer base
We intend to enhance our growth through the continued expansion
of our international customer base into new markets and continue
to penetrate existing international markets. We believe owning
and operating a leading forex Internet domain name enhances our
ability to promote our advanced trading technology and tools, as
well as our market leading customer service, while concurrently
building general awareness of the forex market among retail
investors. In addition to leveraging the FOREX.com brand name
globally, we intend to grow internationally by continuing to
open offices or partnering with licensed financial services
firms in markets that offer us substantial growth opportunities.
For example, we are currently seeking local registration,
licensing and authorization to conduct our forex trading
services in Australia and Singapore.
To successfully expand into new international markets, we intend
to employ a strategy that centralizes brand management, trading,
middle- and back-office functions at our U.S. headquarters,
while adapting customized marketing programs, sales and customer
support to the local market. We also plan to cultivate new
retail forex investors in new and existing international markets
by making forex trading more accessible and intuitive through
our educational initiatives.
Expand
our product offering
We intend to grow our business by offering our customers
additional products which are complementary to our current
product offerings. Since customers who trade in forex often
trade in other financial products, we believe we have
significant growth opportunities to cross-sell complementary
products to these customers. Expanding our product offerings to
include other financial products will enable our customers to
execute diversified trading strategies across various products
from a single, integrated trading platform. We believe our
proprietary and scaleable technology infrastructure, along with
our extensive forex trading experience, will allow us to
introduce new products efficiently and cost effectively. As a
result, we believe the expansion of our product offerings will
allow us to attract and satisfy our customers increased
investment needs which will in turn result in increased customer
trading volume with us. In 2009, we introduced spot trading in
gold and silver, and we also introduced
85
GAIN Capital Securities Inc., or GAIN Securities, a registered
broker-dealer for trading of equity securities. Some other
products we intend to offer include:
We intend to offer additional forex trading products, including
more currency pairs, currency options and a range of other
currency-related investment products.
|
|
|
|
|
Contracts for difference
|
Outside the United States, we intend to expand on our CFD
offerings. CFDs are instruments linked to the performance of the
price of an underlying financial instrument, including precious
metals, energy products and other commodities, as well as stock
indices and government bonds. Because CFDs are margin-based and
are traded
over-the-counter,
or OTC, we believe that we can effectively apply our
market-making and risk management expertise to these financial
instruments.
|
|
|
|
|
Listed exchange products
|
Our status as an FCM provides us with the regulatory ability to
offer a variety of exchange-traded products, including futures
and options on equity and fixed income indices, and commodities,
to our customers in the United States. We also intend to expand
the offerings of GAIN Securities to include advanced options
trading, as well as fixed income and other equities products.
Increase
our partnerships with other financial services
firms
We intend to continue to develop relationships with white label
partners and introducing brokers which provide us with
additional channels to attract prospective customers that we
could not otherwise efficiently solicit. These prospective
customers include individuals in jurisdictions where we are not
currently registered with the local regulator
and/or those
customers who have demonstrated continued loyalty to an existing
financial services firm. In these circumstances, the partnership
arrangements are more profitable for us since the customers
provided through these partnerships generate trading revenue for
us, but do not require us to incur any incremental direct
marketing or regulatory compliance expenses. We believe
compensating our partners based on the volume traded by the
customers they introduce to us presents an attractive economic
proposition.
Pursue
strategic acquisitions and alliances to expand our product and
service offerings and geographic reach
We intend to continue to selectively pursue attractive
acquisition and alliance opportunities. In the past, we have
successfully expanded the breadth of our product and service
offerings by acquiring companies with complementary products and
services, such as our acquisitions of London-based RCG GAIN
Limited (now known as GAIN Capital-Forex.com U.K., Ltd), our
purchase of a 70.0% interest, with rights to acquire up to a
95.0% interest, in Fortune Capital Co., Ltd. (now known as GAIN
Capital Japan, Co. Ltd.) and our acquisition of GAIN Securities,
a registered broker-dealer of equity securities. Additionally,
we will consider acquisitions and alliances in key geographic
markets to establish or increase our presence and accelerate our
growth. Following this offering, we will have the ability to use
our publicly traded common stock as an additional acquisition
currency with which to pursue future acquisitions.
Trading
Platforms and Tools
Our trading platform provides currency traders of all experience
levels a full-service trading capability with extensive
educational and support tools.
FOREXTrader PRO, our retail customer trading platform, is
designed for retail traders of all experience levels, providing
trade execution along with real-time position and account
information, advanced order management features and
comprehensive analytical and decision support tools, including
charting, news and market research. For maximum flexibility, we
offer our customers a choice of four versions of the FOREXTrader
PRO platform: FOREXTrader PRO, Windows edition, is our most
comprehensive platform, offering a highly intuitive user
interface, advanced customization features and a full suite of
professional trading tools; FOREXTrader.java edition allows
86
customers to trade and manage their positions in a real-time,
web-based environment; FOREXTrader.web is a secure,
browser-based trading platform that can be accessed through an
Internet connection; and FOREXTrader.wireless is a fully
functional mobile trading solution.
To meet the needs of a growing customer segment, in 2007 we
licensed a third party turn-key trading platform, MetaTrader,
provided by MetaQuotes Software Corp., which is popular with the
international retail trading community and offers our clients a
choice in trading interfaces. Although we do not own the source
code, the MetaTrader platform utilizes our proprietary trading
platform infrastructure and benefits from our investment in our
offsite environmentally-controlled, secure facilities housing
our hardware and network connections.
To support our trading platforms, in 2004 we entered into an
agreement with eSignal, a division of Interactive Data
Corporation, to license, disseminate and display Tahoe
Charts, a technical charting tool. Our agreement with
eSignal enables us to provide a charting package that includes
real-time market data and technical analysis. The agreement was
for a one year term and continues to automatically renew for one
year periods, unless either party terminates the agreement by
providing 60 days notice. We have also entered into a Sales
Lead Agreement in 2006 with Trading Central, which allows us to
distribute investment research and technical analysis, which has
been prepared by Trading Central, on a non-exclusive basis to
our customers. The research reports created by Trading Central
present information regarding anticipated market action and are
helpful decision-making tools that customers may use to
formulate trading strategies.
In addition to providing our customers with extensive tools to
enhance their trading experience, our trading platform provides
us with integrated functionality that allows us to manage our
business through real-time credit monitoring, instantaneous
position management, automated risk management tools and
forward-looking order management. This technology allows us to
streamline our trading management operations and improve our
overall productivity and profitability.
The following table identifies our key technology tools and
their functionality:
|
|
|
Tool Name:
|
|
Functionality:
|
|
FOREXTrader PRO
|
|
Our flagship trading platform for active traders, featuring a
highly intuitive user interface, advanced customization features
and a full suite of professional trading tools. The FOREXTrader
PRO platform is available primarily as a Windows-based desktop
application, but is also available in both Java-based and
browser-based versions.
|
Web trading
|
|
A comprehensive web-based environment featuring easy to use
trading tools, a robust learning center and seamless integration
of market information, trading functionality and account
management tools.
|
FOREXTrader.wireless
|
|
Our fully functional mobile trading platform that provides
real-time rates, market information and trading capabilities.
|
MetaTrader
|
|
Third-party trading application that features robust charting
and technical analysis tools along with trade automation
capabilities.
|
CST
|
|
Our proprietary web-based customer relationship management tool
providing support staff with detailed account and trade
information, as well as a full audit trail of support-related
customer interactions.
|
eMAC
|
|
Our proprietary web-based tool used by authorized traders to
manage pooled customer funds and track trading performance;
handles all customer administration functions and reporting.
|
We have invested in excess of $4.8 million since beginning
commercial operations in the development and support of our
software and we continue to develop all of our software
in-house. We believe that owning and developing our trading
technology has and will continue to provide us with a
significant competitive advantage because we have the ability to
adapt quickly to our customers changing needs and rapidly
incorporate new products into our trading platforms.
87
Our
Customers
Our customer base is comprised primarily of self-directed retail
traders, but also includes managed accounts. Our customers come
to us through either a direct or an indirect channel. The
percentages in the table below reflect customer trading volume
for the nine months ended September 30, 2009.
Self-directed
traders
Self-directed retail forex traders comprise the majority of our
customer base. For the nine months ended September 30,
2009, self-directed customers represented approximately 93.0% of
our customer trading volume. We believe that our leading
industry reputation, advanced trading technology and high level
of customer service are the key selling points for these
customers. To meet the needs of our customers, we tailor our
products and services to the experience level of the individual
customer. Our products and services include personal account
reviews, free access to decision support tools (such as news,
charting and research) and customer support via phone, email and
online chat.
Managed
accounts
Managed account customers have engaged an intermediary to make
trading decisions on their behalf. These intermediaries include
authorized traders consisting of money managers, investment
firms that trade a significant amount of aggregated customer
funds, and individuals, such as ex-currency traders, that trade
for a small number of customer accounts. We provide those
authorized traders with our trading and execution services, as
well as a full suite of back-office tools and services
specifically targeted at entities that manage funds on behalf of
multiple customers. Our back-office services include accounting
and administrative tools and services to help these authorized
traders reduce administrative costs. Our customizable suite of
services include automated trade allocation, online reporting,
end of month statements and commission reporting, as well as
online account access. For the nine months ended
September 30, 2009, authorized traders collectively
represented approximately 7.0% of our customer trading volume.
In addition to authorized traders, customers representing 1.8%
of our customer trading volume have engaged GCAM to make trading
decisions on their behalf. GCAMs trading activities are
segregated from our market-making business. Our GCAM business
generates revenue in the form of management and performance fees.
88
Our
Channel Partners
White
label partners
White label partners are firms that have not developed their own
forex trading capabilities and have entered into an arrangement
with us whereby we provide all of the front- and back-office
services necessary for them to provide forex trading on their
platforms under their own brands. There are significant benefits
in sourcing new customer volume through these partnerships. For
regulatory purposes, the white label partners customers
that engage in forex trading are deemed to remain customers of
the white label partner, rather than becoming our customers.
Accordingly, we generally seek to enter into arrangements with
white label partners to expand into new markets where we have
not obtained the regulatory authorizations necessary to provide
forex trading services directly to customers. These arrangements
allow us to enter into new markets through the white label
partner quickly and without the cost of becoming regulated in
such markets. Our relationships with white label partners also
allow us to reduce our direct marketing expenses since we do not
incur any such costs in connection with soliciting the customers
directed to us by our white label partners. We compensate our
white label partners based on the forex customer trading volume
generated by their customers, generally paying a specified
commission. Our white label partner arrangements contain general
termination provisions, including termination by us at any time
upon reasonable notice and termination by either party in the
event of a material breach by the other party that is not
remedied within thirty days of notice of such breach.
Our white label partners typically fall into two categories:
|
|
|
|
|
Traditional financial services firms, such as banks or other
financial institutions seeking to provide an online forex
trading platform quickly and cost effectively; or
|
|
|
|
Established online brokers, which are registered broker-dealers,
FCMs or other online brokerage firms seeking to expand the
number of financial products they offer to their customers.
|
Since our white label partners adopt the capabilities of our
system as their own, we provide a customized trading
platform branded with each white label partners company
name and logo, which is a crucial selling point in white label
partner relationships. White label partners typically establish
their own fee structure through commissions or spread
mark-ups to
our dealing spreads. For example, we have previously determined
that the provincial laws of British Columbia, Canada would
require us to register as a dealer to offer our trading services
directly, so we have conducted our business in British Columbia
through Questrade, Inc., a registered investment dealer in
Canada, since December 1, 2004. Pursuant to an Access
Agreement that we entered into with Questrade in December 2004,
Questrade provides its clients with access to our forex trading
services through Questrades software. Our agreement was
for a one year term but automatically renews each year unless
either party terminates the agreement by providing
60 days notice. In addition, pursuant to the
agreement, we may not enter into any arrangements similar to the
Access Agreement with any other Canadian brokerage firm.
We currently support our trading platform through white label
partner arrangements in six languages, including English,
traditional and simplified Chinese, Russian, Arabic and
Japanese. We provide our white label partners with online access
to real-time customer trading volume information and revenue
accrual, as well as support through a dedicated partner services
team.
Introducing
brokers
We work selectively with introducing brokers that direct
customers to us who are interested in forex trading services. We
work with a variety of different types of introducing brokers,
ranging from small, specialized firms which specifically
identify and solicit customers interested in forex trading, to
larger, more established financial services firms which seek to
enhance their customer base by offering a broader array of
financial products. Once the introducing brokers customer
becomes our customer, we generally pay the introducing broker a
commission based on their referred customers trading
volume. To attract introducing brokers, we manage all of their
back-office functions related to forex trading customers they
refer to us and provide them with online access to real-time
customer trading volume information and revenue accrual, as well
as support through a dedicated partners services team. We
believe that our key selling points for introducing brokers and
their customers are our solid reputation, leading-edge trading
technology and tools, and superior pricing and trading execution
quality. For the nine months
89
ended September 30, 2009, 10.7% of our forex trading volume
was derived from TradeStation Securities, Inc. We entered into
an introducing broker agreement with TradeStation in April 2005,
and the current agreement expires in December 2010.
Our Forex
Market-Making and Trading Business
Our
forex market-making model
We offer our customers the ability to trade spot forex currency
pairs in the OTC market
24-hours a
day during forex market trading hours, and currently allow our
customers the ability to trade in 37 different currency pairs.
We offer both standard and mini accounts, which allow customers
100-to-1 and 200-to-1 margin, and minimum lots of $100,000 and
$10,000, respectively, in notional trading size. The maximum
notional trading size for our standard accounts is
$5 million per trade and the maximum notional trading size
for our mini accounts is $500,000 per trade. However, in certain
instances standard account customers and mini account customers
may request trades in excess of our maximum notional trading
sizes. For the nine months ended, less than one percent (1%) of
our customers trades were in excess of our maximum
notional trading sizes. Our margin requirements remain the same
regardless of the notional amount of the trade.
Customers can fund their open accounts with us by transferring
or electronically wiring cash or by using checks or a credit
card to fund their account. While we do not extend credit to our
customers, we allow them to trade greater notional amounts than
the funds they have on deposit with us. As of September 30,
2009, based on the maximum leverage we offered of 200-to-1, our
trading policies required that customers, other than those
customers trading micro-lots, fund their accounts with a minimum
of approximately $30 to $40 in order to execute the minimum
notional trade amount in a currency, which is equal to a maximum
equivalent of $6,000 to $8,000. Based on the maximum leverage we
offered of 200-to-1, our trading policies required that
customers funds their micro-lot accounts with a minimum of
approximately $3 to $4 in order to execute the minimum notional
trade amount in a currency which is equal to a maximum
equivalent of $600 to $800.
We continuously receive market quotes from our wholesale forex
trading partners and identify the mid-point price between the
available best bid and best offer, which
then becomes the basis for our dealable spread quoted to our
customers. We earn the difference between the retail price
quoted to our customers and the wholesale price received from
our wholesale liquidity partners. We provide our small- to
mid-sized customers with the consistent liquidity and dealing
spreads generally only available to the large institutional
customers of major banks.
We generate trading revenue from our market-making activities.
As a market maker, we stand ready to make simultaneous
bids/offers for transactions in any of our 37 currency pairs. We
treat order flow from our customers as follows:
|
|
|
|
|
Immediately offset the trade with one of our wholesale forex
trading partners. We refer to the order flow that we handle in
this manner as offset flow. Offset flow allows us to earn the
difference between the retail bid/offer spread we offer our
customers and the wholesale bid/offer spread we receive from our
wholesale forex trading partners, while minimizing market risk
in the transaction. From January 2006 to September 2009, between
2.6% and 28.7% of our executed trade volume were immediately
offset. For the nine months ended September 30, 2009, 8.1%
of our executed trade volume was handled in this manner.
|
|
|
|
Direct the trade into our managed flow portfolio. Order flow
that is initially directed into our managed flow portfolio may
be subsequently reclassified as offset flow based on market
conditions. From January 2006 to September 2009, between 71.3%
and 97.4% of our executed trade volume was either naturally
hedged or managed pursuant to our risk management policies and
procedures. For the nine months ended September 30, 2009,
91.9% of our executed trade volume was handled in this manner.
|
We believe it is neither economically optimal nor necessary from
a risk management perspective to hedge all of the trades in our
managed flow portfolio on a
one-to-one
basis, as we do with our offset flow transactions. Instead,
90
trades in our managed flow portfolio are evaluated and managed
on an aggregate basis. Our managed flow portfolio is treated in
the following manner:
|
|
|
|
|
Natural Hedging Many trades are naturally
hedged, where one customer executing a trade in a currency is
offset by a trade taken by another customer. When a transaction
within the portfolio is naturally hedged, we do not hedge our
exposure by entering into a transaction with our wholesale forex
trading partners. Accordingly, for naturally hedged transactions
we capture the entire bid/offer spread on the two offsetting
transactions while completely hedging our exposure and reducing
our overall risk.
|
|
|
|
Net Exposure Generally, there is also a
portion of our managed flow portfolio that is not naturally
hedged, which we refer to as our net exposure. We manage our net
exposure by applying position and exposure limits established
under our risk management policies and by continuous, active
monitoring by our traders. A portion of our net exposure may be
hedged with our wholesale forex trading partners based on our
risk management guidelines. We do not actively initiate market
positions in anticipation of future movements in the prices of
currencies in the market, referred to as proprietary directional
market positions. However, as a result of our hedging
activities, we are likely to have open positions in various
currencies at any given time. In the event of unfavorable market
movements, we may take a loss on such positions.
|
|
|
|
Redirected Trades In certain cases, specific
trades from customers generally handled in our managed flow
portfolio may be redirected and offset with our wholesale forex
trading partners. These trades may be selected based on size,
and whether they relate to currencies that are experiencing
lower transaction volume or higher volatility in trading prices.
|
Regardless of a customers order flow designation as offset
or managed, the customers experience is identical with
respect to trade execution. Since we manage our portfolio on an
aggregate basis, we do not track whether an individual trade is
naturally hedged, subject to net exposure or redirected.
Each month, approximately 5.5% to 14.9% of customer trades
submitted are immediately rejected as not executable due to
insufficient trading account margin, currency rate movements or
other administrative disqualifications, including incorrectly
established customer accounts, frozen customer accounts due to
regulatory non-compliance and technical errors. When a trade
request is rejected, the customer is immediately notified
on-screen that such request has been rejected and the customer
is later notified the reason for such rejection. Depending upon
the cause for the rejection, many of these rejected trade
requests are subsequently executed if the factors leading to
their initial rejection are resolved. For instance, when a trade
is rejected due to insufficient trading account margin, the
customer may either reduce his position(s) in order to place
another trade or add additional funds to his account. When a
trade is rejected due to currency rate movements, the customer
may simply place another trade. Depending upon market
conditions, rates can move in one direction very quickly (often
in response to political and economic news and events and the
release of economic indicators and reports), making it difficult
to place a successful trade request at a specific, requested
rate until the rate movement slows. In such markets, customers
may choose deal at best orders where buy or sell
orders are executed at the next best possible rate or
limit/stop orders where buy or sell orders are
automatically triggered when a particular rate is met or
breached. In the event of a rejection due to
91
administrative reasons, customers have the option of contacting
our customer service staff to obtain a more detailed explanation
and possibly place a subsequent trade via telephone.
Our
quote aggregation model
We generate trading revenue from our market-making activities.
Our trading revenue is comprised of two components: (1) our
gains, offset by losses, from our trading positions and
(2) our revenue derived from dealing spreads on customer
transactions. In order to make a market in a particular currency
pair, we continuously identify the mid-point price between the
available best bid and best offer quotes
for each currency that we receive from our wholesale forex
trading partners, and generally in less than one second, publish
as our dealable spread quoted to our customers. Depending on the
currency pair being traded, the dealable spread recognized by us
over the mid-point price is typically between 2 and 5 basis
points ($0.0002 $0.0005), or pips, which reflects a
trading spread generally available only to large institutional
customers of major banks. We earn the difference between the
retail price quoted to our customers and the wholesale price
received from our wholesale forex trading partners. For
customers who prefer a commission-based fee model similar to
that which is offered in the equities and futures markets, we
have the ability to offer an alternate pricing model of smaller
bid/offer spreads coupled with trading commissions. In addition,
we are able to maintain different sets of spreads for different
customers based on their designated trading package. For
example, we offer our high asset, high volume customers reduced
bid/offer spreads. A particular customer will receive the same
dealable spread regardless of such customers order flow
designation as offset or managed. Managed flow trades, to the
extent such trades are naturally hedged, provide us with the
opportunity to capture the entire bid/offer spread on the two
offsetting transactions. In the event that managed flow trades
are not naturally hedged, after time such trades may be
redirected and offset. Offset flow trades allow us to earn the
difference between the retail bid/offer spread we offer the
customer and the wholesale bid/offer spread we receive from our
wholesale forex trading partners.
Below is an example of how we aggregate bids and offers from our
multiple wholesale forex trading partners in order to publish
real-time executable quotes to our retail customers.
92
Quote
Aggregation Example
|
|
|
|
|
|
|
|
|
Bid
|
|
Ask
|
|
|
Wholesale Forex Trading Partner A
|
|
0.0054
|
|
|
0.0057
|
|
Wholesale Forex Trading Partner B
|
|
0.0053
|
|
|
0.0056
|
|
Wholesale Forex Trading Partner C
|
|
0.0055
|
|
|
0.0058
|
|
Wholesale Forex Trading Partner D
|
|
0.0054
|
|
|
0.0057
|
|
Best Execution Wholesale Spread
|
|
0.0055
|
|
|
0.0056
|
|
Best Execution Wholesale Mid-Point Price
|
|
0.00555
|
|
|
|
|
Our Bid/Offer Spread
|
|
(0.0002) 2 pips
|
|
|
|
|
Our Bid/Offer Quoted to Customers
|
|
0.00545
|
|
|
0.00565
|
|
Market
risk management
We are exposed to market risk in connection with our
market-making activities. When acting as a market-maker, we act
as counterparty to our customers when consummating a trade. As a
result, we are exposed to a degree of risk on each trade that
the market price of our position will decline or the market will
move against us. Accurate and efficient management of our risk
exposure is a high priority and as such we have developed both
proprietary automated and manual policies and procedures to
manage our exposure. Our risk management policies are
established and reviewed regularly by the risk committee of our
board of directors. Our risk management policies require
quantitative analyses by currency pair, as well as assessment of
a range of market inputs, including trade size, dealing rate,
customer margin and market liquidity. Our risk management
procedures require our team of senior traders to monitor risk
exposure on a continuous basis and update senior management both
informally over the course of the trading day and formally
through intraday and end of day reporting. These procedures
require our senior traders to manage risk by closely monitoring
our net exposure to any currency, as well as by allocating trade
volume between our managed flow and offset flow portfolios. In
addition, our chief dealer, who is responsible for the
day-to-day
operations of our trading desk, monitors our risk exposure and
implements our risk management policies, and his team of senior
traders, assisted by our proprietary risk management systems,
determine which hedging strategies are appropriate in order to
maximize revenue and minimize risk based on our risk management
policies. For each month of 2008 and for each of the nine months
through September 30, 2009, more than approximately 89.2%
of all proposed trades fell within our risk management policies
and were automatically executed. The remaining proposed trades
were immediately rejected because they did not satisfy our risk
management policies. Many of these rejected trades were
subsequently executed as the factors leading to their rejection
were resolved within a reasonable period of time.
Counterparty
credit risk management and mitigation
Our forex market-making operations require a commitment of our
capital and involve risk of loss due to the potential failure of
our customers to perform their obligations under these
transactions. In order to avoid the incidence of a
customers losses exceeding the amount of cash in their
account, which we refer to as negative equity, we require that
each trade must be collateralized in accordance with our
collateral risk management policies described below. Each
customer is required to have minimum funds in their account for
opening positions, which we refer to as the initial margin, and
for maintaining positions, which we refer to as maintenance
margin, depending on the currency pair being traded. Margin
requirements are expressed as a percentage of the
customers total position in that currency, and the
customers total margin requirement is based on the
aggregated margin requirement across all of the positions that a
customer holds at any one moment in time. Each net position in a
particular currency pair is margined separately. Accordingly, we
do not net across different currency pairs, thereby producing a
fairly conservative margin policy. Our systems automatically
monitor each customers margin requirements in real-time
and we confirm that each of our customers has sufficient cash
collateral in their account before we execute their trades. If
at any point in time a customers trading position does not
comply with the applicable margin requirement because our
pre-determined liquidation thresholds have been exceeded, the
position may be automatically partially or entirely liquidated
in accordance with our margin policies and procedures
93
documented in our customer agreement. This policy protects both
us and the customer. We believe that as a result of implementing
real-time margining and liquidation processing as outlined in
our policies and procedures, the incidence of customer negative
equity has been insignificant in the last three years, with
aggregate negative equity amounts of $953,381 at
December 31, 2008, $306,222 at December 31, 2007 and
$247,657 at December 31, 2006. The aggregate negative
equity amount at September 30, 2009 was $952,945.
We are also exposed to potential credit risk arising from our
exposure to counterparties with which we hedge and financial
institutions with whom we deposit cash. By transacting with
several of the largest financial institutions in the market, we
have limited our exposure to any one institution. In the event
that our access to one or more financial institutions becomes
limited, our ability to hedge may be impaired.
Relationships
with wholesale forex trading partners
The combination of direct agreements with our wholesale forex
trading partners, including relationships with our three prime
brokers, offers us the ability to access forex market liquidity.
Given the level of our customers trading volume, in order
to continually provide our market-making services, we need to
access liquidity from third party financial institutions. We
have leveraged our extensive industry experience to secure a
substantial liquidity pool by establishing trading relationships
with at least nine financial institutions, including Deutsche
Bank, RBS, UBS, Barclays Bank PLC, Merrill Lynch International
Bank, Dresdner Bank AG, Goldman Sachs & Co.,
Skandinaviska Enskilda Banken AB and Man FX Clear LLC. These
relationships provide us with sufficient access to liquidity to
allow us to consistently execute significant trades in varying
market conditions at the notional amounts our customers desire
by providing us with as much as 50:1 leverage on the notional
amounts of our available collateral we have on deposit with such
financial institutions. We generally maintain collateral on
deposit, which includes our funds and our customers funds,
with our wholesale forex trading partners ranging from
$75.0 million to $100.0 million in the aggregate, with
the average monthly balances for the nine months ended
September 30, 2009 being approximately $100.0 million.
We have also established collateralized trading lines that
facilitate trading at the Chicago Mercantile Exchange as an
additional source of liquidity.
Our liquidity relationships are legally formed pursuant to
International Swaps and Derivatives Association, or ISDA, form
agreements signed with each financial institution. These
standardized agreements are widely used in the interbank market
for establishing credit relationships and are typically
customized to meet the unique needs of each liquidity
relationship. Each ISDA agreement outlines the products
supported along with indicative bid/offer spreads and margin
requirements for each product. We have had a number of key
liquidity relationships in place for over five years and as such
we believe we have developed a strong track record of meeting
and exceeding the requirements associated with each
relationship. However, our wholesale forex trading partners have
no obligation to continue to provide liquidity to us and may
terminate our arrangements with them at any time. We currently
have effective ISDA agreements and other applicable agreements
with Deutsche Bank, RBS, UBS, Barclays Bank PLC, Merrill Lynch
International Bank, Dresdner Bank AG, Goldman Sachs &
Co., Skandinaviska Enskilda Banken AB and Man FX Clear LLC.
In addition to the multiple direct relationships we have
established with our wholesale forex trading partners pursuant
to the ISDA agreements, we have also entered into prime
brokerage agreements with three prime brokers which allow us to
maximize our credit relationships and activities while improving
efficiency. As our prime brokers, Deutsche Bank, RBS and UBS
operate as central hubs through which we transact with our
wholesale forex trading partners. These prime brokers allow us
to source liquidity from a variety of executing dealers, even
though we maintain a credit relationship, place collateral, and
settle with a single entity the prime broker. We
depend on the services of these prime brokers to assist in
providing us access to liquidity through our wholesale forex
trading partners. In return for paying a modest
transaction-based prime brokerage fee, we are able to aggregate
our trading positions, thereby reducing our transaction costs
and increasing the efficiency of the capital we are required to
post as collateral in order to conduct our market-making
activities. In addition, our prime brokers also serve as a third
party check as they review our open positions, collateral
balances and trade confirmations as we trade with our wholesale
forex trading partner through them. Our prime brokerage
agreements may be terminated at any time by either us or the
prime broker upon complying with certain notice requirements. We
are also obligated to indemnify our prime brokers for certain
losses they may incur.
94
Our
Broker-Dealer Business
Our
broker- dealer model
We offer our customers the ability to trade equity securities
during normal exchange trading hours through our wholly-owned
subsidiary, GAIN Securities, representing approximately less
than 1.0% of our business for the nine months ended
September 30, 2009. GAIN Securities is an SEC registered
and FINRA member broker-dealer offering direct access to listed
U.S. equity securities, including stocks, exchange traded
funds, or ETFs, options, mutual funds and bonds. Through GAIN
Securities, we offer our customers a wide variety of customer
account vehicles, including individual, joint, custodian,
corporate, investment club, partnership, and trust accounts. We
also offer traditional IRAs, Roth IRAs and Rollover
accounts. Customers can fund accounts with us by transferring
assets from other broker dealers via the automated customer
account transfer system, electronically wiring cash or by using
checks or automated clearing house transfers.
We offer brokerage and related products and services primarily
to individual self-directed retail investors primarily to
customers in the U.S. through our internet website at
www.gainsecurities.com. Unlike our forex trading
business, we extend credit to our GAIN Securities customers
through our clearing relationship based on the Federal Reserve
Boards Regulation T margin lending guidelines. In
order to take advantage of margin trading credit, our customers
must maintain an account with at least $2,000 in assets. To
date, we have not marketed GAIN Securities to our forex
customers and prospective forex customers, but we plan to do so
in the future.
We generate trading revenue from three main sources;
commissions, net interest income and account fees. We are an
introducing broker to our clearing provider, Ridge Clearing and
Outsourcing Solutions, and therefore do not accept customer
funds directly nor maintain custody of client assets.
Customers interact with us through the following channels:
|
|
|
|
|
Branch Offices we maintain two branch
offices. Our main retail office is located in
Woodmere, Ohio which allows customers to receive
face-to-face
customer support. Our other office is located in Jersey City,
New Jersey and is primarily used for online customer support and
operations. Our customer service representatives in both
locations provide customer support and process customer
orders/transactions.
|
|
|
|
Online we have an online internet website,
www.gainsecurities.com, where customers can request
services on their accounts and obtain answers to frequently
asked questions. This website also provides customers with the
ability to send a secure message to our customer service
representatives, participate in
one-on-one
live chat with our customer service representatives and to
obtain specific information related to their account.
|
|
|
|
Telephone we have toll free and local
telephone numbers that route calls to our branch offices. In
addition, we allow customers to access an automated phone system
for trading and account access.
|
Each of our customer service representatives holds Series 7
and 63 licenses. Additionally, a large percentage of our
customer service representatives maintain additional supervisory
designations such as Series 24 and 4 licenses.
All customer trades submitted electronically are automatically
reviewed prior to submission to the exchanges. Approximately
11.2% are immediately rejected to clients directly on the
website, and approximately 2.4% are rejected based on
supervisory review. Trades can be rejected due to a number of
factors such as, insufficient available funds, suspicious
trades, insufficient margin, suitability, system problem or
other factors.
We offer a wide range of products and services to assist our
customers with their financial needs. Our primary retail
products and services consist of:
|
|
|
|
|
Automated order placement and execution of U.S. equities,
options, exchange-traded funds and mutual funds;
|
|
|
|
Advanced trading capabilities (contingent, trailing stops), real
time quotes, research and analysis tools;
|
|
|
|
Access to comprehensive listing of non-proprietary load, no-load
and no transaction fee mutual funds;
|
|
|
|
FDIC-insured sweep deposit accounts; and
|
95
|
|
|
|
|
Interest-earning checking, money market, and certificates of
deposit.
|
Our
Contracts-for-Difference
Business
Our
contracts-for-difference
model
|
|
|
|
|
We offer our customers the ability to trade CFDs which are
linked to the performance of an underlying commodity, index or
financial instrument. Our CFD offerings, which we began offering
in August 2009, currently include contracts for energy products,
and we plan to offer additional CFDs in the future. Due to
U.S. regulatory requirements, CFDs may not be traded or
offered to U.S. residents.
|
|
|
|
We continuously receive market quotes from various market
sources which are aggregated and processed by our proprietary
rate engine in order to identify the prevailing market price for
the instruments underlying the CFDs we offer. From this market
data, we compute unique,
over-the-counter
prices and publish these prices to customers of GAIN
Capital-Forex.com U.K., or GAIN U.K. GAIN U.K. customers place
trade requests directly with GAIN U.K. and the trades are then
executed with GAIN U.K. as counterparty. GAIN U.K. hedges its
CFD exposure in accordance with pre-established risk parameters
through a variety of liquidity sources, including futures and
options exchanges.
|
Sales and
Marketing
Our sales and marketing strategy is designed to attract new
customers and to increase the trading activity of existing
customers. As of September 30, 2009, we had 195,559 opened
customer accounts, of which 47,374 were tradable accounts.
Opened customer accounts are accounts opened with us at any time
since we commenced operations and tradable accounts are opened
customer accounts with cash balances sufficient to execute a
trade in compliance with our policies. Our sales and marketing
strategy focuses on our two customer acquisition channels to
expand our customer base:
|
|
|
|
|
For our direct channel, we use a
one-to-one
strategy of direct marketing principally by leveraging our
FOREX.com brand to cost-effectively attract new
customers; and
|
|
|
|
For our indirect channel, we use a
one-to-many
strategy of forging partnerships with financial services firms,
including white label partnerships and introducing brokers, that
have existing customers to whom they wish to offer forex trading
capabilities.
|
In executing our direct marketing strategy, we employ a mixture
of traditional marketing programs such as on- and off-line
advertising, search engine marketing, email marketing,
attendance at industry trade shows and strategic public and
media relations, all of which are aimed at driving prospective
customers to the FOREX.com website to open registered practice
trading accounts or tradable accounts. We also advertise on
television and national business radio networks, which we
believe has significantly increased not only our brand name
recognition in the marketplace, but also awareness of the forex
market in general. Our media marketing efforts also seek to
position us as an expert industry resource, with senior members
of our trading and research teams appearing on average between
10 and 15 times per month on major financial news outlets such
as CNBC, Business News Network (Canada), FOX News and Bloomberg
TV, as well as the Wall Street Journal and Reuters.
We offer prospective customers access to free registered
practice trading accounts for a
30-day trial
period, which is our principal lead-generation tool. During this
trial period, our customer service team is available to assist
and educate the prospective customers. From a prospective
customers point of view, we believe the registered
practice trading account serves two important functions. First,
it serves as an educational tool, providing the prospective
customers with the opportunity to try forex trading in a
risk-free environment, without committing any capital. Second,
it allows the prospective customer to evaluate our trading
platform, tools and services. The registered practice trading
account is identical to the platform used by our active trading
customers, including the availability of real-time streaming
quotes, with the one exception that trades are not sent to our
market-making desk and no actual capital is at risk.
In order to maximize lead generation, we have made the
registered practice trading account easily accessible to
prospective customers by requiring a minimum amount of
registration information. As a result, the
4-year
96
compounded annual growth rate of our registered practice trading
account users is 81.8%, growing from 105,959 registered practice
trading account users in 2004, to 1,158,682 registered practice
trading account users in 2008 (including 380,025 registered
practice trading account users in China). While this approach
increases our pool of potential customers and likely to result
in a greater number of funded tradable accounts overall, it
reduces our average conversion rate of registered practice
trading accounts to funded tradable accounts. As part of our
conversion efforts, we employ a team of Series 3 licensed
sales representatives to contact all
U.S.-based
registered practice trading account holders. These specialists
are trained to assist the prospective customers as they evaluate
our products and services, and answer general questions about
the forex market, provide more information about the products we
offer and help the prospective customer learn how to use
specific features of our trading platform. Our sales
representatives also assist prospective customers in the
tradable account opening process.
To execute our indirect marketing strategy, we employ a
dedicated institutional sales team made up of nine employees
that conduct proactive outreach to qualified firms and handle
inbound inquiries. As business partnerships are often
relationship driven, we also leverage the business network of
our senior executives and attend and sponsor industry events in
order to contact potential partners who are unlikely to respond
to traditional marketing efforts.
Education is an important part of our marketing strategy. Our
educational programs are all developed internally and are
designed to accommodate a variety of experience levels and
learning preferences, from self-study to fully instructional
programs. Our educational resources currently include a variety
of interactive webinars (web-based seminars) covering topics
ranging from getting started in forex trading, to developing
advanced technical analysis skills held in regularly scheduled
90-minute
introductory workshops and
half-day
intensive classroom-style training courses held in various
cities throughout the United States, and a comprehensive
web-based training course coupled with access to an experienced
forex instructor. In addition, educational content is located
throughout the FOREX.com website, including guides on getting
started, articles, video tutorials and glossaries.
To assist with implementing our marketing strategies, our
customer service staff uses Salesforce.com to automate and
manage our sales efforts. Salesforce.com is a third party
automation platform that we have integrated with our platform
and provides sales management from lead generation through the
new account opening process. We believe that in addition to the
automation and management features that Salesforce.com has
brought to our sales and marketing efforts, Salesforce.com is an
example of how our proprietary technology is able to integrate
with key, third party platforms and technologies to increase our
service offerings.
Customer
Service
We have a dedicated, multilingual customer service staff located
in the United States that handles customer inquiries via
telephone, email and online chat. Customer support is available
seven days a week, with continuous coverage beginning Sunday at
10:00 a.m. through 5:00 p.m. Friday and Saturday
9:00 a.m. to 5:00 p.m. (Eastern Standard time). We
have documented customer issue response and escalation
procedures, which help us provide timely resolution to customer
inquiries. For the year ended December 31, 2008, we
received approximately 1,156,000 customer inquiries, including
approximately 320,000 inbound telephone calls, 720,000 online
chats and 116,000 emails. Inquiries range from requests for
account status to technical and support requests concerning
trading techniques and concepts.
Our customer services toolkit, or CST, is a highly customized,
internally developed customer relationship management solution
and is an important element of our integrated technology
platform. Initially designed as an internal web application to
support our relationships with direct customers, the CST has
evolved into a feature-rich application that has also been
deployed to some of our larger white label partners. The CST
allows us and our white label partners to access customer
account details that fall into six broad categories:
|
|
|
|
|
Customer contact information;
|
|
|
|
Account setup details;
|
|
|
|
Recent and historical account activity and status;
|
|
|
|
Customer-specific time and sales data;
|
97
|
|
|
|
|
Customer interaction review/research; and
|
|
|
|
Management metrics (including new accounts by date, account
representative and account type).
|
The detailed, real-time information provided by the CST enhances
our ability, and that of our white label partners, to deliver
timely and tailored support and service to our respective
customers, which we believe enhances the overall customer
experience. We view the CST as a strategic advantage in the
indirect sales process where it can be used as a key element of
our partner services solution package.
Competition
The retail forex trading market is fragmented and highly
competitive. Our competitors in the retail currency market can
be grouped into several broad categories based on size of net
capital, technologies, product offerings, target customers and
geographic scope of operations:
|
|
|
|
|
Market Leading Forex Trading Firms: include
our firm and other firms with similar business models, such as
Forex Capital Markets LLC, Global Futures & Forex, LLC
and OANDA Corporation. The firms within this category are our
primary competition for our existing forex trading services.
|
|
|
|
Small/Specialized Forex Trading Firms: include
firms such as Capital Markets Services, LLC, FXDirectDealer, LLC
and InterbankFX, LLC. These firms, to date, have not been our
core competitors due to their smaller size and technology and
marketing limitations.
|
|
|
|
Other Online Trading Firms: include firms such
as OptionsXpress Holdings, Inc., E*TRADE Financial Corp.,
TDAMERITRADE and Scottrade. These firms are generally either
niche players focused on a particular product, such as equity
options, or traditional online equity brokers, that have
expanded into other financial products that may already, or will
in the future, include forex trading.
|
|
|
|
Multi-Product Trading Firms: include firms
such as Saxo Bank, CMC Group, IG Group Holdings plc, City Index
Limited and Interactive Brokers LLC. Among these firms,
U.S. firms tend to focus on listed products and provide
forex principally as a complementary offering. Other than Saxo
Bank, the international firms tend to focus on CFDs.
|
There has been an increase of interest in the retail forex
market from international banks and other financial institutions
with significant forex operations. In 2007, a number of these
institutions announced or launched retail forex operations. In
each case, the financial institutions chose to enter into a
joint venture with an independent retail currency firm in lieu
of building a retail operation. We believe these financial
institutions are electing to enter into joint ventures because
these arrangements can result in accelerated time to market and
increased profitability. However, we believe we are positioned
through our relationship with certain of our white label
partners who offer products to their customers to compete. We
believe that retail forex trading will become an increasing area
of focus for international financial institutions in the future.
We believe the key competitive factors impacting the retail
forex market include:
|
|
|
|
|
Functionality, performance and reliability of trading platform;
|
|
|
|
Speed and quality of trade executions;
|
|
|
|
Pricing;
|
|
|
|
Level of customer service;
|
|
|
|
Brand reputation;
|
|
|
|
Efficacy of sales and marketing efforts;
|
|
|
|
Strategic partnerships with financial services firms;
|
|
|
|
The ability to offer ancillary services, such as research and
education;
|
|
|
|
Range of product offering; and
|
98
|
|
|
|
|
Capacity of trading platform to handle large volumes of customer
transactions.
|
We attribute our competitive success to the customer experience
we deliver, including our advanced technology platform and
extensive customer service. We believe that our expertise in
market-making, technology innovation and marketing will allow us
to continue to compete on a global basis as we expand our
product and service offerings and further extend our global
footprint.
Intellectual
Property
We rely on a combination of trademark, copyright, trade secret
and fair business practice laws in the United States and other
jurisdictions to protect our proprietary technology,
intellectual property rights and our brand. We also enter into
confidentiality and invention assignment agreements with our
employees and consultants, and confidentiality agreements with
other third parties. We also rigorously control access to
proprietary technology. Currently, we do not have any pending or
issued patents.
We use the following service marks that have been registered or
for which we have applied for registration with the
U.S. Patent and Trademark Office: GAIN Capital (registered
service mark), FOREX.com Gain Capital Group (registered service
mark), Trade Real Time (registered service mark), ForexPro
(registered service mark), ForexPremier (registered service
mark), Forex Insider (registered service mark), ForexTrader
(pending service mark), FOREX.com (pending service mark),
ForexPlus (pending service mark) and Its Your World. Trade
It (pending service mark).
Technology
Systems and Architecture
Proprietary
platform
Our forex trading platform is based upon proprietary
technologies that have been designed and structured to meet the
demands of a fast-paced and competitive marketplace. We focus
our proprietary technologies on three major service areas:
customer-facing trading platforms, educational tools and
websites; market-making and risk management; and back-office
account management.
We leverage a wide variety of standard technologies to deliver
our forex trading services to our customers and provide secure
risk management and back-office management internally. Our
customer-facing trading platform is primarily Microsoft-based;
ASP.net for lite browser-based delivery and C#.net for more
technologically advanced delivery. We also offer multiple
methods through which our customers can transact with us:
ForexTrader PRO (Rich Windows customer, HTML browser,
ForexTrader.java, Wireless/WAP, web services API and FIX API).
All of these customer-facing applications integrate with our
core proprietary trading platform for market-making and risk
management. All of our customer-facing trading platforms can
easily be branded for white label partners.
MetaTrader
platform
In addition to our proprietary trading platform, in August 2007
we licensed MetaTrader, a well-known turn-key trading platform,
from MetaQuotes Software Corp., in order to meet the needs of a
growing customer segment. This trading platform is popular with
the international retail trading community and offers our
customers a choice in trading interfaces. Although we do not own
the source code, the MetaTrader platform utilizes the same
infrastructure as our proprietary trading platform and benefits
from our investment in our offsite environmentally- controlled,
secure facilities housing our hardware and network connections.
For the nine months ended September 30, 2009, 24.5% of our
forex trading volume was derived from trades utilizing our
MetaTrader platform.
Scalability
Our trading platform is designed to meet the demands of our
growing customer base by incrementally adding readily-available
hardware components and Internet bandwidth as necessary. In
addition, we work with third-party service providers to
continuously provide excess capacity with respect to space,
power, heating/cooling systems and communications bandwidth from
over 300 communications providers. We believe our approach to
scaling allows us to efficiently and effectively address costs
required to support our current business and provide for rapid,
real-time growth in the future.
99
At any given time, we believe our forex trading platform has
adequate capacity to support our customer activity. On average,
we have at least 5,000 customers logged onto our trading
platform at any given time and we handle an average of
approximately 85,000 trade requests per day. During peak trading
periods, we receive and execute thousands of trade requests
within a period of a few minutes. Peak trading periods include
economic announcements related to gross domestic product,
non-farm payroll and the Federal Open Market Committee decisions
on the federal funds rate. Our current trading platform
configuration is capable of handling a maximum of over 3,000,000
trade requests per trading day. This capacity allows us to
continue to grow as we deploy planned improvements in both
hardware and software to our trading platform in order to reduce
trade latency and increase capacity. Our average trade execution
times are currently less than .05 seconds, or 50 milliseconds.
If a customer has difficulty logging onto our trading platform,
or has any other issues or questions, they can contact our
customer service team. Our customer service team is trained to
addresses a variety of problems with customers logging onto our
trading platform. Most common issues are local to the customer;
including issues with respect to customers computers,
internet access, firewall configuration and forgotten user I.D.s
and passwords. Our customer service team is trained to assist in
addressing these issues, and where appropriate, reset passwords
and communicate user I.D.s to authorized customers.
Reliability
and availability
We are highly reliant on the availability of our technology
systems and have made significant investments in
high-availability, layered hardware and software technologies.
Our hardware infrastructure is hosted at two separate geographic
locations, providing a live-live redundancy model.
Our primary hardware is housed at a dedicated International
Business Exchange, or IBX, hosted by Equinix, Inc., or Equinix,
a provider of environmentally-controlled, secure facilities
connected to multiple communications providers focused on
meeting the demands of the financial services sector. Each
Equinix IBX center has an uninterruptible power supply,
back-up
systems, and N+1 (or greater) redundancy with extensive heating,
ventilation, air-conditioning system capable of handling the
demands of high-power density deployments. Each Equinix IBX
center also offers the highest level of physical security, power
availability and infrastructure flexibility. Housed at Equinix,
our forex trading platform resides in the same internet
neighborhood as many of our wholesale forex trading
providers and white label partners. We believe this close
proximity provides a competitive advantage on pricing and
execution speed. In addition to our primary Equinix location, we
maintain a secondary site (currently located at our corporate
headquarters) to balance customer traffic and provide
live-live redundancy in case of interruptions at our
Equinix IBX location.
To further supplement our multi-site, live-live
redundancy model, our technology systems (located at our Equinix
and corporate headquarters locations) have been designed to
ensure that there are no single points of failure in the system
architecture. All hardware (network devices and servers) are
configured for high-availability which is leveraged by server
virtualization where we partition our server technologies at all
tiers to facilitate our platform management and provide rapid
response. We also contract with multiple communications carriers
at each of our locations to ensure service availability for
communications with our customers and wholesale forex trading
providers. Our uptime, or system availability, is
continuously monitored (minute by minute) by our external
third-party vendors, and we strive to maintain an uptime of
99.9% within published forex market trading hours. During the
12-month
period beginning October 1, 2008 and ending
September 30, 2009, we achieved an uptime of 99.96%.
We intend to relocate our corporate headquarters between the
fourth quarter of fiscal year 2009 and first quarter of fiscal
year 2010. In addition to our corporate relocation, we intend to
make significant investments in our business continuity and
disaster recovery infrastructure during this same time period.
We anticipate capital expenditures for our corporate relocation
to be $3.0 million to $4.0 million and capital
expenditures for our infrastructure investment to be
$1.0 million to $2.0 million.
Security
Securing access to our trading platform and customer information
is paramount to our business success. We maintain strict
internal practices, procedures and controls to enable us to
secure our customers sensitive information (including
social security numbers, bank account information and other
personal data). We employ industry-leading firewall technologies
at the perimeter of our hosting facilities to restrict
inappropriate access. All
100
customer-facing servers are contained within a secure
DeMilitarized Zone, or DMZ, that partitions customers from our
core infrastructure and trading transactional services. We have
also partnered with IBM Internet Security System to provide a
managed intrusion detection/prevention system which actively
monitors and blocks inappropriate traffic on our production
network. IBMs global Security Operations Centers
proactively monitors our production networks 24 hours a
day. Access to our information systems is granted to our
customers and internal users on an as-needed basis. Customers
access our trading platform and secure portals using a user ID
and password challenge/response approach.
All customer communications are initiated over secure (128-bit
SSL or HTTPS) connections to ensure that no customer data can be
compromised as it traverses the Internet. In addition, all
communications with wholesale forex trading providers are made
over private or virtual private networks to ensure secure
communications of pricing and trade data. In our processing of
credit card transactions, we do not store customer card numbers.
We have been tested and are PCI-compliant (Payment Card
Industry). Our chief information officer is primarily
responsible for the security of our technology infrastructure
and application development.
In addition, physical access is restricted at our Equinix IBX
center and corporate headquarters facilities. Access is granted
to technical and support staff using swipe card-based
entitlement. Our network operations center is manned
24 hours a day to ensure that our technology services are
continuously running, with any potential issues being addressed
in real-time. Our corporate headquarters is also monitored by
building security from 3:00 p.m. until 7:00 a.m.
(Eastern Standard time) Mondays through Fridays with
24 hour coverage on Saturdays and Sundays. At all other
times the building is monitored by building management which is
open from 8:00 a.m. until 5:00 p.m. Monday through
Friday.
Business
continuity
We maintain formal business continuity policies, practices and
procedures aimed at ensuring rapid recovery from any business or
trading interruption. Each of our systems and services has been
ranked according to the risk associated with an interruption.
Business recovery time objectives have been established relative
to our risk assessment and business criticality and our recovery
plans and controls have been established to avoid and mitigate
such risks. Our recovery plans and controls are tested on an
annual basis to determine effectiveness and are continuously
maintained and updated in order to support changes in business
requirements or IT environments.
To effect these business continuity objectives, our
live-live redundancy sites are geographically
separated (more than 36 miles apart) and are interconnected
via private, multi-layered high speed circuits, allowing
real-time, two way data replication for all of our trading
technologies. Each of our locations provide redundant UPS
battery power and diesel generator backup to ensure power
availability with multiple Internet communications circuits
provided by various carriers to ensure availability. In
addition, we maintain three separate office locations in the New
York/New Jersey area capable of supporting critical functions in
order to ensure that our personnel are able to maintain our
business in the event that one physical site becomes unavailable.
We plan to make significant investments in our business
continuity and our disaster recovery infrastructure between the
fourth quarter of fiscal year 2009 and the first quarter of
fiscal year 2010. We anticipate capital expenditures for our
infrastructure investment to be $1.0 million to
$2.0 million.
Clearing,
Custodial and Reporting Services
We offer custody, clearing and reporting services for our
customers and our forex trading partners. We are responsible for
deal, position, profit and loss, and margin verification with
our global prime brokers (and by extension, all of our wholesale
forex trading partners). Because we are electronically connected
to our global prime brokers, we electronically confirm any
trades transacted with our wholesale forex trading partners in
near real-time. In addition to near real-time transaction
matching, transactions and positions are re-checked at regular
intervals throughout the
24-hour
daily cycle. Our online reporting services allow back-office
personnel to check settled cash, available margin, open
positions, daily trade activity, profit/loss exposure and end of
day trading profit/loss to ensure that the front-office,
back-office, and prime brokerage systems are all in agreement.
As a complement to this daily control procedure, our finance and
operations departments are actively looking for trading
anomalies through online and automated reporting. Finally, our
finance team reconciles our profit and loss with both customers
and
101
wholesale forex trading partners against the general ledger, and
wholesale forex trading partner account balances are regularly
confirmed against hard copy statements issued by these partners.
In addition to position, order, and margin management, our
self-directed trading platform provides a host of back-office
functions including account value reporting, transaction detail
research, and profit and loss analysis. The platform also
provides support for automated, overnight position financing
(rollovers) with reports detailing all debits and credits in the
account. For managed accounts, we offer a full service web
portal that provides a detailed accounting of all account
activity including deposits, withdrawals, trades, profit/loss,
interest, and fees.
We require that each of our customers trades is
collateralized. As a result, we hold our customers funds
and our funds in collateral
and/or
deposit accounts at various financial institutions. In those
jurisdictions where our operating subsidiaries are not required
to segregate customer funds from our funds, we act as custodian
for our customers funds on deposit. In those jurisdictions
requiring segregation of customer funds from our funds, we
adhere to such requirements.
Employees
and Culture
We have assembled what we believe is a highly talented group of
employees. We maintain a code of business conduct and ethics
applicable to our employees, directors and officers.
Additionally, we have a policy that none of our officers,
directors or employees may hold or maintain a self-directed open
account with us or any of our subsidiaries or affiliates.
Although we allow our officers, directors and employees to
maintain registered practice trading accounts with us, we
require that any officer, director or employee wishing to trade
in forex do so with another forex dealer. As of
September 30, 2009, we had 348 full-time employees and
fourteen part-time employees. Ten of our current employees have
been with us since 2000, fourteen of our current employees have
been with us since 2001, and sixteen of our current employees
have been with us since 2002. None of our employees are covered
by collective bargaining agreements. We believe that our
relations with our employees are good.
Regulation
Overview
Our business and industry are highly regulated. In the United
States, regulatory bodies are charged with safeguarding the
integrity of the forex and other financial markets and with
protecting the interest of customers participating in those
markets. In recent years, the financial services industry in the
United States has been subject to increasing regulatory
oversight. The regulatory bodies that regulate our business and
industry in the United States have proposed and may consider
additional legislative and regulatory initiatives and may adopt
new or revised regulations that may affect the way in which we
conduct our business. Currently, our wholly-owned
U.S. operating subsidiary, GAIN Capital Group, LLC, or GCG,
is registered as an FCM and FDM with the CFTC and is a member of
the NFA (NFA #0339826), which serves as its designated self
regulatory examining authority. Our broker-dealer subsidiary,
GAIN Securities, is registered with the SEC as a broker-dealer
and is a member of FINRA (CRD #16203).
In Australia and Singapore, we are currently seeking local
registration, licensing and authorization to conduct our forex
trading services. In addition, in 2008 we acquired a 51.0%
interest, with rights to acquire up to a 95.0% interest, in
Fortune Capital Co., Ltd. (now known as GAIN Capital Japan, Co.
Ltd.), a Tokyo-based market maker authorized by the Japan
Financial Services Agency. In October 2009, we increased our
ownership interest in GAIN Capital Japan, Co. Ltd. to 70.0%.
In those jurisdictions in which we engage in a material amount
of business, we are regulated by the following governmental
bodies and self-regulatory organizations:
|
|
|
|
|
United States: Commodity Futures Trading
Commission, Securities and Exchange Commission, National Futures
Association, and Financial Industry Regulatory Authority.
|
|
|
|
United Kingdom: Financial Services Authority.
|
|
|
|
Japan: Financial Services Agency.
|
102
|
|
|
|
|
Hong Kong: Securities and Futures Commission.
|
|
|
|
The Cayman Islands: The Cayman Islands
Monetary Authority.
|
Substantially all of our operations involving the execution and
clearing of forex transactions are conducted through
subsidiaries that are regulated by governmental bodies or
self-regulatory organizations. These regulators and
self-regulatory organizations regulate the conduct of our
business in many ways and conduct regular examinations to
monitor our compliance with these regulations. Among other
things, we are subject to laws, rules and regulations that cover
all aspects of the forex business, including:
|
|
|
|
|
sales practices, including our interaction with and solicitation
of customers and our marketing activities;
|
|
|
|
trading practices, including restrictions on our execution of
certain forex transactions and surveillance to detect potential
regulatory violations;
|
|
|
|
treatment of customer assets, including, custody, control,
safekeeping, and segregation of our customers funds and
securities;
|
|
|
|
licensing for our operating subsidiaries and registration and
continuing education requirements for our employees;
|
|
|
|
maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
|
|
|
|
anti-money laundering practices;
|
|
|
|
recordkeeping and making financial and other reports to
regulators; and
|
|
|
|
supervision of our business, including the conduct of directors,
officers and employees.
|
For trading by customers in jurisdictions outside the United
States (which in the aggregate represented approximately 43.3%
of our total volume for the nine months ended September 30,
2009), we seek to operate in a manner which enables us to deal
with customers in the relevant jurisdiction in compliance with
local laws but without the obligation to be registered, licensed
or otherwise authorized under the applicable local laws. Our
current policy is that when we enter into a new market or when
residents of a particular jurisdiction account for one percent
(1%) or greater of our customer trading volume, we engage local
legal counsel within such jurisdiction to review and advise on
our regulatory status and compliance with local laws. We have
conducted such a regulatory review of our trading operations in
all such jurisdictions to ensure compliance with local laws.
When we commenced offering our forex trading services through
our Chinese language website to residents of China in October
2003, we believed that our operations were in compliance with
applicable Chinese regulations. However, as a result of our
review of our regulatory compliance in China during 2008, in May
2008 we became aware of a China Banking and Regulatory
Commission, or CBRC, prohibition on forex trading firms
providing retail forex trading services to Chinese residents
through the Internet without a CBRC permit. We do not have such
a permit and to our knowledge, no such permit exists. As a
result of this regulatory uncertainty, we decided to terminate
all service offerings to residents of China and ceased our
trading support operations located in that country. As of
December 31, 2008, we no longer accept new customers or
maintain direct customer accounts from residents of China.
However, due to an ongoing relationship with one of our
introducing brokers, eight immaterial legacy accounts (as of
September 30, 2009), which were originally sourced through
that introducing broker prior to the termination of our service
offering in China, remained open. For the nine months ended
September 30, 2009, the trading activity by these legacy
accounts resulted in an immaterial amount of trading volume. We
have taken steps to close these accounts, and expect they will
be closed, by December 31, 2009. We are unable to predict
if we may be subject to fines or penalties, and if so in what
amounts, as a result of this insignificant trading activity on
our platform in China.
We have also become aware that the CBRC may, at a future date,
issue regulations by which certain institutions will be allowed
to engage in retail forex trading services. There is no
assurance as to when these clarifying regulations will be issued
or, if issued, whether we will be able to offer our trading
services to Chinese residents under such regulations. We will
continue to monitor the regulatory environment in China and,
when possible, we
103
will seek to obtain the necessary permits, licenses or approvals
from the applicable Chinese regulators, or to partner with a
firm with such approval, to resume our retail forex trading
services in China. As our Chinese language website is also used
by customers in other countries, we will continue to use it as
we offer our services to Chinese-speaking customers who do not
reside in China. We cannot provide any assurance that we will
not be subject to fines or penalties relating to the period in
which we provided forex trading services through the Internet to
Chinese residents.
In Canada, the securities industry is governed locally by
provincial or territorial legislation, and there is no national
regulator. Local legislation differs from province to province
and territory to territory. We have previously determined that
the provincial laws of British Columbia would require us to
register as a dealer to offer our trading services directly, so
we have conducted our business in British Columbia through
Questrade, Inc., a registered investment dealer in Canada, since
December 1, 2004. In other provinces and territories in
Canada, where we conduct the bulk of our Canadian business, we
provide our services directly from our U.S. facilities,
without registering as a dealer.
The Canadian regulatory environment is complex and evolving, and
we cannot be certain that our forex trading services are
currently compliant with the regulations of each province and
territory outside British Columbia. Moreover, local regulators
in one or more provinces or territories may in the future
announce that forex trading services must be carried out through
a registered dealer. For example, on October 30, 2009, the
Ontario Securities Commission issued interim guidance pursuant
to a staff notice which took the position that rolling spot
foreign exchange contracts and similar
over-the-counter
derivative contracts fall under the definition of securities.
Accordingly, we have taken preliminary steps to seek exemptive
relief from the registration requirements of Ontario. If we are
unsuccessful, we may seek to offer our services in the affected
province or territory through a white label partnership with a
registered dealer, or seek to register as a dealer in order to
offer our trading services directly. In a province or territory
where we needed to enter into a white label partnership, our
profitability would be negatively impacted because we would have
to share a portion of the revenue generated from customers in
that province or territory with the white label partner. In
addition, we may also be subject to enforcement actions and
penalties or customer claims in any province or territory where
our forex trading operations are deemed to have violated local
regulations.
In Australia and Singapore, we had previously believed that we
did not require a license or permit to conduct our services
directly. As a result of our regulatory review in these
jurisdictions, we have determined that we are required to be
licensed to offer our services directly, and we are therefore
seeking the appropriate registration in Australia and Singapore.
Net
Capital Rule
GAIN Capital Group, LLC, our regulated, wholly-owned subsidiary,
and its regulated affiliates, are subject to jurisdictional
specific minimum net capital requirements, designed to measure
the general financial integrity and liquidity of a regulated
entity. In general, net capital rules require that at least a
minimum specified amount of a regulated entities assets be kept
in relatively liquid form. Net capital is generally defined as
net worth, assets minus liabilities, plus qualifying
subordinated borrowings and discretionary liabilities, and less
mandatory deductions that result from excluding assets that are
not readily convertible into cash and from valuing
conservatively other assets.
If a firm fails to maintain the required net capital, its
regulator and the self-regulating organizations, or other
regulatory bodies may suspend the firm or revoke its
registration and ultimately could require the firms
liquidation. The Net Capital Rule may prohibit the payment of
dividends, the redemption of stock, the prepayment of
subordinated indebtedness and the making of any unsecured
advance or loan to a stockholder, employee or affiliate, if the
payment would reduce the firms net capital below required
levels.
Regulators in the United States continue to evaluate and modify
regulatory capital requirements from time to time in response to
market events in an effort to improve the stability of the
international financial system. For example, NFA issued a notice
to forex dealer members on July 23, 2008 informing them
that on July 17, 2008, the NFAs executive committee
recommended that the NFAs board of directors approve
revisions that increase the current net capital and security
deposit requirements. The proposed increases to the net capital
requirements would increase to $10.0 million on
October 31, 2008, $15.0 million on January 17,
2009 and $20.0 million on May 16, 2009.
104
Additionally, the proposed rule changes would require forex
dealer members to maintain a security deposit equal to or
greater than 150.0% of the then current net capital requirement
to be exempt from collecting minimum security deposits related
to customer transactions. These recommendations were approved
and increased our regulatory capital requirements by
approximately $13.3 million. As of September 30, 2009,
our regulated subsidiary, GAIN Capital Group, LLC, through which
we conduct our foreign exchange business, held
$85.5 million of adjusted net capital, representing
$65.5 million of excess adjusted net capital. We believe
that our excess capital position positively positions us for
potential future increases in required minimum capital
requirements domestically and abroad. Additionally, we believe
that our capital position enhances our access to foreign
exchange liquidity, thereby improving our ability to provide
customers with attractive pricing and facilitating our trading
and hedging activities. Also, we believe that we have adequate
capital positions in all other regulated jurisdictions allowing
us to fulfill our intended business plans and increase our
market share. Our capital position allows us to provide capital
to our affiliates as needed to accommodate their business growth
and meet potential increases in minimum capital requirements.
Foreign
jurisdictions and regulation
We and our subsidiaries are registered or authorized by
financial regulatory authorities in the United States, the
United Kingdom, Japan, Hong Kong and the Cayman Islands. Our
customers access our services through the Internet. We are
seeking registration and authorization by financial regulatory
authorities in Singapore and Australia. As noted above, in those
jurisdictions outside the United States where we have no
permanent establishment but we do have customers, we conduct our
business in a manner which we believe is in compliance with
applicable local law but which does not require local
registration, licensing or authorization. In any such foreign
jurisdiction, there is a possibility that a regulatory authority
could assert jurisdiction over our activities and seek to
subject us to the laws, rules and regulations of that
jurisdiction.
The laws, rules and regulations of each foreign jurisdiction
differ. In foreign jurisdictions other than China and certain
provinces in Canada (where the customers currently represent the
source of more than one percent of our aggregate customer
revenue), we believe that we are exempt from licensing
requirements due to our limited conduct, lack of physical
presence
and/or
non-solicitation of customers in those jurisdictions. In any
jurisdiction where we believe we need not be licensed to conduct
our business, there remains the risk that we could be required
to obtain a license, and therefore be subject to enforcement
action and local regulatory requirements (which may include
having to establish a permanent physical presence) or, in the
alternative, to reduce or terminate our activities in these
jurisdictions. Our current policy is that when we enter into a
new market or when residents of a particular jurisdiction
account for one percent (1%) or greater of our customer trading
volume, we engage local legal counsel within such jurisdiction
to review and advise on our regulatory status and compliance
with local laws. We have conducted such a regulatory review of
our trading operations in all such jurisdictions to ensure
compliance with local laws.
We are commonly restricted from direct marketing to retail
investors including the operation of a website specifically
targeted to investors in a particular foreign jurisdiction or we
are restricted from dealing with retail customers unless they
can be classified as professional, sophisticated or high net
worth investors which may limit our ability to grow our business
in that jurisdiction. We are also commonly restricted from
maintaining a presence in a foreign jurisdiction including
computer servers, bank accounts and the provision of local
account process services which may limit our ability to grow our
business in that jurisdiction or may result in increased
overhead costs or degradation in service provision to customers
in that jurisdiction.
Patriot
Act
Registered FCMs and FDMs traditionally have been subject to a
variety of rules that require that they know their customers and
monitor their customers transactions for suspicious
financial activities. With the passage of the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the Patriot
Act, FCMs and FDMs are now subject to even more stringent
requirements. As required by the Patriot Act, we have
established comprehensive anti-money laundering and customer
identification procedures, designated an anti-money laundering
compliance officer, trained our employees and conducted an
independent audit of our program. Our customer identification
procedures include both a documentary and a non- documentary
review and analysis of the potential customer. Our documentary
review requires the collection and confirmation of multiple
forms of identification and other documentary evidence from each
prospective customer in
105
order to validate such prospective customers identity. We
also contract with several third party global providers of
background checks to perform extensive non-documentary
background checks on each prospective customer. These procedures
and tools coupled with our periodic training assist us with
complying with the provisions of the Patriot Act. There are
significant criminal and civil penalties that can be imposed for
violations of the Patriot Act. For more information, see below
under Supervision and Compliance.
Supervision
and compliance
The role of our compliance department is to provide education,
supervision, surveillance, mediation and communication review.
Many members of our senior management team are NFA-registered
principals with supervisory responsibility over forex trading or
other aspects of our business. In addition, all sales employees
have successfully completed licensing requirements as mandated
by their local regulatory regimes.
Our anti-money laundering screening is conducted using a mix of
automated and manual review and has been structured to comply
with recent regulations. We collect required information through
our new account process and then screen accounts with several
third party databases for the purposes of identity verification
and for review of negative information and appearance on the
Office of Foreign Assets and Control, Specially Designated
Nationals and Blocked Persons lists. Additionally, we have
developed proprietary methods for risk control and continue to
add specialized processes, queries and automated reports
designed to identify money laundering, fraud and other
suspicious activities.
Corporate
Structure, Facilities and Properties
Corporate
structure
We currently occupy space in eight sites: Our headquarters in
Bedminster, New Jersey, sales and support offices in New York
City, the Cayman Islands, Jersey City, Woodmere, Ohio, London,
Hong Kong, and a representative office and a technology
development office in Shanghai. Consistent with the termination
of our business in China, we are in the process of closing our
Shanghai offices. These sites comprise approximately
75,000 square feet in aggregate. Each site is leased by one
of our wholly-owned subsidiaries and we believe each site is
suitable for our current use.
Although our current headquarters is in Bedminster, New Jersey,
we plan to vacate this space by the end of 2009. We entered into
a new lease agreement on August 18, 2009 for approximately
45,000 square feet of office space at 135 Route 202/206,
Bedminster, New Jersey and plan to move our operations into the
new facility in the first quarter of 2010.
106
GAIN
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
|
|
|
|
|
|
as of September 30,
|
Location
|
|
Function
|
|
Square Feet
|
|
Lease Expiration
|
|
2009
|
|
Bedminster, New Jersey
|
|
Management, Marketing, Operations, Compliance, Legal, Human
Resources, Call Center
|
|
|
33,725
|
|
|
December 2009
|
|
|
210
|
|
New York City, New York
|
|
Sales and Customer Service
|
|
|
23,294
|
|
|
July 2010
|
|
|
96
|
|
Jersey City, New Jersey
|
|
Management, Operations, Sales, Customer Service, Operations,
Technology Development
|
|
|
5,252
|
|
|
December 2009
|
|
|
24
|
|
Tokyo, Japan
|
|
Management, Sales, Compliance, Operations
|
|
|
4,090
|
|
|
May 2011
|
|
|
11
|
|
Shanghai, China
|
|
In Process of Closing Offices
|
|
|
3,875
|
|
|
December 2009
|
|
|
0
|
|
Woodmere, Ohio
|
|
Management, Operations, Customer Service, Compliance
|
|
|
2,496
|
|
|
October 2010
|
|
|
6
|
|
London, England
|
|
Management, Sales, Compliance, Operations
|
|
|
2,120
|
|
|
March 2011
|
|
|
11
|
|
Hong Kong
|
|
Management, Sales, Compliance
|
|
|
236
|
|
|
October 2009
|
|
|
4
|
|
Grand Cayman, Cayman Islands
|
|
Management, Sales, Customer Service
|
|
|
200
|
|
|
Month to Month
|
|
|
0
|
|
107
MANAGEMENT
Our executive officers, directors and other significant
employees, and their ages and positions as of September 30,
2009, are set forth below:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Executive Officers
|
|
|
|
|
|
|
Glenn H.
Stevens(4)
|
|
|
46
|
|
|
President, Chief Executive Officer and Director
|
Henry C. Lyons
|
|
|
46
|
|
|
Chief Financial Officer and Treasurer
|
Timothy OSullivan
|
|
|
45
|
|
|
Chief Dealer
|
Samantha
Roady(5)
|
|
|
39
|
|
|
Chief Marketing Officer
|
Directors
|
|
|
|
|
|
|
Mark E.
Galant(4)
|
|
|
51
|
|
|
Chairman of the Board of Directors
|
Ken
Hanau(2)(3)
|
|
|
44
|
|
|
Director
|
Gerry
McCrory(1)(6)
|
|
|
47
|
|
|
Director
|
James C.
Mills(3)
|
|
|
42
|
|
|
Director
|
Peter
Quick(1)(2)(3)
|
|
|
53
|
|
|
Director and Lead Independent Director
|
Joseph
Schenk(1)(4)
|
|
|
50
|
|
|
Director
|
Christopher S.
Sugden(1)(3)
|
|
|
39
|
|
|
Director
|
Roger
Tarika(2)(4)
|
|
|
53
|
|
|
Director
|
Susanne D.
Lyons(3)
|
|
|
52
|
|
|
Director
|
Significant Employees
|
|
|
|
|
|
|
Alexander Bobinski
|
|
|
45
|
|
|
Senior Vice President, Operations
|
Christopher W. Calhoun
|
|
|
39
|
|
|
Senior Advisor and Secretary
|
Andrew Haines
|
|
|
44
|
|
|
Chief Information Officer
|
Kenneth OBrien
|
|
|
37
|
|
|
Senior Vice President, Strategic Integration
|
|
|
|
(1)
|
|
Member of Audit Committee
|
|
(2)
|
|
Member of Nominating and Corporate
Governance Committee
|
|
(3)
|
|
Member of Compensation Committee
|
|
(4)
|
|
Member of Risk Committee
|
|
(5)
|
|
Ms. Roady was appointed an
executive officer in August 2009.
|
|
(6)
|
|
Effective upon closing of our
initial public offering, Mr. McCrory intends to resign as a
member of our board of directors.
|
None of our directors is related to any other director or to any
of our executive officers or significant employees.
Executive
Officers
Glenn H. Stevens has served as our president and chief
executive officer since June 2007 and a member of our board of
directors since June 2007. From February 2000 to May 2007,
Mr. Stevens served as one of our managing directors. From
June 1997 to January 2000, Mr. Stevens served as managing
director, head of North American sales and trading, at National
Westminster Bank Plc (which was acquired by the Royal Bank of
Scotland Group in 2000). From June 1990 to June 1997,
Mr. Stevens served as managing director and chief FX dealer
at Merrill Lynch & Co., Inc. Mr. Stevens is
registered with the CFTC and NFA as a principal and associated
person. Mr. Stevens received a BS in Finance from Bucknell
University and an MBA in Finance from Columbia University.
108
Henry C. Lyons has served as our chief financial officer
and treasurer since March 2008. From September 2006 to February
2008, Mr. Lyons served as senior vice president and chief
financial officer at ACI Worldwide, a global provider of
e-payment
processing software and services. Mr. Lyons served from
April 2004 to August 2006 as chief financial officer for
Discovery Systems, a business unit of GE Healthcare Biosciences,
Inc. From January 2001 to March 2004, Mr. Lyons was
employed by Amersham Biosciences, Inc. (which was acquired by GE
Healthcare in 2004) as corporate controller of the
Biosciences division. Mr. Lyons received a BBA in
Accounting from Millsaps College and an MBA from New York
Institute of Technology.
Timothy OSullivan has served as chief dealer since
March 2000. Mr. OSullivan manages the
day-to-day
operations of our trading desk. From March 1994 to March 2000,
Mr. OSullivan served as director of the New York
Sterling desk at Merrill Lynch & Co., Inc.
Mr. OSullivan received a BS in Civil Engineering from
the University of Delaware.
Samantha Roady has served as our chief marketing officer
since August 2006. From September 1999 until August 2006, she
was our senior vice president, marketing. From November 1994 to
October 1999, Ms. Roady served as director of marketing for
FNX Limited, a privately-held provider of trading and risk
management solutions to the international financial community.
Ms. Roady is registered with the CFTC and NFA as a
principal. Ms. Roady received a BA in International Affairs
from James Madison University.
Non-Employee
Directors
Mark E. Galant has served as chairman of our board of
directors since our founding in October 1999. Since October
2008, Mr. Galant has served as chief executive officer and
chairman of the board of directors of Tydall Trading LLC, a
privately held high frequency algorithmic trading firm. From
October 1999 to June 2007, Mr. Galant served as our chief
executive officer. From 1994 to 1999, Mr. Galant served as
president of FNX Limited, an international provider of trading
and risk management systems. From 1991 to 1994, Mr. Galant
served as global head of foreign exchange options trading at
Credit Suisse. In May 2008, Mr. Galant founded the Galant
Center for Entrepreneurship with the McIntire School of Commerce
at the University of Virginia. Mr. Galant currently serves
as a member of the board of directors of Scivantage, Inc.,
Trader Tools, Inc. and Fonas Trading, LLC. Mr. Galant
received a BS in Finance from the University of Virginia and an
MBA from Harvard Business School.
Ken Hanau has served as a member of our board of
directors since May 2009. Since July 2006, Mr. Hanau has
served as a partner of 3i U.S. Growth Capital. From July
2002 to July 2006, Mr. Hanau served as a partner of Halyard
Capital, a private equity firm leading investments in the media
and business services sectors. Previously Mr. Hanau worked
in investment banking at Morgan Stanley and at K&H
Corrugated Case Corporation, a family-owned business.
Mr. Hanau is a certified public accountant and started his
career with Coopers & Lybrand. He received his BA with
honors from Amherst College and his MBA from Harvard Business
School.
Gerry McCrory has served as a member of our board of
directors since September 2005. Since its founding in 1998,
Mr. McCrory has served as managing director of Cross
Atlantic Capital Partners, a venture capital fund. From 1997 to
1998, Mr. McCrory served as managing director of Cambridge
Technology Partners (Ireland), a technology consulting firm now
owned by Novell Corporation. Mr. McCrory is a fellow of the
Institute of Chartered Accountants and received a first class
degree in Economics from the University of Ulster and an MBA
from University College Dublin. Mr. McCrory intends to
resign as a member of our board of directors immediately upon
the completion of this offering.
James C. Mills has served as a member of our board of
directors since March 2006. Mr. Mills is a managing
director at VantagePoint Venture Partners, Inc., a venture
capital firm which he joined in September 2001. From October
1998 to April 2001, Mr. Mills served in a number of
different capacities at Webvan Group, an online retail company.
From February 1997 to October 1998, Mr. Mills held product
management positions in the Application Server Division of
Oracle Corporation, an enterprise software company.
Mr. Mills received BA in Engineering Sciences from
Dartmouth College and an MBA from Stanford University.
Peter Quick has served as a member of our board of
directors since December 2006 and was designated lead
independent director in 2008. Since May 2005, Mr. Quick has
acted as a private investor managing a diversified
109
portfolio of public and private investments. From July 2000 to
May 2005, Mr. Quick served as the president and member of
the board of governors of the American Stock Exchange, or AMEX.
Prior to joining the AMEX, Mr. Quick served from January
1983 to March 2000 as president and chief executive officer of
Quick & Reilly, Inc., a leading national discount
brokerage firm, which was acquired by Bank of America.
Mr. Quick currently serves as a member of the board of
directors of Medicure, Inc., a publicly-held pharmaceutical
company focused on cardiovascular and cerebral vascular
therapeutics, the board of governors of St. Francis Hospital and
Good Shepard Hospice and the board of directors of the Jefferson
Scholars Foundation at the University of Virginia.
Mr. Quick received a BS in Civil Engineering from the
University of Virginia.
Joseph Schenk has served as a member of our board of
directors since April 2008. Since June 2009, Mr. Schenk has
served as senior managing partner of First NY Securities, LLC, a
principal trading firm. From June 2008 to March 2009,
Mr. Schenk served as chief executive officer of Pali
Capital, Inc., a financial services firm. From January 2000
until December 2007, Mr. Schenk served as chief financial
officer and executive vice president of Jefferies Group, Inc., a
full service investment bank and institutional securities firm.
Mr. Schenk also served as senior vice president, corporate
services, of Jefferies from September 1997 through December
1999. From January 1996 through September 1997, Mr. Schenk
served as chief financial officer and treasurer of Tel-Save
Holdings, Inc., now Talk America Holdings, Inc. From September
1993 to January 1996, Mr. Schenk served as Vice President,
Capital Markets Group, with Jefferies. Mr. Schenk received
a BS in Accounting from the University of Detroit.
Christopher S. Sugden has served as a member of our board
of directors since April 2006. He is Managing Partner and
Chairman of the investment committee of Edison Venture Fund, a
venture capital fund. Since May 2007, Mr. Sugden has served
as a general partner of Edison Venture Fund. From April 2002 to
May 2007, Mr. Sugden held various positions with Edison
Venture Fund, including partner and principal. From January 1999
to December 2001, Mr. Sugden served as executive vice
president and chief financial officer of Princeton eCom, a
privately-held financial services software company.
Mr. Sugden currently serves as a member of the board of
directors of Billtrust, Inc., Business Financial Services, Inc.,
Folio Dynamix, Inc., IPP of America, Inc., Operative Media,
Inc., Trader Tools, Inc., and Scivantage, Inc. A certified
public accountant, Mr. Sugden received a BA in Accounting,
with Honor, from Michigan State University.
Roger Tarika has served as a member of our board of
directors since July 2004. From May 2004 to May 2009,
Mr. Tarika has served as vice president of development for
DPS Sporting Club LLC, a real estate development firm. From 1984
to 2001 Mr. Tarika held various positions with Morgan
Stanley & Co, including managing director, head of FX
Europe, global FX sales manager. Mr. Tarika currently
serves as a member of the board of directors of Farms Academy
School and Horizons at GFA student enrichment program.
Mr. Tarika received a BS from Duke University and an MBA
from Harvard Business School.
Susanne D. Lyons has served as a member of our board of
directors since January 2009. Ms. Lyons retired in
September 2007. From June 2004 to September 2007, Ms. Lyons
served as executive vice president and chief marketing officer
of Visa, USA. From 2003 to 2004, Ms. Lyons served as
managing director of Russell Reynolds Associates, an executive
search firm. From 1992 to 2001, Ms. Lyons served in various
senior capacities at Charles Schwab & Co., including
president of retail client services and chief marketing officer.
Prior to 1992, Ms. Lyons served in various capacities at
Fidelity Investments. Ms. Lyons received a BA from Vassar
College and an MBA from Boston University.
Significant
Employees
Alexander Bobinski has served as our senior vice
president, operations, since September 2008. Mr. Bobinski
served as chief financial officer and chief compliance officer
of our wholly-owned subsidiary, GAIN Capital Group since August
2005. From January 2002 to March 2005, Mr. Bobinski served
as chief financial officer at Refco, LLC, the global commodity
futures trading and clearing entity of Refco, Inc. On
October 15, 2007, a petition under the federal bankruptcy
laws was filed against Mr. Bobinski by Marc Krischner, as
trustee for the Refco Litigation Trust, relating to the October
2005 bankruptcy of Refco, Inc., and was settled in March 2008.
From July 1990 to December 2001, Mr. Bobinski served as
vice president and controller for the futures and options
business at Nomura Securities International, a global clearing
firm, commodity pool operator and trading advisor.
Mr. Bobinski is registered with
110
the CFTC and NFA as a principal. Mr. Bobinski, a Certified
Public Accountant, received a BS in Business
Administration/Accounting from Ramapo College of New Jersey.
Christopher W. Calhoun has served as our senior advisor
since April 2009 and our corporate secretary since June 2007.
From June 2008 to April 2009, Mr. Calhoun served as our
Managing Director. From December 2005 to July 2008,
Mr. Calhoun served as our chief operating officer. From
November 2000 to December 2005, Mr. Calhoun served in
various positions with us, including vice president of
operations and vice president of business technology. From March
1992 to March 2000, Mr. Calhoun served in a number of
executive level roles, including chief operating officer, of FNX
Limited, a privately-held provider of trading and risk
management solutions to the international financial community.
Mr. Calhoun is registered with the CFTC and NFA as an
associated person. Mr. Calhoun received a BS in Finance and
an MBA from La Salle University.
Andrew Haines has served as our chief information officer
since September 2007. From September 2004 to July 2005
Mr. Haines was President at Arch Technology Group, LLC, a
private technology consulting firm. From July, 2005 until
September, 2007, Mr. Haines served as our vice president,
application development. From January 2004 to September
2004, Mr. Haines served as the chief information officer
and vice president of technology at Bluefly, Inc., a
publicly-held online retailer. Mr. Haines received a BS in
Finance from the University of Delaware and his MA in Technology
Management from the Stevens Institute of Technology.
Kenneth OBrien has served as our senior vice
president, strategic integration since January 2008. From
December 2004 to December 2007, Mr. OBrien served as
our vice president, product management & strategic
alliances. From July 2004 to December 2004,
Mr. OBrien served as vice president, North American
sales of Accurate Software, Inc., a privately-held provider of
financial electronic commerce services and products that was
acquired by CheckFree Software in 2005. From May 2002 to July
2004, Mr. OBrien served as vice president,
North American sales for City Networks, Inc., a privately
held provider of back-office operational software. From
July 1994 to May 2002, Mr. OBrien served in
various capacities, including managing director, director of
sales support and Product Manager of back office operations, at
FNX Limited, a privately-held provider of trading and risk
management solutions to the international financial community.
Mr. OBrien received a BS in Business Administration
from La Salle University.
Board
Composition
Independent
directors
Our board of directors is currently composed of ten members and
will be composed of nine members as of the closing of this
offering. Mr. McCrory intends to resign as a member of the
board of directors immediately upon completion of this offering.
Messrs. Hanau, Mills, Sugden, Quick, Schenk, Tarika and
Ms. Lyons qualify as independent directors in accordance
with the published listing requirements of NASDAQ. The NASDAQ
independence definition includes a series of objective tests,
such as that the director is not, and has not been for at least
three years, one of our employees and that neither the director
nor any of his or her family members has engaged in various
types of business dealings with us. In addition, as further
required by the NASDAQ rules, our board of directors has made a
subjective determination as to each independent director that no
relationships exist that, in the opinion of our board of
directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Since 2008, our board of directors has designated a lead
independent director who acts as the leader of the independent
directors and as chairperson of the executive sessions of our
independent directors, serves as a non-exclusive intermediary
between the independent directors and management, including our
chairman and chief executive officer and president, provides
input to the chairman in planning agendas for the board of
directors meetings and facilitates discussions among the
independent directors as appropriate between board of directors
meetings. Mr. Quick is currently serving as our lead
independent director.
Staggered
board structure
Our amended and restated certificate of incorporation and our
amended and restated bylaws that will become effective
immediately prior to the closing of this offering, provide for a
board of directors consisting of three classes
111
of directors as nearly equal in size as possible, class I,
class II and class III, with each class serving
staggered three-year terms. Upon the completion of this
offering, the members of the classes on our board will be
divided as follows:
|
|
|
|
|
the class I directors will be Peter Quick, Christopher S.
Sugden and Roger Tarika, and their terms will expire at the
annual meeting of stockholders to be held in 2010;
|
|
|
|
the class II directors will be Mark Galant, Ken Hanau and
James C. Mills and their terms will expire at the annual meeting
of stockholders to be held in 2011; and
|
|
|
|
the class III directors will be Susanne Lyons, Joseph
Schenk and Glenn H. Stevens, and their terms will expire at the
annual meeting of stockholders to be held in 2012.
|
Our amended and restated certificate of incorporation and
amended and restated bylaws that will become effective
immediately prior to the closing of this offering provide that
the number of authorized directors may be changed only by
resolution of a majority of the number of directors present at a
meeting and any vacancies or new directorships on our board of
directors may be filled by a majority vote of the directors then
in office.
Election
arrangements
Messrs. Galant, McCrory, Sugden, Hanau, Mills, Stevens,
Quick, Schenk and Tarika were elected pursuant to a voting
agreement contained in the stockholders agreement we entered
into with certain holders of our common and preferred stock.
These provisions contained in the stockholders agreement will
terminate upon the closing of this offering and all outstanding
shares of preferred stock will be converted into shares of our
common stock in connection with this offering, and there will be
no further contractual obligations, or terms of our outstanding
securities, regarding the election of our directors. Upon the
effectiveness of our initial public offering, our directors will
hold office for three-year terms and until their successors have
been elected and qualified or their earlier death, resignation
or removal.
Board
Committees
Our board of directors has established an audit committee, a
compensation committee, a nominating and corporate governance
committee and a risk committee. Our board of directors and its
committees set schedules to meet throughout the year and can
also hold special meetings and act by written consent under
certain circumstances. The independent members of our board of
directors will also regularly hold separate executive session
meetings at which only independent directors are present. Our
board of directors has delegated various responsibilities and
authority to its committees as generally described below. The
committees will regularly report on their activities and actions
to the full board of directors. Except for our risk committee
which includes Messrs. Stevens and Galant, each member of
each committee of our board of directors will, as of the time of
the effectiveness of the registration statement of which this
prospectus forms a part, qualify as an independent director in
accordance with the NASDAQ standards described above. Each
committee of our board of directors will, prior to the
completion of this offering, adopt a written charter approved by
our board of directors. Upon the effectiveness of the
registration statement of which this prospectus forms a part,
copies of each charter will be posted on our website at
www.gaincapital.com under the Investor Relations section.
The inclusion of our website address in this prospectus does not
include or incorporate by reference the information on, or that
may be accessed through, our website into this prospectus.
Audit
committee
The audit committee of our board of directors oversees our
accounting practices, system of internal controls, audit
processes and financial reporting processes. Among other things,
our audit committee is responsible for reviewing our disclosure
controls and processes and the adequacy and effectiveness of our
internal controls. It also discusses the scope and results of
the audit with our independent registered public accounting
firm, reviews with our management and our independent registered
public accounting firm our interim and year-end results of
operations and, as appropriate, initiates inquiries into aspects
of our financial affairs. In addition, our audit committee has
sole and direct responsibility for the appointment, retention,
compensation and oversight of the work of our independent
registered public accounting firm, including approving services
and fee arrangements. Our audit committee is also responsible
for establishing procedures for the receipt, retention and
treatment of complaints regarding accounting,
112
internal accounting controls or auditing matters, and matters
related to our code of business conduct, and for the
confidential, anonymous submission by our employees of concerns
regarding these matters. Our audit committee also is responsible
for reviewing and approving all related party transactions in
accordance with the related party transactions approval policy
we will adopt prior to the completion of this offering.
The current members of our audit committee are
Messrs. McCrory, Quick, Schenk and Sugden, and upon the
effectiveness of the registration statement of which this
prospectus forms a part, the members will be Messrs. Quick,
Schenk and Sugden. The composition of our audit committee will,
as of the time of the effectiveness of the registration
statement of which this prospectus forms a part, meet the
requirements for independence under the rules and regulations of
the SEC and the listing standards of NASDAQ, taking into account
the relevant transition rules for IPO issuers. Mr. Schenk
currently chairs the audit committee and will continue to chair
the audit committee as of the time of effectiveness of the
registration statement of which this prospectus forms a part.
Our board of directors has determined that Mr. Schenk is an
audit committee financial expert as defined in
Item 407(d)(5)(ii) of
Regulation S-K
promulgated by the SEC.
Compensation
committee
The compensation committee of our board of directors has primary
responsibility for discharging the responsibilities of our board
of directors relating to executive compensation policies and
programs. Specific responsibilities of our compensation
committee include, among other things, evaluating the
performance of our chief executive officer and determining our
chief executive officers compensation. In consultation
with our chief executive officer, it will also determine the
compensation of our other executive officers. In addition, our
compensation committee will administer our equity compensation
plans and has the authority to grant equity awards and approve
modifications of those awards under our equity compensation
plans, subject to the terms and conditions of the equity award
policy adopted by our board of directors. Our compensation
committee also reviews and approves various other compensation
policies and matters.
The current members of our compensation committee are
Ms. Lyons and Messrs. Hanau, Mills, Quick and Sugden,
and upon the effectiveness of the registration statement of
which this prospectus forms a part, the members will be
Ms. Lyons and Messrs. Mills and Quick. Mr. Mills
currently chairs the compensation committee. As of the
effectiveness of the registration statement of which this
prospectus forms a part, Ms. Lyons will chair the
compensation committee. The composition of our compensation
committee will, as of the time of the effectiveness of the
registration statement of which this prospectus forms a part,
meet the requirements for independence under the rules and
regulations of the SEC and the listing standards of NASDAQ,
taking into account the relevant transition rules for IPO
issuers.
Nominating
and corporate governance committee
The nominating and corporate governance committee of our board
of directors will oversee the nomination of directors,
including, among other things, identifying, evaluating and
making recommendations of nominees to our board of directors,
and will evaluate the performance of our board of directors and
individual directors. Our nominating and corporate governance
committee will also be responsible for reviewing developments in
corporate governance practices, evaluating the adequacy of our
corporate governance practices and making recommendations to our
board of directors concerning corporate governance matters.
The current members of our nominating and corporate governance
committee are Messrs. Hanau, Quick and Tarika. Upon
effectiveness of the registration statement of which this
prospectus forms a part, the members of our nominating and
corporate governance committee will be Ms. Lyons and
Messrs. Hanau, Quick and Tarika. Mr. Quick will chair
the nominating and corporate governance committee. The
composition of our nominating and corporate governance committee
will, as of the time of the effectiveness of the registration
statement of which this prospectus forms a part, meet the
requirements for independence under the rules and regulations of
the SEC and the listing standards of NASDAQ, taking into account
the relevant transition rules for IPO issuers.
113
Risk
committee
The risk committee assists our board of directors in overseeing
our risk management practices. Our risk committee reviews risk
reports generated by our management to ensure that we are
effectively identifying, monitoring and controlling operational,
legal and regulatory risks. As appropriate, our risk committee
communicates with other committees with respect to risk issues.
In addition, the risk committee will also have oversight
responsibilities for risks relating to our lending operations
(credit risk), and risks and results related to our balance
sheet (primarily its managed flow portfolio, capital and
liquidity) and the impact of market conditions and interest
rates on our operations.
Upon effectiveness of the registration statement of which this
prospectus forms a part, the members of our risk committee will
be Messrs. Galant, Stevens, Tarika and Schenk.
Mr. Galant will chair the risk committee. Each of
Messrs. Schenk and Tarika is an independent
director under the applicable rules and regulations of
NASDAQ.
Code of
Business Conduct and Ethics
Our board of directors will adopt a code of business conduct and
ethics prior to the effectiveness of the registration statement
of which this prospectus forms a part. The code of business
conduct and ethics will apply to all of our employees,
consultants, officers and directors. Upon the effectiveness of
the registration statement of which this prospectus forms a
part, the full text of our code of business conduct and ethics
will be posted on our website at www.gaincapital.com
under the Investors Relations section. We intend to disclose
future amendments to certain provisions of our code of business
conduct and ethics, or waivers of these provisions, at the same
location on our website identified above and also in public
filings. The inclusion of our website address in this prospectus
does not include or incorporate by reference the information on,
or that may be accessed through, our website into this
prospectus.
Compensation
of Directors
The following table sets forth information concerning the total
compensation paid to our current directors during fiscal year
2008 for their respective service on our board of directors. The
compensation amounts presented in the table below are historical
and are not indicative of the amounts we may pay our directors
in the future. Directors who are also our employees receive no
additional compensation for their services as directors. After
our initial public offering, each non-employee director will be
entitled to receive an annual fee from us of $30,000. The
chairpersons of our audit committee and compensation committee
will each receive an additional annual fee of $10,000. Our
non-employee directors will also be entitled to additional
compensation for attendance at in-person or telephonic board of
directors or committee meetings of $1,500 for each in-person
board of directors meeting attended, $750 for each telephonic
board of directors meeting attended and $750 for each committee
meeting, in-person or telephonic, attended. We also reimburse
non-employee directors for reasonable expenses incurred in
connection with attending board of directors and committee
meetings Each non-employee director will also be entitled to an
annual grant of options to purchase 4,500 shares of our
common stock under our 2009 Omnibus Incentive Compensation Plan.
The chairman of our board of directors will be entitled to
equity grants at a ratio of 1.375 equity grants for every one
equity grant made to the other
114
non-employee directors when equity grants are made. Non-employee
directors may elect to receive restricted stock units under our
2009 Omnibus Incentive Compensation Plan in lieu of the annual
cash fees described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
Non-Equity
|
|
Nonqualified
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
|
|
|
|
|
or Paid
|
|
|
|
Option
|
|
Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
in Cash
|
|
Stock Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
|
Name(a)
|
|
($)(b)
|
|
($)(1)(2)(c)
|
|
($)(d)
|
|
($)(e)
|
|
($)(f)
|
|
($)(g)
|
|
Total ($)(h)
|
|
Roger Tarika
|
|
|
|
|
|
$
|
95,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,178
|
|
Peter Quick
|
|
|
|
|
|
$
|
89,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89,327
|
|
Mark E.
Galant(3)
|
|
|
|
|
|
$
|
823,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
823,146
|
|
Joseph Schenk
|
|
|
|
|
|
$
|
28,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,533
|
|
Susanne
Lyons(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerry McCrory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken
Hanau(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Mills
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Sugden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the compensation cost
recognized with respect to the portion of the stock awards which
vested in that year, including awards which may have been
granted in earlier years. The reported dollar amounts do not
take into account any estimated forfeitures related to
service-based vesting conditions.
|
|
(2)
|
|
The grant date fair value of the
stock awards granted in 2008 under SFAS 123(R) is $98,216
for Mr. Tarika, $98,296 for Mr. Galant, $27,315 for
Mr. Schenk and $92,615 for Mr. Quick. As of
December 31, 2008, each director had the following number
of restricted stock units outstanding: Mr. Tarika (9,083),
Mr. Galant (121,974), Mr. Schenk (1,624) and
Mr. Quick (6,750).
|
|
(3)
|
|
The amount set forth under Stock
Awards consists of (i) $102,679 that vested in 2008 from
his immediately vested 2008 director grants, and
(ii) $720,467 that vested in 2008 for grants in prior years
while he served in the capacity of chief executive officer and
director.
|
|
(4)
|
|
Ms. Lyons was elected to our
board of directors in January 2009.
|
|
(5)
|
|
Mr. Hanau was elected to our
board of directors in June 2009.
|
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board
of directors or compensation committee, or other committee
serving an equivalent function, of any other entity that has one
or more of its executive officers serving as a member of our
board of directors or compensation committee. None of the
current members of our compensation committee, nor any directors
that will comprise our compensation committee upon effectiveness
of the registration statement of which this prospectus forms a
part, has ever been an employee of our company.
Executive
Officers
Each of our executive officers has been appointed by our board
of directors and serves until his or her successor is duly
appointed and qualified.
Compensation
Discussion and Analysis
Our executive compensation program is designed to attract
individuals with the skills necessary for us to achieve our
business objectives, to reward those individuals fairly over
time, to retain those individuals who continue to perform at or
above the levels that we expect and to closely align the
compensation of those individuals with our performance on both a
short-term and long-term basis. To that end, our executive
officers compensation has three primary components: base
compensation, annual incentive compensation and long-term
incentive compensation. We also provide our executive officers a
variety of benefits that are available generally to all salaried
employees, except for the country club membership as described
below under Other Benefits.
115
General
We view each component of executive compensation as related but
distinct, and we review total compensation of our executive
officers to ensure that our overall compensation goals are met.
We attempt to establish compensation, and determine the
appropriate level for each compensation component, at levels
comparable to companies with which we compete and other
companies who employ similarly skilled personnel, consistent
with our recruiting and retention goals, our view of internal
equity and consistency, our overall performance and other
considerations we deem relevant. For annual compensation
reviews, we evaluate each executives performance, look to
industry trends in compensation levels and generally seek to
ensure that compensation is appropriate for an executive
officers level of responsibility and for the promotion of
future performance and provides an adequate incentive to the
executive to promote our ongoing strategic growth and financial
objectives.
Except as described below, we have not adopted any formal or
informal policies or guidelines for allocating compensation
between long-term and current compensation, between cash and
non-cash compensation or among different forms of non-cash
compensation. However, since we are a growing company our
general philosophy is, and has been to date, to keep base
compensation to a nominally competitive level while rewarding
employees through performance based annual incentives and
long-term compensation. Our performance based annual incentive
compensation is generally payable in cash, and performance based
long-term incentive compensation is generally in the form of
equity based compensation. Our experience has been that the
breakdown of compensation in this manner is a significant
motivator in attracting employees within our industry.
We did not engage in competitive benchmarking with peer
companies for our 2008 executive compensation program. In 2008,
our compensation committee engaged Frederic W. Cook and Co.,
Inc., or Frederic Cook, an independent compensation consultant,
to provide an executive compensation review of our overall
executive compensation, benchmark such compensation in relation
to other comparable companies with which we may compete for
executive talent and provide recommendations to ensure that our
2009 executive compensation program continues to enable us to
attract and retain qualified executives through competitive
compensation packages which will result in the attainment of our
short-term and long-term strategic objectives. Frederic Cook
found peer group comparison data difficult to find due to the
unique nature of our business. Therefore, while the peer group
data provided by Frederic Cook provides useful comparisons for
our 2009 executive compensation program, the compensation
committee uses the data as a guide, not as a rule when
establishing the 2009 compensation packages we provide to our
executives and takes into account other factors as it deems
appropriate.
Frederic Cook benchmarked our executive compensation against a
group of nine publicly-traded securities, brokers, dealers and
related service companies, including: ETRADE, GFI Group, Knight
Capital, Investment Technology Group, thinkorswim Group,
LaBranche & Company, OptionsXpress, TradeStation
Group, BGC Partners, and Marketaxess. Frederic Cook also
benchmarked our executive compensation against five securities
data and technology providers, including: DST Systems,
Interactive Data, Factset Research Systems, and Advent Software.
Our compensation committee utilizes Frederic Cook on an ongoing
basis as its consultant for executive compensation matters.
Elements
of compensation
Our compensation committee has traditionally sought to perform,
at least annually, a review of our executive officers
overall compensation packages to determine whether they provide
adequate incentives and motivation and whether they adequately
compensate our executive officers relative to the market. In
addition to the analysis provided by Frederic Cook in 2008, our
compensation committee has relied upon its collective experience
in our industry in general in evaluating the market for
attracting and retaining qualified executives. To achieve the
objectives for our executive compensation program, our
compensation committee evaluates executive compensation with a
goal of setting aggregate annual compensation at levels the
compensation committee believes are competitive. For 2009, total
cash compensation targets for Messrs. Stevens,
OSullivan and Lyons are $2,112,500, $1,075,500 and
$526,000, respectively, and are 103%, 42% and 9%, respectively,
over the median of peer group target comparisons.
116
Executive compensation consists of the following elements:
Base Compensation. We fix executive officer
base compensation at a level that we believe, based on the
collective industry experience of our compensation committee,
survey data based on publicly available sources and the
executive officers previous compensation history, best
enables us to hire and retain individuals in a competitive
environment and reward individual performance according to
satisfactory levels of contribution to our overall business
goals. We make periodic adjustments to base salary based on
individual performance and contributions, market trends,
competitive position and our financial situation. We view base
compensation as one component of our named executive
officers total annual cash compensation and sometimes
change the mix between base compensation and annual incentive
compensation. The salaries of Messrs. Stevens, Calhoun and
OSullivan were increased by approximately 63.0%, 17.0%,
and 0.0% in 2008, respectively. Mr. Lyons was hired as our
chief financial officer in March 2008 and his salary was
negotiated in connection with his hire. The salary of
Mr. OSullivan was increased by approximately 20.0%
for 2009. The salaries of Messrs. Stevens and Lyons did not
change for 2009. These changes were part of our normal annual
compensation review process and reflect our review of
competitive compensation levels in the market. In July 2009,
Mr. Calhoun agreed to modify his position as managing
director whereby he agreed to assume a part-time position as
senior advisor, overseeing certain of our strategic initiatives.
In connection with this change in responsibility,
Mr. Calhouns compensation was modified to reflect his
part-time employment and was paid $50,000 annually. In October
2009, Mr. Calhouns compensation was increased to $100,000
annually to reflect increased responsibilities. Mr. Calhoun
remains a part-time employee.
Annual Incentive Compensation. We utilize cash
bonuses to reward performance achievements, to provide
incentives to attain both individual and corporate goals and
have in place annual target incentive bonuses for each of our
executive officers, that are payable, depending on the extent to
which the applicable performance goals are achieved. For 2009,
our compensation committee determined that all executive annual
cash incentive bonuses will be earned based upon:
|
|
|
|
|
our corporate performance, consisting of revenue and
EBITDA; and
|
|
|
|
each named executive officers individual performance
relative to the corporate performance.
|
The weighting of the components of the total annual cash
compensation targets for each named executive officers is
based 50% on the achievement of corporate annual revenue levels
and 50% based on the achievement of annual EBITDA levels. The
compensation committee establishes total cash compensation
targets for each named executive officer based on various levels
of annual revenue and EBITDA achievement. Cash incentive bonus
amounts for each named executive officer is calculated by
subtracting the named executive officers base salary from
the total cash compensation target for the named executive
officer at our achieved level of revenue and EBITDA. Total cash
compensation for any named executive officer cannot go below the
base salary of such named executive officer.
Targeted 2009 annual cash incentive compensation for
Messrs. Stevens, OSullivan, and Lyons are $1,462,500,
$835,500, and $201,000, respectively. Due to his change in
employment status in 2009, Mr. Calhoun is not participating
in the incentive compensation program for 2009. The compensation
committee believes that these targets present achievable goals,
but are not certain and depend upon successful execution of our
business plan.
We must achieve certain minimum corporate revenue levels and
minimum annual EBITDA levels for the annual cash incentive bonus
to be paid. The minimum corporate revenue levels and minimum
annual EBITDA levels vary for each named executive officer based
on the mix of the total annual cash compensation for each named
executive officer. We vary the respective minimum levels so that
a named executive officer who receives a larger portion of their
annual cash compensation in the form of an annual bonus will
have a lower minimum corporate revenue level and minimum annual
EBITDA level compared to a named executive officer who receives
a larger
117
portion fixed as base salary. For 2009, the minimum corporate
revenue levels, the minimum corporate EBITDA levels, the revenue
targets and the EBITDA targets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Annual
|
|
|
Minimum Annual
|
|
|
|
|
|
|
|
Name
|
|
Revenue Levels
|
|
|
EBITDA Levels
|
|
|
Target Revenue
|
|
|
Target EBITDA
|
|
|
Glenn H. Stevens
|
|
$
|
77,022,874
|
|
|
$
|
29,268,692
|
|
|
$
|
210,150,000
|
|
|
$
|
90,364,500
|
|
Henry C. Lyons
|
|
$
|
118,987,369
|
|
|
$
|
45,215,200
|
|
|
$
|
210,150,000
|
|
|
$
|
90,364,500
|
|
Timothy OSullivan
|
|
$
|
53,823,278
|
|
|
$
|
20,452,845
|
|
|
$
|
210,150,000
|
|
|
$
|
90,364,500
|
|
The annual cash incentive bonus is paid out based on quarterly
and annual results with 50% of the total incentive bonus paid
based on quarterly results and 50% of the total bonus paid based
on full-year performance. The annual cash incentive bonus is one
component of the total annual cash compensation for our named
executive officers and is calculated by subtracting each named
executive officers base compensation from their total cash
compensation target at the level of revenue and EBITDA achieved.
Each named executive officers total annual cash
compensation has a minimum level based on each named executive
officers base compensation. Our named executive officers
can achieve an annual cash incentive bonus based on the
achievement of the revenue and EBITDA targets established by our
compensation committee. The total cash compensation is weighted
differently for each named executive officer so that
Messrs. Stevens and OSullivan receive a larger
portion of their total annual cash compensation in the form of
an annual cash incentive bonus and Mr. Lyons receives a
larger portion of his total annual cash compensation in the form
of base compensation. For 2008, we paid incentive cash bonuses
for our named executive officers based on our achievement of
annual revenue levels and annual EBITDA levels generally in an
aggregate amount of $3,903,000, of which Messrs. Stevens,
Calhoun, OSullivan and Lyons received an aggregate bonus
of $2,302,000, $440,000, $968,000 and $193,000, respectively,
which represented 354.0%, 144.0%, 484.0% and 59.0% of their base
salaries, respectively. For all of our executive officers except
Mr. Stevens, bonuses are reviewed and approved by our
compensation committee, taking into account recommendations from
Mr. Stevens. For Mr. Stevens, our compensation
committee reviews and approves the amount of his bonus.
For 2008, the target and achieved corporate revenue and EBITDA
levels were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Total
|
|
Name
|
|
Target Revenue
|
|
|
Target EBITDA
|
|
|
2008 Revenue
|
|
|
2008 EBITDA
|
|
|
Compensation
|
|
|
Glenn H. Stevens
|
|
$
|
167,500,00
|
|
|
$
|
73,700,000
|
|
|
$
|
190,797,757
|
|
|
$
|
91,905,189
|
|
|
$
|
2,100,000
|
|
Henry C. Lyons
|
|
$
|
167,500,00
|
|
|
$
|
73,700,000
|
|
|
$
|
190,797,757
|
|
|
$
|
91,905,189
|
|
|
$
|
465,000
|
|
Timothy OSullivan
|
|
$
|
167,500,00
|
|
|
$
|
73,700,000
|
|
|
$
|
190,797,757
|
|
|
$
|
91,905,189
|
|
|
$
|
1,150,000
|
|
Christopher W. Calhoun
|
|
$
|
167,500,00
|
|
|
$
|
73,700,000
|
|
|
$
|
190,797,757
|
|
|
$
|
91,905,189
|
|
|
$
|
670,000
|
|
Long-Term Incentive Compensation. We believe
that long-term performance is achieved through an ownership
culture that encourages performance by our executive officers
through the use of stock and stock-based awards to ensure that
our executive officers have a continuing stake in our long-term
success. Prior to December 2006 we utilized stock options.
Beginning in December 2006, due to a change in the accounting
treatment of stock options and restricted stock units, our
compensation committee decided to use restricted stock units.
Historically, our stock option grants vest at the rate of
331/3%
per year over three years beginning on the first anniversary of
the date of grant. Our restricted stock unit grants vest at the
rate of 25.0% per year over four years beginning on the first
anniversary of the date of grant. Mr. Stevens is also
entitled to certain additional vesting with respect to his
outstanding equity grants in the event he is terminated without
cause or upon a change in control, or upon his resignation for
good reason, as described in further detail below under
Executive Compensation Employment
Agreements. Once vested, payment with respect to
restricted stock units is made upon the occurrence of a
specified date, or upon the occurrence of a change in control or
the grantees separation from service, or death, whichever
is earliest.
When determining whether to make equity grants for 2008, as well
as the size of such grants, the board of directors considered:
|
|
|
|
|
each named executive officers contribution to our
long-term health and growth;
|
|
|
|
retention considerations based on the assessment of each named
executive officers contributions; and
|
118
|
|
|
|
|
any other considerations that the compensation committee deemed
relevant with respect to a named executive officer, including
the accomplishment of the individuals assigned objectives
based on the initiatives between our named executive officers
and executive management.
|
To date, authority to make equity grants to executive officers
has rested with our compensation committee. In determining the
size of equity grants to executive officers, our compensation
committee considers our performance compared to our overall
strategic goals, individual performance against the
individuals assigned objectives that are directly linked
to our overall strategic goals, the extent to which equity
awards previously granted are vested and, with respect to grants
made to all executives, including executive officers, other than
Mr. Stevens, the recommendations of Mr. Stevens and
other members of management, if applicable. Our named executive
officers objectives are not static and vary based on the
initiatives between our executive officers and other key members
of executive management. The objectives generally relate to our
ability to grow, as described in further detail under
Business Growth Strategies.
We believe any additional disclosure regarding these objectives
would cause us an undue competitive harm.
All stock options awarded to our executive officers were granted
with an exercise price equal to or greater than the fair market
value of our common stock on the date of grant, the
determination of which is discussed below. Accordingly, the
stock options will have value to our executive officers only if
the market price of our common stock increases after the date of
grant.
Our 2006 Equity Compensation Plan authorizes us to grant a wide
variety of equity awards, including stock options, shares of
restricted stock, restricted stock units, stock appreciation
rights, and other stock-based awards to our employees and
executive officers as well as non-employee members of our board
of directors and certain consultants and advisors to the
company, which is described in further detail below under
Benefit Plans.
Our board has adopted a new 2009 Omnibus Incentive Compensation
Plan, which is expected to be approved by our shareholders prior
to our initial public offering and is described below under
Benefit Plans. The 2009 Omnibus
Incentive Compensation Plan will replace our existing 2006
Equity Compensation Plan immediately following this offering and
will provide for a wide variety of equity awards, including
stock options, shares of restricted stock, restricted stock
units, stock appreciation rights and other stock-based awards
(including equity grants intended to qualify as qualified
performance-based compensation under section 162(m)
of the Internal Revenue Code) to our executive officers and our
other employees, as well as non-employee members of our board of
directors and certain consultants and advisors to the company,
as well as cash awards to our named executive officers that are
considered qualified performance-based compensation
under section 162(m) of the Internal Revenue Code.
We do not have any equity security ownership guidelines or
requirements for our executive officers. We do not have any
program, plan or obligation that requires us to grant equity
compensation on specified dates, although with certain
exceptions for new hires and promotions, grants are typically
made during the first quarter of each year and are based on
performance for the preceding year. Because we have not been a
public company, we have not made equity grants in connection
with the release or withholding of material non-public
information. However, we intend to implement policies to ensure
that equity awards are granted at fair market value on the date
that the grant action occurs.
Other Benefits. Executive officers are
eligible to participate in all of our employee benefit plans,
such as medical, dental, vision, group life, short and long-term
disability, and supplemental insurance and our 401(k) plan, in
each case on the same basis as other employees, subject to
applicable laws. We also provide vacation and other paid
holidays to all employees, including our executive officers. The
only executive perquisite is a corporate membership at a country
club that our named executive officers are entitled to use.
Employment,
severance and change in control arrangements
We have an employment agreement with Mr. Stevens. We
believe that the employment agreement provides a competitive
total compensation package and is appropriate for the
responsibilities and duties of Mr. Stevens as our chief
executive officer. Among other terms, the employment agreement
provides for payments and other benefits if we terminate
Mr. Stevens employment without cause, or if he
terminates employment for good reason, or if we
119
elect not to renew the term of his employment agreement. No
distinction is made in the amount of severance payable to him
before or after a change in control of GAIN.
Mr. Lyons does not have an employment agreement but our
letter to him offering employment with us provides for severance
if he is terminated involuntarily within one (1) year
following a change in control.
Our compensation committee approved these severance and change
in control provisions in these agreements because the committee
believes that these benefits are appropriate for the caliber of
executives hired and for the size of our company. In addition,
the committee desired to alleviate the financial hardships which
may be experienced by the executives if their employment is
terminated under specified circumstances and to reinforce and
encourage the continued attention and dedication of those
executives to their assigned duties, notwithstanding the
potential impact a change in control transaction could have on
their respective careers or positions. The severance level for
Mr. Stevens is greater than for the other executives,
because of his greater responsibilities with respect to our
company. There are no severance arrangements in place for
Messrs. Calhoun and OSullivan.
The severance
and/or
change in control arrangements applicable to
Messrs. Stevens and Lyons are set forth in each of their
respective agreements, as discussed in detail below under the
heading Executive Compensation
Employment Agreements. The severance and change in control
arrangements in place for Messrs. Stevens and Lyons were
individually negotiated with each named executive officer party
thereto.
In general terms, a change of control occurs: (i) if a
person, entity or affiliated group acquires more than 50.0% of
our then outstanding voting securities; (ii) if we merge
into another entity, unless the holders of our voting shares
immediately prior to the merger have at least 50.0% of the
combined voting power of the securities in the merged entity or
its parent; (iii) if we sell or dispose of all or
substantially all of our assets; or (iv) if we are
liquidated or dissolved. The compensation committee also has the
flexibility to modify this definition as needed to comply with
section 409A of the Code.
In the event of a change in control, in the case of outstanding
options and restricted stock units held by all grantees under
the terms of our 2006 Equity Compensation Plan, all options and
restricted stock units vest, unless our compensation committee
determines otherwise. Mr. Stevens employment
agreement provides for certain accelerated vesting of his
outstanding options and restricted stock if he is terminated
without cause, resigns for good reason or if we fail to renew
the term of his employment agreement. The offer letter in place
for Mr. Lyons provides that his outstanding restricted
stock units will vest on a change in control. In addition, the
restricted stock unit agreements of all holders of restricted
stock units provide for accelerated payment of vested restricted
stock units upon the occurrence of a change in control. Our
compensation committee believes that these contractual rights
provide a valuable incentive for management. For more details
regarding the terms of the employment agreements, offer letters
and outstanding restricted stock units grants, see
Executive Compensation Employment
Agreements below.
Tax
and accounting treatment
As discussed above, our compensation committee considers the tax
and accounting treatment associated with the cash and equity
awards it makes, although these considerations are not
dispositive. Section 162(m) of the Internal Revenue Code
places a limit of $1,000,000 per person on the amount of
compensation that we may deduct in any one year with respect to
each of our named executive officers. There is an exemption from
the $1,000,000 limitation for performance-based compensation
that meets certain requirements. Since we are a privately held
corporation, section 162(m) does not currently apply to our
compensation. Under the transition rules, in general,
compensation paid under a plan that existed while we are private
is exempt from the $1,000,000 deduction limit until the third
annual meeting of our stockholders following our initial public
offering. We will take these transition rules into account when
awarding compensation to our named executive officers. Following
our initial public offering, grants of options or stock
appreciation rights under our 2009 Omnibus Incentive
Compensation Plan are intended to qualify for the exemption.
Grants of restricted shares or stock units that are made in the
future under the 2009 Omnibus Incentive Compensation Plan may
qualify for the exemption if vesting is contingent on the
attainment of objectives based on the performance criteria set
forth in the plan and if certain other requirements are
satisfied. Grants of restricted shares or stock units that vest
solely on the basis of service cannot qualify for the exemption.
In addition, the terms of the 2009 Omnibus Incentive
Compensation Plan contemplate that cash bonuses
120
made in the future may qualify for the exemption. To maintain
flexibility in compensating officers in a manner designed to
promote varying corporate goals, our compensation committee has
not adopted a policy requiring all compensation to be
deductible. Our compensation committee may approve compensation
or changes to plans, programs or awards that may cause the
compensation or awards to exceed the limitation under
section 162(m) if it determines that action is appropriate
and in our best interests.
Executive
Compensation
Summary
compensation table
The table below presents the annual compensation for services to
us in all capacities for the periods shown for our
(i) chief executive officer, (ii) principal financial
officer, (iii) the three most highly compensated executive
officers other than our chief executive officer and chief
financial officer who were serving as our executive officers on
December 31, 2008 and (iv) up to two additional
individuals for whom disclosures would have been provided but
for the fact that the individual was not serving as an executive
officer of our company on December 31, 2008. These officers
are referred to as the named executive officers. All
dollar amounts are in U.S. dollars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Compen-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Compen-
|
|
|
sation
|
|
|
All Other
|
|
|
|
|
Name and
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards(1)
|
|
|
Awards(1)
|
|
|
sation(2)
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Principal Position(a)
|
|
Year(b)
|
|
|
($)(c)
|
|
|
($)(d)
|
|
|
($)(e)
|
|
|
($)(f)
|
|
|
($)(g)
|
|
|
($)(h)
|
|
|
($)(i)
|
|
|
($)(j)
|
|
|
Glenn H. Stevens
|
|
|
2008
|
|
|
$
|
650,000
|
|
|
$
|
2,302,000
|
|
|
|
1,174,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,748
|
(3)
|
|
$
|
4,151,024
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher W.
Calhoun(4)
|
|
|
2008
|
|
|
$
|
305,000
|
|
|
$
|
440,000
|
|
|
|
477,137
|
|
|
|
44,833
|
|
|
|
|
|
|
|
|
|
|
$
|
22,852
|
(5)
|
|
$
|
1,289,822
|
|
Senior Advisor, and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry C. Lyons
|
|
|
2008
|
|
|
$
|
325,000
|
|
|
$
|
193,000
|
|
|
|
172,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
429
|
(6)
|
|
$
|
690,643
|
|
Chief Financial Officer and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy OSullivan
|
|
|
2008
|
|
|
$
|
200,000
|
|
|
$
|
968,000
|
|
|
|
299,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,014
|
(7)
|
|
$
|
1,481,486
|
|
Chief Dealer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts shown represent the
compensation costs recognized rather than an amount paid to or
realized by the named executive officer. Pursuant to SEC rules,
the amount disclosed disregards estimates of forfeitures of
awards that are otherwise included in the financial statement
reporting for such awards. Ratable amounts expensed for stock
awards and stock options that were granted in years prior to
2008 are also reflected in this column.
|
(2)
|
|
Represents incentive compensation
earned for the year ended December 31, 2008 under the 2006
Equity Compensation Plan. For more details on our bonus program,
see Compensation Discussion and Analysis
Annual Incentive Compensation.
|
(3)
|
|
This amount includes:
(i) $7,750 in employer matching contribution to our 401(k)
plan; (ii) $8,640 in car allowance ($720 per month);
(iii) $7,500 in country club membership; and (iv) $858
for payment of term life insurance premiums.
|
|
|
|
(4)
|
|
In April 2009, Mr. Calhoun
agreed to modify his position as our managing director whereby
he agreed to assume a part-time position as senior advisor,
overseeing certain strategic initiatives. In connection with
this change in responsibility, Mr. Calhouns
compensation was modified to reflect his part-time employment
and his salary was $50,000 per year. In October 2009,
Mr. Calhouns annual compensation was increased to
$100,000 annually to reflect increased responsibilities.
Mr. Calhoun remains a part-time employee.
|
|
|
|
(5)
|
|
This amount includes:
(i) $7,750 in employer matching contribution to our 401(k)
plan; (ii) $7,200 in car allowance ($600 per month);
(iii) $7,500 in county club membership; and (iv) $402
for payment of term life insurance premiums.
|
(6)
|
|
This amount includes $429 for
payment of term life insurance premiums.
|
(7)
|
|
This amount includes:
(i) $7,750 in employer matching contribution to our 401(k)
plan; (ii) $6,000 in car allowance ($500 per month); and
(iii) $264 for payment of term life insurance premiums.
|
121
Grants
of plan-based awards
The following table sets forth information concerning grants of
plan-based awards to the named executive officers during the
year ended December 31, 2008. The estimated possible
payouts under non-equity incentive plan awards consist of the
bonus plans that are described in Compensation
Discussion and Analysis Annual Incentive
Compensation. The actual amounts realized in respect of
the non-equity plan incentive awards in respect of 2008 are
reported in the Summary Compensation Table under the Non-Equity
Incentive Plan Compensation column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number
|
|
|
Number of
|
|
|
or Base
|
|
|
Fair Value of
|
|
|
|
|
|
|
Payouts Under Non-Equity
|
|
|
Under Equity Incentive
|
|
|
of Shares
|
|
|
Securities
|
|
|
Price of
|
|
|
Stock and
|
|
|
|
|
|
|
Incentive Plan Awards
|
|
|
Plan Awards
|
|
|
of Stock
|
|
|
Underly-
|
|
|
Option
|
|
|
Option
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
or
|
|
|
ing Options
|
|
|
Awards
|
|
|
Awards
|
|
Name(a)
|
|
Grant Date(b)
|
|
|
($)(c)
|
|
|
($)(d)
|
|
|
($)(e)
|
|
|
(#)(f)
|
|
|
(#)(g)
|
|
|
(#)(h)
|
|
|
Units (#)(i)
|
|
|
(#)(j)
|
|
|
($/Sh)(k)
|
|
|
($)(l)
|
|
|
Glenn H. Stevens
|
|
|
4/15/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
$
|
2,205,000
|
|
Christopher W. Calhoun
|
|
|
4/15/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
$
|
735,000
|
|
Henry C. Lyons
|
|
|
4/15/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
$
|
918,750
|
|
Timothy OSullivan
|
|
|
4/15/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
$
|
367,500
|
|
122
Outstanding
equity awards at fiscal year-end
The following table sets forth information regarding unexercised
stock options and restricted stock awards that had not vested
for each of the named executive officers as of December 31,
2008. For more information on equity awards made to the named
executive officers see Compensation Discussion
and Analysis Long-Term Incentive Compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
Option Awards
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Payout
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Market Value
|
|
|
Shares,
|
|
|
Shares,
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
or Units of
|
|
|
of Shares or
|
|
|
Units or
|
|
|
Units or
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Stock That
|
|
|
Units of Stock
|
|
|
Other
|
|
|
Other Rights
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
That Have
|
|
|
Rights That
|
|
|
That Have
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Options
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Not Vested
|
|
|
Have Not
|
|
|
Not Vested
|
|
Name(a)
|
|
Exercisable(b)
|
|
|
Unexercisable(c)
|
|
|
(#)(d)
|
|
|
($)(e)
|
|
|
Date(f)
|
|
|
(#)(g)
|
|
|
($)(h)
|
|
|
Vested (#)(i)
|
|
|
($)(j)
|
|
|
Glenn H. Stevens
|
|
|
53,813
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
1.75
|
|
|
|
6/10/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
2.50
|
|
|
|
1/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
2.50
|
|
|
|
1/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
2.50
|
|
|
|
4/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
2.50
|
|
|
|
9/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
3.50
|
|
|
|
1/31/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
6/15/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
5.50
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(4)
|
|
$
|
319,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,965
|
(3)(4)
|
|
$
|
126,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
(3)(5)
|
|
$
|
2,398,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
(3)(6)
|
|
$
|
1,918,800
|
|
|
|
|
|
|
|
|
|
Christopher W. Calhoun
|
|
|
10,833
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
6/15/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,833
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
5.50
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,667
|
(1)
|
|
|
8,333
|
(1)
|
|
|
|
|
|
$
|
6.50
|
|
|
|
1/31/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(4)
|
|
$
|
319,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
(3)(5)
|
|
$
|
959,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
(3)(6)
|
|
$
|
639,600
|
|
|
|
|
|
|
|
|
|
Henry C. Lyons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(3)(6)
|
|
$
|
799,500
|
|
|
|
|
|
|
|
|
|
Timothy OSullivan
|
|
|
3,333
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
3.50
|
|
|
|
1/31/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,400
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
6/15/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
5.50
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(4)
|
|
$
|
319,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,685
|
(3)(4)
|
|
$
|
85,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
(3)(5)
|
|
$
|
479,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(6)
|
|
$
|
319,800
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Such incentive stock options vest
ratably over three years, with one-third of the options vesting
on each of the first three anniversaries of the grant date and
have a term of ten years.
|
(2)
|
|
Such incentive stock options were
fully vested on the date of grant and have a term of ten years.
|
(3)
|
|
Such restricted stock units vest
ratably over four years, with one-fourth of the options vesting
on each of the first four anniversaries of the grant date.
|
(4)
|
|
Such restricted stock units were
granted on December 31, 2006.
|
(5)
|
|
Such restricted stock units were
granted on June 30, 2007.
|
(6)
|
|
Such restricted stock units were
granted on April 15, 2008.
|
123
Option
exercises and stock vested
The following table provides information regarding options
exercised and stock awards vested for the named executive
officers during the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
($)(2)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
Glenn H. Stevens
|
|
|
160,524
|
|
|
$
|
7,015,725
|
|
|
|
31,982
|
|
|
$
|
787,924
|
|
Christopher W. Calhoun
|
|
|
90,167
|
|
|
$
|
3,072,156
|
|
|
|
15,000
|
|
|
$
|
353,950
|
|
Henry C. Lyons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy OSullivan
|
|
|
65,187
|
|
|
$
|
2,691,059
|
|
|
|
11,342
|
|
|
$
|
244,479
|
|
|
|
|
(1)
|
|
Represents the difference between
the exercise price and the fair market value of our common stock
on the date of exercise for each option.
|
(2)
|
|
Represents the fair market value of
our common stock on the applicable vesting date, multiplied by
the number of shares of restricted stock that vested on that
date.
|
Potential
Payments Upon Termination or Change of Control
Employment
agreements and change of control arrangements
Glenn H.
Stevens
Employment
agreement
We entered into an employment agreement with Mr. Stevens,
our president and chief executive officer, dated January 1,
2008. Mr. Stevens agreement will continue, unless
earlier terminated by the parties, until December 31, 2009,
or the Term. The Term will be automatically extended for an
additional one-year period unless either we or Mr. Stevens
provide a written notice at least 90 days prior to the
scheduled expiration of the initial Term. Mr. Stevens
annual base salary under the agreement is $650,000, which shall
be reviewed annually for appropriate increases by the board of
directors. Mr. Stevens will also be eligible to receive
quarterly and annual bonuses during the Term as determined by
the compensation committee of the board of directors in its sole
discretion. Mr. Stevens will also be eligible to
participate in any of our benefit plans and programs in place
for our executive officers.
Mr. Stevens agreement provides that in the event we
terminate Mr. Stevens at any time without Cause
(as defined in the agreement) or Mr. Stevens resigns for
Good Reason (as defined in the agreement),
Mr. Stevens will be entitled to receive severance payments
in an amount equal to 18 months of Mr. Stevens
monthly base salary in effect at that time, plus any accrued and
unpaid annual and quarterly bonus or, if no such annual or
quarterly bonus has accrued, Mr. Stevens will be eligible
to receive a pro rata portion of any quarterly and annual bonus.
In addition, all equity grants held by Mr. Stevens at the
time of his termination that would vest within the 24 month
period following the termination date will immediately vest and
become exercisable. Mr. Stevens will also be entitled to
continued health benefits at the same premium rates charged to
other current employees for the 18 month period following
Mr. Stevens termination. For further information,
please see Compensation, Discussion and
Analysis Employment and Change in Control
Arrangements.
Mr. Stevens agreement also contains nondisclosure,
noncompetition and nonsolicitation provisions. The nondisclosure
provisions provide for protection of our confidential
information. The noncompetition and nonsolicitation provisions
of Mr. Stevens agreement prevent Mr. Stevens
from competing with us or soliciting our customers or employees
for a period of 18 months following termination of
employment for any reason. Mr. Stevens agreement also
provides that his purchase right with respect to all securities
of GCAM, LLC held by us, referred to
124
as the Stevens Purchase Option (as defined in that certain
Letter Agreement, dated as of January 1, 2007, between
Mr. Stevens and us), which is described below, is
terminated.
GCAM
letter agreement
On January 1, 2007, we entered into a securities purchase
agreement with Glenn H. Stevens, our chief executive officer,
Mark E. Galant, the chairman of our board of directors, and GAIN
Capital Group, LLC, our indirect wholly-owned subsidiary.
Pursuant to the purchase agreement, we purchased all of the
issued and outstanding units of GCAM, LLC, or GCAM, an entity
offering managed account services, from each of
Mr. Stevens, Mr. Galant and GAIN Capital Group, LLC,
resulting in GCAM becoming our direct wholly-owned subsidiary.
In consideration of the GCAM units, we issued 48,820 restricted
stock units to Mr. Stevens and 19,430 restricted stock
units to Mr. Galant. Pursuant to Mr. Stevens
restricted stock unit agreement, upon a Change of
Control (as defined in the restricted stock unit
agreement), Mr. Stevens shall receive an additional award
of 9,764 restricted units in exchange for one hundred thousand
dollars ($100,000) paid by Mr. Stevens to us; provided that
both Mr. Stevens and Mr. Galant are employed by us or
providing services to us at the time of the Change of Control.
As a condition to consummating the transaction, on
January 1, 2007, we entered into a letter agreement with
Mr. Stevens which, among other things, obligates us to pay
Mr. Stevens compensation in consideration for his services
as chief executive officer of GCAM based upon a pre-determined
formula set forth in the letter agreement. For the 2007 fiscal
year, we did not pay Mr. Stevens any compensation for his
services as chief executive officer of GCAM, and such
compensation provisions were superseded by
Mr. Stevens employment agreement, dated
January 1, 2008. Pursuant to the letter agreement,
Mr. Stevens was also entitled to a purchase right with
respect to all securities of GCAM held by us, but such right was
terminated in connection with Mr. Stevens employment
agreement, dated January 1, 2008.
Christopher
W. Calhoun
Prior to April 2009, Christopher W. Calhoun was employed by us
as our managing director and secretary pursuant to an offer
letter, dated November 12, 2000. Pursuant to his offer
letter, Mr. Calhoun was originally hired as our vice
president of operations. Mr. Calhoun is eligible for other
benefits paid by us, including, among other benefits, long-term
incentive compensation and a portion of his health care
insurance coverage. Mr. Calhouns offer letter
required his execution of our standard form confidentiality,
non-compete and non-hire agreement. In April 2009,
Mr. Calhoun agreed to modify his position as managing
director whereby he agreed to assume the new role as our senior
advisor and corporate secretary overseeing certain of our
strategic initiatives. In August 2009, we entered into an
agreement with Mr. Calhoun to reflect this change in
responsibility. In connection with this change,
Mr. Calhouns compensation was modified to reflect his
part-time employment and his annual salary was $50,000. In
October 2009, Mr. Calhouns compensation was increased
to $100,000 annually to reflect increased responsibilities.
Mr. Calhoun remains a part-time employee.
Mr. Calhouns employment is at-will and he
is not entitled to severance. For further information, please
see Compensation, Discussion and Analysis
Employment and Change in Control Arrangements.
Henry C.
Lyons
Henry C. Lyons is currently employed by us as our chief
financial officer and treasurer pursuant to an offer letter,
dated March 23, 2009. Pursuant to his offer letter,
Mr. Lyons is employed by us as our chief financial officer
and earns an annual salary of $325,000. Mr. Lyons is
eligible for other benefits paid by us, including, among other
benefits, long-term incentive compensation and a portion of his
healthcare insurance coverage. Mr. Lyons employment
is at will and not for any specified period of time.
Mr. Lyons offer letter required his execution of our
standard form confidentiality, non-compete and non-hire
agreement. Pursuant to the offer letter, we will pay
Mr. Lyons a one-time, lump sum payment in an amount equal
to one times his annual base salary in the event he is
terminated as within one (1) year following a change in
control of us. If a change of control occurs, all of
Mr. Lyons outstanding restricted stock units would
become automatically fully vested.
125
Timothy
OSullivan
Timothy OSullivan is currently employed by us as our chief
dealer pursuant to an offer letter, dated March 8, 2000.
Pursuant to his offer letter, Mr. OSullivan was hired
for an annual salary of $130,000, which has been increased to
$240,000 per year. Mr. OSullivan is also eligible for
certain other benefits paid for by us, including, among other
benefits, annual bonuses, long-term incentive compensation and
health care insurance coverage. Mr. OSullivans
employment is at will and not for any specified
period of time. Mr. OSullivans offer letter
required his execution of our standard confidentiality,
non-compete and non-hire agreement. In the event of a change of
control, Mr. OSullivan may be entitled to accelerated
vesting of equity awards. For further information, please see
Compensation, Discussion and Analysis
Employment and Change in Control Arrangements.
Potential
payments upon termination or change of control
table
The tables below reflect the compensation and benefits, if any,
due to each of the named executive officers upon a voluntary
termination, a termination for cause, an involuntary termination
other than for cause or resignation for good reason, both before
and after a change of control, a change of control, or a
termination due to death, disability or retirement. The amounts
shown assume that each termination of employment or the change
of control, as applicable, was effective as of December 31,
2008, and the fair market value of a share of our common stock
as of December 31, 2008 was $31.98. The amounts shown in
the table are estimates of the amounts which would be paid upon
termination of employment or change of control as applicable.
The actual amounts to be paid can only be determined at the time
of the actual termination of employment or change of control, as
applicable. The amounts payable to Mr. Stevens are based on
the terms of his employment agreement as in effect on
January 1, 2009, in order to present an accurate reflection
of the amounts to which Mr. Stevens would become entitled
upon a termination of employment or change of control, as set
forth in the table below.
The value of the accelerated vesting of options was calculated
by multiplying the number of unvested shares subject to each
option by the difference between the fair market value of a
share of our common stock as of December 31, 2008, and the
per share exercise price of the option. The value of the
accelerated vesting and payment of restricted stock units was
calculated by multiplying the aggregate number of restricted
stock units by the fair market value of a share of our common
stock as of December 31, 2008, subtracting the present
value of the vested units based on the mid-term Applicable
Federal Rate (AFR) for December 2008 of 3.40%,
compounded semi-annually over a
6-year
period, and adding the time value of the acceleration of the
unvested units. More details concerning these values are set
forth in the footnotes below. A
6-year
period is used because the vested restricted stock units held by
the named executive officers are otherwise to be paid on
December 31, 2014, or upon a change of control of the named
executive officers separation from service, if earlier.
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause
|
|
|
|
|
|
Without Cause
|
|
|
|
|
|
|
|
|
|
|
|
or Resignation
|
|
|
|
|
|
or Resignation
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
for Good
|
|
|
|
|
|
for Good
|
|
|
|
|
|
|
|
|
Resignation
|
|
|
Reason
|
|
|
|
|
|
Reason
|
|
|
Death,
|
|
|
|
|
|
or
|
|
|
Prior to
|
|
|
Change
|
|
|
After
|
|
|
Disability
|
|
|
|
|
|
Termination
|
|
|
Change in
|
|
|
of
|
|
|
Change in
|
|
|
or
|
|
Name
|
|
Benefit
|
|
for Cause
|
|
|
Control
|
|
|
Control
|
|
|
Control
|
|
|
Retirement
|
|
|
Glenn Stevens
|
|
Cash
severance(1)
|
|
|
|
|
|
$
|
3,277,000
|
(2)
|
|
|
|
|
|
$
|
3,277,000
|
(2)
|
|
$
|
2,302,000
|
(3)
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
7,845,203
|
(4)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
$
|
18,000
|
(5)
|
|
|
|
|
|
$
|
18,000
|
(5)
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
$
|
3,295,000
|
|
|
$
|
7,845,203
|
|
|
$
|
3,295,000
|
|
|
$
|
2,302,000
|
|
Christopher Calhoun
|
|
Cash severance
|
|
|
|
|
|
$
|
592,500
|
(6)
|
|
|
|
|
|
$
|
592,500
|
(6)
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
212,324
|
(7)
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
2,622,387
|
(8)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
$
|
592,500
|
|
|
$
|
2,834,711
|
|
|
$
|
592,500
|
|
|
|
|
|
Henry
Lyons(9)
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,000
|
(10)
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
965,793
|
(11)
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,290,793
|
|
|
|
|
|
Timothy OSullivan
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
848,582
|
(12)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
$
|
848,582
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The cash severance payments to
Mr. Stevens are calculated based on the terms of his
employment agreement effective January 1, 2008.
|
(2)
|
|
Pursuant to the terms of his
employment agreement, Mr. Stevens is entitled to payment of
eighteen (18) months continued base salary plus the
quarterly bonuses and annual bonuses which he would have
otherwise been paid had his employment not terminated, based on
the amount that would actually have been earned. Since the table
assumes termination as of December 31, 2008,
Mr. Stevens would be entitled to the full amount of the
quarterly bonuses and annual bonuses payable to him for the year
of termination. The amount reflected in the table includes the
full amount of the bonuses payable to Mr. Stevens for 2008.
The amount set forth in the table is equal to 1.5 times
Mr. Stevens 2008 base salary, $975,000, plus the full
amount of Mr. Stevens 2008 bonuses, $2,302,000.
|
(3)
|
|
Pursuant to the terms of his
employment agreement, Mr. Stevens is entitled to a payment
of one (1) times his annual bonus upon termination of
employment due to death or disability. The amount in the table
is equal to one (1) times Mr. Stevens annual
bonus for 2008.
|
(4)
|
|
This amount represents the value of
the accelerated vesting and payment of 246,514 restricted stock
units based on a price per share as of December 31, 2008 of
$31.98, minus the present value of the vested units based on the
mid-term AFR for December 2008 of 3.40%, compounded
semi-annually over a
6-year
period, plus the time value of the acceleration of the unvested
units. This amount represents more than what would actually be
paid but is the value of the payment that would be taken into
account for purposes of section 280G of the Internal
Revenue Code.
|
(5)
|
|
This amount is equal to eighteen
(18) months of continued health benefits assuming a monthly
cost of $1,000 as set forth in Mr. Stevens employment
agreement effective January 1, 2008.
|
(6)
|
|
Pursuant to the terms of
Mr. Calhouns offer letter, as amended, if we
terminate his employment without cause, he is entitled to six
months of continued salary plus a pro rated bonus for the year
of termination. This amount is equal to six months of
Mr. Calhouns 2008 base salary, such amount being
$152,500 plus the full amount of Mr. Calhouns 2008
annual bonus, such amount being $440,000. In April 2009,
Mr. Calhoun agreed to modify his position as managing
director whereby he agreed to assume the new role as our senior
advisor and
|
(footnotes continued on following page)
127
|
|
|
|
|
corporate secretary. In connection
with this change in responsibility, Mr. Calhouns
compensation was modified to reflect his part-time employment
and his annual salary was $50,000, and he is no longer entitled
to severance. In October 2009, Mr. Calhouns
compensation was increased to $100,000 annually to reflect
increased responsibilities. Mr. Calhoun remains a part-time
employee.
|
|
|
|
(7)
|
|
This amount represents the value of
the accelerated vesting of options to purchase 8,333 shares
of common stock based on a price per share as of
December 31, 2008 of $31.98.
|
(8)
|
|
This amount represents the value of
accelerated vesting and payment of 80,000 restricted stock units
based on a price per share as of December 31, 2008 of
$31.98, minus the present value of the vested units calculated
using the mid-term AFR for December 2008 of 3.40%, compounded
semi-annually over a
6-year
period, plus the time value of the acceleration of the unvested
units. This amount represents more than what would actually be
paid but is the value of the payment that would be taken into
account for purposes of section 280G of the Internal
Revenue Code.
|
(9)
|
|
The amounts payable to
Mr. Lyons are based on the terms of his offer letter, as
amended, as in effect on March 23, 2009.
|
(10)
|
|
Pursuant to the terms of his
employment letter, if we terminate Mr. Lyons without cause
following a change of control, he is entitled to a payment of
one (1) time his base annual salary, such amount being
$325,000, plus the accelerated vesting and payment of all
outstanding restricted stock units, such amount being $965,793.
|
(11)
|
|
This amount represents the value of
accelerated vesting and payment of 25,000 restricted stock units
based on a price per share as of December 31, 2008 of
$31.98, minus the present value of the vested units calculated
using the mid-term AFR for December 2008 of 3.40%, compounded
semi-annually over a
6-year
period, plus the time value of the acceleration of the unvested
units. This amount represents more than what would actually be
paid but is the value of the payment that would be taken into
account for purposes of section 280G of the Internal
Revenue Code.
|
(12)
|
|
This amount represents the value of
accelerated vesting and payment of 55,370 restricted stock units
based on a price per share as of December 31, 2008 of
$31.98, minus the present value of the vested units calculated
using the mid-term AFR for December 2008 of 3.40%, compounded
semi-annually over a
6-year
period, plus the time value of the acceleration of the unvested
units. This amount represents more than what would actually be
paid but is the value of the payment that would be taken into
account for purposes of section 280G of the Internal
Revenue Code.
|
Benefit
Plans
2009
Omnibus Incentive Compensation Plan and 2006 Equity Compensation
Plan
Introduction. Our board of directors
previously adopted the GAIN Capital Holdings, Inc. 2006 Equity
Compensation Plan (the 2006 Plan), effective as of
December 31, 2006, to provide for the grant of incentive
stock options, nonqualified stock options, stock awards, stock
units, stock appreciation rights and other equity-based awards
to employees, certain consultants and advisors and non-employee
members of the board.
Recently our board adopted the GAIN Capital Holdings, Inc. 2009
Omnibus Incentive Compensation Plan, (the 2009
Plan), effective as
of ,
2009, to provide for the grant of incentive stock options,
nonqualified stock options, stock awards, stock units, stock
appreciation rights and other stock-based awards to employees,
certain consultants and advisors and non-employee members of the
board. The 2009 Plan will also provide for the grant of equity
awards intended to qualify as qualified performance based
compensation for purposes of section 162(m) of the
Internal Revenue Code and for the payment of annual bonus awards
in cash to selected executive employees that are also intended
to so qualify.
As of the effective date of the 2009 Plan, the 2006 Plan will be
merged with and into the 2009 Plan and no additional grants will
be made thereafter under the 2006 Plan. Outstanding grants under
the 2006 Plan will continue in effect according to their terms
as in effect before the 2009 Plan merger, and the shares with
respect to outstanding grants under the 2006 Plan will be issued
or transferred under the 2009 Plan.
Except as provided in the description below with respect to the
definition of a change of control under the 2006 Plan, the
descriptions provided below regarding incentive stock options,
nonqualified stock options, stock awards, stock units, stock
appreciation rights and other stock-based awards under the 2009
Plan are also applicable to the terms of such awards under the
2006 Plan. The 2006 Plan does not provide for payment of annual
bonus awards.
Under the 2006 plan, a change of control occurs if: (i) a
person, entity or affiliated group (with certain exceptions)
acquires more than 50.0% of our then outstanding voting
securities, (ii) a transaction in which we merge into
another entity is consummated unless the holders of our voting
shares immediately prior to the merger have at least 50.0% of
the combined voting power of the securities in the merged entity
or its parent, (iii) we sell or dispose of all or
substantially all of our assets, or (iv) we are liquidated
or dissolved.
128
2009
Omnibus Incentive Compensation Plan
Introduction. Our board has adopted the 2009
Plan. It is expected that the 2009 Plan will be approved by our
stockholders and will become effective immediately prior to the
effectiveness of the registration statement for this offering.
The purpose of the 2009 Plan is to attract and retain employees,
non-employee directors and consultants and advisors. The 2009
Plan provides for the issuance of incentive stock options,
nonqualified stock options, stock awards, stock units, stock
appreciation rights and other stock-based awards. The 2009 Plan
also provides for the issuance of annual bonus awards (intended
to qualify as qualified performance-based
compensation for purposes of section 162(m) of the
Internal Revenue Code) to selected executive employees. It is
intended that the 2009 Plan will provide an incentive to
participants to contribute to our economic success by aligning
the economic interests of participants with those of our
stockholders.
Administration of the 2009 Plan. The 2009 Plan
will be administered by our compensation committee and the
committee will determine all of the terms and conditions
applicable to grants under the 2009 Plan. Our compensation
committee will also determine who will receive grants under the
2009 Plan and the number of shares of our common stock that will
be subject to grants, except that grants to our non-employee
directors may only be made by our board.
Awards. The 2009 Plan authorizes the issuance
or transfer of up
to shares
of our common stock (which includes the number of shares that
(i) are subject to outstanding grants under the 2006 Plan,
and (ii) remain available for issuance (but unexercised,
unvested or not paid) under the 2006 Plan). During the term of
the Plan, the share reserve will automatically increase on the
first trading day in January each calendar year, beginning in
calendar year 200 , by an amount equal to the lesser
of % of the total number of
outstanding shares of our common stock on the last trading day
in December in the prior calendar year
or shares.
In no event will any such annual increase
exceed shares.
If any options or stock appreciation rights (including options
and stock appreciation rights granted under the 2006 Plan)
terminate, expire or are canceled, forfeited, exchanged or
surrendered without having been exercised or if any stock
awards, stock units or other stock-based awards (including
awards granted under the 2006 Plan) are forfeited, terminated or
otherwise not paid in full, the shares subject to such grants
will again be available for purposes of the 2009 Plan. In
addition, if any shares of our common stock are surrendered in
payment of the exercise price of an option or stock appreciation
right, the number of shares available for issuance under the
Plan will be reduced only by the net number of shares actually
issued upon exercise and not by the total number of shares under
which such option or stock appreciation right is exercised. If
shares of our common stock otherwise issuable under the Plan are
withheld in satisfaction of the withholding taxes incurred in
connection with the issuance, vesting or exercise of any grant
or the issuance of our common stock, then the number of shares
of our common stock available for issuance under the Plan shall
be reduced by the net number of shares issued, vested or
exercised under such grant. If any grants are paid in cash, and
not in shares of our common stock, any shares of our common
stock subject to such grants will also be available for future
grants.
The 2009 Plan also contain limits
of shares
for all grants measured in shares of our common stock and
$ (whether payable in common
stock, cash or a combination of both), for all grants measured
in cash dollars. Both limits are subject to adjustment as
described in the Plan.
Adjustments. In connection with stock splits,
stock dividends, recapitalizations and certain other events
affecting our common stock, the committee will make adjustments
as it deems appropriate in the maximum number of shares of our
common stock reserved for issuance as grants, the maximum number
of shares of our common stock that any individual participating
in the 2009 Plan may be granted in any year, the number and kind
of shares covered by outstanding grants, the kind of shares that
may be issued or transferred under the 2009 Plan, and the price
per share or market value of any outstanding grants.
Eligibility. All of our employees and
employees of our subsidiaries are eligible to receive grants
under the 2009 Plan. In addition, our non-employee directors and
consultants and advisors who perform services for us and our
subsidiaries may receive grants under the 2009 Plan.
129
Vesting. Our committee determines the vesting
of awards granted under the 2009 Plan.
Options. Under the 2009 Plan, the committee
will determine the exercise price of the options granted and may
grant options to purchase shares of our common stock in amounts
as determined by the committee. The committee may grant options
that are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code, or nonqualified
stock options, which are not intended to so qualify. Incentive
stock options may only be granted to employees. Anyone eligible
to participate in the 2009 Plan may receive a grant of
nonqualified stock options. The exercise price of a stock option
granted under the Plan cannot be less than the fair market value
of a share of our common stock on the date the option is
granted. If an incentive stock option is granted to a 10.0%
stockholder, the exercise price cannot be less than 110.0% of
the fair market value of a share of our common stock on the date
the option is granted. The exercise price for any option is
generally payable (i) in cash, (ii) in certain
circumstances as permitted by our committee, by the surrender of
shares of our common stock with an aggregate fair market value
on the date the option is exercised equal to the exercise price,
(iii) by payment through a broker in accordance with
procedures established by the Federal Reserve Board, or
(iv) by another method approved by our committee. The term
of an option cannot exceed ten years from the date of grant,
except that if an incentive stock option is granted to a 10.0%
stockholder, the term cannot exceed five years from the date of
grant. In addition, to the extent an option is at the time
exercisable for vested shares of our common stock, all or any
part of that vested portion may be surrendered to us for an
appreciation distribution payable in shares of our common stock
with a fair market value at the time of the option surrender
equal to the dollar amount by which the then fair market value
of the shares of our common stock subject to the surrendered
portion exceeds the aggregate exercise price.
Except as provided in the grant instrument or as otherwise
determined by the committee, an option may only be exercised
while a grantee is employed by or providing service to us or our
subsidiaries or during an applicable period after termination of
employment or service.
Stock Awards. Under the 2009 Plan, the
committee may grant stock awards. A stock award is an award of
our common stock that may be subject to restrictions as our
committee determines. The restrictions, if any, may lapse over a
specified period of employment or based on the satisfaction of
pre-established criteria, in installments or otherwise, as our
committee may determine. Except to the extent restricted under
the grant instrument relating to the stock award, a grantee will
have all of the rights of a stockholder as to those shares,
including the right to vote and the right to receive dividends
or distributions on the shares. All unvested stock awards are
forfeited if the grantees employment or service is
terminated for any reason, unless the committee determines
otherwise.
Stock Units. Under the 2009 Plan, the
committee may grant stock units to anyone eligible to
participate in the 2009 Plan. Stock units are phantom units that
represent shares of our stock. Stock units become payable on
terms and conditions determined by the committee and will be
payable in cash or shares of our stock as determined by the
committee. All unvested stock units are forfeited if the
grantees employment or service is terminated for any
reason, unless the committee determines otherwise.
Stock Appreciation Rights (SARs). The 2009
Plan authorizes the committee to grant SARs to anyone eligible
to participate in the Plan. Upon exercise of an SAR, the grantee
will receive an amount equal to the excess of the fair market
value of the common stock on the date of exercise over the base
amount set forth in the grant letter. Such payment to the
grantee will be in cash, in shares of common stock, or in a
combination of cash and shares of common stock, as determined by
the committee. The committee will determine the period when SARs
vest and become exercisable, the base amount for SARs, and
whether SARs will be granted in connection with, or
independently of, any options. SARs granted in connection with
an option will have a base amount equal to the related option.
If the SAR is not granted in connection with an option, the base
amount will be equal to or greater than the fair market value of
our common stock on the date the SAR is granted. SARs may be
exercised while the grantee is employed by us or providing
service to us or within a specified period of time after
termination of such employment or service, as determined by the
committee.
Other Stock-Based Awards. Under the 2009 Plan,
the committee may grant other types of awards that are based on,
measured by or payable to anyone eligible to participate in the
2009 Plan in shares of our common stock. The committee will
determine the terms and conditions of such awards. Other
stock-based awards may be payable in cash, shares of our common
stock or a combination of the two.
130
Dividend Equivalents. Under the 2009 Plan, the
committee may grant dividend equivalents in connection with
grants of stock units or other stock-based awards made under the
plan. Dividend equivalents entitle the grantee to receive
amounts equal to ordinary dividends that are paid on the shares
underlying a grant while the grant is outstanding. The committee
will determine whether dividend equivalents will be paid
currently or credited to a bookkeeping account as a dollar
amount or in the form of stock units. Dividend equivalents may
be paid in cash, in shares of our common stock or in a
combination of the two. The committee will determine whether
dividend equivalents will be conditioned upon the exercise,
vesting or payment of the grant to which they relate and the
other terms and conditions of the grant.
Qualified Performance-Based Compensation. The
2009 Plan permits the committee to impose performance goals that
must be met with respect to grants of stock awards, stock units,
other stock-based awards and dividend equivalents that are
intended to meet the exception for qualified performance-based
compensation under Section 162(m) of the Internal Revenue
Code. Prior to or soon after the beginning of a performance
period, the committee will establish the performance goals that
must be met, the applicable performance periods, the amounts to
be paid if the performance goals are met and any other
conditions.
The performance goals, to the extent designed to meet the
requirements of Section 162(m) of the Internal Revenue
Code, will be based on one or more of the following criteria:
stock price, earnings per share, net earnings, operating
earnings, earnings before income taxes, EBITDA (earnings before
income tax expense, interest expense, and depreciation and
amortization expense), return on assets, stockholder return,
return on equity, growth in assets, unit volume, sales or market
share, or strategic business criteria consisting of one or more
objectives based on meeting specified revenue goals, market
penetration goals, geographic business expansion goals, cost
targets or goals relating to acquisitions or divestitures.
If dividend equivalents are granted as qualified
performance-based compensation, the maximum amount of dividend
equivalents that may be accrued by a grantee in a calendar year
is $1,000,000.
Change of Control. If we experience a change
of control, unless our committee determines otherwise, all
outstanding options and stock appreciation rights will
automatically accelerate and become fully exercisable, the
restrictions and conditions on all outstanding stock awards will
immediately lapse and all grantees holding stock units, dividend
equivalents and other equity-based awards will receive a payment
in settlement of such grants in an amount determined by the
committee. The committee may also provide that (i) grantees
will be required to surrender their outstanding stock options
and stock appreciation rights in exchange for a payment, in cash
or shares of our common stock, equal to the difference between
the exercise price and the fair market value of the underlying
shares of common stock, (ii) after grantees have the
opportunity to exercise their stock options and stock
appreciation rights, any unexercised stock options and stock
appreciation rights will be terminated on the date determined by
our committee, or (iii) all outstanding stock options and
stock appreciation rights not exercised will be assumed or
replaced with comparable options or rights by the surviving
corporation (or a parent or subsidiary of the surviving
corporation) and other outstanding grants will be converted to
similar grants of the surviving corporation (or a parent or
subsidiary of the surviving corporation) as determined by the
committee.
In general terms, a change of control under the Plan occurs:
|
|
|
|
|
if a person, entity or affiliated group (with certain
exceptions) acquires more than 50.0% of our then outstanding
voting securities;
|
|
|
|
if we merge into another entity unless the holders of our voting
shares immediately prior to the merger have at least 50.0% of
the combined voting power of the securities in the merged entity
or its parent;
|
|
|
|
if we sell or dispose of all or substantially all of our assets;
|
|
|
|
if we are liquidated or dissolved; or
|
|
|
|
if a majority of the members of our board of directors is
replaced during any
12-month
period or less by directors whose appointment or election is not
endorsed by a majority of the incumbent directors.
|
Annual Bonus Awards. The 2009 Plan authorizes
the committee to grant annual bonus awards (which are intended
to qualify as qualified performance-based
compensation for purposes of Section 162(m) of the
Internal
131
Revenue Code) to executive employees as selected by the
committee. The committee will impose and specify the performance
goals that must be met with respect to the grant of annual bonus
awards and the performance period for the performance goals. To
satisfy the requirements of Section 162(m) of the Internal
Revenue Code for qualified performance-based compensation, the
committee will establish in writing the (i) performance
goals that must be met in order to receive payment for the bonus
award, (ii) maximum amounts to be paid if the performance
goals are met, (iii) performance threshold levels that must
be met to receive payment for the bonus award, and (iv) any
other conditions the committee determines and to be consistent
with the requirements of Section 162(m) of the Internal
Revenue Code.
The committee will use performance goals based on one or more
criteria as described above for qualified performance-based
compensation and may relate to one or more business units, our
performance, the performance of our subsidiaries as a whole, or
any combination of the foregoing. Prior to, or soon after the
beginning of, the performance period (or such other date as
required or permitted under Section 162(m) of the Internal
Revenue Code), the committee will establish in writing the
performance goals that must be met for each bonus award.
For purposes of Section 162(m) of the Internal Revenue
Code, the bonus awards can only be awarded with awards
designated as qualified performance-based
compensation. The committee may reduce (but may not
increase) the amount paid for the performance goals met based on
their assessment of personal performance and other factors and
such reduction will not result in an increase of any other bonus
award paid. The committee will certify the performance results
for the performance period after the performance period ends and
will determine the amount, if any, to be paid pursuant to each
bonus award based on the (i) achievement of the performance
goals, (ii) committees discretion to reduce any bonus
awards, and (iii) satisfaction of all other terms of the
bonus awards. Upon committee certification, payment of bonus
awards will be made in a single lump sum cash payment on or
after January 1, but no later than March 15 of the calendar
year following the end of the performance period (providing that
such payment does not affect other grants or bonuses awarded or
has been deferred).
The executive employee must remain employed by us through the
last day of the performance period in order to receive payment
of a bonus award. The committee will determine if, and under
what circumstances, payment of a bonus award will be made if
termination of employment occurs prior to the end of a
performance period. If a change of control occurs prior to the
end of a performance period, the committee will determine the
amount and time bonus awards will be awarded to an executive
employee who was awarded a bonus award and is employed by us
during the performance period in which the change of control
occurred.
Separate and apart from the annual bonus awards, the committee
may also grant to selected executive employees other bonuses
which may be based on individual performance, our performance,
or such other criteria as determined by our committee.
Deferrals. The committee may permit or require
grantees to defer receipt of the payment of cash or the delivery
of shares of our common stock that would otherwise be due to the
grantee in connection with a grant under the 2009 Plan. The
committee will establish the rules and procedures applicable to
any such deferrals, consistent with the requirements of
Section 409A of the Internal Revenue Code.
Repricing of Options. The committee may
cancel, with the consent of the affected holders, any or all of
the outstanding options or SARs (including options or SARs
transferred from the 2006 Plan) and in exchange for (i) new
options or SARs covering the same or a different number of
shares of our common stock but with an exercise price or base
amount per share not less than the fair market value per share
of our common stock on the new grant date or (ii) cash or
shares of our common stock, whether vested or unvested, equal in
value to the value of the cancelled options or SARs. The
committee shall also have the authority, with the consent of the
affected holders, to reduce the exercise price or base amount of
one or more outstanding options or SARs to the then current fair
market value per share of our common stock or issue new options
or SARs with a lower exercise price or base amount.
Section 162(m) Stockholder Approval
Requirements. In compliance with the transition
rules under Section 162(m) of the Internal Revenue Code,
and after our initial public offering, our stockholders will
approve the 2009 Plan no later than the first occurrence of:
(i) the expiration of the 2009 Plan, (ii) a material
modification of the 2009 Plan (in accordance with
Section 162(m) of the Internal Revenue Code),
(iii) the issuance of all of our common stock authorized
for issuance under the 2009 Plan, or (iv) the first meeting
of our stockholders (during
132
which our directors are elected) that occurs after the end of
the third calendar year following the year in which our initial
public offering occurred. Following the stockholder approval in
accordance with the transition rules, if qualified
performance-based compensation or bonus awards are granted after
our initial public offering, the 2009 Plan must be reapproved by
our stockholders by our first stockholders meeting that
occurs in the fifth year after which our stockholders previously
approved the terms of the 2009 Plan applicable to qualified
performance based compensation and annual bonus awards. Our
board may amend or terminate the 2009 Plan at any time; except
that our stockholders must approve any amendment if such
approval is required in order to comply with the Internal
Revenue Code, applicable laws, or applicable stock exchange
requirements. Unless terminated sooner by our board or extended
with stockholder approval, the 2009 Plan will terminate on the
day immediately preceding the tenth anniversary of the date on
which the underwriting agreement related to this offering is
signed.
Foreign Participants. If any individual who
receives a grant under the 2009 Plan is subject to taxation in
countries other than the United States, the 2009 Plan provides
that the committee may make grants to such individuals on such
terms and conditions as the committee determines appropriate to
comply with the laws of the applicable countries.
Outstanding Grants. Our committee has
previously approved the grant of options to the following
executive officers at an exercise price equal to the initial
public offering price as shown in the following table:
2009
Employee Stock Purchase Plan
Introduction. The 2009 Employee Stock Purchase
Plan, or the ESPP, was adopted by our board of directors
on ,
2009, subject to approval by our stockholders. It is expected
that the ESPP will be approved by our stockholders and will
become effective immediately prior to the effectiveness of the
registration statement for this offering. The ESPP permits
eligible employees to purchase shares of our common stock
through after-tax payroll deductions. It is intended that the
ESPP meets the requirements for an employee stock purchase
plan under Section 423 of the Internal Revenue Code.
Share Reserve. shares of our common stock,
representing % of our outstanding
common stock, are initially reserved for issuance under the
ESPP. During the term of the ESPP, the reserve will
automatically increase on the first trading day in January each
calendar year, beginning in calendar year 200 , by an amount
equal to the lesser of % of the
total number of outstanding shares of our common stock
outstanding on the last trading day in December of the prior
calendar year
or shares.
In no event will any such annual increase exceed shares. All of
the foregoing share limits are subject to adjustment as
described below.
Adjustments. In connection with stock splits,
stock dividends, recapitalizations and other events affecting
our common stock, the compensation committee will make
adjustments as it deems appropriate to the maximum number and
class of securities issuable under the ESPP, the maximum number
and class of securities purchasable per participant on any
interim purchase date, the maximum number and class of
securities purchasable in total by all participants on any
interim purchase date, and the number and class of securities
and the price per share in effect under each outstanding option,
in order to prevent the dilution or enlargement of benefits
thereunder.
Eligibility. Each of our employees and
employees of our subsidiaries that adopt the ESPP who are
regularly scheduled to work more than 20 hours per week and
for more than five months per calendar year will be eligible to
participate in the ESPP. Under the Internal Revenue Code
requirements, an employee who owns 5.0% or more of the total
combined voting power of all classes of our stock is not
eligible to participate. For purposes of determining who is a
5.0% owner, attribution of ownership rules apply, and shares of
stock subject to outstanding options are taken into account.
Eligible employees may not participate in more than one offering
period at a time.
Offering Period. Under the ESPP, there will be
a series of overlapping offering periods, each 24 months
long with interim purchase intervals approximately every six
months. The first offering period will begin on the effective
date of this initial public offering of our common stock and
will end
on .
Purchase intervals will run
from
to
and
from
to ,
except that the first purchase interval will run from the
effective date of the initial public offering of our common
stock
until .
Unless our compensation
133
committee determines otherwise prior to the beginning of an
offering period, each subsequent offering period will begin
on
and will end
on ,
24 months later. If any of the designated dates is not a
business day, the purchase date will be moved to the next
business day.
Reset Feature. If the fair market value of our
common stock on any interim purchase date is less than the fair
market value of our common stock on the first day of the
offering period, the participants in the offering period will,
immediately after the purchase of shares on such interim
purchase date, be transferred from that offering period into the
next offering period that commences after the interim purchase
date.
Participation. Each eligible employee who
elects to participate in an offering period will be granted an
option to purchase shares of our common stock on the first day
of the offering period. The option will automatically be
exercised on each interim purchase date during the offering
period based on the employees accumulated contributions to
the ESPP. The purchase price for each share of stock during the
initial offering period will be equal to 85.0% of the lesser of
the initial public offering price of our common stock or the
fair market value of our stock on the interim purchase date. For
each subsequent offering period, the purchase price of each
share of our common stock under the ESPP will be equal to 85.0%
of the lesser of the fair market value per share of our common
stock on the first day of the offering period or the fair market
value of our stock on each interim purchase date. Participants
will generally be permitted to allocate up to 10.0% of their
compensation to purchase our common stock under the ESPP.
Initial Election Period. The first offering
period will begin on the effective date of this initial public
offering of our common stock. For the first offering period, all
eligible employees will be automatically enrolled in the ESPP
prior to the commencement of the offering period at a
contribution rate equal to % of
their compensation. Shortly after the first offering period
commences, but prior to the first interim purchase date,
participants will be able to elect to continue their
participation in the ESPP, withdraw from participation in the
ESPP or reduce the amount they contribute to the ESPP.
Termination of Employment. Participants may
modify or end their participation in the ESPP at any time during
any offering period. Participation ends automatically upon
termination of employment or if the participant ceases to be an
eligible employee.
Maximum Number of Purchasable Shares. The
maximum number of shares that a participant may purchase on any
interim purchase date may not exceed shares and the maximum
number of shares purchasable in the aggregate by all
participants in the ESPP on any one interim purchase date may
not exceed shares, subject to adjustment by the compensation
committee prior to the beginning of the offering period and
subject to adjustments as described above. In addition, no
participant may purchase more than $25,000 worth of our common
stock during each calendar year under the ESPP.
Change of Control. If we experience a change
of control while the ESPP is in effect, all outstanding options
under the ESPP will automatically be exercised immediately prior
to the effective date of any change of control and the purchase
price for each share of our common stock under the ESPP on such
purchase date will be equal to 85.0% of the lesser of the fair
market value per share of our common stock on the first day of
the offering period in which the participant is enrolled or the
fair market value of our stock immediately prior to the change
of control. If a change of control occurs, the limitation on the
aggregate number of shares that all participants may purchase on
the purchase date will not apply.
In general terms, a change of control under the ESPP occurs:
|
|
|
|
|
if a person, entity or affiliated group acquires more than 50.0%
of our then outstanding voting securities;
|
|
|
|
if we merge with another entity, unless the holders of our
voting shares immediately prior to the merger have at least
50.0% of the combined voting power of the securities in the
merged entity or its parent;
|
|
|
|
if we merge with another entity and the members of the board
prior to the merger would not constitute a majority of the board
in the merged entity or its parent;
|
|
|
|
if we sell or dispose of all or substantially all of our assets;
|
|
|
|
if we are liquidated or dissolved; or
|
134
|
|
|
|
|
if a majority of the members of our board of directors is
replaced during any
12-month
period or less by directors whose appointment or election is not
endorsed by a majority of the incumbent directors.
|
Plan Administration. The ESPP will be
administered by our compensation committee.
Amendment; Termination. Our board of directors
may amend or terminate the ESPP at any time, with such amendment
or termination to become effective immediately following the
close of an interim purchase date. However, our board of
directors may not amend the ESPP without stockholder approval if
such amendment increases the number of shares of our common
stock issuable under the ESPP except for permissible adjustments
in the event of changes in our capitalization, alters the
purchase price formula to reduce the purchase price payable for
shares purchasable under the ESPP, or modifies the eligibility
requirements under the ESPP. Unless sooner terminated by our
board of directors, the ESPP will terminate upon the earliest of:
|
|
|
|
|
,
2019;
|
|
|
|
the date all shares available for issuance under the plan have
been issued; or
|
|
|
|
the date all options are exercised in connection with a change
of control.
|
401(k)
Plan
We maintain a retirement and deferred savings plan for our
employees. The retirement and deferred savings plan is intended
to qualify as a tax-qualified plan under Section 401 of the
Internal Revenue Code. The retirement and deferred savings plan
provides that each participant may contribute up to 100.0% of
his or her pre-tax compensation, up to a statutory limit, which
for most employees was $15,500 in 2008. Under the plan, each
employee is fully vested in his or her deferred salary
contributions. Employee contributions are held and invested by
the plans trustee. We match 25.0% of employee
contributions up to $15,500 for all employees who have been
employed with us for less than three years, and we match 50.0%
of employee contributions up to $15,500 for all employees who
have been employed with us for more than three years.
Nonqualified
Deferred Compensation Plan
We maintain a non-qualified employee pension plan primarily for
the purpose of providing deferred compensation for a select
group of management or highly compensated employees, thereby
creating an incentive for such employees to remain in the employ
of the Employer and to promote its continued growth. This
nonqualified deferred compensation plan provides that each
eligible employee may defer up to either $15,000 (for
tier 2 eligible employees) or $35,000 (for tier 1
eligible employees) of their earned bonus or commission
beginning with 2009 earned bonuses or commissions. Under the
plan, each employee is fully vested in his or her deferred
contributions. Employee deferrals are held and invested at the
employees direction by the plans trustee. We do not
match employee deferrals into this plan.
Limitation
of Liability and Indemnification of Officers and
Directors
Our certificate of incorporation that will be in effect upon
completion of this offering limits the personal liability of
directors for breach of fiduciary duty to the maximum extent
permitted by the Delaware General Corporation Law. Our
certificate of incorporation provides that no director will have
personal liability to us or to our stockholders for monetary
damages for breach of fiduciary duty or other duty as a
director. However, these provisions do not eliminate or limit
the liability of any of our directors:
|
|
|
|
|
for any breach of their duty of loyalty to us or our
stockholders;
|
|
|
|
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
|
|
|
|
for voting or assenting to unlawful payments of dividends or
other distributions; or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
135
Any amendment to or repeal of these provisions will not
eliminate or reduce the effect of these provisions in respect of
any act or failure to act, or any cause of action, suit or claim
that would accrue or arise prior to any amendment or repeal or
adoption of an inconsistent provision. If the Delaware General
Corporation Law is amended to provide for further limitations on
the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to
the greatest extent permitted by the Delaware General
Corporation Law.
In addition, our certificate of incorporation provides that we
must indemnify our directors and officers and we must advance
expenses, including attorneys fees, to our directors and
officers in connection with legal proceedings, subject to very
limited exceptions. Our amended and restated bylaws provide that
we will indemnify our directors and officers to the fullest
extent permitted by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities
reasonably incurred in connection with their service for or on
our behalf. Our amended and restated bylaws provide that we must
advance the expenses incurred by a director or officer in
advance of the final disposition of an action or proceeding. Our
amended and restated bylaws also authorize us to indemnify any
of our employees or agents and permit us to secure insurance on
behalf of any officer, director, employee or agent for any
liability arising out of his or her action in that capacity,
whether or not Delaware law would otherwise permit
indemnification.
In addition to the indemnification provided for in our
certificate of incorporation, we have entered into separate
indemnification agreements with each of our directors which are
broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. These indemnification
agreements require us, among other things, to indemnify our
directors and executive officers for some expenses, including
attorneys fees, judgments, fines and settlement amounts
incurred by a director or executive officer in any action or
proceeding arising out of his service as one of our directors or
executive officers, or any of our subsidiaries or any other
company or enterprise to which the person provides services at
our request. Also, our directors and officers are insured
against certain losses from potential third party claims for
which we are legally or financially unable to indemnify them. We
believe that these provisions and agreements are necessary to
attract and retain qualified individuals to serve as directors
and executive officers.
Rule 10b5-1
Sales Plans
Our directors and executive officers may adopt written plans,
known as
Rule 10b5-1
plans, in which they will contract with a broker to buy or sell
shares of our common stock on a periodic basis. Under a
Rule 10b5-1
plan, a broker executes trades pursuant to parameters
established by the director or officer when entering into the
plan, without further direction from them. The director or
officer may amend or terminate the plan in some circumstances.
Our directors and executive officers may also buy or sell
additional shares outside of a
Rule 10b5-1
plan when they are not in possession of material, nonpublic
information.
136
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Issuance
of Series E Preferred Stock
On January 11, 2008, we issued and sold an aggregate of
2,611,606 shares of Series E preferred stock to
certain investors at a purchase price per share of $44.80 for an
aggregate purchase price of $116,999,948.80. The investors
consisted of 3i U.S. Growth Partners L.P., 3i Technology
Partners III L.P., VantagePoint Venture Partners IV
(Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint
Venture Partners IV Principals Fund, L.P. and VP New York
Venture Partners L.P.
Issuance
of Series D Preferred Stock
On March 29, 2006, we issued and sold 3,254,678 shares
of Series D preferred stock at a purchase price of $12.29
per share for an aggregate purchase price of $39,999,992.62. The
investors consisted of VantagePoint Venture Partners IV
(Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint
Venture Partners IV Principals Fund, L.P. and VP New York
Venture Partners L.P.
Issuance
of Series C Preferred Stock
On August 1, 2003 and August 8, 2003, we issued and
sold a total of 2,496,879 shares of Series C preferred
stock at a purchase price of $4.005 per share for an aggregate
purchase price of $10,000,000. The investors consisted of Tudor
Ventures II, L.P., The Raptor Global Portfolio, Ltd. and ALTAR
Rock Fund, L.P.
Issuance
of Series B Preferred Stock
On July 25, 2001, we issued and sold 2,848,516 shares
of Series B preferred stock at a purchase price of
$1.11 per share, and on August 15, 2001, we sold an
additional 30,000 shares of Series B preferred stock
at a purchase of $1.11 per share, for an aggregate purchase
price for both closings of $3,195,152.70. The investors
consisted of Edison Venture Fund IV SBIC, L.P., Cross
Atlantic Capital Partners, Inc., Blue Rock Capital, L.P.,
Christopher Calhoun and JD Seed Fund LP.
Issuance
of Series A Preferred Stock
In a series of closings from December 2, 1999 to
March 1, 2001, we issued and sold an aggregate of
4,280,591 shares of Series A preferred stock to
certain investors at a purchase price of $1.10 per share for an
aggregate purchase price of $4,780,650.10. The investors
consisted of Cross Atlantic Capital Partners, Inc., Blue Rock
Capital, L.P. and nineteen other small investors.
Repurchase
Agreement with Certain Stockholders and Warrantholders
In connection with the issuance and sale of our Series E
preferred stock, and in order to provide partial liquidity to
long-term holders of our capital stock, we entered into a
repurchase agreement with certain holders of our Series A,
Series B and Series C preferred stock, as well as
certain holders of our common stock, options to purchase our
common stock and warrants to purchase our Series A
preferred stock, identified on Schedule A to the repurchase
agreement, whereby we repurchased such stock (including stock
issuable upon exercise of such options and warrants) on
January 11, 2008 and January 25, 2008. We refer to
this agreement as the Repurchase Agreement. For purposes of this
discussion, each such stockholder, optionholder and
warrantholder who sold shares to us pursuant to this Repurchase
Agreement shall be referred to as an Equityholder. The names of
the officers, directors and 5.0%
137
stockholders from whom we repurchased securities, as well as the
number and type of security and aggregate purchase price are set
forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number and Type of Securities
|
|
Purchase
|
|
Name
|
|
Repurchased by the
Company
|
|
Price
|
|
|
Cross Atlantic Technology Fund, L.P.
|
|
948,662 shares of Series A preferred stock
|
|
$
|
42,433,651
|
|
Blue Rock Capital, L.P.
|
|
165,549 shares of Series A preferred stock
|
|
$
|
7,405,007
|
|
Silicon Valley Bank
|
|
Warrant to purchase 88,206 shares of Series A
preferred stock
|
|
$
|
3,945,454
|
|
Tudor Ventures II, L.P.
|
|
173,831 shares of Series C preferred stock
(convertible into 223,215 shares of common stock)
|
|
$
|
9,984,423
|
|
Mark E. Galant
|
|
223,488 shares of common stock (189,954 shares were
repurchased on January 11, 2008 and 33,534 shares were
repurchased on January 25, 2008)
|
|
$
|
9,996,618
|
|
Roger Tarika
|
|
Options to purchase 13,000 shares of our common stock
|
|
$
|
581,490
|
|
Others
|
|
48,037 shares of Series A preferred stock,
1,601 shares of Series B preferred Stock,
52,074 shares of common stock and options to purchase
5,001 shares of common stock
|
|
$
|
4,773,272
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,119,915
|
|
|
|
|
|
|
|
|
Pursuant to our Second Amended and Restated Certificate of
Incorporation, there will be an adjustment to the conversion
price (which in turn will affect the conversion rate) for the
Series E preferred stock if our initial public offering
Offer Price or Revised Offer Price, as applicable (each as
defined in our Second Amended and Restated Certificate of
Incorporation), is less than $53.76 (as adjusted for stock
splits or similar transactions). See Description of
Capital Stock Preferred Stock for a more
detailed description of this conversion.
Each Equityholder who sold our shares back to us pursuant to the
Repurchase Agreement is required by the Repurchase Agreement to
indemnify us if there is an adjustment to the Series E
preferred stock conversion price, subject to the indemnification
limits described below. In such an event, the Equityholders
will, severally (and not jointly) and pro rata to the payments
they received for the Repurchased Securities (as defined in the
Repurchase Agreement) sold by each Equityholder, indemnify us in
an aggregate amount equal to the product of (a) the number
of additional shares of common stock issuable as a result of any
adjustment to the Series E preferred stock conversion price
with respect to 2,070,312 out of a total of 3,738,688 authorized
shares of Series E preferred stock, multiplied by
(b) the Offer Price or Revised Offer Price, as applicable.
The Equityholders shall be entitled to make any indemnification
payments in cash or in shares of our common stock. The
Repurchase Agreement provides that the indemnification
obligation is capped at an Offer Price or Revised Offer Price,
as applicable, of $48.96 (as adjusted for stock splits or
similar transactions). Should the Offer Price or Revised Offer
Price, as applicable, be lower than $48.96, it shall be deemed
to be $48.96 (as adjusted for stock splits or similar
transactions) for the purpose of calculating the indemnification
amount.
Employee
Repurchase with Certain Stockholders and Optionholders
In addition to the repurchases conducted pursuant to the
Repurchase Agreement and in connection with the issuance and
sale of our Series E preferred stock, we sought to offer
partial liquidity and to promote employee retention and
incentive for future equity award appreciation by offering to
repurchase shares of our common stock (including the stock
issuable upon exercise of options) from certain employees on
January 11, 2008 and January 18, 2008. We effected
each of these repurchases pursuant to transmittal letters that
were executed and returned to us by each employee that
participated in the employee repurchase. The names of the
officers, directors and 5.0%
138
stockholders from whom we repurchased securities, as well as the
number and type of security and aggregate purchase price, are
set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number and Type of Securities
|
|
Purchase
|
|
Name
|
|
Repurchased by the
Company
|
|
Price
|
|
|
Glenn H. Stevens
|
|
55,803 shares of common stock and options to purchase
160,524 shares of common stock
|
|
$
|
9,676,307
|
|
Christopher W. Calhoun
|
|
5,000 shares of common stock and options to purchase
66,000 shares of common stock
|
|
$
|
3,175,830
|
|
Timothy OSullivan
|
|
Options to purchase 65,187 shares of common stock
|
|
$
|
2,915,815
|
|
Others
|
|
4,983 shares of common stock and options to purchase
263,512 shares of common stock
|
|
$
|
12,009,781
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,777,733
|
|
|
|
|
|
|
|
|
Stockholders
Agreement
We entered into the Amended and Restated Stockholders Agreement,
dated January 11, 2008, with certain holders of our common
stock and the holders of our Series A, Series B,
Series C, Series D and Series E preferred stock.
We refer to this agreement below as the Stockholders Agreement.
The purpose of the Stockholders Agreement is to govern the
relationship among the parties to the agreement. The
Stockholders Agreement provides, among other things, the terms
on which our securities held by these stockholders are to be
transferred and voted. The Stockholders Agreement contains
customary transfer restrictions, rights of first refusal and
co-sale, tag-along and voting obligations. These rights and
obligations set forth in the Stockholders Agreement will
terminate immediately prior to the closing of this offering.
Investor
Rights Agreement
In connection with the issuance and sale of our series E
preferred stock, we entered into an Amended and Restated
Investor Rights Agreement, dated January 11, 2008, with the
holders of our Series A, Series B, Series C,
Series D and Series E preferred stock and Mark E.
Galant, our founding stockholder. We refer to this agreement
below as the Investor Rights Agreement. Pursuant to the Investor
Rights Agreement, under certain circumstances, holders of our
preferred stock and certain holders of our common stock are
entitled to require us to register their shares under the
securities laws for resale. See Description of Capital
Stock Registration Rights.
Indemnification
of Directors
In connection with the issuance and sale of our Series E
preferred stock, we entered into indemnification agreements with
each of our directors, whereby we will indemnify each director
to the fullest extent permitted by law and advance expenses to
each indemnified director in connection with any proceeding in
which indemnification is available.
Acquisition
of GCAM, LLC
On January 1, 2007, we entered into a securities purchase
agreement with Glenn H. Stevens, our president and chief
executive officer, Mark E. Galant, the chairman of our board of
directors, and GAIN Capital Group, LLC, our indirect,
wholly-owned subsidiary. Pursuant to the purchase agreement, we
purchased all of the issued and outstanding units of GCAM, LLC,
or GCAM, from each of Mr. Stevens, Mr. Galant and GAIN
Capital Group, LLC, resulting in GCAM becoming our direct,
wholly-owned subsidiary. In consideration of the GCAM units, we
issued 48,820 restricted stock units to Mr. Stevens and
19,430 restricted stock units to Mr. Galant. Pursuant to
Mr. Galants restricted stock unit agreement, upon a
Change of Control (as defined in such restricted stock unit
agreement), Mr. Galant shall surrender 9,764 restricted
stock units to us in return for one hundred thousand dollars
($100,000); provided that both Mr. Stevens and
Mr. Galant are employed by us or providing services to us
at the time of the
139
Change of Control. Pursuant to Mr. Stevens restricted
stock unit agreement, upon a Change of Control (as defined in
the restricted stock unit agreement), Mr. Stevens shall
receive an additional award of 9,764 restricted units in
exchange for one hundred thousand dollars ($100,000) paid by
Mr. Stevens to us; provided that both Mr. Stevens and
Mr. Galant are employed by us or providing services to us
at the time of the Change of Control.
As a condition to consummating the transaction, on
January 1, 2007, we entered into a letter agreement with
Mr. Stevens which, among other things, obligated us to pay
Mr. Stevens compensation in consideration for his services
as chief executive officer of GCAM based upon a pre-determined
formula set forth in the letter agreement. Mr. Stevens did
not receive any compensation under such letter agreement for the
2007 fiscal year and such compensation provisions were
superseded by Mr. Stevens employment agreement, dated
January 1, 2008. Pursuant to the letter agreement,
Mr. Stevens was also entitled to a purchase right with
respect to all securities of GCAM held by us, but such right was
terminated in connection with Mr. Stevens employment
agreement, dated January 1, 2008. Each of
Mr. Stevens and Mr. Galants restricted
stock units received in connection with the GCAM acquisition was
also subject to a call option allowing us to cause the grantee
to forfeit and transfer back to us all or a portion of the
restricted stock units, but such right has since been terminated
in connection with Mr. Stevens employment agreement
and Mr. Galants separation agreement, each as
described above. See Management Employment
Agreements and Change of Control Arrangements.
GCAM, LLC is the general partner of GCAM Madison Fund, L.P., a
Delaware limited partnership formed on April 10, 2006 to
operate as a private investment partnership. The partnership is
engaged primarily in the business of trading and investing in
over the counter foreign currencies. The general partner directs
the partnerships trading and investments as well as its
day-to-day
operations. Mr. Stevens is the limited partner of GCAM
Madison Fund, L.P.
Acquisition
of GAIN Global Markets, Inc.
GAIN Global Markets, Inc., or GGM, was incorporated on
January 19, 2006 in the Cayman Islands. The sole
incorporator of GGM, Sophia Dilbert, was issued one share of
GGMs capital stock upon GGMs incorporation, which
share was immediately transferred to Mark E. Galant. On
November 27, 2006, Mr. Galant was issued an additional
sixty-five shares of GGM capital stock and Mr. Stevens was
issued thirty-three shares of GGM capital stock. On
July 30, 2007, Mr. Stevens contributed $1,200,000 of
capital to GGM, which represented the outstanding capital
contribution by Mr. Stevens for the shares he held in GGM,
along with the outstanding capital contribution by
Mr. Galant and as such, Mr. Stevens purchased
Mr. Galants sixty-six (66) shares of GGM. On
September 18, 2007, Mr. Stevens transferred and sold
his ninety-nine shares of capital stock of GGM, which represent
100.0% ownership of GGM, to our wholly-owned subsidiary, GAIN
Capital Holdings International, LLC, a Delaware limited
liability company, or GAIN International, in exchange for the
payment by GAIN International to Mr. Stevens of $1,241,442
on December 13, 2007, which amount represented the
$1,200,000 aggregate capital contributions made by
Mr. Stevens to GGM, plus interest accrued on the initial
capital contribution.
Transactions
with Mark E. Galant
Stock
Repurchase Agreement with Mark E. Galant in June
2007
On June 7, 2007, contemporaneous with Mark E. Galants
resignation as our chief executive officer, we entered into a
Stock Repurchase Agreement with Mr. Galant, pursuant to
which we repurchased an aggregate of 870,070 shares of our
common stock held by Mr. Galant at a repurchase price of
$34.48 per share, and an aggregate purchase price of $30,000,000.
Separation
agreement with Mark E. Galant
On January 11, 2008, we entered into a separation agreement
with Mark E. Galant, our founder, chairman of our board of
directors and former chief executive officer, pursuant to which
Mr. Galant acknowledged and agreed, among other things,
that no amounts were owed to him under that certain severance
agreement, dated March 29, 2006, between Mr. Galant
and us in connection with his June 7, 2007 voluntary
resignation as our chief executive officer, and that such
severance agreement was terminated and no longer in effect.
Under the terms of the separation agreement, we agreed to pay
Mr. Galant a bonus in an amount equal to $807,000
representing the aggregate of all prior accrued and unpaid
quarterly and annual bonus amounts owed to Mr. Galant in
connection with his services as
140
our chief executive officer. Under the terms of the separation
agreement, Mr. Galant is entitled to receive health
insurance benefits in amounts comparable to our executive
officers for as long as he is a member of our board of
directors. Mr. Galant is also entitled to receive annual
compensation for his role as a member of our board of directors
equal to amounts received by independent members of our board of
directors; provided, however, that so long as Mr. Galant
serves as chairman of our board of directors, he shall receive
annual compensation equal to between 1.25 times and 1.5 times
the annual compensation received by independent members of our
board of directors, as determined by the compensation committee
of the board of directors. We have also agreed to provide
Mr. Galant with executive office space and access to an
administrative assistant at our headquarters in Bedminster, New
Jersey.
Mr. Galant is entitled to certain priority rights to
include shares of our capital stock held by Mr. Galant in
our initial public offering. In addition, Mr. Galants
separation agreement also amends the vesting schedule for the
unvested restricted stock units granted to Mr. Galant on or
after December 31, 2006 which were unvested as
January 1, 2008 such that 50.0% of such unvested restricted
stock units shall vest monthly during calendar year 2008 (on the
last day of the applicable month) and the remaining 50.0% of
such unvested restricted stock units shall vest monthly during
calendar year 2009 (on the last day of the applicable month).
However, in the event Mr. Galant is removed as a director
for any reason, other than for Cause (as defined in
the severance agreement, dated March 29, 2006, between
Mr. Galant and us), any unvested options or restricted
stock units held by Mr. Galant shall immediately accelerate
and be deemed fully vested. Mr. Galant has also agreed to
terminate the call provisions in the restricted stock unit
agreement, dated January 1, 2007, between Mr. Galant
and us.
Pursuant to Mr. Galants restricted stock unit
agreement granted in connection with our acquisition of GCAM,
LLC (as described below), upon a Change of Control (as defined
in the restricted stock unit agreement), Mr. Galants
restricted stock unit account shall automatically be reduced by
9,764 restricted units, and we shall credit his restricted unit
account with one hundred thousand dollars ($100,000), but only
if both Mr. Stevens and Mr. Galant are employed by us
or providing services to us at the time of the Change of Control.
Repurchase
agreement with Mark E. Galant in January 2008
Please see Certain Relationships and Related Party
Transactions Repurchase Agreement with Certain
Stockholders, Warrantholders and Optionholders for a
description of a repurchase agreement we entered into with
Mr. Galant in January 2008.
Services
Agreement with Scivantage, Inc.
On February 1, 2008, we entered into a services agreement
with Scivantage, Inc., or Scivantage, in which Scivantage
provides us with access to office accommodations, including
fully furnished office workstations, 24 hours a day,
7 days a week, at 10 Exchange Place, Jersey City, New
Jersey, for a fee of $24,000 per month, with an additional
one-time move-in fee of $24,000. We exercised our option to
renew the agreement and the current term expires on
December 31, 2009. Two of our board members,
Messrs. Galant and Sugden, are members of the board of
directors of Scivantage.
Forex
Trading by certain officers, directors and employees on our
platform
In June 2007, we instituted a policy that prohibits our
officers, directors and employees from opening an account with
us and directly engaging in forex trading on our proprietary
platform. However, our policy does not prohibit our officers,
directors and employees from opening an account with one of our
white label partners in order to engage in forex trading through
the white label partner on our platform.
Executive
Compensation and Stock Option Awards
Please see Management for information on the
compensation of, and stock options granted to, our directors and
executive officers.
141
Employment
Agreements
We have entered into an employment agreement with Glenn H.
Stevens, our president and chief executive officer, and have
entered into employment arrangements pursuant to executed offer
letters with each of Christopher W. Calhoun, our senior advisor
and secretary and Henry C. Lyons, our chief financial officer
and treasurer, as described in Management
Employment Agreements and Change of Control Agreements.
Policies
and Procedures for Review and Approval of Related Person
Transactions
Our board of directors intends to adopt, prior to completion of
this offering, a written code of business conduct and ethics,
under which our employees and officers are discouraged from
entering into any transaction that may cause a conflict of
interest for us. In addition, they will be required to report
any potential conflict of interest, including related party
transactions, to their managers or our compliance officer who
will then review and summarize the proposed transaction for our
audit committee. Pursuant to its charter, our audit committee
will then be required to approve any related-party transactions,
including those transactions involving our directors. In
approving or rejecting such proposed transactions, the audit
committee will consider the relevant facts and circumstances
available and deemed relevant to the audit committee, including
the material terms of the transactions, risks, benefits, costs,
availability of other comparable services or products and, if
applicable, the impact on a directors independence. Our
audit committee will approve only those transactions that, in
light of known circumstances, are in, or are not inconsistent
with, our best interests, as our audit committee determines in
the good faith exercise of its discretion. Immediately after the
effective time of the registration statement of which this
prospectus forms a part, a copy of our code of business conduct
and ethics and our audit committee charter will be posted to our
website
http://www.gaincapital.com.
142
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table provides information concerning beneficial
ownership of our capital stock as of September 30, 2009,
and as adjusted to reflect the sale of shares of common stock in
this offering, by:
|
|
|
|
|
each stockholder, or group of affiliated stockholders, that we
know owns more than 5.0% of our outstanding capital stock;
|
|
|
|
each other selling stockholder in this offering;
|
|
|
|
each of our named executive officers;
|
|
|
|
each of our directors; and
|
|
|
|
all of our directors and named executive officers as a group.
|
The following table lists the number of shares and percentage of
shares beneficially owned based on shares of common stock
outstanding as of September 30, 2009
and shares
of common stock outstanding upon the completion of this
offering, each of which gives effect to the conversion of all
outstanding shares
of preferred stock into an aggregate
of shares
of common stock, but does not give effect to the adjustment to
the conversion price that will be determined upon the filing of
the preliminary prospectus and will occur if the offering price
in the final prospectus is less than $53.76. See
Description of Capital Stock Preferred
Stock for a discussion of this conversion adjustment and
Certain Relationships and Related Party
Transactions Repurchase Agreement with Certain
Stockholders, Warrantholders and Optionholders for a
discussion of certain indemnification provisions in the
Repurchase Agreement that are triggered if this adjustment to
the conversion price with respect to the Series E preferred
stock occurs.
Beneficial ownership is determined in accordance with the rules
of the SEC, and generally includes voting power
and/or
investment power with respect to the securities held. Shares of
common stock subject to options currently exercisable or
exercisable within 60 days of September 30, 2009 are
deemed outstanding and beneficially owned by the person holding
those options for purposes of computing the number of shares and
percentage of shares beneficially owned by that person, but are
not deemed outstanding for purposes of computing the percentage
beneficially owned by any other person. Except as indicated in
the footnotes to this table, and subject to applicable community
property laws, the persons or entities named have sole voting
and investment power with respect to all shares of our common
stock shown as beneficially owned by them.
For information with respect to the selling stockholders and
their relationships with us as well as a description of the
transactions in which certain of the selling stockholders
purchased the shares being offered in this prospectus, see
Certain Relationships and Related Party Transactions.
143
Unless otherwise indicated in the footnotes, the principal
address of each of the stockholders identified below is
c/o GAIN
Capital Holdings, Inc., 550 Hills Drive, Bedminster, New Jersey
07921.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
|
|
|
Shares Being Sold in Offering
|
|
|
Immediately Following Offering
|
|
|
|
|
|
|
|
|
|
Assuming
|
|
|
Assuming
|
|
|
Assuming
|
|
|
Assuming
|
|
|
|
|
|
|
|
|
|
Underwriters
|
|
|
Underwriters
|
|
|
Underwriters Over-
|
|
|
Underwriters Over-
|
|
|
|
Shares Beneficially
|
|
|
Over-Allotment
|
|
|
Over-Allotment
|
|
|
Allotment
|
|
|
Allotment
|
|
|
|
Owned Prior to
|
|
|
Option is
|
|
|
Option is
|
|
|
Option is
|
|
|
Option is
|
|
|
|
Offering
|
|
|
Not
|
|
|
Exercised
|
|
|
Not Exercised
|
|
|
Exercised in Full
|
|
Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Exercised
|
|
|
in Full
|
|
|
Number
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
|
5.0% Beneficial Owners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i U.S. Growth Partners
L.P.(1)
|
|
|
2,165,178
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3i Technology Partners III
L.P.(1)
|
|
|
2,165,178
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VantagePoint Venture Partners IV(Q),
L.P.(2)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VantagePoint Venture Partners IV,
L.P.(2)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VantagePoint Venture Partners IV Principals Fund,
L.P.(2)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP New York Venture Partners,
L.P.(2)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tudor Ventures II
L.P.(3)
|
|
|
1,220,103
|
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edison Venture Fund IV SBIC,
L.P.(4)
|
|
|
2,853,963
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Atlantic Technology Fund,
L.P.(5)
|
|
|
1,527,402
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Selling Stockholders, Named Executive Officers and
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Raptor Global Portfolio,
Ltd.(6)
|
|
|
135,154
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALTAR Rock Fund,
L.P.(7)
|
|
|
412
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blue Rock Capital,
L.P.(8)
|
|
|
496,647
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark E.
Galant(9)
|
|
|
1,290,645
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2007 Galant Family
Trust(10)
|
|
|
391,826
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn H.
Stevens(11)
|
|
|
383,813
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher W.
Calhoun(12)
|
|
|
110,666
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry C. Lyons
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
OSullivan(13)
|
|
|
106,733
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken
Hanau(14)
|
|
|
2,165,178
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerry
McCrory(15)
|
|
|
1,527,402
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James C.
Mills(16)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Quick
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Schenk
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher S.
Sugden(17)
|
|
|
2,853,963
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger Tarika
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susanne D. Lyons
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and named executive officers as a group
(12 persons)(18)
|
|
|
12,420,666
|
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Represents ownership of less than
1.0%.
|
|
|
|
(1)
|
|
Amounts shown reflect the aggregate
number of shares of common stock issuable upon automatic
conversion of outstanding shares of preferred stock held by 3i
U.S. Growth Partners L.P. and 3i Technology
Partners III L.P. 3i U.S. Growth Partners L.P.s
general partners are 3i US Growth Corporation, a Delaware
corporation, and 3i 2004 GmbH & Co. KG, a German
limited partnership. The investment committee of 3i US Growth
Corporation holds voting and dispositive power for the shares
held by 3i U.S. Growth Partners L.P. The current members of
the investment committee of 3i US Growth Corporation are Ken
Hanau, Robert Stefanowski and John Moore. Ken Hanau is also one
of our directors. Each of the members disclaims beneficial
ownership of the shares except to the extent of their pecuniary
interest. 3i Technology Partners III LPs general
partners are 3i Technology Corporation, a Delaware corporation,
and 3i 2004 GmbH & Co. KG, a German limited
partnership. The investment committee of 3i Technology
Corporation holds voting and dispositive power for the shares
held by 3i Technology Partners III L.P. The current members
of the investment committee of 3i Technology Corporation are Ken
Hanau, Robert Stefanowski and John Moore. Ken Hanau is also one
of our directors. Each of the members disclaims beneficial
ownership of the shares except to the extent of their pecuniary
interest. The address of the 3i Entities is
c/o Mourant &
Co. Limited, 22 Grenville Street, St. Helier, Jersey (Attention:
Group 12).
|
|
|
|
(2)
|
|
Consists of
(i) 2,358,991 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VantagePoint Venture Partners IV (Q),
L.P., (ii) 236,159 shares of common stock issuable
upon the automatic conversion
|
(footnotes continued on following page)
144
|
|
|
|
|
of preferred stock upon completion
of this offering held by VantagePoint Venture Partners IV, L.P.,
(iii) 8,592 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VantagePoint Venture Partners IV
Principals Fund, L.P., (iv) 650,936 shares of common
stock issuable upon the automatic conversion of preferred stock
upon completion of this offering held by VP New York Venture
Partners, L.P., (v) 323,570 shares of common stock
issuable upon the automatic conversion of preferred stock upon
completion of this offering held by VantagePoint Venture
Partners IV (Q), L.P., (vi) 32,393 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering held by VantagePoint
Venture Partners IV, L.P., (vii) 1,179 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering held by VantagePoint
Venture Partners IV Principals Fund, L.P., and
(viii) 89,286 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VP New York Venture Partners, L.P. VantagePoint
Venture Associates IV, L.L.C., or VPVA, is the general partner
of each of the VantagePoint Venture Partners entities. Alan E.
Salzman and James D. Marver are the managing members of VPVA and
may be deemed to have voting and investment control over the
shares held by the VantagePoint Venture Partners entities. Each
of Mr. Salzman and Mr. Marver disclaims beneficial
ownership of all shares owned by VantagePoint Venture Partners
entities, except to the extent of their pecuniary interest
therein. Certain of the VantagePoint entities own shares in a
company that has a FINRA broker-dealer license, and thus, such
VantagePoint entities may be affiliated with a broker-dealer.
The VantagePoint Venture Partners entities purchased the
securities in the ordinary course of business, and at the time
of the purchase of the securities to be resold, had no
agreements or understandings, directly or indirectly, with any
person to distribute the securities. The principal address of
the VantagePoint Venture Partners entities is 1001 Bayhill
Drive, Suite 300, San Bruno, CA 94066.
|
(3)
|
|
Consists of 1,220,103 shares
of common stock issuable upon the automatic conversion of
preferred stock upon completion of this offering. Tudor Ventures
Group L.P. is the general partner of Tudor Ventures II L.P.
Tudor Ventures Group LLC is the general partner of Tudor
Ventures Group L.P. Robert P. Forlenza and Carmen Scarpa are the
managing directors of Tudor Ventures Group L.L.C. and may be
deemed to have voting and investment control over the shares
held by Tudor Ventures II L.P. Tudor Ventures II L.P.
is the indirect owner of more than 10% of the equity interests
of Montgomery & Co., LLC and Pipeline Trading Systems,
LLC, each of which is a member of FINRA. Thus, Tudor
Ventures II L.P. may be deemed to be affiliated with a
broker-dealer. Tudor Ventures II L.P. purchased the
securities in the ordinary course of business, and at the time
of the purchase of the securities to be resold, had no
agreements or understandings, directly or indirectly, with any
person to distribute the securities. The principal address of
Tudor Ventures II L.P. is 1275 King Street, Greenwich,
CT 06831.
|
(4)
|
|
Consists of
(i) 1,708,755 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering and (ii) warrants to purchase
1,145,208 shares of common stock. Mr. Sugden, one of
our directors, is a member of Edison Partners IV SBIC, LLC,
the general partner of Edison Venture Fund IV SBIC, L.P.
Mr. Sugden disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein. Voting
and dispositive authority of the shares held by Edison Venture
Fund IV SBIC, L.P. are shared by John Martinson, Joseph
Allegra, Gary Golding, Ross Martinson and Christopher Sugden,
each a member of Edison Partners IV SBIC, LLC. The
principal address of Edison Venture Fund IV SBIC, L.P. is
1009 Lenox Drive #4, Lawrenceville, NJ 08648.
|
(5)
|
|
Consists of
(i) 1,303,888 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering, and (ii) warrants to purchase 223,514 shares
common stock. XATF Management, L.P. is the general partner of
Cross Atlantic Technology Fund, L.P. Cross Atlantic Capital
Partners, Inc. is the general partner of XATF Management, L.P.
Donald R. Caldwell is the sole shareholder of Cross Atlantic
Capital Partners, Inc. and may be deemed to have voting and
investment control over the shares held by Cross Atlantic
Technology Fund, L.P. The principal address of Cross Atlantic
Technology Fund L.P. is 5 Radnor Corporate Center,
Suite 555, Radnor, PA 19087.
|
|
|
|
(6)
|
|
Consists of 135,154 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering. Raptor Capital
Management LP may be deemed to have voting and investment
control over the shares held by The Raptor Global Portfolio,
Ltd. The principal address of Raptor Global Portfolio, Ltd. is
c/o Raptor
Capital Management LP, 50 Rowes Wharf, 6th Floor Boston, MA
02110. James J. Pallotta is the Chairman of the Board of
Directors, President and Managing Director of Raptor Capital
Management, Inc., which indirectly controls Raptor Capital
Management LP. As such, Mr. Pallotta may be deemed to
beneficially own the securities reported herein. Raptor Capital
Management, Inc., Raptor Capital Management LP, and
Mr. Pallotta do not directly own any of the shares
registered hereby and each expressly disclaims beneficial
ownership of such shares.
|
|
|
|
(7)
|
|
Consists of 412 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering. Raptor Capital
Management, as the investment advisor to The Altar Rock
Fund Liquidating Trust (formerly known as The Altar Rock
Fund L.P.), may be deemed to have voting and investment
control over the shares held by The Altar Rock
Fund Liquidating Trust. The principal address of The Altar
Rock Fund L.P. is
c/o Raptor
Capital Management LP, 50 Rowes Wharf, 6th Floor Boston, MA
02110. James J. Pallotta is the Chairman of the Board of
Directors, President and Managing Director of Raptor Capital
Management, Inc., which indirectly controls Raptor Capital
Management LP. As such, Mr. Pallotta may be deemed to
beneficially own the securities reported herein. Raptor Capital
Management, Inc., Raptor Capital Management LP, and
Mr. Pallotta do not directly own any of the shares
registered hereby and each expressly disclaims beneficial
ownership of such shares.
|
|
|
|
(8)
|
|
Consists of
(i) 407,034 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering, and (ii) warrants to purchase 89,613 shares
of common stock. Blue Rock Inc. is the corporate general partner
of Blue Rock Capital, L.P. Virginia G. Breen and P. Terry
Collison are the officers of Blue Rock Inc. and may be deemed to
have voting and investment control over the shares held by Blue
Rock Capital, L.P. The principal address of Blue Rock Capital,
L.P. is Andover, NJ
|
(9)
|
|
Consists of
(i) 795,291 shares of common stock,
(ii) 10,354 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering and (iii) options to purchase 485,000 shares
of common stock.
|
(10)
|
|
Consists of 391,826 shares of
common stock held by The 2007 Galant Family Trust, by and among
Mark E. Galant, as donor, and the Goldman Sachs
Trust Company of Delaware and Farid Naib, as trustees.
|
(footnotes continued on following page)
145
|
|
|
(11)
|
|
Consists of options to purchase
383,813 shares of common stock.
|
(12)
|
|
Consists of
(i) 45,000 shares of common stock, and
(ii) options to purchase 65,666 shares of common stock.
|
(13)
|
|
Consists of options to purchase
106,733 shares of common stock.
|
(14)
|
|
Consists of 2,165,178 shares
of our common stock issuable upon automatic conversion of
outstanding shares of preferred stock held by the 3i entities.
The reporting person is a partner of 3i U.S. Growth Capital and
disclaims beneficial ownership of the reported securities except
to the extent of his pecuniary interest therein.
|
(15)
|
|
Consists of
(i) 1,303,888 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering, and (ii) warrants to purchase 223,514 shares
common stock held by Cross Atlantic Technology Fund, L.P. The
reporting person is a managing director of Cross Atlantic
Capital Partners and disclaims beneficial ownership of the
reported securities except to the extent of his pecuniary
interest therein.
|
(16)
|
|
Consists of
(i) 2,358,991 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VantagePoint Venture Partners IV (Q),
L.P., (ii) 236,159 shares of common stock issuable
upon the automatic conversion of preferred stock upon completion
of this offering held by VantagePoint Venture Partners IV, L.P.,
(iii) 8,592 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VantagePoint Venture Partners IV
Principals Fund, L.P., (iv) 650,936 shares of common
stock issuable upon the automatic conversion of preferred stock
upon completion of this offering held by VP New York Venture
Partners, L.P., (v) 323,570 shares of common stock
issuable upon the automatic conversion of preferred stock upon
completion of this offering held by VantagePoint Venture
Partners IV (Q), L.P., (vi) 32,393 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering held by VantagePoint
Venture Partners IV, L.P., (vii) 1,179 shares of
common stock issuable upon the automatic conversion of preferred
stock upon completion of this offering held by VantagePoint
Venture Partners IV Principals Fund, L.P., and
(viii) 89,286 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering held by VP New York Venture Partners, L.P. The
reporting person is a managing director of VantagePoint Venture
Partners, Inc. and disclaims beneficial ownership of the
reported securities except to the extent of his pecuniary
interest therein.
|
(17)
|
|
Consists of
(i) 1,708,755 shares of common stock issuable upon the
automatic conversion of preferred stock upon completion of this
offering and (ii) warrants to purchase
1,145,208 shares of common stock held by Edison Venture
Fund IV SBIC, L.P. The reporting person is a member of
Edison Venture Fund IV SBIC, L.P. and disclaims beneficial
ownership of the reported securities except to the extent of his
pecuniary interest therein.
|
(18)
|
|
See footnotes 9 through 17.
|
146
DESCRIPTION
OF CAPITAL STOCK
General
The following is a summary of our capital stock and certain
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, which will become
effective immediately prior to the closing of this offering.
This summary does not purport to be complete and is qualified in
its entirety by the provisions of our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which will be filed as exhibits to the registration
statement of which this prospectus forms a part.
Following the closing of this offering, our authorized capital
stock will consist
of shares
of common stock, par value $0.00001 per share,
and shares
of preferred stock, par value $0.00001 per share.
Common
Stock
As of September 30, 2009, there were 1,309,052 shares
of common stock outstanding held of record by approximately 40
stockholders; 865,154 shares of Series A preferred
stock outstanding held of record by approximately five
stockholders; 2,610,210 shares of Series B preferred
stock outstanding held of record by approximately four
stockholders; 1,055,739 shares of Series C preferred
stock outstanding held of record by approximately three
stockholders; 3,254,678 shares of Series D preferred
stock outstanding held of record by approximately four
stockholders and 2,611,606 shares of Series E
preferred stock outstanding held of record by approximately six
stockholders. There will
be shares
of common stock outstanding following the closing of this
offering, assuming no exercise of the underwriters
over-allotment option and assuming no exercise of outstanding
options and reflecting the conversion of all outstanding shares
of preferred stock into an aggregate
of shares
of common stock.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. The holders
of common stock are entitled to receive ratably those dividends,
if any, that may be declared from time to time by our board of
directors out of funds legally available, subject to preferences
that may be applicable to preferred stock, if any, then
outstanding. See Dividend Policy. In the event of a
liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and
non-assessable.
Preferred
Stock
Upon the closing of this offering, all outstanding shares of our
Series A, Series B, Series C and Series D
preferred stock as
of ,
2009 will be converted into an aggregate of shares of our common
stock. Series A, Series B and Series D preferred
stock will convert on a
one-to-one
basis into shares of our common stock, and the Series C
preferred stock will convert on a 1:1.284095064 basis into
shares of our common stock.
If (i) the majority of our Series E preferred
stockholders vote to do so or (ii) our initial public
offering price per share, or IPO Price, equals or exceeds $67.20
(as adjusted for stock splits and similar transactions), all
outstanding shares of our Series E preferred stock as
of ,
2009 will be converted on a
one-to-one
basis into an aggregate
of shares
of our common stock. If our IPO Price is less than $67.20 (as
adjusted for stock splits and similar transactions), the
Series E preferred stock will be converted into shares of
our common stock if a majority of all of our preferred
stockholders, voting as one class, approve such conversion. In
the event there is a conversion of Series E preferred stock
where our IPO Price (as determined below) is less than $53.76
(as adjusted for stock splits and similar transactions), there
will be an adjustment to the Series E preferred stock
conversion price as described below.
Pursuant to our Second Amended and Restated Certificate of
Incorporation, if the mid-point of the estimated price range in
our preliminary prospectus in connection with our initial public
offering, referred to herein as the Offer Price, is less than
$53.76 (which is 20.0% higher than the original purchase price
per share of our Series E preferred stock, as adjusted for
stock splits, combinations and similar changes), referred to
herein as the Target
147
Price, then the conversion price at which the Series E
preferred stock will convert to common stock shall be adjusted
to such price which will cause the number of shares of common
stock issuable upon conversion of one share of Series E
preferred stock, multiplied by the Offer Price, to be equal to
the Target Price. The adjustment to the conversion price would
be determined upon the filing of the preliminary prospectus and
would become effective immediately prior to the filing of the
preliminary prospectus, but subject to the consummation of our
initial public offering. Any such adjustment would be made only
once, if at all. No adjustment to the conversion price shall be
made if the offering price in the final prospectus is equal to
or exceeds $53.76. See Certain Relationships and Related
Party Transactions Repurchase Agreement with Certain
Stockholders, Warrantholders and Optionholders for a
discussion of certain indemnification provisions in the
Repurchase Agreement that are triggered if this adjustment to
the conversion price with respect to the Series E preferred
stock occurs. We do not anticipate that there will be any shares
of preferred stock outstanding upon completion of this offering.
However, following this conversion and the closing of this
offering, our board of directors will be authorized to issue
preferred stock in one or more series, to establish the number
of shares to be included in each such series and to fix the
designation, powers, preferences and rights of these shares and
any qualifications, limitations or restrictions thereof. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company
without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to
others. At present, we have no plans to issue any of the
preferred stock.
Warrants
As of September 30, 2009, we had outstanding warrants to
purchase an aggregate of 1,458,335 shares of our
series B preferred stock at an exercise price of $1.11 per
share. These warrants will continue to be exercisable following
the closing of this offering. These warrants expire on
July 25, 2011.
Restricted
Stock Units
Restricted stock units are units that represent shares of our
stock. Under our 2006 Plan, restricted stock units become
payable on terms and conditions determined by our board of
directors, or a committee consisting of members of our board of
directors, and are payable in cash or shares of our stock as
determined by the committee. Our restricted stock unit grants
vest at the rate of 25.0% per year over four years beginning on
the first anniversary of the date of grant. All unvested
restricted stock units are forfeited if the grantees
employment or service is terminated for any reason, unless the
committee determines otherwise. Certain of our officers and
directors are also entitled to certain additional vesting with
respect to their outstanding equity grants in the event they are
terminated without cause or upon a change in control, as
described in further detail under Executive
Compensation Employment Agreements. We have
also granted restricted stock units that vest upon attainment of
performance criteria from time to time. Once vested, payment
with respect to restricted stock units is made upon the
occurrence of a specified date (December 31, 2014 for all
of our currently outstanding restricted stock units), or upon
the occurrence of a change in control or the grantees
separation from service or death, whichever is earliest. In the
event of a change in control, in the case of outstanding
restricted stock units held by all grantees under the terms of
our 2006 Equity Compensation Plan, all restricted stock units
vest, unless the committee determines otherwise. As of
September 30, 2009, 42,794 shares of common stock were
issuable pursuant to outstanding restricted stock units. For
more details regarding the terms of the outstanding restricted
stock units grants, see Executive Compensation
Compensation, Discussion and Analysis and
Employment Agreements above.
Registration
Rights
We entered into an Amended and Restated Investor Rights
Agreement, dated January 11, 2008, with the holders of our
Series A, Series B, Series C, Series D and
Series E preferred stock and Mark E. Galant, our founding
stockholder. Subject to the terms of this agreement, holders of
shares having registration rights, or registrable securities,
can demand that we file a registration statement or request that
their shares be covered by a registration statement that we are
otherwise filing.
148
Demand Registration Rights. At any time after
the effective date of this offering, subject to certain
exceptions, the holders of thirty percent of the Registrable
Securities then outstanding (as defined in the Investor Rights
Agreement) have the right to demand that we file a registration
statement covering the offering and sale of their shares of our
common stock that are subject to the Investor Rights Agreement,
provided, however, that we are not obligated to cause the
registration statement to become effective prior to the date
which is six months following the effective date of this
offering. We are not obligated to file a registration statement
on more than two occasions upon the request of the holders of
thirty percent of the Registrable Securities then outstanding;
however, this offering will not count toward that limitation. If
marketing factors require a limitation of the number of
securities to be underwritten, then the number of shares that
may be included in the underwriting and registration shall be
allocated pro rata to the participating holders based on the
number of Registrable Securities held; provided, however, the
percentage of securities assigned to the VantagePoint Entities
(as defined in the Investor Rights Agreement) shall in no case
be lower than 30.0% of the total number of securities
underwritten. Our founding stockholder shall have the priority
right to include his shares in any green shoe up to
his pro rata share of securities sold by the stockholders in any
underwritten initial public offering to the extent such shares
are not already included in the underwritten initial public
offering.
Form S-3
Registration Rights. If we are eligible to file a
registration statement on
Form S-3,
investor parties to the agreement holding Registrable Securities
(as defined in the Investor Rights Agreement) anticipated to
have an aggregate sale price (net of underwriting discounts and
commissions, if any) in excess of $1,000,000 shall have the
right, on one or more occasions, to request registration on
Form S-3
of the sale of the Registrable Securities held by the requesting
investor. We have the ability to delay the filing of a
registration statement under specified conditions, such as for a
period of time following the effective date of a prior
registration statement, if our board of directors deems it
advisable to delay such filing or if we are in possession of
material nonpublic information that would be in our best
interests not to disclose. Such postponements cannot exceed
90 days during any
12-month
period.
Piggyback Registration Rights. All parties to
the Investor Rights Agreement have piggyback registration
rights. Under these provisions, if we register any securities
for public sale, including pursuant to any stockholder initiated
demand registration, these stockholders will have the right to
include their shares in the registration statement, subject to
customary exceptions. If marketing factors require a limitation
of the number of shares to be underwritten, then the number of
shares that may be included in the underwriting shall be
allocated, first, to us; second, to the holders pro rata based
on the total number of Registrable Securities held by such
holders (provided that the percentage of securities assigned to
the VantagePoint Entities (as defined in the Investor Rights
Agreement) shall in no case be lower than 30.0% of the total
number of securities underwritten); and third (to the extent of
availability), to any other stockholder on a pro rata basis
based on the total number of shares of common stock then held by
such other stockholders. Our founding stockholder shall have the
priority right to include his shares in any green
shoe up to his pro rata share of securities sold by the
stockholders in any underwritten initial public offering to the
extent such shares are not already included in the underwritten
initial public offering.
Expenses of Registration. We will pay all
registration expenses, other than underwriting discounts and
commissions, related to any demand or piggyback registration.
Indemnification. The Investor Rights Agreement
contains customary cross-indemnification provisions, under which
we are obligated to indemnify the selling stockholders in the
event of material misstatements or omissions in the registration
statement attributable to us, and they are obligated to
indemnify us for material misstatements or omissions
attributable to them.
Expiration of Registration Rights. All
registration rights granted pursuant to this Investor Rights
Agreement will terminate as to each holder upon the date the
holder is able to sell all of its Registrable Securities under
Rule 144 during any
90-day
period.
See Certain Relationships and Related Party
Transactions Investor Rights Agreement. This
is not a complete description of the investor rights agreement
and is qualified by the full text of the Investor Rights
Agreement filed as an exhibit to the registration statement of
which this prospectus forms a part.
149
Anti-Takeover
Effects of Our Charter and Bylaws and Delaware Law
Some provisions of Delaware law and our amended and restated
certificate of incorporation and amended and restated bylaws,
effective immediately prior to the closing of this offering,
could make the following transactions more difficult:
|
|
|
|
|
acquisition of our company by means of a tender offer, a proxy
contest or otherwise; and
|
|
|
|
removal of our incumbent officers and directors.
|
These provisions, summarized below, are expected to discourage
and prevent coercive takeover practices and inadequate takeover
bids. These provisions are designed to encourage persons seeking
to acquire control of our company to negotiate first with our
board of directors. They are also intended to provide our
management with the flexibility to enhance the likelihood of
continuity and stability if our board of directors determines
that a takeover is not in the best interests of our
stockholders. These provisions, however, could have the effect
of discouraging attempts to acquire us, which could deprive our
stockholders of opportunities to sell their shares of common
stock at prices higher than prevailing market prices. We believe
that the benefits of these provisions, including increased
protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or
restructure our company, outweigh the disadvantages of
discouraging takeover proposals, because negotiation of takeover
proposals could result in an improvement of their terms.
Election and Removal of Directors. Our amended
and restated certificate of incorporation and our amended and
restated bylaws contain provisions that establish specific
procedures for appointing and removing members of our board of
directors. Under our amended and restated certificate of
incorporation and amended and restated bylaws, effective
immediately prior to the closing of this offering, our board
will consist of three classes of directors: Class I,
Class II and Class III. A nominee for director shall
be elected to the board of directors if the votes cast for such
nominees election exceed the votes cast against such
nominees election; provided, however, under certain
circumstances, directors shall be elected by a plurality of the
votes cast at any meeting of stockholders. Each director will
serve a three-year term and will stand for election upon the
third anniversary of the annual meeting at which such director
was elected. In addition, our amended and restated certificate
of incorporation and amended and restated bylaws provide that
vacancies and newly created directorships on our board of
directors may be filled only by a majority of the directors then
serving on our board of directors, except as otherwise required
by law or by resolution of our board of directors. Under our
amended and restated certificate of incorporation and amended
and restated bylaws, directors may be removed by the
stockholders only for cause and only by the affirmative vote of
the holders of at least
2/3
of the voting power of all of the then-outstanding shares of our
capital stock entitled to vote generally in the election of
directors, voting together as a single class.
Special Stockholder Meetings. Under our third
amended and restated certificate of incorporation and amended
and restated bylaws, only the board of directors, the chairman
of the board, our president and our chief executive officer may
call special meetings of stockholders.
Requirements for Advance Notification of Stockholder
Nominations and Proposals. Our amended and
restated bylaws establish advance notice procedures with respect
to stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of our board of directors or a committee of our board
of directors.
Delaware Anti-takeover Law. After this
offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which is an anti-takeover law. In
general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years following the
date that the person became an interested stockholder, unless
the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a merger,
asset or stock sale, or another transaction resulting in a
financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together with affiliates
and associates, owns 15.0% or more of the corporations
voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions that are not
approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the
market price for the shares of common stock held by stockholders.
150
Elimination of Stockholder Action by Written
Consent. Our amended and restated certificate of
incorporation and amended and restated bylaws eliminate the
right of stockholders to act by written consent without a
meeting.
No Cumulative Voting. Under Delaware law,
cumulative voting for the election of directors is not permitted
unless a corporations certificate of incorporation
authorizes cumulative voting. Our amended and restated
certificate of incorporation does not provide for cumulative
voting in the election of directors. Cumulative voting allows a
minority stockholder to vote a portion or all of its shares for
one or more candidates for seats on our board of directors.
Without cumulative voting, a minority stockholder will not be
able to gain as many seats on our board of directors based on
the number of shares of our stock the stockholder holds as the
stockholder would be able to gain if cumulative voting were
permitted. The absence of cumulative voting makes it more
difficult for a minority stockholder to gain a seat on our board
of directors to influence its decision regarding a takeover.
Undesignated Preferred Stock. The
authorization of undesignated preferred stock makes it possible
for our board of directors to issue preferred stock with voting
or other rights or preferences that could impede the success of
any attempt to change control of our company.
Amendment of Charter Provisions. The amendment
of certain of the above provisions in our amended and restated
certificate of incorporation and our amended and restated bylaws
requires approval by holders of at least two-thirds (2/3) of our
outstanding capital stock entitled to vote generally in the
election of directors.
These and other provisions could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the
effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish
transactions that stockholders might otherwise deem to be in
their best interests.
Transfer
Agent
The transfer agent for our common stock is American Stock
Transfer and Trust Company.
Listing
We are applying to list our common stock on the NASDAQ Global
Market under the symbol GCAP.
151
SHARES ELIGIBLE
FOR FUTURE SALE
Immediately prior to this offering, there was no public market
for our common stock. Future sales of substantial amounts of our
common stock in the public market, or the perception that such
sales may occur, could adversely affect the market price of our
common stock. Although we are applying to list our common stock
on the NASDAQ Global Market, we cannot assure you that there
will be an active public market for our common stock.
Upon the closing of this offering, we will have outstanding an
aggregate
of shares
of common stock, assuming no exercise of options after
September 30, 2009. Of these shares, all shares sold in
this offering will be freely tradable without restriction or
further registration under the Securities Act, except for any
shares purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act, whose sales
would be subject to certain limitations and restrictions
described below.
The
remaining shares
of common stock will be restricted securities, as
that term is defined in Rule 144 under the Securities Act.
These restricted securities are eligible for public sale only if
they are registered under the Securities Act or if they qualify
for an exemption from registration under the Securities Act such
as Rules 144 or 701, which are summarized below.
Subject to the
lock-up
agreements described below and the provisions of Rules 144
and 701 under the Securities Act, these restricted securities
will be available for sale in the public market as follows:
|
|
|
|
|
|
|
Days After Date of
|
|
|
|
|
|
this Prospectus
|
|
Shares Eligible for Sale
|
|
|
Comment
|
|
Date of Prospectus
|
|
|
|
|
|
Shares sold in this offering
|
90 Days
|
|
|
|
|
|
Shares saleable under Rules 144 and 701 that are not subject to
a lock-up
|
180 Days
|
|
|
|
|
|
Lock-up released; shares saleable under Rules 144 and 701
|
In addition, of
the shares
of our common stock that were subject to stock options
outstanding as of September 30, 2009, options to
purchase shares
of common stock were exercisable as of September 30, 2009,
and all of the warrants to
purchase shares
of our common stock outstanding as of September 30, 2009
were exercisable as of that date.
Lock-up
Agreements
Our officers and directors and each other person who, directly
or indirectly, owns or has the right to acquire (through the
ownership of vested options to acquire shares of our common
stock) shares of common stock at the date of this offering have
or will have signed
lock-up
agreements under which they agreed not to offer, sell, contract
to sell, pledge, or otherwise dispose of, or to enter into any
hedging transaction with respect to, any shares of our common
stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock for a period ending
180 days after the date of this prospectus, subject to
extension for an additional 18 days upon the occurrence of
certain events. These stockholders and optionees will together
beneficially own an aggregate
of shares
of our common stock upon completion of this offering. The
foregoing does not prohibit the establishment of a trading plan
pursuant to
rule 10b5-1
under the Securities Exchange Act of 1934 during the period or
transfers or dispositions by our officers, directors and
stockholders:
|
|
|
|
|
with the prior written consent of Morgan Stanley & Co.
Incorporated and Deutsche Bank Securities Inc.;
|
|
|
|
of shares of Common Stock or other securities acquired in open
market transactions after the completion of this offering;
|
|
|
|
as a distribution to limited partners or stockholders of a
holder of our common stock;
|
|
|
|
as a transfer by a business entity to another business entity so
long as the transferee controls or is under common control with
the holder; or
|
|
|
|
as a bona fide gift.
|
Unless a transfer or disposition is made with the written
consent of Morgan Stanley & Co. Incorporated and
Deutsche Bank Securities Inc., the permitted transfers and
dispositions described above may not be made (i) by any
152
of our officers and certain of our directors unless the transfer
or disposition does not result in a filing under
Section 16(a) of the Exchange Act reporting a reduction in
beneficial ownership of shares of common stock being required or
voluntarily made during the
lock-up
period (other than a Form 5 under certain circumstances)
and (ii) by any of our directors, officers and stockholders
unless the transferee of each such shares agrees to be bound by
the lock-up
agreement. For more information regarding the
lock-up
agreements of our executive officers, directors and other
stockholders and optionees, see Underwriters.
Rule 144
The availability of Rule 144 will vary depending on whether
restricted shares are held by an affiliate or a non-affiliate.
Under Rule 144 as in effect on the date of this prospectus,
once we have been a reporting company subject to the reporting
requirements of Section 13 or Section 15(d) of the
Exchange Act for 90 days, an affiliate who has beneficially
owned restricted shares of our common stock for at least six
months would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of either of
the following:
|
|
|
|
|
1.0% of the number of shares of common stock then outstanding,
which will equal shares immediately after this offering; and
|
|
|
|
the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
|
However, the six month holding period increases to one year in
the event we have not been a reporting company for at least
90 days. In addition, any sales by affiliates under
Rule 144 are also limited by manner of sale provisions and
notice requirements and the availability of current public
information about us.
The volume limitation, manner of sale and notice provisions
described above will not apply to sales by non-affiliates. For
purposes of Rule 144, a non-affiliate is any person or
entity who is not our affiliate at the time of sale and has not
been our affiliate during the preceding three months. Once we
have been a reporting company for 90 days, a non-affiliate
who has beneficially owned restricted shares of our common stock
for six months may rely on Rule 144 provided that certain
public information regarding us is available. The six month
holding period increases to one year in the event we have not
been a reporting company for at least 90 days. However, a
non-affiliate who has beneficially owned the restricted shares
proposed to be sold for at least one year will not be subject to
any restrictions under Rule 144 regardless of how long we
have been a reporting company.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchases
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of the
registration statement of which this prospectus forms a part is
entitled to sell such shares 90 days after such effective
date in reliance on Rule 144. Our affiliates can resell
shares under Rule 701 without having to comply with the
holding period requirement of Rule 144, and our
non-affiliates can resell shares without having to comply with
the public information or holding period provisions of
Rule 144 as currently in effect.
The Securities and Exchange Commission has indicated that
Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares
acquired upon exercise of such options, including exercises
after the date of this prospectus.
Stock
Options
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register all shares of common stock
subject to outstanding stock options and common stock issued or
issuable under our equity plans. We expect to file the
registration statement covering shares offered pursuant to our
equity plans shortly after the date of this prospectus,
permitting the resale of such shares by nonaffiliates in the
public market without restriction under the Securities Act and
the sale by affiliates in the public market, subject to
compliance with the resale provisions of Rule 144. All
shares issued under Rule 701, however, are subject to
lock-up
agreements and will only become eligible for sale when the
180-day
lock-up
period described above expires.
153
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material
U.S. federal income tax considerations related to the
ownership and disposition of our common stock as of the date of
this prospectus. Except where specifically noted otherwise, this
discussion deals only with shares of our common stock purchased
in this offering and held as a capital asset and does not deal
with beneficial owners that are subject to special rules, such
as dealers in securities or currencies, financial institutions,
regulated investment companies, real estate investment trusts,
tax-exempt entities, insurance companies, persons holding shares
of our common stock as part of a hedging, integrated, conversion
or constructive sale transaction or as part of a straddle,
traders in securities that elect to use a
mark-to-market
method of accounting for their securities holdings, persons
liable for alternative minimum tax, persons owning, actually or
constructively, 10.0% or more of our stock for United States
federal income tax purposes, pass-through or look-through
entities and their investors or United States holders (as
defined below) of shares of our common stock whose
functional currency is not the United States dollar.
Furthermore, this discussion is based upon the provisions of the
U.S. Internal Revenue Code of 1986, as amended (the
Code), and regulations, rulings and judicial
decisions thereunder as of the date of this prospectus, and such
authorities may be repealed, revoked or modified so as to result
in United States federal income tax consequences different from
those described below. In addition, this discussion does not
address taxes imposed by any state, local or foreign taxing
jurisdiction and, except as otherwise noted, does not address
United States federal taxes other than income taxes. Persons
considering the purchase, ownership or disposition of shares of
our common stock should consult their own tax advisors
concerning the United States federal income tax consequences in
light of their particular situations, as well as any
consequences arising under the laws of any other taxing
jurisdiction.
United
States Holders
For purposes of this discussion, United States
holder generally means a beneficial owner of a share of
our common stock that is, for United States federal income tax
purposes, (i) a citizen or resident of the United States,
(ii) a corporation (including an entity treated as a
corporation for United States federal income tax purposes)
created or organized under the laws of the United States, any
state thereof or the District of Columbia, (iii) an estate
the income of which is subject to United States federal income
taxation regardless of its source or (iv) a trust if
(x) a court within the United States is able to exercise
primary supervision over its administration and one or more
United States persons have the authority to control all
substantial decisions of the trust or (y) it has a valid
election in effect under United States Treasury regulations to
be treated as a United States person. As used herein, the term
non-United
States holder means a beneficial owner of a share of our
common stock that is not a United States holder.
If a partnership holds shares of our common stock, the tax
treatment of a partner in the partnership will generally depend
upon the status of the partner and activities of the
partnership. If you are a partner of a partnership holding our
shares, you should consult your tax advisor.
Dividends. Distributions of cash or property
that we pay in respect of our common stock will constitute
dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles)
and will be includible in gross income by a United States
holder upon receipt. Any such dividend will be eligible for the
dividends received deduction if received by an otherwise
qualifying corporate United States holder that meets the holding
period and other requirements for the dividends received
deduction. Dividends paid by us to certain non-corporate United
States holders (including individuals), with respect to taxable
years beginning on or before December 31, 2010, are
eligible for United States federal income taxation at the rates
generally applicable to long-term capital gains for individuals
(currently at a maximum tax rate of 15.0)%, provided that the
United States holder receiving the dividend satisfies applicable
holding period and other requirements. If the amount of a
distribution exceeds our current and accumulated earnings and
profits, such excess first will be treated as a tax-free return
of capital to the extent of the United States holders tax
basis in our common stock, and thereafter will be treated as
capital gain.
Dispositions. Upon a sale, exchange or other
taxable disposition of shares of our common stock, a
United States holder generally will recognize capital gain
or loss equal to the difference between the amount realized on
the sale, exchange or other taxable disposition and the United
States holders adjusted tax basis in the
154
shares of our common stock. Such capital gain or loss will be
long-term capital gain or loss if the United State holder has
held the shares of the common stock for more than one year at
the time of disposition. Long-term capital gains of certain
non-corporate United States holders (including individuals) are
currently subject to U.S. federal income taxation at a
maximum rate of 15.0%. The deductibility of capital losses is
subject to limitations under the Code.
Information Reporting and Backup
Withholding. In general, dividends on our common
stock and payments of the proceeds of a sale, exchange or other
disposition of our common stock paid to a United States holder
are subject to information reporting and may be subject to
backup withholding at a current maximum rate of 28.0% unless the
United States holder (i) is a corporation or other exempt
recipient or (ii) provides an accurate taxpayer
identification number and certifies that it is not subject to
backup withholding. Backup withholding is not an additional tax.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against such holders
United States federal income tax liability provided the required
information is timely furnished to the Internal Revenue Service
(the IRS).
Non-United
States Holders
The following is a summary of certain United States federal
income and estate tax consequences that will apply to you if you
are a
non-United
States holder of a share of our common stock. Special rules may
apply with respect to certain
non-United
States holders, such as controlled foreign
corporations, passive foreign investment
companies, and other holders that are subject to special
treatment under the Code. These persons should consult their own
tax advisors to determine the United States federal, state,
local and other tax consequences that may be relevant to them.
Dividends. In general, dividends paid to you
will be subject to withholding of United States federal income
tax at a 30.0% rate or such lower rate as may be specified by an
applicable tax treaty, provided that the holder is eligible for
the benefits of such treaty. However, dividends that are
effectively connected with your conduct of a trade or business
within the United States are generally exempt from the
withholding tax. Instead, these dividends are subject to United
States federal income tax on a net income basis at applicable
graduated individual or corporate United States federal income
tax rates (assuming, if required by an applicable tax treaty,
that the dividends are attributable to a permanent establishment
maintained by you within the United States). You must comply
with certification and disclosure requirements in order for
effectively connected income to be exempt from withholding. If
you are a foreign corporation, any effectively connected
dividends you receive may also be subject to an additional
branch profits tax at a 30.0% rate or such lower
rate as may be provided for in an applicable income tax treaty.
We plan to withhold U.S. income tax at the rate of 30.0% on
the gross amount of any dividend distribution paid to a
non-United
States holder unless either (1) a lower treaty rate applies
and the
non-United
States holder files IRS
Form W-8BEN
(or successor form) evidencing eligibility for that reduced rate
with us or (2) the
non-United
States holder files an IRS
Form W-8ECI
(or successor form) with us claiming that the distribution is
effectively connected income. Special rules apply to claims for
treaty benefits by
non-United
States persons that are entities rather than individuals and to
beneficial owners of dividends paid to entities in which such
beneficial owners are interest holders. The application of these
rules depends upon your particular circumstances and, therefore,
you should consult your own tax advisor regarding your
eligibility for such benefits.
If you are eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty, you may be
entitled to obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the IRS.
Dispositions. You generally will not be
subject to United States federal income tax with respect to gain
recognized on a sale, exchange, redemption or other disposition
of a share of our common stock unless:
|
|
|
|
|
the gain is effectively connected with your conduct of a trade
or business in the United States, and, where a tax treaty
applies, is attributable to a permanent establishment in the
United States;
|
|
|
|
you are an individual who is present in the United States for
183 or more days in the taxable year of the sale, exchange,
redemption or other disposition and certain other conditions are
met; or
|
155
|
|
|
|
|
we are or have been a United States real property holding
corporation for United States federal income tax purposes.
We believe that we are not currently and have not been, and do
not anticipate becoming, a United States real
property holding corporation for United States federal
income tax purposes.
|
In general, gain that is effectively connected with the conduct
of a trade or business within the United States will be subject
to United States federal income tax imposed on net income on the
same basis that applies to United States persons generally
and, for corporate
non-United
States holders, may also be subject to branch profits
tax, but will not be subject to withholding provided that
documentation requirements are satisfied.
Non-United
States holders should consult any applicable tax treaties that
may provide for different rules.
United States Federal Estate Taxes. Individual
non-United
States holders and entities the property of which is potentially
includible in such individuals gross estates for United
States federal estate tax purposes (for example, a trust funded
by such an individual and with respect to which the individual
has retained certain interests or powers), should note that,
absent an applicable treaty benefit, shares of our common stock
will be treated as United States situs property subject to
United States federal estate tax.
Information Reporting and Backup
Withholding. We will be required to report
annually to the IRS and to you the amount of dividends paid to
you and any tax withheld by us from dividends paid to you,
regardless of whether withholding was required. The United
States may make available copies of the information returns
reporting the dividends and withholding to the tax authorities
in the country in which you reside.
Backup withholding at a current maximum rate of 28.0% will apply
to dividends paid to you unless you satisfy the certification
requirements of applicable United States Treasury regulations
(e.g., by providing an IRS
Form W-8BEN)
or otherwise establish an exemption.
Payment of the proceeds of a sale of a share of our common stock
to you within the United States or conducted through certain
United States-related financial intermediaries will be subject
to both backup withholding and information reporting unless
(1)(a) you certify under penalties of perjury in accordance with
specified procedures that you are a
non-United
States holder and (b) the payor does not have actual
knowledge that you are a United States person or
(2) you otherwise establish an exemption. Information
reporting and backup withholding generally will not apply to a
payment of the proceeds of a sale of common stock effected
outside the United States by a foreign office of a foreign
broker. However, information reporting requirements (but not
backup withholding) will apply to a payment of the proceeds of a
sale of common stock effected outside the United States by a
foreign office of a broker if the broker (i) is a United
States person, (ii) derives 50.0% or more of its gross
income for certain periods from the conduct of trade or business
in the United States, (iii) is a controlled foreign
corporation as to the United States or (iv) is a
foreign partnership that, at any time during its taxable year,
is more than 50.0% (by income or capital interest) owned by
United States persons or is engaged in the conduct of a
U.S. trade or business, unless in any such case the broker
has documentary evidence in its records that the holder is a
non-United
States holder and certain conditions are met, or the holder
otherwise establishes an exemption. Payment by a
U.S. office of a broker of the proceeds of a sale of common
stock will be subject to both backup withholding and information
reporting unless the holder certifies under penalties of perjury
that it is not a United States person or otherwise establishes
an exemption.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against your United States
federal income tax liability provided the required information
is timely furnished to the IRS.
156
UNDERWRITERS
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley &
Co. Incorporated and Deutsche Bank Securities Inc. are acting as
representatives, have severally agreed to purchase, and the
selling stockholders have agreed to sell to them, severally, the
number of shares indicated below:
|
|
|
|
|
|
|
Number of
|
|
Name
|
|
Shares
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
Subtotal
|
|
|
|
|
Total
|
|
|
|
|
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from the selling stockholders
and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and
accept delivery of the shares of common stock offered by this
prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any such shares
are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters
over-allotment option described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of $ a share under the
public offering price. Any underwriter may allow, and such
dealers may reallow, a concession not in excess of
$ a share to other underwriters or
to certain dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may
from time to time be varied by the representatives.
Certain of the selling stockholders have granted to the
underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to an aggregate
of
additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase about the same
percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table. If the underwriters option is exercised
in full, the total price to the public would be
$ , the total underwriters
discounts and commissions would be
$ , and total proceeds to the
selling stockholders would be $ .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
Application has been made to have the common stock approved for
quotation on the NASDAQ Global Market under the symbol
GCAP.
Each of us, the selling stockholders, our directors, executive
officers and certain of our other stockholders has agreed that,
without the prior written consent of Morgan Stanley &
Co. Incorporated and Deutsche Bank Securities Inc. on behalf of
the underwriters, it will not, during the period ending
180 days after the date of this prospectus:
|
|
|
|
|
offer, pledge, sell, contract to sell, grant any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock; or
|
|
|
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock;
|
157
whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not
apply to:
|
|
|
|
|
the sale of shares to the underwriters;
|
|
|
|
transactions relating to shares of common stock or other
securities acquired in open market transactions after completion
of our initial public offering;
|
|
|
|
transfers of shares of common stock or any security convertible
into common stock as a bona fide gift;
|
|
|
|
distributions of shares of common stock or any security
convertible into common stock to limited partners or
stockholders;
|
|
|
|
the establishment of a trading plan pursuant to
Rule 10b5-1
under the Securities Exchange Act of 1934 for the transfer of
shares of Common Stock, provided that no such transfer occurs
during the period;
|
|
|
|
transfers of shares of Common Stock to any affiliated entities
of the transferor; or
|
|
|
|
the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the
underwriters have been advised in writing.
|
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over allotment option. The underwriters
can close out a covered short sale by exercising the over
allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over allotment option. The underwriters may also sell
shares in excess of the over allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. As an
additional means of facilitating the offering, the underwriters
may bid for, and purchase, shares of common stock in the open
market to stabilize the price of the common stock. The
underwriting syndicate may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases
previously distributed common stock to cover syndicate short
positions or to stabilize the price of the common stock. These
activities may raise or maintain the market price of the common
stock above independent market levels or prevent or retard a
decline in the market price of the common stock. The
underwriters are not required to engage in these activities, and
may end any of these activities at any time.
GCAM, LLC, one of our subsidiaries, has entered into a foreign
currency exchange prime brokerage agreement with Deutsche Bank
AG, London Branch, an affiliate of Deutsche Bank Securities
Inc., pursuant to which Deutsche Bank AG, London Branch receives
customary transaction-based fees.
The underwriters have agreed to pay for their expenses incurred
in connection with the offering of the common stock.
We, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act.
Directed
Share Program
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to shares
offered in this prospectus for directors, officers, employees,
business associates and related persons of GAIN. The number of
shares of common stock available for sale to the general public
will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the
same basis as the other shares offered in this prospectus.
158
Pricing
of the Offering
Prior to this offering, there has been no public market for the
shares of our common stock. The initial public offering price
will be determined by negotiations among us, the selling
stockholders and the representatives of the underwriters. Among
the factors to be considered in determining the initial public
offering price will be our future prospects and those of our
industry in general, our sales, earnings and certain other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of
companies engaged in activities similar to ours. The estimated
initial public offering price range set forth on the cover page
of this preliminary prospectus is subject to change as a result
of market conditions and other factors.
LEGAL
MATTERS
Certain legal matters with respect to the validity of the shares
of common stock offered hereby will be passed upon for us by
Morgan, Lewis & Bockius LLP, Princeton, New Jersey.
Davis Polk & Wardwell LLP, New York, New York, will
pass upon certain legal matters for the underwriters in
connection with this offering.
EXPERTS
The consolidated financial statements and financial statement
schedule as of December 31, 2007 and 2008, and for each of
the three years in the period ended December 31, 2008,
included in this Prospectus, have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report appearing
herein and elsewhere in the Registration Statement. Such
consolidated financial statements have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock the selling stockholders are offering to sell. This
prospectus, which constitutes part of the registration
statement, does not include all of the information contained in
the registration statement. You should refer to the registration
statement and its exhibits for additional information. Whenever
we make reference in this prospectus to any of our contracts,
agreements or other documents, the references are not
necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual
contract, agreement or other document. When we complete this
offering, we will also be required to file annual, quarterly and
special reports, proxy statements and other information with the
Securities and Exchange Commission. We anticipate making these
documents publicly available, free of charge, on our website at
www.gaincapital.com as soon as reasonably practicable
after filing such documents with the Securities and Exchange
Commission. The information on our website is not incorporated
by reference into this prospectus and should not be considered
to be a part of this prospectus. We have included our website
address as an inactive textual reference only.
You can read the registration statement and our future filings
with the Securities and Exchange Commission, over the Internet
at the Securities and Exchange Commissions web site at
http://www.sec.gov.
You may also read and copy any document that we file with the
Securities and Exchange Commission at its public reference room
at 100 F Street N.E., Washington, District of
Columbia, 20549. Please call the Securities and Exchange
Commission at
1-800-SEC-0330
for further information on the operation of the public reference
room.
INDUSTRY
AND MARKET DATA
We obtained the industry, market and competitive position data
in this prospectus from our own internal estimates and research
as well as from industry and general publications and research,
surveys and studies conducted by third parties. Industry
publications, studies and surveys generally state that they have
been obtained from sources believed to be reliable, although
they do not guarantee the accuracy or completeness of such
information. While we believe that each of these studies and
publications is reliable, we have not independently verified
market and industry data from third party sources. While we
believe our internal company research is reliable and the market
definitions are appropriate, neither such research nor these
definitions have been verified by any independent source.
159
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
GAIN Capital Holdings, Inc.:
Bedminster, New Jersey
We have audited the accompanying consolidated statements of
financial condition of GAIN Capital Holdings, Inc. and
subsidiaries (the Company) as of December 31,
2007 and 2008, and the related consolidated statements of
operations and comprehensive income/(loss), shareholders
deficit, and cash flows for each of the three years in the
period ended December 31, 2008. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of GAIN
Capital Holdings, Inc. and subsidiaries at December 31,
2007 and 2008, and the results of their operations and their
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.
/s/ Deloitte & Touche LLP
New York, New York
August 31, 2009
F-2
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except share and per share data)
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
Receivables from brokers
|
|
|
74,630
|
|
|
|
75,817
|
|
Property and equipment (net of accumulated
depreciation and amortization of $3,343 and $5,278 at
December 31, 2007 and 2008, respectively)
|
|
|
3,423
|
|
|
|
3,937
|
|
Prepaid assets
|
|
|
619
|
|
|
|
1,632
|
|
Deferred financing costs
|
|
|
402
|
|
|
|
313
|
|
Deferred initial public offering costs
|
|
|
42
|
|
|
|
|
|
Goodwill
|
|
|
1,078
|
|
|
|
3,092
|
|
Intangible assets (net of accumulated amortization
of $406 and $609 at December 31, 2007 and 2008,
respectively)
|
|
|
523
|
|
|
|
320
|
|
Other assets (net of allowance for doubtful accounts
of $1,129 and $2,213 at December 31, 2007 and 2008,
respectively)
|
|
|
1,017
|
|
|
|
3,274
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
Liabilities
|
|
|
|
|
|
|
|
|
Payables to brokers, dealers, FCMs and other regulated
entities
|
|
$
|
2,163
|
|
|
$
|
1,679
|
|
Payables to customers
|
|
|
106,741
|
|
|
|
122,293
|
|
Accrued compensation and benefits
|
|
|
4,928
|
|
|
|
5,282
|
|
Accrued expenses and other liabilities
|
|
|
4,552
|
|
|
|
5,627
|
|
Income tax payable
|
|
|
8,742
|
|
|
|
10,539
|
|
Deferred taxes
|
|
|
842
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
264,566
|
|
|
|
82,785
|
|
Notes payable
|
|
|
49,875
|
|
|
|
39,375
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
442,409
|
|
|
|
267,580
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 14)
|
|
|
|
|
|
|
|
|
Convertible, Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
Series A Convertible, Redeemable Preferred Stock;
($0.00001 par value; 4,545,455 shares authorized;
2,027,402 and 865,154 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
3,288
|
|
|
|
2,009
|
|
Series B Convertible, Redeemable Preferred Stock;
($0.00001 par value; 7,000,000 shares authorized;
2,611,811 and 2,610,210 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
5,414
|
|
|
|
5,412
|
|
Series C Convertible, Redeemable Preferred Stock;
($0.00001 par value; 2,496,879 shares authorized;
1,229,570 and 1,055,739 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
6,017
|
|
|
|
5,319
|
|
Series D Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,254,678 shares authorized,
issued and outstanding as of December 31, 2007 and 2008,
respectively)
|
|
|
39,840
|
|
|
|
39,840
|
|
Series E Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,738,688 shares authorized;
2,611,606 shares issued and outstanding as of
December 31, 2008)
|
|
|
|
|
|
|
116,810
|
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
54,559
|
|
|
|
169,390
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
GAIN Capital Holdings, Inc. Shareholders Deficit
|
|
|
|
|
|
|
|
|
Common Stock; ($0.00001 par value; 23,000,000 and
27,000,000 shares authorized; 1,534,253 and
1,304,029 shares issued and outstanding as of
December 31, 2007 and 2008)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
21
|
|
Additional paid-in capital
|
|
|
(95,115
|
)
|
|
|
(182,891
|
)
|
Retained earnings/(accumulated deficit)
|
|
|
(221,225
|
)
|
|
|
10,201
|
|
|
|
|
|
|
|
|
|
|
Total Gain Capital Holdings, Inc. shareholders
deficit
|
|
|
(316,340
|
)
|
|
|
(172,669
|
)
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(316,340
|
)
|
|
|
(172,154
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except share and
|
|
|
|
per share data)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
69,471
|
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
Other revenue
|
|
|
242
|
|
|
|
437
|
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
69,713
|
|
|
|
118,613
|
|
|
|
188,370
|
|
Interest revenue
|
|
|
3,145
|
|
|
|
5,024
|
|
|
|
3,635
|
|
Interest expense
|
|
|
(356
|
)
|
|
|
(611
|
)
|
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue
|
|
|
2,789
|
|
|
|
4,413
|
|
|
|
2,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
72,502
|
|
|
|
123,026
|
|
|
|
190,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
17,258
|
|
|
|
25,093
|
|
|
|
37,024
|
|
Selling and marketing
|
|
|
12,517
|
|
|
|
21,836
|
|
|
|
29,312
|
|
Trading expenses and commissions
|
|
|
10,321
|
|
|
|
10,436
|
|
|
|
16,310
|
|
Interest expense on notes payable
|
|
|
2,075
|
|
|
|
3,688
|
|
|
|
2,697
|
|
Bank fees
|
|
|
935
|
|
|
|
2,316
|
|
|
|
3,754
|
|
Depreciation and amortization
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
Communications and data processing
|
|
|
873
|
|
|
|
1,659
|
|
|
|
2,467
|
|
Occupancy and equipment
|
|
|
1,045
|
|
|
|
1,616
|
|
|
|
2,419
|
|
Bad debt provision
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
Professional fees
|
|
|
1,295
|
|
|
|
1,380
|
|
|
|
3,104
|
|
Software expense
|
|
|
78
|
|
|
|
123
|
|
|
|
888
|
|
Professional dues and memberships
|
|
|
48
|
|
|
|
187
|
|
|
|
773
|
|
Write-off of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
Impairment of intangible assets
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3,085
|
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
112,898
|
|
|
|
236,062
|
|
|
|
(75,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN
EARNINGS OF EQUITY METHOD INVESTMENT
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
Income tax expense
|
|
|
9,063
|
|
|
|
21,615
|
|
|
|
34,977
|
|
Equity in earnings of equity method investment
|
|
|
(43
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS,
INC.
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS)
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income applicable to noncontrolling interest, net
of tax
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL
HOLDINGS, INC.
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
$
|
(39,006
|
)
|
|
$
|
|
|
|
$
|
(63,913
|
)
|
Effect of preferred share accretion
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deficit)/
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
|
|
(in thousands, except share and per share data)
|
|
|
BALANCE January 1, 2006
|
|
|
4,528,902
|
|
|
$
|
4
|
|
|
$
|
954
|
|
|
$
|
(39,254
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(38,296
|
)
|
Retirement of Tudor escrow shares
|
|
|
(408,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
32,397
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
Accretion of historical beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
Revalue of common stock at new par value ($0.00001)
|
|
|
|
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization exercise of options
|
|
|
1,095,085
|
|
|
|
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,623
|
|
Repurchase of common shares
|
|
|
(2,895,444
|
)
|
|
|
|
|
|
|
(35,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,667
|
)
|
Repurchase of preferred shares
|
|
|
|
|
|
|
|
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,006
|
)
|
Post reorganization option exercises
|
|
|
30,500
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Reversal of historical accretion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
2,231
|
|
Accretion of beneficial conversion features
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Tax benefit from employee exercises
|
|
|
|
|
|
|
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,003
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,502
|
)
|
|
|
|
|
|
|
|
|
|
|
(49,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
2,382,990
|
|
|
|
|
|
|
|
(67,691
|
)
|
|
|
(86,551
|
)
|
|
|
|
|
|
|
|
|
|
|
(154,242
|
)
|
Exercise of options
|
|
|
21,333
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Repurchase of shares
|
|
|
(870,070
|
)
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
GCAM, LLC acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Restricted stock units issued to acquire GCAM, LLC, net of call
option liability
|
|
|
|
|
|
|
|
|
|
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
943
|
|
Consolidation of Gain Global Markets, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,563
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134,651
|
)
|
|
|
|
|
|
|
|
|
|
|
(134,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
|
1,534,253
|
|
|
|
|
|
|
|
(95,115
|
)
|
|
|
(221,225
|
)
|
|
|
|
|
|
|
|
|
|
|
(316,340
|
)
|
Exercise of options
|
|
|
617,818
|
|
|
|
|
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686
|
|
Repurchase of common shares
|
|
|
(914,572
|
)
|
|
|
|
|
|
|
(40,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,752
|
)
|
Repurchase of preferred shares
|
|
|
|
|
|
|
|
|
|
|
(60,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,064
|
)
|
Conversion restricted stock units into common stock
|
|
|
66,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of warrants
|
|
|
|
|
|
|
|
|
|
|
(3,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,848
|
)
|
Tax benefit from employee exercises
|
|
|
|
|
|
|
|
|
|
|
10,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,709
|
|
Reversal of call option liability
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,492
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
7
|
|
|
|
28
|
|
Increase in noncontrolling interest related to acquisition of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
529
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,426
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
231,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
|
1,304,029
|
|
|
$
|
|
|
|
$
|
(182,891
|
)
|
|
$
|
10,201
|
|
|
$
|
21
|
|
|
$
|
515
|
|
|
$
|
(172,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,405
|
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange transactions liquidity
providers and customers
|
|
|
(5,604
|
)
|
|
|
2,740
|
|
|
|
1,776
|
|
Loss on foreign currency exchange rates
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Depreciation and amortization
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
Impairment of intangible asset
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Litigation settlement
|
|
|
|
|
|
|
(1,479
|
)
|
|
|
|
|
Deferred taxes
|
|
|
1,278
|
|
|
|
(1,538
|
)
|
|
|
(932
|
)
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Amortization of deferred financing costs
|
|
|
63
|
|
|
|
89
|
|
|
|
89
|
|
Bad debt provision
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
Loss in earnings of equity method investment
|
|
|
43
|
|
|
|
|
|
|
|
214
|
|
Loss on disposal of fixed assets
|
|
|
22
|
|
|
|
23
|
|
|
|
91
|
|
Stock compensation expense
|
|
|
204
|
|
|
|
1,657
|
|
|
|
4,492
|
|
Tax benefit from employee stock option exercises
|
|
|
(4,003
|
)
|
|
|
|
|
|
|
(10,709
|
)
|
Change in fair value of preferred stock embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from brokers
|
|
|
(12,861
|
)
|
|
|
(4,983
|
)
|
|
|
(2,380
|
)
|
Prepaid assets
|
|
|
(229
|
)
|
|
|
(152
|
)
|
|
|
(849
|
)
|
Other assets
|
|
|
(1,553
|
)
|
|
|
(615
|
)
|
|
|
(3,043
|
)
|
Current tax receivable
|
|
|
(4,874
|
)
|
|
|
4,874
|
|
|
|
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
Payables to customers
|
|
|
25,763
|
|
|
|
35,473
|
|
|
|
13,528
|
|
Accrued compensation and benefits
|
|
|
1,634
|
|
|
|
1,453
|
|
|
|
354
|
|
Payables to brokers, dealers, FCMs and other regulated
entities
|
|
|
671
|
|
|
|
(3,085
|
)
|
|
|
(483
|
)
|
Accrued expenses and other liabilities
|
|
|
4,312
|
|
|
|
871
|
|
|
|
939
|
|
Income tax payable
|
|
|
2,071
|
|
|
|
8,742
|
|
|
|
12,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
20,803
|
|
|
|
77,774
|
|
|
|
69,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,818
|
)
|
|
|
(2,719
|
)
|
|
|
(2,679
|
)
|
Purchases of marketing lists
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
Cash acquired in GCAM, LLC acquisition
|
|
|
|
|
|
|
191
|
|
|
|
|
|
Acquisition and funding of Fortune Capital Co., Ltd, net of cash
acquired
|
|
|
|
|
|
|
|
|
|
|
(666
|
)
|
Acquisition and funding of S.L. Bruce Financial Corporation, net
of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(248
|
)
|
Acquisition and funding of RCG GAIN Limited, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(2,592
|
)
|
|
|
(2,528
|
)
|
|
|
(3,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D preferred shares
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
Series D issuance costs
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
(280
|
)
|
|
|
(273
|
)
|
|
|
|
|
Proceeds from notes payable
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
Payment on notes payable
|
|
|
(2,500
|
)
|
|
|
(7,625
|
)
|
|
|
(10,500
|
)
|
Proceeds from exercise of stock options
|
|
|
1,837
|
|
|
|
70
|
|
|
|
1,686
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Issuance of Series E preferred shares
|
|
|
|
|
|
|
|
|
|
|
117,000
|
|
Series E issuance costs
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
Tax benefit from employee stock option exercises
|
|
|
4,003
|
|
|
|
|
|
|
|
10,709
|
|
Repurchase of warrants
|
|
|
|
|
|
|
|
|
|
|
(3,945
|
)
|
Repurchase of common shares
|
|
|
(35,687
|
)
|
|
|
(30,000
|
)
|
|
|
(40,752
|
)
|
Repurchase of preferred shares
|
|
|
(46,430
|
)
|
|
|
|
|
|
|
(62,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
(9,217
|
)
|
|
|
(7,828
|
)
|
|
|
12,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
8,994
|
|
|
|
67,418
|
|
|
|
77,537
|
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
22,482
|
|
|
|
31,476
|
|
|
|
98,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,206
|
|
|
$
|
4,093
|
|
|
$
|
3,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
10,609
|
|
|
$
|
9,524
|
|
|
$
|
20,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units for purchase of GCAM, LLC
|
|
|
|
|
|
$
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in GCAM, LLC at acquisition date
|
|
|
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of GGMI at date of consolidation
|
|
|
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets in accrued expense and other liabilities
|
|
|
|
|
|
|
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in S.L. Bruce Financial Corporation in accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of prior year accretion of preferred stock
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of beneficial conversion feature
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
|
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of restricted stock units to common stock
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of call option liability
|
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-6
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
1.
|
Nature of
Operations and Significant Accounting Policies
|
Nature
of operations
GAIN Capital Holdings, Inc. and Subsidiaries is a Delaware
corporation formed and incorporated on March 24, 2006. GAIN
Holdings, LLC is a wholly-owned subsidiary of GAIN Capital
Holdings, Inc., and owns all outstanding membership units in
GAIN Capital Group, LLC, the operating company.
GAIN Capital Group, Inc., a Delaware corporation, was formed and
incorporated on August 1, 2003. Immediately following the
formation of the corporation, it acquired all the outstanding
equity of GAIN Capital, Inc. On March 27, 2006, GAIN
Capital Group, Inc. converted to a Delaware limited liability
company known as GAIN Capital Group, LLC (Group,
LLC).
Prior to the conversion, GAIN Capital Group, Inc. had two fully
owned subsidiaries, GAIN Capital, Inc. and Forex.com.
|
|
|
|
|
GAIN Capital, Inc. acted as a retail, Internet based,
market-maker for foreign exchange trading and converted to GAIN
Capital, LLC on March 27, 2006. At the same time, GAIN
Holdings, LLC, a newly created holding company and wholly-owned
subsidiary of GAIN Capital Holdings, Inc., became the sole
member and holder of all of the membership interests of Group,
LLC. GAIN Capital, LLC then merged into Group, LLC on
April 28, 2006 to complete the conversion.
|
|
|
|
Forex.com acted as a wholly owned introducing broker. Forex.com
merged into GAIN Capital Group, Inc. on February 24, 2006
and no longer exists as a separate legal entity.
|
Group, LLC is a market-maker in a number of foreign currencies.
Its internet trading platform provides a market for customers to
trade, on a margin basis, spot foreign exchange. In connection
with its market-making activities, Group, LLC seeks to manage
its market risk by entering into offsetting positions with large
money center banks and other financial institutions. As a result
of its market-making operations, Group, LLC, may have open
positions in various currencies at any given time. Group, LLC
manages its open positions and exposure in real time. The
majority of Group, LLCs foreign exchange business relates
to major foreign currencies such as U.S. dollars, Japanese
yen, euros, United Kingdom pound sterling, Swiss francs and
Canadian dollars.
The counterparties to Group, LLCs foreign exchange
transactions include retail traders, investment advisors,
commercial banks, small to mid-sized corporations, hedge funds,
investment banks and broker-dealers.
Group, LLC is a registered Futures Commission Merchant
(FCM) with the Commodity Futures Trading Commission
(CFTC). As such, it is subject to the regulations of
the CFTC, an agency of the U.S. Government, and the rules
of the National Futures Association (NFA), an
industry self-regulatory organization.
GAIN Capital Holdings, Inc. and subsidiaries (the
Company) strategically expanded its operations from
2006 to 2008:
|
|
|
|
|
The Company established a wholly-owned subsidiary, Jia Shen
Forex Software Development Technology, LLC (Jia Shen,
LLC) in Shanghai, China in 2007. This entity was closed in
2009. See Note 19 for additional information.
|
|
|
|
GCAM, LLC is a Delaware limited liability company formed on
April 10, 2006 to operate as a private investment vehicle.
GCAM, LLC is engaged primarily in the business of trading and
investing in over the counter (OTC) foreign
currencies and was the general partner of the GCAM Madison Fund,
L.P., through the fund closure in December 31, 2008. The
general partner directed the funds trading and investments
as well as its
day-to-day
operations. GCAM, LLC currently directs the asset management
program of Group, LLC. GAIN Capital Holdings, Inc. owned a
20.36% interest in GCAM, LLC as of December 31, 2006, and
acquired the remaining 79.64% interest in GCAM, LLC as of
January 1, 2007. Group, LLC subsequently transitioned its
investment in GCAM, LLC to the ultimate parent, GAIN Capital
Holdings, Inc.
|
F-7
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Gain Global Markets, Inc. (GGMI) was incorporated in
the Cayman Islands on January 19, 2006. In 2007, GGMI
became wholly owned by GAIN Capital Holdings International,
LLC., which is 100% owned by the Company. GGMI is registered
with the Cayman Islands Monetary Authority (CIMA) as
an Exchange Contracts Dealer and operates a trading platform
called Trade Real-Time which provides self-directed traders with
direct access to Contracts for Difference (CFD),
Forex, Metals and Energy markets.
|
|
|
|
Group, LLC entered into a joint venture with Rosenthal Collins
Group (RCG), a leading independent futures clearing
firm, that was approved by the UK Financial Services Authority
(FSA) effective January 2008 in which Group, LLC and
RCG each owned a 50% interest. On December 22, 2008, Group,
LLC acquired RCGs 50% interest in RGGGL. Prior to the
acquisition of the remaining 50% interest, the joint venture was
accounted for as an equity method investment and was fully
consolidated as of December 31, 2008. Upon achieving
complete ownership, the legal name was changed to GAIN Capital
Forex.com UK Limited (GCUK).
|
|
|
|
On October 3, 2008, the Company acquired all outstanding
common stock of S.L. Bruce Financial Corporation, the parent
company of State Discount Brokers, Inc. which is a broker-dealer
registered with the Securities and Exchange Commission and a
member of the Financial Industry Regulatory Authority
(FINRA). The Company subsequently changed the
company name to Gain Capital Securities, Inc. (GCSI).
|
|
|
|
GAIN Holdings International, LLC acquired a 51% controlling
interest, with rights to acquire up to a 95% interest, in
Fortune Capital Co., Ltd (FORTUNE) on
December 12, 2008. FORTUNE was previously a privately owned
provider of forex trading services in Japan, and has been a
white label partner to Group, LLC since 2002. FORTUNE maintains
a securities license with Japans Financial Services Agency
(FSA).
|
|
|
|
The Company incorporated Gain Capital Forex.com Hong Kong
Limited (GCHK) on July 9, 2008. In July 2009,
GCHK was granted a license by the Securities and Futures
Commission (SFC) which regulates forex trading in
Hong Kong.
|
Summary
of significant accounting policies
Basis of Accounting The Company and its
subsidiaries consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America (generally
accepted accounting principles).
Consolidation The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiaries and majority owned subsidiary. The
consolidated financial statements include 100% of the assets and
liabilities of the majority owned subsidiary and the ownership
interest of minority investors is recorded as noncontrolling
interest. All intercompany transactions and balances are
eliminated in consolidation.
The Company applies FIN 46R, Consolidation of Variable
Interest Entities, and ARB 51, Consolidated Financial
Statements (ARB 51), in its principles of
consolidation. FIN 46R addresses arrangements where a
company does not hold a majority of the voting or similar
interests of a variable interest entity (VIE). A
company is required to consolidate a VIE if it has determined it
is the primary beneficiary. ARB 51 addresses the policy when a
company owns a majority of the voting or similar rights and
exercises effective control.
Interest Revenue and Interest Expense The
Company reports interest expense on notes payable separately
from operating interest income and operating interest expense.
The Companys Consolidated Statements of Operations and
Comprehensive Income presentation is consistent with how the
Company manages its business and evaluates its performance. The
Company views operating interest income and operating expense as
one interrelated activity, as along with trading revenues, they
are generated from the operations of the Company.
Use of Estimates The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and
F-8
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. In
presenting the consolidated financial statements, management
makes estimates regarding:
|
|
|
|
|
Valuation of assets and liabilities requiring fair value
estimates;
|
|
|
|
The allowance for doubtful accounts;
|
|
|
|
The realization of deferred taxes;
|
|
|
|
The carrying amount of goodwill and other intangible assets;
|
|
|
|
The amortization period of intangible assets with definite lives;
|
|
|
|
Incentive based compensation accruals and valuation of
share-based payment compensation arrangements; and
|
|
|
|
Other matters that affect the reported amounts and disclosure of
contingencies in the consolidated financial statements.
|
Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those
estimates and could have a material impact on the consolidated
financial statements, and it is possible that such changes could
occur in the near term.
The Company makes estimates of the uncollectibility of accounts
receivable and records an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account
balance becomes doubtful. Management specifically analyzes
accounts receivable and historical bad debt experience when
evaluating the adequacy of the allowance for doubtful accounts.
Should any of these factors change, the estimates made by
management will also change, which could affect the level of our
future provision for doubtful accounts.
Revenue Recognition The Company recognizes
revenue in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue
Recognition, (SAB 104). The Company
generates revenue from forex trading. SAB 104 requires that
four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered;
(3) the sellers price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Foreign exchange contracts generally involve the exchange of two
currencies at market rates on a specified date; spot contracts
usually require the exchange of currencies to occur within two
business days of the contract date. Customer transactions and
related revenue and expenses are recorded on a trade date basis.
Gains or losses are realized when customer transactions are
liquidated. Unrealized gains or losses on cash positions
revalued at prevailing foreign currency exchange rates (the
difference between contract price and market price) at the date
of the statement of financial condition are included in
Receivables from brokers, Payables to customers and
Payables to brokers, dealers, FCMs and other regulated
entities on the Consolidated Statements of Financial
Condition. Changes in net unrealized gains or losses are
recorded in Trading revenue on the Consolidated
Statements of Operations and Comprehensive Income.
Other revenue, on the Consolidated Statements of Operations and
Comprehensive Income, is comprised primarily of trading
commissions related to the Forex Pro trading program which
allows customers to receive tighter spreads in return for a
commission fee paid to us. The Company also records to Other
revenue the inactivity fees charged monthly to customers who
have not executed trades and maintained the required minimum
account balance.
Interest revenue and interest expense are recorded when earned
and incurred, respectively. Net interest revenue consists
primarily of the revenue generated by Company cash and customer
cash held and invested at banks, money market funds and deposits
at wholesale forex trading partners, less interest paid to
customers on their balances.
F-9
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents The Company
considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
Included in this balance are funds deposited by customers and
funds accruing to customers as a result of trades or contracts.
Substantially all financial instruments consist of cash and cash
equivalents and are carried at amounts that approximate fair
value.
Prepaid Assets The Company records as prepaid
assets those goods and services paid for but not to be received
until a future date. These include payments for advertising and
insurance.
Receivables from Brokers The Company has
posted funds with brokers as collateral as required by
agreements for holding spot foreign exchange positions. In
addition, the Company has cash in excess of required collateral.
These amounts are reflected as receivables from brokers and
include gains or losses realized on liquidated contracts, as
well as unrealized gains or losses on open positions.
Property and Equipment Property and equipment
are stated at cost, net of accumulated depreciation.
Identifiable significant improvements are capitalized and
expenditures for maintenance and repairs are charged to expense
as incurred.
Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets as follows:
|
|
|
|
|
Purchased software
|
|
|
3 years
|
|
Furniture and fixtures
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
Shorter of lease term or estimated useful life
|
|
Telephone equipment
|
|
|
3 years
|
|
Office equipment
|
|
|
3 years
|
|
Vehicles
|
|
|
5 years
|
|
The Company accounts for costs incurred to develop its trading
platform and related software in accordance with the American
Institute of Certified Public Accountants (AICPA)
Statement of Position
98-1
(SOP 98-1),
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
SOP 98-1
requires that such technology be capitalized in the application
and infrastructure development stages. Costs related to
training, administration and non-value-added maintenance are
charged to expense as incurred. Capitalized software development
costs are being amortized over the useful life, which the
Company has estimated at three years.
Foreign Currencies The Company has determined
that its functional currency is U.S. dollars
(USD). Realized foreign currency transaction gains
and losses are recorded in Trading revenue on the
Consolidated Statements of Operations and Comprehensive Income
during the year at the exchange rate on the date of the
transaction. Unrealized foreign currency transaction gains and
losses are computed using the closing rate of exchange
prevailing at the date of the Consolidated Statements of
Financial Condition. Gains and losses arising from these
transactions are also recorded in Trading revenue on the
Consolidated Statements of Operations and Comprehensive Income.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, Foreign Currency Translation,
monetary assets and liabilities denominated in foreign
currencies are converted into USD at rates of exchange in effect
at the date of the Consolidated Statements of Financial
Condition. The Company recorded foreign currency transaction
gains and losses in Other revenue on the Consolidated
Statements of Operations and Comprehensive Income. The Company
recorded a loss of $158,803, a gain of $212,578 and a loss of
$191,115 for the years ended December 31, 2006, 2007 and
2008, respectively.
Intangible Assets The Financial Accounting
Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), which requires
purchased intangible assets other than goodwill to be amortized
over their useful lives unless their lives are determined to be
indefinite. If the assets are determined to
F-10
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have a finite life in the future, the Company will amortize the
carrying value over the remaining useful life at that time. In
accordance with SFAS No. 142, the Companys
URLs (foreignexchange.com and forex.com) are indefinite
life intangible assets and are therefore not amortized. The
Company compares the recorded value of its indefinite life
intangible assets to their fair value on an annual basis and
whenever circumstances arise that indicates that an impairment
may have occurred. See Note 5 for additional information.
The Company acquired a marketing list in November 2006 for
$773,885 that was amortized over its useful life, with an
amortization period of 18 months. The Company recorded an
impairment of $165,000 in 2006 and amortization of $405,924 and
$202,961 in 2007 and 2008, respectively. No impairment was
recorded in 2007 or 2008.
Goodwill In accordance with
SFAS No. 142, the Company tests goodwill for
impairment on an annual basis during the fourth quarter and on
an interim basis when conditions indicate impairment has
occurred. Goodwill impairment is determined by comparing the
estimated fair value of the reporting unit with its respective
book value. The Company utilized a discounted cash flow approach
in order to determine the fair value. The Company believes that
its procedures for estimating discounted future cash flows were
reasonable and consistent with market conditions at the time of
estimation. The Company recorded goodwill with the acquisition
of GCAM, LLC, GCSI, FORTUNE, and GCUK. No amount of goodwill is
expected to be deductible for tax purposes.
Other Assets The Company recorded receivables
from affiliates (See Note 11), vendors, a credit card
processing service and lead deposits in Other assets on
the Consolidated Statements of Financial Condition. See
Note 7 for additional information.
Allowance for Doubtful Accounts The Company
records an increase in the allowance for doubtful accounts when
the prospect of collecting a specific customer account balance
becomes doubtful. Management specifically analyzes accounts
receivable and historical bad debt experience when evaluating
the adequacy of the allowance for doubtful accounts. Should any
of these factors change, the estimates made by management will
also change, which could affect the level of our future
provision for doubtful accounts. The allowance for doubtful
accounts is included in Other assets on the Consolidated
Statements of Financial Condition. Receivables from customers
are reserved for and recorded in Bad debt provision on
the Consolidated Statements of Operations and Comprehensive
Income.
The allowance for doubtful accounts consisted of the following
(amounts in thousands):
|
|
|
|
|
Balance as of January 1, 2006
|
|
$
|
(96
|
)
|
Addition to provision
|
|
|
(589
|
)
|
Amounts written off
|
|
|
337
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
(348
|
)
|
Addition to provision
|
|
|
(1,209
|
)
|
Amounts written off
|
|
|
428
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
(1,129
|
)
|
Addition to provision
|
|
|
(1,418
|
)
|
Amounts written off
|
|
|
334
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
(2,213
|
)
|
|
|
|
|
|
Long-Lived Assets In accordance with
Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company periodically evaluates the
carrying value of long-lived assets when events and
circumstances warrant such review. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such an asset is separately
identifiable and is less than the carrying value. In that event,
a loss is recognized in the amount by which the carrying value
exceeds the fair market value of the long-lived asset. The
Company has identified no such impairment losses.
F-11
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Payables to Customers Payables to customers,
included on the Consolidated Statements of Financial Condition,
include amounts due on cash and margin transactions. These
transactions include deposits, commissions and gains or losses
arising from settled trades. The Payables to customers
balance also reflects unrealized gains or losses arising
from open positions in customer accounts.
Accrued Compensation and Benefits Accrued
compensation and benefits represents employee salaries and
benefits payable.
Payables to Brokers, Dealers, FCMs and Other Regulated
Entities The Company engages in white label, or
omnibus relationships, with other regulated financial
institutions. The payables balance includes amounts deposited by
these financial institutions in order for the Company to act as
clearing broker. The payables balance includes deposits from all
NFA registered entities.
Accrued Expenses and Other Liabilities Accrued
expenses and other liabilities, included on the Consolidated
Statements of Financial Condition, represents operating expenses
payable at year-end including professional fees.
Noncontrolling Interest Noncontrolling
interest represents the portion of the Companys operating
profit that is attributable to the ownership interest of the
noncontrolling interest owners in FORTUNE as of
December 31, 2008.
Accumulated Other Comprehensive Income The
Companys Accumulated other comprehensive income,
consists of foreign currency translation adjustments from
their subsidiaries not using the U.S. dollar as their
functional currency.
Income Taxes Income tax expense is provided
for using the asset and liability method, under which deferred
tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income
tax bases of assets and liabilities using currently enacted tax
rates.
Convertible, Redeemable Preferred Stock Embedded
Derivative SFAS No. 133, Accounting
for Derivatives and Hedging Activities, as amended
(SFAS No. 133), establishes accounting and
reporting standards for derivative instruments. The Company has
determined that it must bifurcate and account for the conversion
feature in its Series A, Series B, Series C,
Series D, and Series E preferred stock. The embedded
derivative is recorded at fair value and changes in the fair
value are reflected in earnings.
Treasury Stock Repurchased shares of common
and preferred stock are retired and not accounted for as
treasury stock.
Stock Based Compensation In December 2004,
the FASB issued SFAS No. 123R, Share-Based Payment
(SFAS No. 123R).
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, which supersedes
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees.
Generally, the approach to accounting for share-based payments
under SFAS No. 123R is similar to the approach
described in SFAS No. 123. However,
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statements of operations and comprehensive
income based on their fair values. Pro forma disclosure is no
longer an alternative. The Company adopted the provisions of
SFAS No. 123R, effective January 1, 2006.
SFAS No. 123R permits companies to adopt its
requirements using either the prospective transition
method or modified retrospective method. Under the
prospective transition method, compensation cost is
recognized, beginning with the effective date based on the
requirements of SFAS No. 123R for all share-based
payments granted after the effective date. The Company adopted
SFAS No. 123R using the prospective
transition method.
SFAS No. 123R requires measurement of compensation
cost for equity-based awards at fair value and recognition of
compensation cost over the service period, net of estimated
forfeitures. The fair value of restricted
F-12
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock units is determined based on the number of units granted
and the grant date fair value of GAIN Capital Holding,
Inc.s common stock.
See Note 12 for additional stock-based compensation
disclosure.
Earnings Per Common Share Basic earnings per
common share is calculated using the weighted average common
shares outstanding during the year. Common equivalent shares
from stock options and restricted stock awards, using the
treasury stock method, are also included in the diluted per
share calculations unless their effect of inclusion would be
antidilutive. See Note 16 for additional information.
Management Risk In the normal course of
business, the Company executes foreign exchange transactions
with its customers upon request on a margin basis. In connection
with these activities, the Company acts as a market-maker in 43
foreign currencies pairs. The Company actively trades currencies
in the spot market earning a dealer spread. The Company seeks to
manage its market risk by generally entering into offsetting
contracts in the interbank market, also on a margin basis. The
Company deposits margin collateral with large money center banks
and other major financial institutions. The Company is subject
to credit risk or loss from counterparty nonperformance. The
Company seeks to control the risks associated with its
customers activities by requiring its customers to
maintain margin collateral. The trading platform does not allow
customers to enter into trades if sufficient margin collateral
is not on deposit with the Company.
The Company developed risk management systems and procedures
that allow it to manage the market and credit risk associated
with market-making activities in real-time. The Company does not
actively initiate directional market positions in anticipation
of future movements in the prices of currencies and evaluates
market risk exposure on a continuous basis. As a result of the
Companys hedging activities, the Company is likely to have
open positions in various currencies at any given time. An
additional component of the risk management approach is that
levels of capital are maintained in excess of those required
under applicable regulations. The Company also maintains
liquidity relationships with three established, global prime
brokers and at least six other wholesale forex trading partners,
providing the Company with access to a deep forex liquidity pool.
Write-Off of Initial Public Offering Costs
The Company deferred costs incurred for an initial public
offering (IPO) of common stock in 2007 including
legal, audit, tax and other professional fees. The IPO was
delayed due to market conditions, and as a result the Company
recorded a write-off of the deferred costs of $41,858 as well as
costs incurred during the year ended December 31, 2008 of
$1,855,267.
Recent Accounting Pronouncements On
June 30, 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles-a replacement of
FASB No. 162 (SFAS No. 168) . On
the effective date of this statement, FASB Accounting Standards
Codification (ASC) becomes the source of
authoritative U.S. accounting and reporting standards for
nongovernment entities. At that time, FASB ASC will supersede
all then existing, non-SEC accounting and reporting standards
for nongovernmental entities. SFAS No. 168 revises the
generally accepted accounting principles hierarchy into two
levels: One that is authoritative (FASB ASC) and one that is
non-authoritative (not in FASB ASC). The statement is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. The Company does not
expect the adoption of the provisions to have a material impact
on the consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46R
(SFAS No. 167). SFAS No. 167
amends FASB Interpretation No. 46, as revised
(FIN 46R), Consolidation of Variable
Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a reporting entity is
required to consolidate another entity is based on, among other
things, the other entitys purpose and design and the
reporting entitys ability to direct the activities of the
other entity that most significantly impact the other
entitys economic performance. SFAS No. 167 will
be effective for the Company on January 1, 2010. The
Company is currently evaluating the potential impact of adopting
SFAS No. 167.
F-13
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events (SFAS No. 165).
SFAS 165 is intended to establish general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the
date through which an entity has evaluated subsequent events and
the basis for selecting that date, that is, whether that date
represents the date the financial statements were issued or were
available to be issued. SFAS 165 is effective for interim
or annual financial periods ending after June 15, 2009. The
Company does not expect the adoption of the provisions to have a
material impact on the consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161).
SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and requires
entities to provide enhanced 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.
SFAS No. 161 will be effective for the Companys
fiscal 2009 interim and annual consolidated financial
statements. The Company does not expect the adoption of the
provisions to have a material impact on the consolidated
financial statements.
On December 4, 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160). SFAS 160 clarifies that a
noncontrolling or minority interest in a subsidiary is
considered an ownership interest and accordingly, requires all
entities to report such interests in subsidiaries as equity in
the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15,
2008 and early adoption is prohibited. SFAS No. 160 is
required to be adopted prospectively, with the exception of
certain presentation and disclosure requirements (e.g.,
reclassifying noncontrolling interests to appear in equity),
which are required to be adopted retrospectively. The Company
adopted SFAS No. 160 on January 1, 2009 and
reflected the change in the presentation of the fiscal 2008
consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). This statement
provides a fair value option election under which a
company may irrevocably elect fair value as the initial and
subsequent measurement attribute for certain financial assets
and liabilities. This fair value option will be available on a
contract-by-contract
basis with change in fair value recognized in earnings as those
changes occur. The effective date for this statement is the
beginning of an entitys first fiscal year that begins
after November 15, 2007. The statement also allows an
entity to early adopt provided that the entity also adopts the
requirements of SFAS No. 157.
SFAS No. 159 allows companies to choose to measure
eligible financial instruments and certain other items at fair
value that are not required to be measured at fair value.
SFAS No. 159 requires that unrealized gains and losses
on items for which the fair value option has been elected be
reported in earnings at each reporting date. The Company adopted
SFAS No. 159 during the first quarter of 2008, but has
not elected the fair value option for any eligible financial
instruments as of December 31, 2008.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
(SFAS No. 157). This statement
establishes, among other things, a framework for measuring fair
value and expands disclosure requirements as they relate to fair
value measurements. The statement is effective at the beginning
of an entitys first fiscal year that begins after
November 15, 2007.
SFAS No. 157 establishes a hierarchy for information
and valuations used in measuring fair value, which is broken
down into three levels. Level 1 valuations are based on
quoted prices in active markets for identical assets or
liabilities. Level 2 valuations are based on inputs, other
than quoted prices included within Level 1, that are
observable, either directly or indirectly. Level 3
valuations are based on information that is unobservable and
significant to the overall fair value measurement. A financial
instruments level within the fair value hierarchy is based
on the lowest level of input significant to the fair value
measurement where Level 1 is the highest and Level 3
F-14
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is the lowest. The implementation of SFAS No. 157 did
not result in a material change to the Consolidated Statements
of Financial Condition.
In October 2008, the FASB issued FASB ASC
820-10-65-2
(FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active). FSP
SFAS 157-3
clarifies the application of SFAS No. 157, Fair
Value Measurements, in a market that is not active and
provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active. FSP
SFAS 157-3
is effective upon issuance, including for prior periods for
which financial statements have not been issued. The adoption of
FSP
SFAS No. 157-3
did not have a material effect on the Companys
consolidated financial statements.
In April 2009, the FASB issued FASB ASC
820-10-65-4
(FSP
SFAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly). FSP
SFAS 157-4
provides additional application guidance in determining fair
values when there is no active market or where the price inputs
being used represent distressed sales. Specifically, it
reaffirms the need to use judgment to ascertain if a formerly
active market has become inactive and in determining fair values
when markets have become inactive. FSP
SFAS 157-4
shall be effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied
prospectively. The Company does not expect the adoption of the
provisions to have a material impact on the consolidated
financial statements.
In April 2008, the FASB issued FSP
SFAS 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
SFAS 142-3).
FSP
SFAS 142-3
removes the requirement of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142) for an entity to consider,
when determining the useful life of an acquired intangible
asset, whether the intangible asset can be renewed without
substantial cost or material modifications to the existing terms
and conditions associated with the intangible asset. FSP
SFAS 142-3
replaces the previous useful-life assessment criteria with a
requirement that an entity shall consider its own experience in
renewing similar arrangements. If the entity has no relevant
experience, it would consider market participant assumptions
regarding renewal. The Company does not expect the adoption of
FSP
SFAS 142-3
to have a material impact on the Companys consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS No. 141R). SFAS 141R
requires the acquiring entity in a business combination to
recognize the full fair value of assets acquired and liabilities
assumed in the transaction (whether a full or partial
acquisition); establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities
assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose to
investors and other users all of the information needed to
evaluate and understand the nature and financial effect of the
business combination. SFAS No. 141R applies to all
transactions or other events in which the Company obtains
control of one or more businesses, including those sometimes
referred to as true mergers or mergers of
equals and combinations achieved without the transfer of
consideration, for example, by contract alone or through the
lapse of minority veto rights. SFAS No. 141R applies
prospectively to business combinations for which the acquisition
date is on or after December 15, 2009. The Company expects
SFAS No. 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent
upon acquisitions at that time.
F-15
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Fair
Value Disclosures
|
The following table presents the Companys assets and
liabilities that are measured at fair value and the related
hierarchy levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
|
as of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Netting(1)
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from brokers
|
|
$
|
(163,900
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
190,259
|
|
|
$
|
26,359
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,784,841
|
|
|
$
|
|
|
|
$
|
82,784,841
|
|
|
|
|
(1)
|
|
Represents cash collateral netting.
|
Level 1
Financial Assets
The Company has futures contracts that are Level 1
financial instruments. The futures contracts are recorded in
Receivables from brokers at fair value.
Level 3
Financial Assets
The Company measures the fair value of the embedded derivative
through the use of unobservable inputs which include estimations
for the expected volatility of common stock, an appropriate
risk-free interest rate plus a credit spread and the fair value
of the common stock. See Note 9 for additional information.
The table below provides a reconciliation of the fair value of
the embedded derivative measured on a recurring basis for which
the Company used Level 3 for the year ended
December 31, 2008:
|
|
|
|
|
Beginning January 1, 2008
|
|
$
|
264,566,409
|
|
Unrealized gain included in change in fair value of convertible,
redeemable preferred stock embedded derivative
|
|
$
|
(184,151,912
|
)
|
Purchases, issuances and settlements
|
|
$
|
2,370,344
|
|
Transfers in/out of Level 3
|
|
$
|
|
|
Balance at December 31, 2008
|
|
$
|
82,784,841
|
|
The Level 3 purchases, issuances and settlements is
attributable to the change in fair value of the convertible,
redeemable preferred stock embedded derivative related to the
issuance of Series E preferred stock during 2008.
|
|
3.
|
Receivables
From Brokers
|
Amounts receivable from brokers consisted of the following at
December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Required collateral
|
|
$
|
3,158
|
|
|
$
|
1,687
|
|
Cash in excess of required collateral
|
|
$
|
69,540
|
|
|
$
|
73,598
|
|
Open foreign exchange positions
|
|
$
|
1,932
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,630
|
|
|
$
|
75,817
|
|
|
|
|
|
|
|
|
|
|
F-16
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has posted funds with brokers as collateral as
required by agreements for holding spot foreign exchange
positions. In addition, the Company has cash in excess of
required collateral, which includes the value of futures
contracts recorded based upon listed or quoted market rates that
approximate fair value. Open foreign exchange positions include
the unrealized gains or losses due to the differences in
exchange rates between the dates at which a trade was initiated
versus the exchange rates in effect at the date of the
consolidated financial statements. These amounts are reflected
as Receivables from brokers in the Consolidated
Statements of Financial Condition.
|
|
4.
|
Property
and Equipment
|
Property and equipment, including leasehold improvements and
capitalized software development costs, consisted of the
following as of December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Software
|
|
$
|
3,496
|
|
|
$
|
5,419
|
|
Computer equipment
|
|
|
2,682
|
|
|
|
3,048
|
|
Leasehold improvements
|
|
|
199
|
|
|
|
243
|
|
Telephone equipment
|
|
|
171
|
|
|
|
146
|
|
Office equipment
|
|
|
101
|
|
|
|
159
|
|
Furniture and fixtures
|
|
|
62
|
|
|
|
145
|
|
Web site development costs
|
|
|
43
|
|
|
|
43
|
|
Vehicles
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,766
|
|
|
|
9,215
|
|
Less: Accumulated depreciation and amortization
|
|
|
(3,343
|
)
|
|
|
(5,278
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,423
|
|
|
$
|
3,937
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $897,093, $1,505,511, and $2,293,455
for the years ended December 31, 2006, 2007 and 2008,
respectively.
In 2003, the Company acquired the Forex.com domain name for
$220,000, and in 2004, the foreignexchange.com domain name was
purchased for $100,000. Based on the fact that the rights to use
these domain names requires the payment of a nominal annual
renewal fee, management determined that there was no legal or
regulatory limitations on the useful life and furthermore that
there is currently no technological limitation to their useful
lives. These indefinite-lived assets are not amortized. In
accordance with SFAS No. 142, the Company tests
intangible assets for impairment on an annual basis in the
fourth quarter and on an interim basis when conditions indicate
impairment has occurred.
The Company acquired a marketing list in November 2006 for
$773,885 that is being amortized over its useful life, with an
amortization period no longer than 18 months. The Company
recorded an impairment of $165,000 in 2006 for the portion of
the list considered impaired subsequent to the purchase. No
amortization was recorded in 2006 and amortization of $405,924
and $202,961 was recorded in 2007 and 2008, respectively, with
no impairment recorded in either year. The marketing list was
fully amortized as of June 30, 2008.
F-17
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007 and 2008, the accumulated
amortization related to intangibles was $405,924 and $608,885,
respectively. Intangible assets consisted of the following
(amounts in thousands):
|
|
|
|
|
Balance at January 1, 2006
|
|
$
|
320
|
|
Purchase of marketing list
|
|
|
774
|
|
Impairment of marketing list
|
|
|
(165
|
)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
929
|
|
Amortization of marketing list
|
|
|
(406
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
523
|
|
Amortization of marketing list
|
|
|
(203
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
320
|
|
|
|
|
|
|
Goodwill is calculated as the difference between the cost of
acquisition and the fair value of the net assets of an acquired
business. Goodwill consists of the following as of December 31
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
FORTUNE
|
|
$
|
|
|
|
$
|
1,278
|
|
GCAM, LLC
|
|
|
1,078
|
|
|
|
1,078
|
|
Gain Capital Securities, Inc. (formerly S.L. Bruce Financial
Corp.)
|
|
|
|
|
|
|
533
|
|
Gain Capital Forex.com UK, Ltd (formerly RCGGL)
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,078
|
|
|
$
|
3,092
|
|
|
|
|
|
|
|
|
|
|
The Company owned a 20.36% interest in GCAM, LLC as of
December 31, 2006 that was acquired on December 30,
2005, and acquired the remaining 79.64% interest in GCAM, LLC on
January 1, 2007. The Company issued 68,250 Restricted Stock
Units (RSUs) in exchange for 13,980 shares in
GCAM, LLC. The RSU agreement relating to the purchase of GCAM,
LLC in 2007 was revised, so that the restricted shares at
January 1, 2008 unrestrict over 24 months. At
December 31, 2007 and 2008, the goodwill associated with
the acquisition was $1,078,240.
Goodwill associated with the acquisition of 51% of the
outstanding shares of FORTUNE on December 12, 2008 amounted
to $1,277,568. The purchase agreement includes a second tranche
to acquire up to 70% of the outstanding shares of FORTUNE when
certain trading milestones are met. The Company may acquire up
to 95% of the outstanding shares of FORTUNE after the second
tranche has been executed, but no later than December 31,
2011.
The Company acquired S.L. Bruce Financial Corporation, the
parent company of State Discount Brokers, Inc. on
October 3, 2008, generating $532,776 in goodwill from the
transaction. The acquisition required an initial payment of
$325,000, with another tranche payment due in the amount of
$325,000 in 2009. The second tranche payment is accrued in
Accrued expenses and other liabilities on the
Consolidated Statements of Financial Condition.
The joint venture, entered into on December 20, 2007 and
known as RCGGL, received regulatory approval from the UK
Financial Services Authority (FSA) in January 2008
and was subsequently transferred to the Company on
December 22, 2008 with a transfer of 100,000 shares.
The Company acquired the remaining 100,000 shares of RCGGL
owned by RCG on December 31, 2008, resulting in complete
control of the legal entity. Goodwill associated with the
purchase of RCGs shares of RCGGL amounted to $203,028. RCG
owned 50%
F-18
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest in the joint venture, and the purchase and transfer of
these shares provided the Company with 100% ownership of RCGGL,
now known as GAIN Capital-Forex.com UK, Ltd.
The acquisitions, individually and in the aggregate, did not
meet the conditions of a material business combination and
therefore were not subject to the disclosure requirements of
SFAS No. 141, Business Combinations. The
consolidated financial statements include the operating results
of each business from the date of acquisition. No goodwill
impairment was recorded for the years ended December 31,
2006, 2007 and 2008.
Other assets consisted of the following at December 31 (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Vendor and security deposits
|
|
$
|
919
|
|
|
$
|
2,807
|
|
Customer receivable balances, net of allowance for doubtful
accounts
|
|
|
22
|
|
|
|
82
|
|
Deferred tax asset
|
|
|
|
|
|
|
90
|
|
Miscellaneous receivables
|
|
|
76
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,017
|
|
|
$
|
3,274
|
|
|
|
|
|
|
|
|
|
|
The Company entered into a Loan and Security Agreement with
Silicon Valley Bank and JPMorgan Chase (the Loan)
for $30,000,000 on March 29, 2006. Silicon Valley Bank acts
as the collateral and administrative agent for the loan, and the
joint lenders received a security interest in GAIN Capital
Holdings, Inc. The pledge agreement stipulates that the Company
pledges its membership interest in GAIN Holdings, LLC.
The Loan term required a
6-month
interest only period, and thereafter repayment of principal in
twelve quarterly installments. The interest is paid monthly and
is based upon Prime Rate plus the Prime Rate Margin (0.75)%.
When the Total Funded Debt/Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) drops below 1
x EBITDA, the Prime Rate Margin will decline by 0.5%. The
interest rate at December 31, 2008 was 4.75%.
On October 16, 2006, a loan modification was made to add a
revolving credit line of $5,000,000. Interest on advances are
subject to the same floating per annum interest rate as the base
loan. On March 20, 2007, a second loan modification
increased the revolving credit line from $5,000,000 to
$10,000,000. The Company had a zero balance due under the
advance line of credit for the years ended December 31,
2007 and 2008.
On June 6, 2007, a third loan modification increased the
loan amount to $52,500,000. The financing from the increased
debt was utilized to repurchase and retire common stock from the
Companys founder. The five year term loan is payable in 20
quarterly installments of principal with the first payment
commencing on October 1, 2007. Accrued interest is payable
on a monthly basis. The term loan maturity date is July 1,
2012.
On March 18, 2008, the Company entered into a fourth loan
modification which increased the amount available under the
revolving line of credit to $20,000,000 from $10,000,000, with a
credit line maturity date of March 17, 2009. The credit
line is subject to an annual renewal that was executed on
March 17, 2009 and matures on June 17, 2010. The
Company entered into a fifth loan modification on June 18,
2009 which changed the interest rate for the revolving line of
credit from the prime rate of interest plus 0.75% to a floating
per annum rate equal to the greater of either 4.75% or the prime
rate of interest plus 0.75%.
The debt agreement contains reporting and financial covenants.
The reporting covenant requires the Company to provide monthly
financial statements, annual audited financial statements and
all regulatory filings. The financial covenant requires the
Company to maintain a minimum quarterly debt service ratio and
total funded debt/EBITDA
F-19
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ratio. The Company was in compliance with all financial
covenants at December 31, 2007 and 2008. The carrying
amount of notes payable approximates fair value. The Company had
a balance of $49,875,000 and $39,375,000 outstanding on the Loan
as of December 31, 2007 and 2008, respectively, with future
maturities of the notes payable as follows (amounts in
thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2009
|
|
$
|
10,500
|
|
2010
|
|
|
10,500
|
|
2011
|
|
|
10,500
|
|
2012
|
|
|
7,875
|
|
|
|
|
|
|
|
|
$
|
39,375
|
|
|
|
|
|
|
Loan fees were capitalized to deferred finance costs and are
being amortized over the life of the loan. The Company
capitalized loan costs of $280,334 in 2006, $273,027 in 2007 and
$0 in 2008. Deferred loan costs amortized to interest expense
were $63,075, $88,626 and $88,553 for the years ended
December 31, 2006, 2007 and 2008, respectively. The Company
had Deferred financing costs on the Consolidated
Statements of Financial Condition of $401,660 and $313,107 at
December 31, 2007 and 2008, respectively.
|
|
9.
|
Convertible,
Redeemable Preferred Stock
|
Convertible, Redeemable Series A Preferred
Stock The Company has authorized
4,545,455 shares of Convertible, redeemable Series A
Preferred Stock (Series A). The Series A
shares convert on a one for one basis. The liquidation value of
Series A is calculated as the purchase price of the shares
plus 8 percent per year, commencing upon the initial
issuance date. The Series A redemption price is calculated
based upon the greater of (i) the purchase price plus all
unpaid dividends, compounded annually from the date of issuance
or (ii) the fair market value of the Series A as if
converted to Common Stock.
Series A Preferred Stock have an exercise price of $1.12
per share. Warrants totaling 88,206 to purchase Series A
remained outstanding as of December 31, 2007. No warrants
to purchase Series A remain outstanding at
December 31, 2008.
Convertible, Redeemable Series B Preferred
Stock The Company has authorized
7,000,000 shares of Convertible, redeemable Series B
Preferred Stock (Series B). The Series B
shares are convertible into common shares on a one for one
basis. Conversion may occur with a majority vote, or with
automatic conversion upon an initial public offering. In the
event of default or liquidation, the value of these preferred
shares is calculated as the greater of (i) 200 percent
of the original purchase price per share ($2.22) or
(ii) the amount that would be payable in such liquidation
to the holder of that number of common shares into which each
share of Series B would be convertible immediately prior to
such liquidation.
The Companys Board of Directors and shareholders voted on
January 31, 2005 to change the mandatory redemption
features of the Series B to require a super majority vote
of the shareholders in the class. The Series B redemption
price is calculated as the greater of (i) the original
purchase price, plus an amount equal to (a) 50 percent
of accrued earnings from the date of issuance to the date of
redemption divided by (b) number of outstanding shares of
Series B, provided that the amount shall not exceed all
unpaid dividends (at 12 percent, compounded annually) or
(ii) the fair market value of Series B as if converted
into Common Stock, based upon an independent appraisal.
In accordance with EITF
No. 00-27,
Application of Issue
No. 98-5
to Certain Convertible Instruments, and after considering
the allocation of the proceeds to the Series B, the Company
determined that the Series B contained a beneficial
conversion feature (BCF). In prior years, the
Series B Preferred Stock had a stated mandatory redemption
date of August 1, 2008, so the Company was amortizing the
BCF over the period from issuance until the redemption date.
Accordingly, the Company recorded $26,330 of accretion for the
year ended December 31, 2006.
F-20
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The BCF was subsequently eliminated pursuant to the
Companys Amended and Restated Certificate of Incorporation.
The Series B were issued with attached warrants to purchase
Series B at $1.11 per share. The Company allocated the
proceeds, net of cash transaction costs, to the Series B
Preferred Stock and warrants based on the relative fair value of
each instrument. The fair value of the Series B was
determined based on a discounted cash flow analysis and the fair
value of the warrants was determined based on the Black-Scholes
options pricing model. The Company incurred $65,116 of
transaction costs upon original issuance.
Warrants totaling 1,458,335 to purchase Series B remain
outstanding as of December 31, 2007 and 2008, respectively.
Convertible, Redeemable Series C Preferred
Stock The Company has authorized and issued
2,496,879 shares of convertible, redeemable Series C
Preferred Stock (Series C). The Series C
shares are convertible into common shares at a ratio of
1:1.284095064.
Preferred shares can be converted by a majority vote, as defined
in the preferred stock agreement. The default or liquidation
value of these preferred shares is calculated as the greater of
(i) 200 percent of the original price per share and
all unpaid dividends (at 15 percent, compounded annually)
or (ii) the amount that would be payable in such
liquidation to the holder of that number of common shares into
which each share of Series C would be convertible
immediately prior to such liquidation.
Prior to 2005, the Company was accreting the Series C to
the redemption value using the effective interest method through
the redemption period of five years. The Companys Board of
Directors and stockholders voted on January 31, 2005 to
change the mandatory redemption features of Series C
Preferred Stock, so that it is now redeemable on a super
majority vote of the shareholders in the class. The
Series C redemption price is calculated as equal to the
greater of (i) the Series C Liquidation value which
includes all unpaid dividends or (ii) the fair market value
of Series C as if converted into Common Stock, based upon
an independent appraisal.
Convertible, Redeemable Series D Preferred
Stock The Company authorized and issued
3,254,678 shares of convertible, redeemable Series D
Preferred Stock for $39,999,993, incurring issuance costs of
$160,000, on March 29, 2006.
Preferred shares can be converted by a majority vote, as defined
in the preferred stock agreement. The default or liquidation
value of these preferred shares is calculated as the greater of
(i) the sum of the Series D multiplier, or 1.5, times
the Series D Original Purchase Price plus all unpaid
dividends (at 12 percent, compounded annually) or
(ii) the amount that would be payable in such liquidation
to the holder of that number of common shares into which each
share of Series D would be convertible immediately prior to
such liquidation.
If the Company proposes to sell shares of stock in an IPO with a
price range in the mid-point of which (the Offer
Price) equals a price per share that is less than the sum
of (A) the Series D multiplier, or 1.5, times the
Series D Original Purchase Price, plus (B) all accrued
and unpaid dividends of the Series D Preferred Stock, then
the Conversion Price of the Series D Preferred Stock shall
be adjusted such that the number of shares of Common Stock
issuable upon conversion of the Series D Preferred Stock
multiplier by the Offer Price shall be equal to the
Series D Liquidation Price.
The net proceeds from the issuance of Series D Preferred
Stock were used to repurchase Series A
(2,323,507 shares), Series B (44,169 shares), and
Series C Preferred Stock (5,075,573 shares) and common
stock (2,895,444 shares), thus reducing the number of
shares outstanding on a fully diluted basis. Employees holding
fully vested stock option awards were able to convert their
options to common stock, subject to repurchase by the Company.
Existing shareholders received the same election.
F-21
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Convertible, Redeemable Series E Preferred
Stock On January 11, 2008, the Company
authorized 3,738,688 shares and issued
2,611,606 shares of convertible, redeemable Series E
Preferred Stock for $116,999,949, incurring $190,000 in issuance
costs.
Preferred shares can be converted by a majority vote, as defined
in the preferred stock agreement. The default or liquidation
value of these preferred shares is calculated as the greater of
(i) the Series E Original Purchase Price plus all
unpaid dividends (at 8 percent, compounded annually) or
(ii) the amount that would be payable in such liquidation
to the holder of that number of common shares into which each
share of Series E would be convertible immediately prior to
such liquidation.
The net proceeds from the issuance of Series E Preferred
Stock were used to repurchase Series A
(1,162,248 shares), Series B (1,601 shares), and
Series C Preferred Stock (173,831 shares) and common
stock (914,572 shares), thus reducing the number of shares
outstanding on a fully diluted basis. Employees holding fully
vested stock option awards were able to convert a portion of
their options to common stock, subject to repurchase by the
Company. Existing shareholders received the same election. As a
result of this election, there were 66,530 RSUs converted into
common stock on a 1:1 ratio as of December 31, 2008.
Pursuant to the Second Amended and Restated Certificate of
Incorporation dated January 11, 2008, there will be an
adjustment to the conversion price with respect to the
Series E preferred stock if the initial public offering
Offer Price or Revised Offer Price, as applicable (each as
defined in our Second Amended and Restated Certificate of
Incorporation), is less than $53.76.
Each preferred stock shareholder who sold shares back to the
Company pursuant to a repurchase agreement is required by the
repurchase agreement to indemnify the Company if there is an
adjustment to the Series E preferred stock conversion
price, subject to the indemnification limits described below. In
such an event, the shareholders will, severally (and not
jointly) and pro rata to the payments they received for the
repurchased securities sold by each shareholder, indemnify the
Company in an aggregate amount equal to the product of
(a) the number of additional shares of common stock
issuable as a result of any adjustment to the Series E
preferred stock conversion price with respect to 2,070,312 out
of a total of 3,738,688 authorized shares of Series E
preferred stock, multiplied by (b) the offer price or
revised offer price, as applicable. The preferred stock
shareholder shall be entitled to make any indemnification
payments in cash or in shares of Company common stock. The
repurchase agreement provides that the indemnification
obligation is capped at an offer price or revised offer price,
as applicable, of $48.96. Should the offer price or revised
offer price, as applicable, be lower than $48.96, it shall be
deemed to be $48.96 for the purpose of calculating the
indemnification amount.
Dividends As set forth in the Amended and
Restated Certificate of Incorporation dated January 11,
2008, dividends can be issued upon approval in writing by
holders of a majority of the outstanding shares of preferred
stock, voting together as a single class, if the board
determines that the fully diluted equity value of the Company
exceeds $400,000,000. Dividends would be declared and paid to
the holders of common stock and preferred stock (on an
as-converted basis).
Rank The Series D Preferred Stock ranks
senior to the Series A, Series B, Series C, and
Series E Preferred Stock and the common stock as to
dividends and upon redemption, liquidation, or default.
Series C and Series B Preferred Stock rank equally and
senior to Series A, Series E and common stock as to
dividends and upon redemption, liquidation or default.
Series A Preferred Stock ranks senior to Series E
Preferred Stock and common stock as to dividends and upon
redemption, liquidation or default, with Series E then
ranking senior to common stock.
Rights and Privileges on Convertible, Redeemable Preferred
Stock At December 31, 2008, the Company had
five series of convertible, redeemable preferred stock subject
to certain rights and privileges under the Companys Second
Amended and Restated Certificate of Incorporation.
F-22
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company classifies the convertible, redeemable preferred
stock as mezzanine equity on the Consolidated Statements of
Financial Condition at the carrying value of the preferred
stock. The holders of the preferred stock have the option to
redeem on or after March 31, 2011. Given that the
redemption option is outside of the control of the Company, the
preferred stock is classified as mezzanine equity.
The following table presents a summary of the convertible,
redeemable preferred stock (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible,
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Redeemable
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Preferred
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Series E
|
|
|
Stock
|
|
|
BALANCE January 1, 2006
|
|
$
|
6,704
|
|
|
$
|
5,425
|
|
|
$
|
12,219
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,348
|
|
Accretion of historical beneficial conversion feature
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Reorganization exercise of options
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Repurchase of shares
|
|
|
(2,324
|
)
|
|
|
(44
|
)
|
|
|
(5,076
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,444
|
)
|
Issuance of Series D preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
40,000
|
|
Series D issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
(160
|
)
|
Reversal of historical accretion of preferred stock
|
|
|
(1,092
|
)
|
|
|
(13
|
)
|
|
|
(1,126
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,231
|
)
|
Accretion of beneficial conversion features
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
3,288
|
|
|
|
5,414
|
|
|
|
6,017
|
|
|
|
39,840
|
|
|
|
|
|
|
|
54,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
|
3,288
|
|
|
|
5,414
|
|
|
|
6,017
|
|
|
|
39,840
|
|
|
|
|
|
|
|
54,559
|
|
Repurchase of shares
|
|
|
(1,279
|
)
|
|
|
(2
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,979
|
)
|
Issuance of Series E preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,000
|
|
|
|
117,000
|
|
Series E issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
|
|
(190
|
)
|
Exercise of warrants
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Repurchase of warrants
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
$
|
2,009
|
|
|
$
|
5,412
|
|
|
$
|
5,319
|
|
|
$
|
39,840
|
|
|
$
|
116,810
|
|
|
$
|
169,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption At any time on and after
March 31, 2011, upon the written request of at least a
majority of the outstanding shares of preferred stock (on an
as-converted to common stock basis) voting together as a single
class that all of the shares of preferred stock be redeemed, the
Corporation shall redeem all of the shares of preferred stock
then outstanding upon payment in cash in respect of each share
redeemed in an amount equal to the redemption price.
Automatic Conversion Preferred stock converts
to common stock immediately prior to a qualified initial public
offering (IPO), as defined in the investor rights
agreement for each series of preferred stock. Series A,
F-23
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Series B, Series D preferred stock convert on a
one-to-one
basis into shares of common stock, and the Series C
preferred stock converts on a 1:1284095064 basis into shares of
common stock.
If the majority of Series E preferred stockholders vote to
do so, or the IPO price equals or exceeds $67.20, all
outstanding shares of Series E preferred stock will be
converted on a
one-to-one
basis into shares of common stock. If the IPO price is less than
$67.20, the Series E preferred stock will be converted into
shares of common stock if a majority of all preferred
stockholders, voting as one class, approve such conversion. In
the event there is a conversion of Series E preferred stock
where the IPO price is less than $53.76, there will be an
adjustment to the Series E preferred stock conversion price
as outlined in the Second Amended and Restated Certificate of
Incorporation dated January 11, 2008.
Preferred Stock Embedded Derivative The
Company has determined that the conversion feature in the
Companys Convertible, Redeemable Preferred Stock
Series A, Series B, Series C, Series D and
Series E meets the definition of an embedded
derivative in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities.
The redemption feature enables the holder to elect a net cash
settlement at date of redemption. This event is deemed to be
outside the control of the Company. These provisions require
that these instruments be bifurcated such that the embedded
conversion option is separated from the host contract, and
accounted for as a derivative liability in accordance with
Emerging Issues Task Force (EITF)
00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
The pricing model that the Company uses for determining fair
values of the embedded derivative is a Black-Scholes options
pricing model, which requires the input of highly subjective
assumptions. These assumptions include estimating the expected
volatility of our common stock, an appropriate risk-free
interest rate plus a credit spread and the fair value of the
underlying common stock. The expected volatility is calculated
based on stock volatilities for publicly traded companies in a
similar industry and general stage of development as the
Company. The risk-free interest rate is based on the
U.S. Treasury yield curve consistent with the expected life
of the preferred shares until the date of redemption. The
expected term of the conversion option is based upon the period
remaining until the redemption date of March 31, 2011.
Valuations derived from this model are subject to ongoing
internal and external verification and review. Separating an
embedded derivative from its host contract requires careful
analysis and judgment, and an understanding of the terms and
conditions of the instrument. Selection of inputs involves
managements judgment and may impact net income.
The embedded derivative is recorded at fair value and reported
in Preferred stock embedded derivative on the
Consolidated Statements of Financial Condition with change in
fair value recorded in the Companys Consolidated
Statements of Operations and Comprehensive Income. The losses on
the preferred stock embedded derivative amounted to $61,731,813
and $165,280,438 at December 31, 2006 and 2007,
respectively, and the gain on the embedded derivative amounted
to $181,781,568 at December 31, 2008.
The following summarizes the preferred stock conversion value by
preferred stock share class as of December 31 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Preferred stock series A
|
|
$
|
67,840
|
|
|
$
|
13,317
|
|
Preferred stock series B
|
|
|
86,083
|
|
|
|
38,634
|
|
Preferred stock series C
|
|
|
45,588
|
|
|
|
13,562
|
|
Preferred stock series D
|
|
|
65,055
|
|
|
|
14,902
|
|
Preferred stock series E
|
|
|
|
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
264,566
|
|
|
$
|
82,785
|
|
|
|
|
|
|
|
|
|
|
F-24
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Shareholders
Deficit
|
Common Stock At December 31, 2007, the
Company had authorized 23,000,000 shares of Common Stock
(Common Stock), of which 1,534,253 shares were
issued and outstanding. At December 31, 2008, the Company
had authorized 27,000,000 shares of Common Stock, with
1,304,029 shares issued and outstanding.
The net proceeds from the issuance of Series E Preferred
Stock were used to repurchase 914,572 shares of common
stock. Employees holding fully vested stock option awards were
able to convert a portion of their options to common stock,
subject to repurchase by the Company. Existing shareholders
received the same election. As a result of this election, there
were 66,530 restricted stock units converted into common stock
on a 1:1 ratio as of December 31, 2008.
|
|
11.
|
Related
Party Transactions
|
In 2005, the Group, LLC purchased a 20.36% interest in GCAM,
LLC. The investment of $3,574 was recorded using the equity
method of accounting. Accordingly, the investment in GCAM, LLC
was initially recorded at cost, and adjusted to recognize the
Group, LLCs share of the income or losses after the date
of acquisition. Group, LLC recorded $43,331 in a net loss for
the year ended December 31, 2006. In 2007, GAIN Capital
Holdings, Inc. acquired the remaining 79.64% interest in GCAM,
LLC as of January 1, 2007. Group, LLC subsequently
transferred its investment in GCAM, LLC to GAIN Capital
Holdings, Inc. The Company issued Restricted Stock Units in
exchange for the shares in GCAM, LLC owned by Mark Galant, the
Company founder and current Chairman of the Board, and Glenn
Stevens, the Companys CEO.
The Company recorded $944,889 in 2007 for the purchase of GCAM,
LLC based upon the fair market value of the restricted stock
units at the date of acquisition, with $850,788 allocated toward
the purchase price with the remainder recognized in expense as
the restricted stock units vest. Restricted units were
immediately unrestricted as per the term of the purchase
agreement, or they continue to unrestrict over 27 months.
The Company recorded $94,101 and $64,162 in stock compensation
expense after the date of acquisition in 2007 and 2008,
respectively, in Employee compensation and benefits on
the Consolidated Statements of Operations and Comprehensive
Income. The Company also recorded a liability for call options
of $1,770 in the Consolidated Statements of Financial Condition
as of December 31, 2007.
The RSU agreement relating to the purchase of GCAM, LLC in 2007
was revised effective January 1, 2008, so that the
restricted shares at January 1, 2008 unrestrict over
24 months and the call option was eliminated. The Company
recorded $64,162 in stock compensation expense in 2008 in
Employee compensation and benefits on the Consolidated
Statements of Operations and Comprehensive Income. The Company
fully reversed the liability for call options in Accrued
expenses and other liabilities on the Consolidated
Statements of Financial Condition as of December 31, 2008.
The Company owns 100% interest in GAIN Global Markets, Inc.
(GGMI) incorporated in the Cayman Islands. GGMI was
established in 2006 by Mark Galant and Glenn Stevens. In 2007,
Mr. Stevens maintained $1,200,000 of his personal funds on
deposit with GGMI. This was the required capital limit set by
the regulatory authority. Mr. Stevens received a return of
his $1,200,000 account balance and $41,442 in interest, and
transferred his ownership interest to the Company on
September 18, 2007.
On December 12, 2008, the Company completed the acquisition
of 51% of the outstanding shares of FORTUNE. The Company had a
receivable of $90,514 from the president of FORTUNE, which was
recorded in Other assets on their Statements of Financial
Condition as of December 31, 2008. The receivable balance
was repaid in January 2009.
The acquisition of GCSI included purchase terms requiring an
escrow balance for the last tranche of the purchase payment. The
balance due to the original owner of S.L. Bruce Financial
Corporation of $325,000 is included in Accrued expenses and
other liabilities on the Consolidated Statements of
Financial Condition.
F-25
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Management has personal funds on deposit in customer accounts of
Group, LLC, recorded in Payables to customers on the
Consolidated Statements of Financial Condition. The balance was
$1,100,000, and $1,218,906 at December 31, 2007, and 2008,
respectively, with $59,837, $31,680 and $13,327 of interest paid
for the years ended December 31, 2006, 2007 and 2008,
respectively.
Group, LLC entered into a services agreement with Scivantage,
Inc. on February 1, 2008 for a one year term with an option
to renew whereby Scivantage provided certain office workstations
and related services in Jersey City, New Jersey. The agreement
was later amended to add additional workstations and services
extending the term until December 31, 2009 for a fee of
$24,000 per month. Scivantage also provides hosting services to
GCSI under a master hosting services agreement entered into on
September 16, 2003 in which Scivantage provides the
technology infrastructure hosting facility for GCSI, who
provides brokerage securities services. Two of our board
members, Messrs. Galant and Sugden, are members of the
board of directors of Scivantage.
|
|
12.
|
Employee
Compensation Plans
|
Equity-Based Compensation Plans Employees
participate in compensation plans sponsored by GAIN Capital
Holdings, Inc. The 2006 Equity Compensation Plan (the
Plan) provides for the issuance of up to
4,750,000 shares of common stock for incentive stock
options (ISOs), nonqualified stock options
(NQSOs) and restricted stock units
(RSUs). ISOs, NQSOs and RSUs are granted with
exercise or conversion prices determined by the Board of
Directors.
Incentive Stock Options The Plan provides for
the issuance of ISOs and NQSOs that vest over three years, with
one-third vesting upon the grant anniversary date.
The following table summarizes ISO and NQSO activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding, January 1, 2008
|
|
|
2,172,599
|
|
|
$
|
3.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(617,818
|
)
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(682
|
)
|
|
|
7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
1,554,099
|
|
|
$
|
3.90
|
|
|
|
5.94
|
|
|
$
|
21,244,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest options
|
|
|
1,554,099
|
|
|
$
|
3.90
|
|
|
|
5.94
|
|
|
$
|
21,244,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2008
|
|
|
1,544,270
|
|
|
$
|
3.88
|
|
|
|
5.93
|
|
|
$
|
21,141,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value of common stock at exercise date
|
|
$
|
27,224,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost to exercise
|
|
|
1,839,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net value of ISOs and NQSOs exercised
|
|
$
|
25,384,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes ISOs and NQSOs outstanding and
exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISOs and NQSOs Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
ISOs and NQSOs
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Options
|
|
|
Average
|
|
Exercise Price
|
|
Number
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$0.85
|
|
|
18,275
|
|
|
$
|
0.01
|
|
|
|
0.02
|
|
|
|
18,275
|
|
|
$
|
0.01
|
|
$1.10
|
|
|
2,500
|
|
|
$
|
0.00
|
|
|
|
0.01
|
|
|
|
2,500
|
|
|
$
|
0.00
|
|
$1.75
|
|
|
208,813
|
|
|
$
|
0.24
|
|
|
|
0.59
|
|
|
|
208,813
|
|
|
$
|
0.24
|
|
$2.50
|
|
|
213,178
|
|
|
$
|
0.34
|
|
|
|
0.71
|
|
|
|
213,178
|
|
|
$
|
0.35
|
|
$3.50
|
|
|
187,356
|
|
|
$
|
0.42
|
|
|
|
0.72
|
|
|
|
187,356
|
|
|
$
|
0.42
|
|
$4.50
|
|
|
627,822
|
|
|
$
|
1.83
|
|
|
|
2.58
|
|
|
|
627,822
|
|
|
$
|
1.84
|
|
$5.50
|
|
|
268,072
|
|
|
$
|
0.95
|
|
|
|
1.19
|
|
|
|
268,072
|
|
|
$
|
0.95
|
|
$6.50
|
|
|
27,050
|
|
|
$
|
0.11
|
|
|
|
0.12
|
|
|
|
17,719
|
|
|
$
|
0.07
|
|
$7.50
|
|
|
683
|
|
|
$
|
0.00
|
|
|
|
0.00
|
|
|
|
351
|
|
|
$
|
0.00
|
|
$8.50
|
|
|
350
|
|
|
$
|
0.00
|
|
|
|
0.00
|
|
|
|
184
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554,099
|
|
|
$
|
3.90
|
|
|
|
5.94
|
|
|
|
1,544,270
|
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the status of the non-vested ISOs
and NQSOs shares as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2008
|
|
|
401,119
|
|
|
$
|
5.20
|
|
Vested
|
|
|
(390,792
|
)
|
|
$
|
5.06
|
|
Forfeited
|
|
|
(498
|
)
|
|
$
|
7.48
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
9,829
|
|
|
$
|
10.56
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life for the
1,554,099 outstanding options as of December 31, 2008, is
approximately 5.94 years. There are 1,544,270 ISOs and
NQSOs exercisable as of December 31, 2008.
The total intrinsic value of ISOs and NQSOs exercised during
2006, 2007 and 2008 respectively were $10,279,160, $323,869, and
$25,384,865. During 2008, the Company had 390,792 shares of
ISOs and NQSOs vest. The value of these vested options at date
of grant was $1,977,408 and at vesting date was $6,866,544. The
Company received $1,836,640, $69,667, and $1,686,299 from ISO
and NQSO exercises in 2006, 2007 and 2008, respectively.
No ISOs or NQSOs were granted in 2007 or 2008.
Based on managements estimate, the fair market value of
ISOs at the date of grant during the year ended
December 31, 2006 was $396,580.
F-27
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair market value of each option grant in prior years was
estimated based on a Black Scholes option pricing model using
the following assumptions as approved by the Compensation
Committee of the Companys Board of Directors.
|
|
|
|
|
|
|
For the Fiscal Year
|
|
|
Ended December 31,
|
|
|
2006
|
|
Average risk-free interest rate
|
|
|
4.67
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected life
|
|
|
5 years
|
|
Expected volatility
|
|
|
20
|
%
|
The expected volatility was calculated based upon the volatility
of public companies in similar industries or financial service
companies. The average risk free rate is based upon the five
year bond rate converted to a continuously compounded interest
rate.
The Company recorded stock-based compensation expense in
accordance with SFAS No. 123R of $84,974, $23,721 and
$54,541 for the years ended December 31, 2006, 2007 and
2008, respectively. The stock-based compensation expense is
recorded in Employee compensation and benefits on the
Consolidated Statements of Operations and Comprehensive Income.
Restricted Stock Units The Plan provides for
the issuance of RSUs that are convertible on a 1:1 basis into
shares of GAIN Capital Holdings, Inc.s common stock. GAIN
Capital Holdings, Inc. maintains a restricted unit account for
each grantee. Restrictions lapse over four years, with 25%
lapsing on each anniversary date of the grant. After the
restrictions lapse, the grantee shall receive payment in the
form of cash, shares of GAIN Capital Holdings, Inc.s
common stock, or in a combination of the two, as determined by
GAIN Capital Holdings, Inc., upon a change in control of GAIN
Capital Holdings, Inc. or the employee leaving the Company. GAIN
Capital Holdings, Inc. may also issue performance grants which
have restrictions lapsing immediately, but delivery of the
common stock deferred until a later date.
GAIN Capital Holdings, Inc. RSUs are assigned the value of the
common stock at date of grant issuance, and the cost is
amortized over a four year period. GAIN Capital Holdings, Inc.
issued 289,875 restricted units on December 31, 2006 and
295,750 restricted units in 2007, with 68,250 for the GCAM, LLC
acquisition and 227,500 for employee grants. GAIN Capital
Holdings, Inc. issued 211,850 restricted units to employees in
2008, with an additional 13,301 issued to board members that
unrestricted immediately.
The Company recorded $118,875, $1,633,671 and $4,437,243 in
stock-based compensation expense related to RSUs as of
December 31, 2006, 2007 and 2008, respectively. GAIN
Capital Holdings, Inc. recorded $94,101 and $64,162 in
stock-based compensation expense associated with the acquisition
of GCAM, LLC in Employee compensation and benefits on the
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2007 and 2008,
respectively.
F-28
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of RSU activity under the Plan as of December 31,
2008 and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Aggregate
|
|
|
|
|
Remaining Life
|
|
Intrinsic
|
|
|
Number of RSUs
|
|
(Years)
|
|
Value
|
|
Outstanding, January 1, 2008
|
|
|
570,063
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
225,151
|
|
|
|
|
|
|
|
|
|
Converted
|
|
|
(66,530
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
720,225
|
|
|
|
5.94
|
|
|
$
|
(6,132,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest RSUs
|
|
|
720,225
|
|
|
|
5.94
|
|
|
$
|
(6,132,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2008
|
|
|
228,553
|
|
|
|
5.94
|
|
|
$
|
(400,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of RSUs granted
during the years 2006, 2007 and 2008 was $15.85, $23.87, and
$38.85, respectively. There were no RSUs converted for the years
ended December 31, 2006 and 2007. There were 66,530 RSUs
converted to common stock for the year ended December 31,
2008.
A summary of the status of the non-vested RSUs of GAIN Capital
Holdings, Inc. as of December 31, 2008 and changes during
the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Grant Date
|
Non-Vested Shares
|
|
Number of RSUs
|
|
Fair Value
|
|
Non-vested at January 1, 2008
|
|
|
429,678
|
|
|
$
|
21.07
|
|
Granted
|
|
|
225,151
|
|
|
$
|
38.85
|
|
Vested
|
|
|
(154,698
|
)
|
|
$
|
20.17
|
|
Forfeited
|
|
|
(8,459
|
)
|
|
$
|
36.53
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
491,672
|
|
|
$
|
29.23
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 there was $11,382,380 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plan. The cost is
expected to be recognized over a weighted-average period of
approximately three years. Based on managements estimate,
the fair market value of RSUs vested during the years ended
December 31, 2006, 2007 and 2008 was $118,875, $2,238,849
and $3,121,032, respectively.
RSUs that were unrestricted as of December 31, 2008 had a
value at grant date of $4,415,696. The total value of these RSUs
was $4,015,676 at the date they became unrestricted.
Based on managements estimate, the fair market value of
RSUs at the date of grant during the years ended
December 31, 2006, 2007 and 2008 was $4,594,519,
$7,059,600, and $8,747,739, respectively.
F-29
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income tax expense consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(amounts in thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,056
|
|
|
$
|
17,827
|
|
|
$
|
27,775
|
|
State
|
|
|
1,729
|
|
|
|
5,326
|
|
|
|
8,059
|
|
Non U.S.
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,785
|
|
|
|
23,153
|
|
|
|
35,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
974
|
|
|
|
(1,203
|
)
|
|
|
(723
|
)
|
State
|
|
|
304
|
|
|
|
(335
|
)
|
|
|
(209
|
)
|
Non U.S.
|
|
|
|
|
|
|
|
|
|
|
284
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,278
|
|
|
|
(1,538
|
)
|
|
|
(932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
9,063
|
|
|
$
|
21,615
|
|
|
$
|
34,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences are
expected to reverse. Significant components of the
Companys deferred tax assets and liabilities at
December 31, 2007 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(amounts in thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
State taxes
|
|
$
|
66
|
|
|
$
|
|
|
Allowance for doubtful accounts
|
|
|
59
|
|
|
|
1,009
|
|
Deferred rent
|
|
|
78
|
|
|
|
43
|
|
Accrued expenses
|
|
|
852
|
|
|
|
62
|
|
Stock-based compensation expense
|
|
|
728
|
|
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
1,783
|
|
|
$
|
3,640
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Unrealized trading differences
|
|
$
|
(2,536
|
)
|
|
$
|
(3,466
|
)
|
Basis difference in property and equipment
|
|
|
(89
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(2,625
|
)
|
|
$
|
(3,550
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
(842
|
)
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
F-30
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles the provision to the
U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Federal income tax at statutory rate
|
|
|
(35.00
|
)%
|
|
|
(35.00
|
)%
|
|
|
35.00
|
%
|
Increase/(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax
|
|
|
1.84
|
%
|
|
|
2.87
|
%
|
|
|
1.91
|
%
|
Embedded derivative
|
|
|
53.49
|
%
|
|
|
51.24
|
%
|
|
|
(23.92
|
)%
|
ISOs and NQSOs
|
|
|
0.30
|
%
|
|
|
0.45
|
%
|
|
|
|
|
Foreign earnings
|
|
|
|
|
|
|
|
|
|
|
0.16
|
%
|
Meals & entertainment
|
|
|
0.08
|
%
|
|
|
0.10
|
%
|
|
|
0.03
|
%
|
Other permanent differences
|
|
|
1.73
|
%
|
|
|
(0.54
|
)%
|
|
|
(0.07
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
22.44
|
%
|
|
|
19.12
|
%
|
|
|
13.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has $1,141,386 in foreign net operating loss
(NOL) carryforwards as of December 31, 2008,
for which a full valuation allowance has been established. These
NOLs begin to expire in 2013.
No provision has been made for foreign taxes associated with the
cumulative undistributed earnings of foreign subsidiaries as of
December 31, 2008, as these earnings are expected to be
reinvested in working capital and other business needs
indefinitely. Upon repatriation of those earnings, in the form
of dividends or otherwise, the Company would be subject to
income taxes, subject to an adjustment for the participation
exemption and foreign tax credits. A determination of the amount
of the unrecognized deferred tax liability with respect to such
earnings is not practicable.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of
SFAS No. 109, Accounting for Income Taxes,
FIN 48 provides measurement and recognition guidance
related to accounting for uncertainty in income taxes by
prescribing a recognition threshold for tax positions.
FIN 48 also requires extensive disclosures about
uncertainties in the income tax positions taken.
Effective January 1, 2007, the Company adopted the
provisions of FIN 48, which the Company determined had no
material impact to its financial statements. The Companys
open tax years for its federal returns range from 2007 through
2008 and from 2006 through 2008 for its major state
jurisdictions.
|
|
14.
|
Commitments
and Contingencies
|
Leases The Company leases office space under
non-cancelable operating lease agreements that expire on various
dates through 2011. Future annual minimum lease payments,
including maintenance and management fees, for non-cancellable
operating leases, are as follows (amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2009
|
|
$
|
1,567
|
|
2010
|
|
|
433
|
|
2011
|
|
|
14
|
|
|
|
|
|
|
|
|
$
|
2,014
|
|
|
|
|
|
|
Rent expense was $828,298, $1,217,613 and $1,408,296 for the
years ended December 31, 2006, 2007 and 2008, respectively.
Litigation Refco Inc. filed for bankruptcy on
October 17, 2005. The Refco Trustee (RCM) filed
a court motion on February 13, 2007 to recover a payment
made to the Company in 2005, alleging that such payment
constituted a Preferential Transfer. The Company
received a return of a deposit in October 2005 in the amount of
F-31
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2,279,391 and contested the petition. The Company fully
reserved for the $2,279,391 as of December 31, 2006 in
Accrued expenses and other liabilities on the
Consolidated Statements of Financial Condition.
The Company settled with and issued payment to RCM on
November 7, 2007 in the amount of $800,000. The difference
between the settlement amount of $800,000 and the reserve of
$2,279,391 as of December 31, 2006 resulted in income of
$1,479,391 for the year ended December 31, 2007. The
Company also recovered $40,484 from RCM related to a proprietary
account balance held with Refco at the time of their bankruptcy.
The loss of $40,484 was charged to Bad debt provision in
2005 on the Consolidated Statements of Operations and
Comprehensive Income, and the subsequent recovery in 2007 was
recorded as a credit to Bad debt provision.
The Company has no material litigation pending as of
December 31, 2008.
The Company sponsors a 401k retirement plan. Substantially all
of the Companys employees are eligible to participate in
the plan. Pursuant to the provisions of the plan, the Company is
obligated to match 25% of the employees contribution to
the plan up to 15% of the employees compensation for each
payroll period. The Company matches 50% for employees with three
years or more of service.
In January 2008, the Company added a 401k/Profit sharing plan
which was made available to eligible employees and added a Roth
401k option to the plan. As of December 31, 2008, the
401k/Profit sharing plan was merged into the original 401k
retirement plan. The expense recorded to employee compensation
and benefits on the Consolidated Statements of Operations and
Comprehensive Income by the Company for its employees
participation in the plan during the years ended
December 31, 2006, 2007 and 2008 was $115,529, $239,985 and
$577,675, respectively.
|
|
16.
|
Earnings
per Common Share
|
Basic and diluted earnings per common share is computed by
dividing net income by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
includes the determinants of basic net income/(loss) per share
and, in addition, gives effect to the potential dilution that
would occur if securities or other contracts to issue common
stock are exercised, vested or converted into common stock
unless they are anti-dilutive. Diluted weighted average common
shares includes preferred stock, warrants, vested and unvested
stock options and unvested restricted stock units. For the years
ended December 31, 2006 and 2007, the diluted loss per
share excluded the impact of the conversion of all preferred
stock, warrants, stock options and restricted stock units since
their effect would be anti-dilutive. No stock options or
restricted stock units were excluded from the calculation of
diluted earnings per share for the years ended 2006, 2007 and
2008.
F-32
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(amounts in thousands, except share and per share data)
|
|
|
Net income/(loss)
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
Effect of redemption of preferred shares
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
(63,913
|
)
|
Effect of preferred share accretion
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series A
|
|
|
|
|
|
|
|
|
|
|
899,666
|
|
Preferred stock series B
|
|
|
|
|
|
|
|
|
|
|
2,610,254
|
|
Preferred stock series C
|
|
|
|
|
|
|
|
|
|
|
1,361,768
|
|
Preferred stock series D
|
|
|
|
|
|
|
|
|
|
|
3,254,678
|
|
Preferred stock series E
|
|
|
|
|
|
|
|
|
|
|
2,540,251
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
1,408,725
|
|
ISOs and NQSOs
|
|
|
|
|
|
|
|
|
|
|
1,380,283
|
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
259,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following common stock equivalents were excluded from the
calculation of diluted net loss per share since the effects are
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Number of potential shares that are anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
9,614,037
|
|
|
|
9,467,741
|
|
|
|
|
|
Warrants
|
|
|
1,412,191
|
|
|
|
1,484,670
|
|
|
|
|
|
ISOs and NQSOs
|
|
|
1,824,889
|
|
|
|
1,892,604
|
|
|
|
|
|
RSUs
|
|
|
|
|
|
|
169,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,851,117
|
|
|
|
13,014,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Regulatory
Requirements
|
As a registered futures commission merchant and forex dealer
member, GAIN Capital Group, LLC is subject to the net capital
requirements of Rule 1.17 (the Rule) under the
Commodity Exchange Act (the Act) and capital
requirements of the CFTC and NFA. Under the Rule, the minimum
required net capital, as defined, shall be the greater of
$10,000,000 or 5% of the total payables to customers, brokers,
dealers, FCMs and other regulated entities. The Company
was compliant with the regulations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(amounts in thousands)
|
|
|
GAIN Capital Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital
|
|
$
|
19,326
|
|
|
$
|
53,954
|
|
|
$
|
114,978
|
|
Adjusted net capital
|
|
$
|
18,086
|
|
|
$
|
49,604
|
|
|
$
|
107,726
|
|
Excess adjusted net capital
|
|
$
|
15,296
|
|
|
$
|
44,148
|
|
|
$
|
97,726
|
|
CIMA Schedule 1 requirements provide that the
Companys Cayman Island subsidiary, GAIN Global Markets,
Inc. (GGMI) must maintain a capital level that is
the greater of one quarter of relevant annual expenditure, or
$100,000. A licensee must at all times maintain financial
resources in excess of its financial resources requirement. GGMI
was compliant with CIMA regulations and required capital levels
at December 31, 2008.
GCSI is a broker-dealer registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
GCSI is a member of the Financial Industry Regulatory Authority
(FINRA), Municipal Securities Rulemaking Board
(MSRB), and Securities Investor Protection
Corporation (SIPC). GCSI is required to maintain a
minimum net capital balance (as defined) of $50,000, pursuant to
the SECs Uniform Net Capital
Rule 15c3-1.
GCSIs net capital balance was $378,732 at
December 31, 2008. GCSI must also maintain a ratio of
aggregate indebtedness (as defined) to net capital of not more
than 15 to 1. Their ratio was .61 to 1 at December 31, 2008.
GCUK is authorized and regulated by the Financial Services
Authority (FSA). At December 31, 2008, GCUK had
£200,000, or $291,800 of share capital. The share capital
held was in excess of the FSAs £50,000, or $72,950
regulatory minimum. Following a review of its Internal Capital
Adequacy Assessment Policy, GCUK deemed its capital level to be
adequate.
FORTUNE became a registered financial futures business firm
under the Foreign Exchange and Foreign Trade Law
(FFTL) as of March 17, 2006. After the
Financial Instruments and Exchange Law (FIEL) came
into effect on September 30, 2007, upon which FFTL was
repealed, the registered financial futures business firm under
the FFTL was deemed to be registered as an FFIB Firm under the
FIEL (Article 60, Paragraph 1 of the Law concerning
the Adjustment of Related Laws in accordance with the
Enforcement of the Law for Amendment of Part of the Securities
and Exchange Law, et al. (Shouken Torihiki Hou-tou Kaisei Kankei
Houritsu Seibi Hou; Law No. 66 of 2006).
FORTUNE received the Financial & Futures license from
Financial Services Agency of Japan in accordance to Japanese
Financial Futures regulation law No. 56th. It is a member
of the Financial Futures Association of Japan. FORTUNE is
subject to a minimum capital adequacy ratio of 140%. This
calculation is derived by dividing Net Capital divided by the
sum of FORTUNEs market, counterparty credit risk, and
operational risk. FORTUNE was compliant with regulations and
required capital levels at December 31, 2008.
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an
F-34
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The
Companys operations relate to foreign exchange trading and
related services. Based on the Companys management
strategies, and common production, marketing, development and
client coverage teams, the Company assesses that it operates in
a single operating segment.
For fiscal years ended December 31, 2006, 2007 and 2008, no
single customer accounted for more than 10% of the
Companys trading revenue. The Company does not allocate
revenues by geographic regions since the Company selectively
hedges customer trades on an aggregate basis and does not have a
method to systematically attribute trading volume from a
geographic region to associated trading revenue from a
particular geographic region.
|
|
19.
|
Closure
of Shanghai Company
|
Group, LLC incorporated Jia Shen Forex Software Development
Technology, LLC (Jia Shen) in Shanghai, China, and
commenced operations on January 1, 2007. Upon registration
of Jia Shen with the Shanghai Jin An District government, Group,
LLC funded registration capital of $800,000.
When the Company, through Group, LLC, commenced offering its
forex trading services through its Chinese language website to
residents of China in October 2003, the Company believed that
its operations were in compliance with applicable Chinese
regulations. However, as a result of the Companys review
of its regulatory compliance in China, in May 2008 the Company
became aware of a China Banking and Regulatory Commission (CBRC)
prohibition on forex trading firms providing retail forex
trading services to Chinese residents through the Internet
without a CBRC permit. The Company does not have such a permit
and to the Companys knowledge, no such permit exists. As a
result of this regulatory uncertainty, the Company decided to
terminate all service offerings to residents of China and ceased
its trading support operations located in that country. The
Company also became aware that the CBRC may, at a future date,
issue regulations by which certain institutions will be allowed
to engage in retail forex trading services. There is no
assurance as to when these clarifying regulations will be issued
or, if issued, whether the Company will be able to offer its
trading services to Chinese residents under such regulations. As
a result, as of December 31, 2008 the Company no longer
accepts new customers or maintains direct customer accounts from
residents of China. However, a small number of existing customer
accounts, which were originally opened through the
Companys relationship with one of its white label partners
prior to the termination of its service offering in China,
continued to trade using the Companys platform. The
trading activity by these residual accounts resulted in an
immaterial amount of trading volume to the Company. The Company
expects this volume to continue to be insignificant because the
Company no longer accepts accounts from China through this white
label partner and anticipate that existing activity will
decrease. The Company will continue to monitor the regulatory
environment in China and, when possible, will seek to obtain the
necessary permits, licenses or approvals from the applicable
Chinese regulators, or to partner with a firm with such
approval, to resume the Companys retail forex trading
services in China.
Jia Shen reduced its work force in 2008 and expects to formally
file for closure with Chinese authorities by July 2009. The
Shanghai lease expires in 2009 and there were no vendor contract
termination costs.
GCUK applied for Variation of Permission approval from the FSA
to alter their registration status to deal in investments as a
principal. GCUK could act as an introducing broker to Group,
LLC, but the registration change allows GCUK to act as a
counterparty to customer trades and accept and control customer
funds in the UK. The variance permission, as approved on
April 20, 2009, permits GCUK to also trade in metals and
contracts for difference (CFDs), which cannot
currently be offered in the U.S. This expands the
Companys product offerings to UK customers.
******
F-35
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF
SEPTEMBER 30, 2009 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 AND 2009
(UNAUDITED)
F-36
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION
|
|
|
|
|
|
|
As of September 30,
2009
|
|
|
|
(in thousands, except share
|
|
|
|
and per share data)
|
|
|
|
(unaudited)
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
197,938
|
|
Receivables from brokers
|
|
|
100,171
|
|
Property and equipment (net of accumulated
depreciation and amortization of $6,635)
|
|
|
4,421
|
|
Prepaid assets
|
|
|
1,932
|
|
Deferred financing costs
|
|
|
248
|
|
Deferred initial public offering costs
|
|
|
1,108
|
|
Goodwill
|
|
|
3,092
|
|
Intangible assets
|
|
|
320
|
|
Other assets (net of allowance for doubtful accounts
of $1,833)
|
|
|
6,480
|
|
|
|
|
|
|
Total
|
|
$
|
315,710
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
Liabilities
|
|
|
|
|
Payables to brokers, dealers, FCMs and other regulated
entities
|
|
$
|
1,732
|
|
Payables to customers
|
|
|
168,266
|
|
Accrued compensation and benefits
|
|
|
3,192
|
|
Accrued expenses and other liabilities
|
|
|
6,108
|
|
Deferred taxes
|
|
|
749
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
123,604
|
|
Notes payable
|
|
|
31,500
|
|
|
|
|
|
|
Total liabilities
|
|
|
335,151
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 13)
|
|
|
|
|
Convertible, Redeemable Preferred Stock
|
|
|
|
|
Series A Convertible, Redeemable Preferred Stock;
($0.00001 par value; 4,545,455 shares authorized and
865,154 shares issued and outstanding)
|
|
|
2,009
|
|
Series B Convertible, Redeemable Preferred Stock;
($0.00001 par value; 7,000,000 shares authorized and
2,610,210 shares issued and outstanding)
|
|
|
5,412
|
|
Series C Convertible, Redeemable Preferred Stock;
($0.00001 par value; 2,496,879 shares authorized and
1,055,739 shares issued and outstanding)
|
|
|
5,319
|
|
Series D Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,254,678 shares authorized,
issued and outstanding)
|
|
|
39,840
|
|
Series E Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,738,688 shares authorized and
2,611,606 shares issued and outstanding)
|
|
|
116,810
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
169,390
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
Gain Capital Holdings, Inc. Shareholders Deficit
|
|
|
|
|
Common Stock; ($0.00001 par value; 27,000,000 shares
authorized and 1,309,052 issued and outstanding)
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
484
|
|
Additional paid-in capital
|
|
|
(179,516
|
)
|
Accumulated deficit
|
|
|
(10,318
|
)
|
|
|
|
|
|
Total Gain Capital Holdings, Inc. shareholders
deficit
|
|
|
(189,343
|
)
|
|
|
|
|
|
Noncontrolling interest
|
|
|
519
|
|
|
|
|
|
|
Total deficit
|
|
|
(188,831
|
)
|
|
|
|
|
|
Total
|
|
$
|
315,710
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-37
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except share and per share data)
|
|
|
|
(unaudited)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
129,331
|
|
|
$
|
113,797
|
|
Other revenue
|
|
|
1,984
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
131,315
|
|
|
|
115,451
|
|
Interest revenue
|
|
|
3,180
|
|
|
|
228
|
|
Interest expense
|
|
|
(980
|
)
|
|
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
2,200
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
133,515
|
|
|
|
115,125
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
27,453
|
|
|
|
29,621
|
|
Selling and marketing
|
|
|
21,975
|
|
|
|
26,791
|
|
Trading expenses and commissions
|
|
|
12,992
|
|
|
|
10,431
|
|
Interest expense on notes payable
|
|
|
2,177
|
|
|
|
1,294
|
|
Bank fees
|
|
|
2,595
|
|
|
|
3,415
|
|
Depreciation and amortization
|
|
|
1,897
|
|
|
|
2,013
|
|
Communications and data processing
|
|
|
1,681
|
|
|
|
1,950
|
|
Occupancy and equipment
|
|
|
1,715
|
|
|
|
2,391
|
|
Bad debt provision/(recovery)
|
|
|
1,289
|
|
|
|
593
|
|
Professional fees
|
|
|
1,981
|
|
|
|
2,549
|
|
Software expense
|
|
|
541
|
|
|
|
712
|
|
Professional dues and memberships
|
|
|
566
|
|
|
|
565
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
Other
|
|
|
1,041
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(92,376
|
)
|
|
|
124,236
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN
EARNINGS OF EQUITY METHOD INVESTMENT
|
|
|
225,891
|
|
|
|
(9,111
|
)
|
Income tax expense
|
|
|
24,040
|
|
|
|
11,423
|
|
Equity in earnings of equity method investment
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
201,771
|
|
|
|
(20,534
|
)
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS,
INC.
|
|
|
201,771
|
|
|
|
(20,519
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
11
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME/(LOSS)
|
|
|
201,782
|
|
|
|
(20,037
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss applicable to noncontrolling interest, net of
tax
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL
HOLDINGS, INC.
|
|
$
|
201,782
|
|
|
$
|
(20,048
|
)
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
$
|
(63,913
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
137,858
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
107.06
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
9.18
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,287,650
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
15,019,396
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-38
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deficit)/
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
|
|
(in thousands, except share data)
|
|
|
BALANCE January 1, 2009
|
|
|
1,304,029
|
|
|
$
|
|
|
|
$
|
(182,891
|
)
|
|
$
|
10,201
|
|
|
$
|
21
|
|
|
$
|
515
|
|
|
$
|
(172,154
|
)
|
Exercise of options
|
|
|
2,508
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Conversion of RSUs into common stock
|
|
|
2,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,372
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
19
|
|
|
|
482
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,519
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
(20,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE September 30, 2009
|
|
|
1,309,052
|
|
|
$
|
|
|
|
$
|
(179,516
|
)
|
|
$
|
(10,318
|
)
|
|
$
|
484
|
|
|
$
|
519
|
|
|
$
|
(188,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-39
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands) (unaudited)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
201,771
|
|
|
$
|
(20,534
|
)
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange transactions liquidity
providers and customers
|
|
|
(11,822
|
)
|
|
|
(11,522
|
)
|
Gain on foreign currency exchange rates
|
|
|
15
|
|
|
|
(49
|
)
|
Depreciation and amortization
|
|
|
1,897
|
|
|
|
2,013
|
|
Deferred taxes
|
|
|
5,153
|
|
|
|
838
|
|
Amortization of deferred financing costs
|
|
|
67
|
|
|
|
65
|
|
Bad debt provision/(recovery)
|
|
|
1,289
|
|
|
|
593
|
|
Loss in earnings of equity method investment
|
|
|
80
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
258
|
|
Stock compensation expense
|
|
|
2,920
|
|
|
|
3,372
|
|
Tax benefit from employee stock option exercises
|
|
|
(10,709
|
)
|
|
|
|
|
Change in fair value of preferred stock embedded derivative
|
|
|
(170,279
|
)
|
|
|
40,820
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables from brokers
|
|
|
(25,922
|
)
|
|
|
(20,815
|
)
|
Prepaid assets
|
|
|
(532
|
)
|
|
|
(299
|
)
|
Other assets
|
|
|
1,341
|
|
|
|
(5,444
|
)
|
Payables to customers
|
|
|
63,951
|
|
|
|
53,421
|
|
Accrued compensation and benefits
|
|
|
313
|
|
|
|
(2,091
|
)
|
Payables to brokers, dealers, FCMs and other regulated
entities
|
|
|
(603
|
)
|
|
|
53
|
|
Accrued expenses and other liabilities
|
|
|
1,017
|
|
|
|
7,056
|
|
Income tax payable
|
|
|
(8,742
|
)
|
|
|
(10,538
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
51,205
|
|
|
|
37,197
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,260
|
)
|
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(2,260
|
)
|
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Initial public offering related costs
|
|
|
(1,877
|
)
|
|
|
(701
|
)
|
Issuance of Series E preferred shares
|
|
|
117,000
|
|
|
|
|
|
Series E issuance costs
|
|
|
(190
|
)
|
|
|
|
|
Payment on notes payable
|
|
|
(7,875
|
)
|
|
|
(7,875
|
)
|
Proceeds from exercise of stock options
|
|
|
1,581
|
|
|
|
3
|
|
Proceeds from exercise of warrants
|
|
|
97
|
|
|
|
|
|
Tax benefit from employee stock option exercises
|
|
|
10,709
|
|
|
|
|
|
Repurchase of warrants
|
|
|
(3,945
|
)
|
|
|
|
|
Repurchase of common shares
|
|
|
(40,752
|
)
|
|
|
|
|
Repurchase of preferred shares
|
|
|
(62,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
12,705
|
|
|
|
(8,573
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(349
|
)
|
|
|
(4,369
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
61,301
|
|
|
|
21,507
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
98,894
|
|
|
|
176,431
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
160,195
|
|
|
$
|
197,938
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,711
|
|
|
$
|
1,824
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
20,731
|
|
|
$
|
23,950
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets in accrued expenses and other
liabilities
|
|
$
|
103
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
|
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-40
|
|
1.
|
Significant
Accounting Policies
|
The Companys significant accounting policies as of
September 30, 2009 are similar to those at
December 31, 2008, which are included elsewhere in the
prospectus.
Unaudited Interim Financial Statements The
accompanying interim condensed consolidated statement of
financial condition as of September 30, 2009, the condensed
consolidated statements of operations and comprehensive
income/(loss) for the nine months ended September 30, 2008
and 2009, the condensed consolidated statements of
shareholders deficit for the nine months ended
September 30, 2008 and 2009, and the condensed consolidated
statements of cash flows for the nine months ended
September 30, 2008 and 2009 are unaudited and have been
prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. The unaudited interim
condensed consolidated financial statements have been prepared
on the same basis as the audited consolidated financial
statements and, in the opinion of management, reflect all
adjustments consisting of normal recurring accruals considered
necessary to present fairly the Companys financial
position as of September 30, 2009 and results of its
operations for the nine months ended September 30, 2008 and
2009, and cash flows for the nine months ended
September 30, 2008 and 2009. The results of operations for
the nine months ended September 30, 2009 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2009. These unaudited interim
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
and accompanying notes for the years ended December 31,
2006, 2007 and 2008 included elsewhere in this prospectus.
Foreign Currencies The Company has determined
that its functional currency is U.S. dollars
(USD). Realized foreign currency transaction gains
and losses are recorded in Trading revenue on the
Condensed Consolidated Statements of Operations and
Comprehensive Income during the year at the exchange rate on the
date of the transaction. Unrealized foreign currency transaction
gains and losses are computed using the closing rate of exchange
prevailing at the date of the Condensed Consolidated Statement
of Financial Condition. Gains and losses arising from these
transactions are also recorded in Trading revenue on the
Condensed Consolidated Statements of Operations and
Comprehensive Income.
In accordance with the Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC) 830, Foreign Currency Matters (Prior
authoritative literature: Statement of Financial Accounting
Standards SFAS No. 52, Foreign Currency
Translation), monetary assets and liabilities denominated in
foreign currencies are converted into USD at rates of exchange
in effect at the date of the Condensed Consolidated Statements
of Financial Condition. The Company recorded foreign currency
transaction gains and losses in Other revenue on the
Condensed Consolidated Statements of Operations and
Comprehensive Income/(Loss). The Company recorded a loss of
$15,088 and a gain of $48,764 for the nine months ended
September 30, 2008 and 2009, respectively.
Allowance for Doubtful Accounts The Company
records an increase in the allowance for doubtful accounts when
the prospect of collecting a specific account balance becomes
doubtful. Management specifically analyzes accounts receivable
and historical bad debt experience when evaluating the adequacy
of the allowance for doubtful accounts. Should any of these
factors change, the estimates made by management will also
change, which could affect the level of our future provision for
doubtful accounts. The allowance for doubtful accounts is
included in Other assets on the Condensed Consolidated
Statement of Financial Condition.
F-41
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
The allowance for doubtful accounts consisted of the following
(amounts in thousands):
|
|
|
|
|
Balance as of January 1, 2008
|
|
$
|
(1,129
|
)
|
Addition to provision
|
|
|
(372
|
)
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
(1,501
|
)
|
Addition to provision
|
|
|
(1,046
|
)
|
Amounts written off
|
|
|
334
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
(2,213
|
)
|
Addition to provision
|
|
|
(828
|
)
|
Recovery
|
|
|
242
|
|
Amounts written off
|
|
|
966
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
$
|
(1,833
|
)
|
|
|
|
|
|
Noncontrolling Interest Noncontrolling
interest represents the portion of the Companys operating
profit that is attributable to the ownership interest of the
noncontrolling interest owner in FORTUNE as of
September 30, 2009.
Income Taxes Income tax expense is provided
for using the asset and liability method, under which deferred
tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income
tax bases of assets and liabilities using currently enacted tax
rates.
Convertible, Redeemable Preferred Stock Embedded
Derivative FASB ASC 815, Derivatives and
Hedging (Prior authoritative literature:
SFAS No. 133, Accounting for Derivatives and
Hedging), establishes accounting and reporting standards for
derivative instruments. The Company has determined that it must
bifurcate and account for the conversion feature in its
Series A, Series B, Series C, Series D, and
Series E preferred stock. The embedded derivative is
recorded at fair value and changes in the fair value are
reflected in earnings.
Deferred Initial Public Offering Costs
Specific incremental costs directly associated with the
Companys initial public offering (IPO),
primarily legal, accounting and printing costs, were deferred
and reflected as an asset until reclassification to
shareholders deficit upon closing of the IPO in 2009.
Recent Accounting Pronouncements On
June 30, 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles (the
Codification). SFAS 168 replaces SFAS 162 and
establishes the Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements, as required by ASC 105, U.S. Generally Accepted
Accounting Principles (GAAP). The Codification is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of
this pronouncement by the Company in the third quarter of 2009
did not have a material impact on the financial statements and
references to both current GAAP and the Codification are
included in this filing.
In June 2009, the FASB issued FASB ASC 810, Consolidation
(SFAS No. 167) Amendments to
FASB Interpretation No. 46R. SFAS No. 167
amends FASB Interpretation No. 46, as revised
(FIN 46R), Consolidation of Variable
Interest Entities and changes how a reporting entity
determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a reporting entity is
required to consolidate another entity is based on, among other
things, the other entitys purpose and design and the
reporting entitys ability to direct the activities of the
other entity that most significantly impact the other
entitys economic performance. SFAS No. 167 will
be effective for the Company
F-42
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
on January 1, 2010. The Company is currently evaluating the
impact of adoption of SFAS No. 167 will have on its
financial statements.
In May 2009, the FASB issued FASB ASC 855, Subsequent Events
(SFAS No. 165) . SFAS 165 is
intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to
be issued. SFAS 165 is effective for interim or annual
financial periods ending after June 15, 2009. The Company
adopted SFAS No. 165 in the second quarter of 2009.
The adoption of SFAS No. 165 did not have a material
impact on the Companys condensed consolidated financial
statements.
In March 2008, the FASB issued FASB ASC 815, Derivatives and
Hedging (SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities).
SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and requires
entities to provide enhanced 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. The Company
adopted SFAS No. 161 in the first quarter of 2009. The
adoption of SFAS No. 161 did not have a material
impact on the Companys condensed consolidated financial
statements.
On December 4, 2007, the FASB issued FASB ASC
810-10-65
(SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements). SFAS 160
clarifies that a noncontrolling or minority interest in a
subsidiary is considered an ownership interest and accordingly,
requires all entities to report such interests in subsidiaries
as equity in the consolidated financial statements.
SFAS 160 is effective for fiscal years beginning after
December 15, 2008 and early adoption is prohibited.
SFAS No. 160 is required to be adopted prospectively,
with the exception of certain presentation and disclosure
requirements (e.g., reclassifying noncontrolling interests to
appear in equity), which are required to be adopted
retrospectively. The Company adopted SFAS No. 160 in
the first quarter of 2009. The adoption of this pronouncement
did not have a material impact on the Companys condensed
consolidated financial statements.
In September 2006, the FASB issued FASB ASC 820, Fair Value
Measurements and Disclosures
(SFAS No. 157, Fair Value
Measurements). This statement establishes, among other
things, a framework for measuring fair value and expands
disclosure requirements as they relate to fair value
measurements. The statement is effective at the beginning of an
entitys first fiscal year that begins after
November 15, 2007.
FASB ASC 820 establishes a hierarchy for information and
valuations used in measuring fair value, which is broken down
into three levels. Level 1 valuations are based on quoted
prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs, other than quoted
prices included within Level 1, that are observable, either
directly or indirectly. Level 3 valuations are based on
information that is unobservable and significant to the overall
fair value measurement. A financial instruments level
within the fair value hierarchy is based on the lowest level of
input significant to the fair value measurement where
Level 1 is the highest and Level 3 is the lowest. The
implementation of SFAS No. 157 did not result in a
material change to the Consolidated Statements of Financial
Condition.
In October 2008, the FASB issued FASB ASC
820-10-65-2
(FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active). FSP
SFAS 157-3
clarifies the application of SFAS No. 157, Fair
Value Measurements, in a market that is not active and
provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active. FSP
SFAS 157-3
is effective upon issuance, including for prior periods for
which financial statements have not been
F-43
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
issued. The adoption of FSP
SFAS No. 157-3
did not have a material effect on the Companys
consolidated financial statements.
In April 2009, the FASB issued FASB ASC
820-10-65-4
(FSP
SFAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly). FSP
SFAS 157-4
provides additional application guidance in determining fair
values when there is no active market or where the price inputs
being used represent distressed sales. Specifically, it
reaffirms the need to use judgment to ascertain if a formerly
active market has become inactive and in determining fair values
when markets have become inactive. FSP
SFAS 157-4
shall be effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied
prospectively. The adoption of FSP
SFAS No. 157-4
did not have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued FASB ASC
805-10
(SFAS No. 141R, Business
Combinations). SFAS 141R requires the acquiring entity
in a business combination to recognize the full fair value of
assets acquired and liabilities assumed in the transaction
(whether a full or partial acquisition); establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; requires expensing of
most transaction and restructuring costs; and requires the
acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and
financial effect of the business combination.
SFAS No. 141R applies to all transactions or other
events in which the Company obtains control of one or more
businesses, including those sometimes referred to as true
mergers or mergers of equals and combinations
achieved without the transfer of consideration, for example, by
contract alone or through the lapse of minority veto rights.
FASB ASC
805-10
applies prospectively to business combinations for which the
acquisition date is on or after December 15, 2008. The
adoption of FASB ASC
805-10 will
impact the accounting for business combinations once adopted but
the impact on accounting for business combinations in the future
cannot currently be determined.
|
|
2.
|
Fair
Value Disclosures
|
The following table presents the Companys assets and
liabilities that are measured at fair value and the related
hierarchy levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of September 30, 2009
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting(1)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from brokers
|
|
$
|
(147,200
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
194,454
|
|
|
$
|
47,254
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
123,604,432
|
|
|
$
|
|
|
|
$
|
123,604,432
|
|
|
|
|
(1)
|
|
Represents cash collateral netting.
|
Level 1
financial assets
The Company has futures contracts that are Level 1
financial instruments. The futures contracts are recorded in
Receivables from brokers at fair value.
F-44
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
Level 3
financial assets
The Company measures the fair value of the embedded derivative
through the use of unobservable inputs which include estimations
for the expected volatility of common stock, an appropriate
risk-free interest rate plus a credit spread and the fair value
of the common stock. See Note 9 for additional information.
The table below provides a reconciliation of the fair value of
the embedded derivative measured on a recurring basis for which
the Company used Level 3 for the year ended
September 30, 2009:
|
|
|
|
|
Beginning January 1, 2009
|
|
$
|
82,784,841
|
|
Unrealized loss included in change in fair value of convertible,
redeemable preferred stock embedded derivative
|
|
$
|
40,819,591
|
|
Transfers in/out of Level 3
|
|
$
|
|
|
Balance at September 30, 2009
|
|
$
|
123,604,432
|
|
|
|
3.
|
Receivables
from Brokers
|
Amounts receivable from brokers consisted of the following as of
(amounts in thousands):
|
|
|
|
|
|
|
September 30,
2009
|
|
|
Required collateral
|
|
$
|
18,097
|
|
Cash in excess of required collateral
|
|
|
82,692
|
|
Open foreign exchange positions
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
$
|
100,171
|
|
|
|
|
|
|
The Company has posted funds with brokers as collateral as
required by agreements for holding spot foreign exchange
positions. In addition, the Company has cash in excess of
required collateral, which includes the value of futures
contracts recorded based upon listed or quoted market rates that
approximate fair value. Open foreign exchange positions include
the unrealized gains or losses due to the differences in
exchange rates between the dates at which a trade was initiated
versus the exchange rates in effect at the date of the
consolidated financial statements. These amounts are reflected
as Receivables from brokers in the Consolidated
Statements of Financial Condition.
F-45
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
|
|
4.
|
Property
and Equipment
|
Property and equipment, including leasehold improvements and
capitalized software development costs, consisted of the
following as of (amounts in thousands):
|
|
|
|
|
|
|
September 30,
2009
|
|
|
Software
|
|
$
|
7,398
|
|
Computer equipment
|
|
|
2,735
|
|
Leasehold improvements
|
|
|
281
|
|
Office equipment
|
|
|
200
|
|
Telephone equipment
|
|
|
175
|
|
Furniture and fixtures
|
|
|
172
|
|
Web site development costs
|
|
|
95
|
|
|
|
|
|
|
|
|
|
11,056
|
|
Less: Accumulated depreciation and amortization
|
|
|
(6,635
|
)
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,421
|
|
|
|
|
|
|
Depreciation expense was $1,693,765 and $2,012,831 for the nine
months ended September 30, 2008 and 2009, respectively.
The Company acquired the foreignexchange.com domain name for
$100,000 in January 2004, and the Forex.com domain name for
$220,000 in December 2002. The Company acquired a marketing list
in November 2006 for $773,885 that was amortized over its useful
life, with an amortization period of 18 months. The Company
recognized $202,961 in amortization expense for the nine months
ended September 30, 2008. The marketing list was fully
amortized as of September 30, 2008. In accordance with FASB
ASC 350 (Prior authoritative literature:
SFAS No. 142), the Company tests goodwill for
impairment on an annual basis in the fourth quarter and on an
interim basis when conditions indicate impairment has occurred.
Goodwill is calculated as the difference between the cost of
acquisition and the fair value of the net assets of an acquired
business. FORTUNE was renamed GAIN Capital Japan Co., Ltd
(GC Japan) on July 1, 2009. Goodwill consists
of the following as of (amounts in thousands):
|
|
|
|
|
|
|
September 30,
2009
|
|
|
GC Japan (formerly FORTUNE)
|
|
$
|
1,278
|
|
GCAM, LLC
|
|
|
1,078
|
|
Gain Capital Securities, Inc. (formerly S.L. Bruce Financial
Corp.)
|
|
|
533
|
|
Gain Capital Forex.com UK, Ltd (formerly RCGGL)
|
|
|
203
|
|
|
|
|
|
|
|
|
$
|
3,092
|
|
|
|
|
|
|
No goodwill impairment was recorded for the nine months ended
September 30, 2008 and 2009. In accordance with FASB ASC
350 Intangibles-Goodwill and Other (Prior authoritative
literature: SFAS No. 142), the Company
F-46
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
tests goodwill for impairment on an annual basis in the fourth
quarter and on an interim basis when conditions indicate
impairment has occurred.
Other assets consisted of the following (amounts in
thousands):
|
|
|
|
|
|
|
September 30,
2009
|
|
|
Vendor and security deposits
|
|
$
|
3,155
|
|
Customer receivable balances, net of allowance for doubtful
accounts
|
|
|
5
|
|
Miscellaneous receivables
|
|
|
301
|
|
Current tax receivable
|
|
|
3,019
|
|
|
|
|
|
|
|
|
$
|
6,480
|
|
|
|
|
|
|
The Company entered into a Loan and Security Agreement with
Silicon Valley Bank and JPMorgan Chase (the Loan)
for $30,000,000 on March 29, 2006. The Loan term required a
6-month
interest only period, and thereafter repayment of principal in
twelve quarterly installments. The interest is paid monthly and
is based upon Prime Rate plus the Prime Rate Margin (0.75)%.
When the Total Funded Debt/Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) drops below
1x EBITDA, the Prime Rate Margin will decline by 0.5%. The
interest rate at September 30, 2009 was 4%. The carrying
amount of notes payable approximates fair value.
In June 2007, the Company entered into a loan modification
agreement with Silicon Valley Bank and JPMorgan Chase. The term
loan amount was increased to $52,500,000 from $22,500,000. The
term loan maturity date is July 1, 2012. On March 18,
2008, the Company entered into a fourth loan modification
agreement relating to the term loan. The loan modification
increases the revolving credit line from $10,000,000 to
$20,000,000, and amends the revolving line maturity date from
October 15, 2007 to March 17, 2009. The credit line is
subject to an annual renewal that was executed on March 17,
2009 and matures on June 17, 2010. There was no amount due
on the revolving credit line at September 30, 2009.
The Company has a balance of $31,500,000 outstanding on the Loan
as of September 30, 2009 with scheduled repayments as
follows (amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2009
|
|
$
|
2,625
|
|
2010
|
|
|
10,500
|
|
2011
|
|
|
10,500
|
|
2012
|
|
|
7,875
|
|
|
|
|
|
|
|
|
$
|
31,500
|
|
|
|
|
|
|
Loan fees were capitalized to deferred finance and are being
amortized over the life of the loan. The Company capitalized
loan costs of $280,334 in 2006, and $273,027 in 2007 and $0 in
2008. Deferred loan costs amortized to interest expense were
$66,708 and $65,534 for the nine months ended September 30,
2008 and 2009, respectively.
F-47
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
The Loan agreement terms grant the Company a revolving advance
line of credit. Interest on advances are subject to the same
floating per annum interest rate as the base loan. The Company
had a zero balance due under this advance line of credit at
September 30, 2009.
|
|
9.
|
Convertible,
Redeemable Preferred Stock
|
The following table presents a summary of the convertible,
redeemable preferred stock (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Preferred
|
|
Preferred
|
|
Preferred
|
|
Preferred
|
|
Preferred
|
|
Convertible,
|
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Redeemable
|
|
|
Series A
|
|
Series B
|
|
Series C
|
|
Series D
|
|
Series E
|
|
Preferred Stock
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009
|
|
$
|
2,009
|
|
|
$
|
5,412
|
|
|
$
|
5,319
|
|
|
$
|
39,840
|
|
|
$
|
116,810
|
|
|
$
|
169,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
$
|
2,009
|
|
|
$
|
5,412
|
|
|
$
|
5,319
|
|
|
$
|
39,840
|
|
|
$
|
116,810
|
|
|
$
|
169,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Embedded Derivative The
Company has determined that the convertible feature in the
Companys Convertible, Redeemable Preferred Stock
Series A, Series B, Series C, Series D and
Series E meets the definition of an embedded
derivative in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities.
The redemption feature enables the holder to elect a net cash
settlement at date of redemption. This event is deemed to be
outside the control of the Company. These provisions require
that these instruments be bifurcated such that the embedded
conversion option is separated from the host contract, and
accounted for as a derivative liability in accordance with FASB
ASC 815-40,
Derivatives and Hedging, Contracts in Entitys Own
Equity (Prior authoritative literature: Emerging Issues Task
Force (EITF)
00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
The pricing model that the Company uses for determining fair
values of the embedded derivative is a Black-Scholes options
pricing model, which requires the input of highly subjective
assumptions. These assumptions include estimating the expected
volatility of our common stock, an appropriate risk-free
interest rate plus a credit spread and the fair value of the
underlying common stock. The expected volatility is calculated
based on stock volatilities for publicly traded companies in a
similar industry and general stage of development as the
Company. The risk-free interest rate is based on the
U.S. Treasury yield curve consistent with the expected life
of the preferred shares until the date of redemption. The
expected term of the conversion option is based upon the period
remaining until the redemption date of March 31, 2011.
Valuations derived from this model are subject to ongoing
verifications and review. Separating an embedded derivative from
its host contract requires careful analysis and judgment, and an
understanding of the terms and conditions of the instrument.
Selection of inputs involves managements judgment and may
impact net income.
The embedded derivative is recorded at fair value and reported
in Preferred stock embedded derivative on the Condensed
Consolidated Statement of Financial Condition with change in
fair value recorded in the Companys Condensed Consolidated
Statements of Operations and Comprehensive Income. The Company
recorded a gain on the preferred stock embedded derivative of
$170,279,168 and a loss of $40,819,591 at September 30,
2008 and 2009, respectively.
F-48
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
The following summarizes the preferred stock conversion value by
preferred stock share class as of September 30 (amounts in
thousands):
|
|
|
|
|
|
|
2009
|
|
|
Preferred stock series A
|
|
$
|
18,266
|
|
Preferred stock series B
|
|
|
53,466
|
|
Preferred stock series C
|
|
|
20,838
|
|
Preferred stock series D
|
|
|
26,267
|
|
Preferred stock series E
|
|
|
4,767
|
|
|
|
|
|
|
|
|
$
|
123,604
|
|
|
|
|
|
|
Warrants Warrants totaling 1,458,335 to
purchase Series B remain outstanding as of
September 30, 2009.
|
|
10.
|
Related
Party Transactions
|
The acquisition of GCSI included purchase terms requiring an
escrow balance for the last tranche of the purchase payment. The
balance due to the original owner of S.L. Bruce Financial
Corporation of $325,000 is included in Accrued expenses and
other liabilities at September 30, 2009 on the
Condensed Consolidated Statement of Financial Condition. The
final payment of $325,000 was paid in October 2009.
Management has funds on deposit in Group, LLC customer accounts
with balances of $2,817,964 on deposit at September 30,
2009. Management received interest of $11,527 and $1,391 for the
nine months ended September 30, 2008 and 2009, respectively.
Group, LLC entered into a services agreement with Scivantage,
Inc. on February 1, 2008 for a one year term with an option
to renew whereby Scivantage provided certain office workstations
and related services in Jersey City, New Jersey. The agreement
was later amended to add additional workstations and services
extending the term until December 31, 2009 for a fee of
$14,745 per month. Scivantage also provides hosting services to
GCSI under a master hosting services agreement entered into on
September 16, 2003 in which Scivantage provides the
technology infrastructure hosting facility for GCSI, who
provides brokerage securities services. Two of our board
members, Messrs. Galant and Sugden, are members of the
board of directors of Scivantage.
|
|
11.
|
Employee
Compensation Plans
|
Stock based compensation is recognized as provided under FASB
ASC 718-10,
Stock Compensation (Prior authoritative literature: FASB
Statement 123(R), Share Based Payment.) Companies
must recognize the cost of employee services received in
exchange for awards of equity instruments based on the
grant-date fair value of those awards (the
fair-value-based method).
F-49
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
Total share-based compensation for the nine months ended
September 30, 2008 and 2009 are summarized in the following
table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
|
September 30,
2009
|
|
|
Share based compensation:
|
|
|
|
|
|
|
|
|
Incentive stock options and nonqualified stock options
|
|
$
|
41
|
|
|
$
|
|
|
Restricted stock units
|
|
|
2,879
|
|
|
|
3,372
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,920
|
|
|
$
|
3,372
|
|
|
|
|
|
|
|
|
|
|
There were no restricted stock unit grants awarded during the
nine month period ended September 30, 2009.
FASB ASC
740-10-65
(Prior authoritative literature: FASB interpretation No. 48
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109) provides measurement
and recognition guidance related to accounting for uncertainty
in income taxes by prescribing a recognition threshold for tax
positions. FASB ASC
740-10-65
also requires extensive disclosures about uncertainties in the
income tax positions taken.
The Company has $3,453,711 in foreign net operating loss
(NOL) carryforwards as of September 30, 2009,
for which a full valuation allowance has been established. These
NOLs begin to expire in 2013.
The Company classifies interest expense and potential penalties
related to unrecognized tax benefits as a component of income
tax expense. The Companys open tax years for its federal
returns range from 2007 through 2008 and from 2006 through 2008
for its major state jurisdictions.
The decrease in our effective tax rate was primarily due to the
reduced effect of state and local income taxes and other
permanent items in relation to the increase of income before
taxes.
The following table reconciles the provision to the
U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
|
September 30,
2009
|
|
|
Federal income tax at statutory rate
|
|
|
35.00
|
%
|
|
|
(35.00
|
)%
|
Increase/(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income tax
|
|
|
1.77
|
%
|
|
|
(0.81
|
)%
|
Embedded derivative
|
|
|
(26.38
|
)%
|
|
|
156.81
|
%
|
ISOs and NQSOs
|
|
|
|
|
|
|
|
|
Foreign earnings
|
|
|
0.16
|
%
|
|
|
9.42
|
%
|
Research and development tax credit
|
|
|
|
|
|
|
(3.61
|
)%
|
Meals & entertainment
|
|
|
|
|
|
|
0.49
|
%
|
Other permanent differences
|
|
|
0.09
|
%
|
|
|
(1.92
|
)%
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
10.64
|
%
|
|
|
125.38
|
%
|
|
|
|
|
|
|
|
|
|
F-50
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
|
|
13.
|
Commitments
and Contingencies
|
Leases The Company leases office space under
non-cancelable operating lease agreements that expire on various
dates through 2025. Future annual minimum lease payments,
including maintenance and management fees, for non-cancellable
operating leases, are as follows as of September 30, 2009
(amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2009
|
|
$
|
496
|
|
2010
|
|
|
1,219
|
|
2011
|
|
|
1,159
|
|
2012
|
|
|
990
|
|
2013
|
|
|
990
|
|
Thereafter
|
|
|
13,043
|
|
|
|
|
|
|
|
|
$
|
17,897
|
|
|
|
|
|
|
Rent expense was $1,084,954 and $1,453,712 for the nine months
ended September 30, 2008 and 2009, respectively.
Litigation The Company has no material
litigation pending as of September 30, 2009.
The Company sponsors a 401k retirement plan. Substantially all
of the Companys employees are eligible to participate in
the plan. Pursuant to the provisions of the plan, the Company is
obligated to match 25% of the employees contribution to
the plan up to 15% of the employees compensation for each
payroll period. The Company matches 50% for employees with three
years or more of service. The expense recorded to Employee
compensation and benefits on the Condensed Consolidated
Statements of Operations and Comprehensive Income by the Company
for its employees participation in the plan for the nine
months ended September 30, 2008 and 2009 was $472,352 and
$394,727, respectively.
F-51
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
|
|
15.
|
Earnings
Per Common Share
|
Basic and diluted earnings per common share is computed by
dividing net income by the weighted average number of common
shares outstanding during the period.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(amounts in thousands, except share and per share data)
|
|
|
Net income/(loss)
|
|
$
|
201,771
|
|
|
$
|
(20,519
|
)
|
Effect of redemption of preferred shares
|
|
|
(63,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
137,858
|
|
|
$
|
(20,519
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
1,287,650
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Preferred stock series A
|
|
|
911,253
|
|
|
|
|
|
Preferred stock series B
|
|
|
2,610,268
|
|
|
|
|
|
Preferred stock series C
|
|
|
1,363,816
|
|
|
|
|
|
Preferred stock series D
|
|
|
3,254,678
|
|
|
|
|
|
Preferred stock series E
|
|
|
2,516,292
|
|
|
|
|
|
Warrants
|
|
|
1,417,418
|
|
|
|
|
|
ISOs and NQSOs
|
|
|
1,416,738
|
|
|
|
|
|
RSUs
|
|
|
241,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
15,019,396
|
|
|
|
1,306,265
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
107.06
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
9.18
|
|
|
$
|
(15.71
|
)
|
|
|
|
|
|
|
|
|
|
The following common stock equivalents were excluded from the
calculation of diluted net loss per share since the effects are
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
Number of potential shares that are anti-dilutive:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
10,697,317
|
|
Warrants
|
|
|
|
|
|
|
1,385,810
|
|
ISOs and NQSOs
|
|
|
|
|
|
|
1,275,545
|
|
RSUs
|
|
|
|
|
|
|
267,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,626,136
|
|
|
|
|
|
|
|
|
|
|
F-52
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
|
|
16.
|
Regulatory
Requirements
|
As a registered futures commission merchant and forex dealer
member, GAIN Capital Group, LLC is subject to net capital
requirements of Rule 1.17 (the Rule) under the
Commodity Exchange Act (the Act) and capital
requirements of the CFTC and NFA. Under the Rule, the minimum
required net capital, as defined, shall be the greater of
$20,000,000 or 5% of the total payables to customers, brokers,
dealers, FCMs and other regulated entities. The Company
was compliant with the regulations for the nine month period
ended September 30, 2009.
|
|
|
|
|
|
|
September 30,
2009
|
|
|
(amounts in thousands)
|
|
GAIN Capital Group, LLC
|
|
|
|
|
Net capital
|
|
$
|
106,542
|
|
Adjusted net capital
|
|
$
|
85,492
|
|
Excess adjusted net capital
|
|
$
|
65,492
|
|
The Cayman Islands Monetary Authority (CIMA)
Schedule 1 requirements provide that GGMI must maintain a
capital level that is the greater of one quarter of relevant
annual expenditure, or $100,000. A licensee must at all times
maintain financial resources in excess of its financial
resources requirement. GGMI was compliant with CIMA regulations
and required capital levels at September 30, 2009.
GCSI is a broker-dealer registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
GCSI is a member of the Financial Industry Regulatory Authority
(FINRA), Municipal Securities Rulemaking Board
(MSRB), and Securities Investor Protection
Corporation (SIPC). GCSI is required to maintain a
minimum net capital balance (as defined) of $50,000, pursuant to
the SECs Uniform Net Capital
Rule 15c3-1.
GCSI must also maintain a ratio of aggregate indebtedness (as
defined) to net capital of not more than 15 to 1. GCSI was
compliant with FINRA regulations and required capital levels at
September 30, 2009.
GCUK is authorized and regulated by the Financial Services
Authority (FSA). The FSA requires that share capital
held be in excess of the FSAs £668,680, or $1,068,484
regulatory minimum. GCUK was compliant with FSA regulations and
required capital levels at September 30, 2009.
GC Japan (formerly FORTUNE) has a first class
financial instruments operator license from the Financial
Services Agency of Japan in accordance to Japanese Financial
Futures regulation law No. 56th. It is a member of the
Financial Futures Association of Japan. GC Japan is subject to a
minimum capital adequacy ratio of 140%. GC Japan was compliant
with regulations and required capital levels at
September 30, 2009.
As of July 22, 2009, Gain Capital Forex.com Hong Kong
Limited (GCHK) became licensed with the Securities
and Futures Commission (SFC) to carry on the business of Type 3
(leveraged foreign exchange trading) regulated activity as an
approved introducing agent. GCHK is subject to a minimum liquid
capital requirement of HKD 3,000,000 or $387,090. GCHK was
compliant with regulations and required capital levels at
September 30, 2009 pursuant to the requirements of
section 145 of the Securities and Futures Ordinance
(Cap.571) as amplified in section 56 of the Securities and
Futures (Financial Resources) Rules (Cap.571N).
FASB ASC 280, Segment Reporting (Prior authoritative
literature: FASB Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information),
establishes standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The
Companys operations relate to foreign exchange trading and
related services. Based on the Companys management
strategies, and common production,
F-53
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
(UNAUDITED)
marketing, development and client coverage teams, the Company
assesses that it operates in a single operating segment.
For the nine month periods ended September 30, 2008 and
2009, no single customer accounted for more than 10% of the
Company trading revenue. The Company does not allocate revenues
by geographic regions since the Company selectively hedges
customer trades on an aggregate basis and does not have a method
to systematically attribute trading volume from a geographic
region to associated trading revenue from a particular
geographic region.
On October 1, 2009, the Company purchased an additional
196 shares of GC Japan (formerly FORTUNE) for a purchase
price of $1,293,920 thereby increasing the ownership interest
from 51% to 70% of the outstanding shares, with $944,000 paid on
October 1, 2009 and $349,920 due within two months.
The Company has updated its subsequent events disclosures
through November 24, 2009, the filing date of this
Amendment No. 3 to the
Form S-1.
F-54
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
GAIN Capital Holdings, Inc.:
We have audited the consolidated financial statements of GAIN
Capital Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2008 and 2007, and
for each of the three years in the period ended
December 31, 2008; such consolidated financial statements
are included in this Registration Statement. Our audits also
included Schedule I listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule. This
financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
New York, New York
August 31, 2009
S-2
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except share and per share data)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
252
|
|
|
$
|
905
|
|
Investments in subsidiaries, equity basis
|
|
|
61,921
|
|
|
|
127,902
|
|
Receivables from affiliates
|
|
|
107
|
|
|
|
1,422
|
|
Other assets
|
|
|
443
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,723
|
|
|
$
|
130,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
479
|
|
|
$
|
1,212
|
|
Deferred taxes
|
|
|
842
|
|
|
|
|
|
Income tax payable
|
|
|
8,742
|
|
|
|
10,539
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
264,566
|
|
|
|
82,785
|
|
Notes payable
|
|
|
49,875
|
|
|
|
39,375
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
324,504
|
|
|
|
133,911
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 7)
|
|
|
|
|
|
|
|
|
Convertible, Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
Series A Convertible, Redeemable Preferred Stock;
($0.00001 par value; 4,545,455 shares authorized;
2,027,402 and 865,154 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
3,288
|
|
|
|
2,009
|
|
Series B Convertible, Redeemable Preferred Stock;
($0.00001 par value; 7,000,000 shares authorized;
2,611,811 and 2,610,210 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
5,414
|
|
|
|
5,412
|
|
Series C Convertible, Redeemable Preferred Stock;
($0.00001 par value; 2,496,879 shares authorized;
1,229,570 and 1,055,739 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
6,017
|
|
|
|
5,319
|
|
Series D Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,254,678 shares authorized,
issued and outstanding as of December 31, 2007 and 2008,
respectively)
|
|
|
39,840
|
|
|
|
39,840
|
|
Series E Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,738,688 shares authorized;
2,611,606 shares issued and outstanding as of
December 31, 2008)
|
|
|
|
|
|
|
116,810
|
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
54,559
|
|
|
|
169,390
|
|
Deficit
|
|
|
|
|
|
|
|
|
Shareholders Deficit
|
|
|
|
|
|
|
|
|
Common Stock; ($0.00001 par value; 23,000,000 and
27,000,000 shares authorized and 1,534,253 and
1,304,029 shares issued and outstanding as of
December 31, 2007 and 2008, respectively)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
21
|
|
Additional paid-in capital
|
|
|
(95,115
|
)
|
|
|
(182,891
|
)
|
(Accumulated deficit)/retained earnings
|
|
|
(221,225
|
)
|
|
|
10,201
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Deficit
|
|
|
(316,340
|
)
|
|
|
(172,669
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,723
|
|
|
$
|
130,632
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
S-3
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except share and per share data)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of subsidiaries
|
|
$
|
23,055
|
|
|
$
|
56,722
|
|
|
$
|
91,159
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
119
|
|
|
|
317
|
|
|
|
567
|
|
Interest expense on notes payable
|
|
|
2,075
|
|
|
|
3,688
|
|
|
|
2,697
|
|
Bank fees
|
|
|
|
|
|
|
2
|
|
|
|
33
|
|
Professional fees
|
|
|
292
|
|
|
|
423
|
|
|
|
1,043
|
|
Write-off of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
Other
|
|
|
|
|
|
|
48
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
64,218
|
|
|
|
169,758
|
|
|
|
(175,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE
|
|
|
(41,163
|
)
|
|
|
(113,036
|
)
|
|
|
266,327
|
|
Income tax expense
|
|
|
8,339
|
|
|
|
21,615
|
|
|
|
34,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS):
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS)
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
$
|
(39,006
|
)
|
|
$
|
|
|
|
$
|
(63,913
|
)
|
Effect of preferred share accretion
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
S-4
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of subsidiaries
|
|
|
(23,055
|
)
|
|
|
(56,722
|
)
|
|
|
(91,159
|
)
|
Loss on foreign currency exchange rates
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Deferred taxes
|
|
|
2,379
|
|
|
|
(1,538
|
)
|
|
|
(842
|
)
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Amortization of deferred finance costs
|
|
|
63
|
|
|
|
89
|
|
|
|
89
|
|
Stock compensation expense
|
|
|
119
|
|
|
|
223
|
|
|
|
541
|
|
Tax benefit from employee stock option exercises
|
|
|
(4,003
|
)
|
|
|
|
|
|
|
(10,709
|
)
|
Change in fair value of preferred stock embedded derivative
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from affiliates
|
|
|
1,258
|
|
|
|
1,520
|
|
|
|
2,637
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
Current tax receivable
|
|
|
(4,874
|
)
|
|
|
4,874
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
216
|
|
|
|
221
|
|
|
|
1,102
|
|
Income tax payable
|
|
|
4,003
|
|
|
|
8,742
|
|
|
|
12,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for operating activities
|
|
|
(11,664
|
)
|
|
|
(11,962
|
)
|
|
|
(36,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and funding of subsidiaries
|
|
|
20,953
|
|
|
|
19,878
|
|
|
|
24,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
20,953
|
|
|
|
19,878
|
|
|
|
24,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D preferred shares
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
Series D issuance costs
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
Deferred financing costs
|
|
|
(280
|
)
|
|
|
(273
|
)
|
|
|
|
|
Payment on notes payable
|
|
|
(2,500
|
)
|
|
|
(7,625
|
)
|
|
|
(10,500
|
)
|
Proceeds from exercise of stock options
|
|
|
1,837
|
|
|
|
70
|
|
|
|
1,686
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Issuance of Series E preferred shares
|
|
|
|
|
|
|
|
|
|
|
117,000
|
|
Series E issuance costs
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
Tax benefit from employee stock option exercises
|
|
|
4,003
|
|
|
|
|
|
|
|
10,709
|
|
Repurchase of warrants
|
|
|
|
|
|
|
|
|
|
|
(3,945
|
)
|
Repurchase of common shares
|
|
|
(35,687
|
)
|
|
|
(30,000
|
)
|
|
|
(40,752
|
)
|
Repurchase of preferred shares
|
|
|
(46,430
|
)
|
|
|
|
|
|
|
(62,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
(9,217
|
)
|
|
|
(7,828
|
)
|
|
|
12,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
72
|
|
|
|
88
|
|
|
|
653
|
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
92
|
|
|
|
164
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
164
|
|
|
$
|
252
|
|
|
$
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,787
|
|
|
$
|
3,469
|
|
|
$
|
2,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
8,642
|
|
|
$
|
9,524
|
|
|
$
|
20,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units for purchase of GCAM, LLC
|
|
|
|
|
|
$
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in GCAM, LLC at acquisition date
|
|
|
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of GGMI at date of investment
|
|
|
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in S.L. Bruce Financial Corporation in accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital Group, LLC stock compensation
|
|
$
|
85
|
|
|
$
|
1,340
|
|
|
$
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of prior year accretion of preferred stock
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of beneficial conversion feature
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
|
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of call option liability
|
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
S-5
SCHEDULE I
GAIN CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Basis of Financial Information The
accompanying financial statements of GAIN Capital Holdings, Inc.
(Parent Company), including the notes thereto,
should be read in conjunction with the financial statements of
GAIN Capital Holdings, Inc. and Subsidiaries (the
Company) and the notes thereto found on pages F-1 to
F-52.
The financial statements are prepared in accordance with
accounting principles generally accepted in the U.S. which
require the Company or Parent Company to make estimates and
assumptions regarding valuations of certain financial
instruments and other matters that affect the Parent Company
Financial Statements and related disclosures. Actual results
could differ from these estimates.
The Parent Company on a stand alone basis, has accounted for
majority-owned subsidiaries using the equity method of
accounting.
Income Taxes Income tax expense is provided
for using the asset and liability method, under which deferred
tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income
tax bases of assets and liabilities using currently enacted tax
rates.
Convertible, Redeemable Preferred Stock Embedded
Derivative SFAS No. 133, Accounting
for Derivatives and Hedging Activities, as amended
(SFAS No. 133), establishes accounting and
reporting standards for derivative instruments. The Parent
Company has determined that it must bifurcate and account for
the conversion feature in its Series A, Series B,
Series C, Series D, and Series E preferred stock.
The embedded derivative is recorded at fair value and changes in
the fair value are reflected in earnings.
For a discussion of notes payable, see Note 8 to the
Companys consolidated financial statements.
|
|
3.
|
Convertible,
Redeemable Preferred Stock
|
For a discussion of convertible, redeemable preferred stock, see
Note 9 to the Companys consolidated financial
statements.
For a discussion of the shareholders deficit, see
Note 10 to the Companys consolidated financial
statements.
|
|
5.
|
Transactions
with Subsidiaries
|
The Parent Company has transactions with its subsidiaries
determined on an agreed upon basis. Cash dividends from its
subsidiaries totaled $10,301,121, $22,608,185 and $31,488,919
for the years ended December 31, 2006, 2007 and 2008,
respectively.
The acquisition of S.L. Bruce Financial Corporation, now known
as GAIN Capital Securities, Inc. (GCSI), included
purchase terms requiring an escrow balance for the last tranche
of the purchase payment. The balance due to the original owner
of GCSI of $325,000 is included in Accrued expenses and other
liabilities as of December 31, 2008 on the Parent
Company Statements of Financial Condition.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of
SFAS No. 109, Accounting for Income Taxes,
which provides measurement and recognition guidance related to
accounting for uncertainty in income taxes by prescribing a
recognition threshold for tax positions. FIN 48 also
requires extensive disclosures about uncertainties in the income
tax positions taken.
S-6
SCHEDULE I
GAIN CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2007, the Parent Company adopted the
provisions of FIN 48, which the Company determined had no
material impact to its financial statements. The Parent
Companys open tax years for its federal returns range from
2007 through 2008 and from 2006 through 2008 for its major state
jurisdictions.
The Parent Company classifies interest expense and potential
penalties related to unrecognized tax benefits as a component of
income tax expense.
|
|
7.
|
Commitments
and Contingencies
|
For a discussion of commitments and contingencies, see
Note 14 to the Companys consolidated financial
statements.
S-7
Shares
GAIN Capital Holdings,
Inc.
COMMON STOCK
PROSPECTUS
|
|
MORGAN
STANLEY |
DEUTSCHE BANK SECURITIES |
Dealer Prospectus Delivery Obligation
Through and
including ,
2009 (the
25th
day after the date of this prospectus), all dealers effecting
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealers obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
,
2009
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table indicates the expenses to be incurred in
connection with the offering described in this Registration
Statement, other than underwriting discounts and commissions,
all of which will be paid by us. All amounts are estimated
except the Securities and Exchange Commission (SEC)
registration fee and the Financial Industry Regulatory Authority
(FINRA) filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
6,975
|
|
FINRA filing fee
|
|
|
*
|
|
NASDAQ Global Market listing fee
|
|
|
*
|
|
Accountants fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Transfer Agent and Registrars fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102 of the General Corporation Law of the State of
Delaware permits a corporation to eliminate the personal
liability of directors of a corporation to the corporation or
its stockholders for monetary damages for a breach of fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Our certificate of incorporation provides that no director shall
be personally liable to us or our stockholders for monetary
damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law imposing such liability,
except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of
liability of directors for breaches of fiduciary duty.
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by the person in
connection with an action, suit or proceeding to which he or she
is or is threatened to be made a party by reason of such
position, if such person acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful, except that, in the case of actions
brought by or in the right of the corporation, no
indemnification shall be made with respect to any claim, issue
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or other adjudicating court determines that,
despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Our certificate of incorporation provides that we will indemnify
each person who was or is a party or threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding (other than an action by or in the right of us) by
reason of the fact that he or she is or was, or has agreed to
become, our director or officer, or is or was serving, or has
agreed to serve, at our request as a director, officer, partner,
employee or trustee
II-1
of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (all such
persons being referred to as an Indemnitee), or by
reason of any action alleged to have been taken or omitted in
such capacity, against all expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred in connection with such action, suit or
proceeding and any appeal therefrom, if such Indemnitee acted in
good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interests, and, with respect to
any criminal action or proceeding, he or she had no reasonable
cause to believe his or her conduct was unlawful. Our
certificate of incorporation provides that we will indemnify any
Indemnitee who was or is a party to an action or suit by or in
the right of us to procure a judgment in our favor by reason of
the fact that the Indemnitee is or was, or has agreed to become,
our director or officer, or is or was serving, or has agreed to
serve, at our request as a director, officer, partner, employee
or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been
taken or omitted in such capacity, against all expenses
(including attorneys fees) and, to the extent permitted by
law, amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding, and any
appeal therefrom, if the Indemnitee acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed
to, our best interests, except that no indemnification shall be
made with respect to any claim, issue or matter as to which such
person shall have been adjudged to be liable to us, unless a
court determines that, despite such adjudication but in view of
all of the circumstances, he or she is entitled to
indemnification of such expenses. Notwithstanding the foregoing,
to the extent that any Indemnitee has been successful, on the
merits or otherwise, he or she will be indemnified by us against
all expenses (including attorneys fees) actually and
reasonably incurred in connection therewith. Expenses must be
advanced to an Indemnitee under certain circumstances.
In addition to the indemnification provided for in our
certificate of incorporation, we expect to enter into separate
indemnification agreements with each of our directors and
executive officers which may be broader than the specific
indemnification provisions contained in the Delaware General
Corporation Law prior to completion of this offering. These
indemnification agreements may require us, among other things,
to indemnify our directors and executive officers for some
expenses, including attorneys fees, judgments, fines and
settlement amounts incurred by a director or executive officer
in any action or proceeding arising out of his service as one of
our directors or executive officers, or any of our subsidiaries
or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified
individuals to serve as directors and executive officers.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
During the three year period preceding the date of the filing of
this registration statement, we have issued securities in the
transactions described below without registration under the
Securities Act of 1933. These securities were offered and sold
by us in reliance upon exemptions from the registration
requirements provided by Section 4(2) of the Securities Act
of 1933, Regulation D under the Securities Act as
transactions by an issuer not involving a public offering or
Rule 701 under the Securities Act of 1933 as transactions
pursuant to written compensatory benefit plans and contracts
relating to compensation with our employees.
Issuances
of capital stock
On January 11, 2008, we issued and sold an aggregate of
2,611,606 shares of Series E preferred stock to
certain investors at a purchase price per share of $44.80 for an
aggregate purchase price of $116,999,948.80. The investors
consisted of 3i U.S. Growth Partners L.P., 3i Technology
Partners III L.P., VantagePoint Venture Partners IV
(Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint
Venture Partners IV Principals Fund, L.P. and VP
New York Venture Partners L.P.
All purchasers of shares of our common stock and our preferred
stock described above represented to us in connection with their
purchase that they were accredited investors and were acquiring
the shares for investment and not distribution, that they could
bear the risks of the investment and could hold the securities
for an indefinite period of time. The purchasers received
written disclosures that the securities had not been registered
under the Securities Act and that any resale must be made
pursuant to a registration or an available exemption from such
registration.
II-2
Repurchases
of capital stock
On January 25, 2008, we repurchased an aggregate of
136,243 shares of Series A preferred stock (including
88,206 shares issued upon exercise of warrants to purchase
Series A preferred stock) and 103,809 shares of common
stock (which includes the exercise of options to purchase
18,001 shares of common stock) from certain stockholders,
each at a repurchase price per share of $44.73 and an aggregate
repurchase price of $10,728,580. Such stockholders included
Silicon Valley Bank, Mark E. Galant and other stockholders.
On January 18, 2008, we repurchased an aggregate of
161,920 shares of common stock (which number includes
options to purchase 156,937 shares of common stock) from
certain current and former employees at a repurchase price per
share of $44.73 and an aggregate purchase price of $7,242,682,
pursuant to transmittal letters.
On January 11, 2008, we repurchased an aggregate of
1,114,211 shares of Series A preferred stock,
1,601 shares of Series B preferred stock,
173,381 shares of Series C preferred stock (which on
an as-converted to common stock basis represents
223,215 shares), and 649,043 shares of common stock
(which includes the exercise of options to purchase
398,286 shares of common stock) from certain stockholders,
each at a repurchase price per share of $44.73 and an aggregate
purchase price of $88,926,387. Such stockholders included Cross
Atlantic Capital Partners, Inc., Blue Rock Capital, L.P., Tudor
Ventures II, L.P., Silicon Valley Bank, Mark E. Galant, the
senior management team of Christopher W. Calhoun, Timothy
OSullivan and Glenn H. Stevens and other stockholders.
These repurchases that occurred on January 11, 2008 were
effected pursuant to either repurchase agreements or transmittal
letters.
On June 7, 2007, we repurchased an aggregate of
870,070 shares of our common stock from Mark E. Galant at a
repurchase price of $34.48 per share, and an aggregate purchase
price of $30,000,000.
Stock
option and restricted stock unit grants
On January 1, 2007, we granted an aggregate of 68,250
restricted stock units under our Amended and Restated 2006
Equity Compensation Plan to Glenn H. Stevens and Mark E. Galant
in consideration for all of the membership units in GCAM, LLC, a
Delaware limited liability company.
As of January 31, 2008, the Registrant had granted stock
options under its Amended and Restated 2006 Equity Compensation
Plan, as amended on January 11, 2008, for an aggregate of
1,593,208 shares of common stock (net of exercises,
expirations and cancellations) at a weighted average exercise
price of $2.67 per share.
The issuance of stock options and the common stock issuable upon
the exercise of such options as described in this Item 15
were issued pursuant to written compensatory plans or
arrangements with our employees, directors and consultants, in
reliance on the exemption provided by Rule 701 promulgated
under the Securities Act of 1933. All recipients either received
adequate information about us or had access, through employment
or other relationships, to such information.
All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act of 1933. All certificates
representing the issued shares of common stock described in this
Item 15 included appropriate legends setting forth that the
securities had not been registered and the applicable
restrictions on transfer.
|
|
Item 16.
|
Exhibits
and financial statement schedules.
|
(a) Exhibits
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1*
|
|
Underwriting Agreement.
|
|
3
|
.1**
|
|
Second Amended and Restated Certificate of Incorporation to be
superseded by the Third Amended and Restated Certificate of
Incorporation to be effective upon the closing of the offering.
|
|
3
|
.2*
|
|
Amended and Restated By-laws to be effective upon the closing of
the offering.
|
|
3
|
.3*
|
|
Form of Third Amended and Restated Certificate of Incorporation
to be effective upon the closing of the offering.
|
|
4
|
.1*
|
|
Specimen Certificate evidencing shares of common stock.
|
II-3
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.2**
|
|
Investor Rights Agreement, dated January 11, 2008, by and
among the Company, the Investors and the Founding Stockholder,
as defined therein.
|
|
5
|
.1*
|
|
Opinion of Morgan, Lewis & Bockius LLP.
|
|
10
|
.1**
|
|
2006 Equity Compensation Plan (amended and restated, effective
December 31, 2006).
|
|
10
|
.2*
|
|
2009 Omnibus Incentive Compensation Plan.
|
|
10
|
.3*
|
|
2009 Employee Stock Purchase Plan.
|
|
10
|
.4*
|
|
Form of Incentive Stock Option Agreement.
|
|
10
|
.5*
|
|
Form of Nonqualified Stock Option Agreement.
|
|
10
|
.6*
|
|
Form of Restricted Stock Agreement.
|
|
10
|
.7*
|
|
Form of Restricted Stock Unit Agreement (Time Vesting).
|
|
10
|
.8*
|
|
Form of Restricted Stock Unit Agreement (Performance Vesting).
|
|
10
|
.9*
|
|
Form of Restricted Stock Unit Agreement (Immediate Vesting).
|
|
10
|
.10**
|
|
Form of Indemnification Agreement with the Companys
Non-Employee Directors.
|
|
10
|
.11**
|
|
Loan and Security Agreement, dated as of March 29, 2006, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.12**
|
|
Pledge and Security Agreement, dated as of March 29, 2006,
by and among GAIN Capital Holdings, Inc., Silicon Valley Bank
and JPMorgan Chase Bank, N.A.
|
|
10
|
.13**
|
|
Unconditional Guaranty, dated as of March 29, 2006, by and
among GAIN Holdings, LLC, Silicon Valley Bank and JPMorgan Chase
Bank, N.A.
|
|
10
|
.14**
|
|
First Loan Modification Agreement, dated as of October 16,
2006, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JPMorgan Chase Bank, N.A.
|
|
10
|
.15**
|
|
Second Loan Modification Agreement, dated as of March 20,
2007, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JP Chase Bank, N.A.
|
|
10
|
.16**
|
|
Third Loan Modification Agreement, dated June 6, 2007, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.17**
|
|
Fourth Loan Modification Agreement, dated as of March 18,
2008, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JPMorgan Chase Bank, N.A.
|
|
10
|
.18**
|
|
Fifth Loan Modification Agreement, dated as of June 18,
2009 and effective as of March 17, 2009, by and among GAIN
Capital Holdings, Inc., Silicon Valley Bank and JPMorgan Chase
Bank, N.A.
|
|
10
|
.19**
|
|
Employment Agreement, dated as of January 1, 2008, by and
between GAIN Capital Holdings, Inc. and Glenn Stevens.
|
|
10
|
.20**
|
|
Employment Letter, dated as of August 26, 2009, by and
between GAIN Capital Holdings, Inc. and Christopher Calhoun.
|
|
10
|
.21**
|
|
Employment Letter, dated as of March 23, 2009, by and
between GAIN Capital Holdings, Inc. and Henry Lyons.
|
|
10
|
.22**
|
|
Employment Letter, dated as of March 8, 2000, by and
between GAIN Capital Holdings, Inc. and Timothy OSullivan.
|
|
10
|
.23**
|
|
Separation Agreement, dated as of January 11, 2008, by and
between Mark Galant and GAIN Capital Holdings, Inc.
|
|
10
|
.24**
|
|
FX Prime Brokerage Master Agreement, dated as of
December 6, 2006, by and between GAIN Capital Group, LLC
and The Royal Bank of Scotland, plc.
|
|
10
|
.25**
|
|
FX Prime Brokerage Agreement, dated as of July 8, 2005, by
and between UBS AG and GAIN Capital, Inc.
|
II-4
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.26**
|
|
Foreign Exchange Prime Brokerage Agency Agreement, dated as of
July 12, 2006, by and between GAIN Capital Group, LLC and
The Royal Bank of Scotland, plc.
|
|
10
|
.27**
|
|
Foreign Exchange Prime Brokerage Agreement, dated
October 18, 2005, by and between Deutsche Bank AG, London
Branch and GCAM, LLC.
|
|
10
|
.28**
|
|
Amendment to Foreign Exchange Prime Brokerage Agreement, dated
January 26, 2006, by and between Deutsche Bank AG, London
Branch and GCAM, LLC.
|
|
10
|
.29*
|
|
Form of ISDA Master Agreement, 1992 edition.
|
|
10
|
.30**
|
|
Form of Introducing Broker Agreement.
|
|
10
|
.31**
|
|
Form of Agreement for White Label Services.
|
|
10
|
.32**
|
|
Sublease, dated March 31, 2005, by and between GAIN
Capital, Inc. and NUI Corporation.
|
|
10
|
.33**
|
|
Agreement of Sublease, dated November 14, 2005, by and
between Mellon Investor Services LLC and GAIN Capital, Inc.
|
|
10
|
.34**
|
|
First Amendment to Sublease, dated July 20, 2006, by and
between Mellon Investor Services LLC and GAIN Capital, Inc.
|
|
10
|
.35**
|
|
Services Agreement, dated February 1, 2008, by and between
GAIN Capital Group, LLC and Scivantage, Inc.
|
|
10
|
.36**
|
|
Schedule 1(b) to Services Agreement, dated
February 15, 2009, by and between GAIN Capital Group, LLC
and Scivantage, Inc.
|
|
10
|
.37**
|
|
Lease and Lease Agreement, dated August 18, 2009, by and
between S/K Bed One Associates LLC and GAIN Capital Holdings,
Inc.
|
|
10
|
.38**
|
|
Access Agreement, dated December 1, 2004, by and between
Questrade, Inc. and GAIN Capital, Inc.
|
|
10
|
.39**
|
|
Agreement for Lease, dated May 5, 2009, by and between
Pontsarn Investments Limited and GAIN Capital
Forex.com U.K., Ltd.
|
|
10
|
.40**
|
|
Addendum to Access Agreement, dated July 23, 2007, by and
between GAIN Capital Group, LLC and Questrade, Inc.
|
|
10
|
.41**
|
|
Addendum to Access Agreement, dated October 12, 2007, by
and between GAIN Capital Group, LLC and Questrade, Inc.
|
|
10
|
.42**
|
|
Software Licensing and Services Agreement, dated
December 1, 2004, by and between Questrade, Inc. and GAIN
Capital, Inc.
|
|
10
|
.43**
|
|
License Agreement, dated August 9, 2007, by and between
GAIN Capital Group, LLC and Metaquotes Software Corp.
|
|
10
|
.44
|
|
Agreement, dated November 22, 2004, by and between esignal,
a division of Interactive Data Corporation, and GAIN Capital,
Inc.
|
|
10
|
.45**
|
|
Sales Lead Agreement, dated October 9, 2006, by and between
GAIN Capital Group, LLC and Trading Central.
|
|
10
|
.46**
|
|
Forex Introducing Broker Agreement, dated April 20, 2005,
by and between GAIN Capital Group, Inc. and TradeStation
Securities, Inc.
|
|
10
|
.47**
|
|
Addendum to Introducing Broker Agreement, dated October 1,
2007, by and between GAIN Capital Group, LLC and TradeStation
Securities, Inc.
|
|
10
|
.48**
|
|
Second Addendum to Introducing Broker Agreement, dated
April 1, 2009, by and between GAIN Capital Group, LLC and
TradeStation Securities, Inc.
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
23
|
.2*
|
|
Consent of Morgan, Lewis & Bockius LLP (included in
Exhibit 5.1).
|
II-5
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
23
|
.3**
|
|
Consent of Aite Group, LLC.
|
|
24
|
.1**
|
|
Power of Attorney.
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|
|
|
|
Confidential treatment requested.
Confidential materials omitted and filed separately with the
Securities and Exchange Commission.
|
(b) Financial Statement Schedules.
None
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 3 to
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of
Bedminster, State of New Jersey, on this
24th day
of November, 2009.
GAIN CAPITAL HOLDINGS, INC.
Glenn H. Stevens
President and Chief Executive Officer
II-7
SIGNATURES
AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 3 to registration statement has been signed
by the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Glenn
H. Stevens
Glenn
H. Stevens
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
November 24, 2009
|
|
|
|
|
|
/s/ Henry
C. Lyons
Henry
C. Lyons
|
|
Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
|
|
November 24, 2009
|
|
|
|
|
|
*
Mark
E. Galant
|
|
Chairman of the Board of Directors
|
|
November 24, 2009
|
|
|
|
|
|
*
Ken
Hanau
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Susanne
D. Lyons
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Gerry
McCrory
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
James
C. Mills
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Peter
Quick
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Joseph
Schenk
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Christopher
S. Sugden
|
|
Director
|
|
November 24, 2009
|
|
|
|
|
|
*
Roger
Tarika
|
|
Director
|
|
November 24, 2009
|
By signature set forth below, the undersigned, pursuant to the
duly authorized powers of attorney filed with the Securities and
Exchange Commission, has signed this amendment no. 3 to
registration statement on behalf of the persons indicated.
|
|
|
* By:
|
/s/ Glenn
H. Stevens
|
|
Glenn H. Stevens
Attorney-in-Fact
II-8
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1*
|
|
Underwriting Agreement.
|
|
3
|
.1**
|
|
Second Amended and Restated Certificate of Incorporation to be
superseded by the Third Amended and Restated Certificate of
Incorporation to be effective upon the closing of the offering.
|
|
3
|
.2*
|
|
Amended and Restated By-laws to be effective upon the closing of
the offering.
|
|
3
|
.3*
|
|
Form of Third Amended and Restated Certificate of Incorporation
to be effective upon the closing of the offering.
|
|
4
|
.1*
|
|
Specimen Certificate evidencing shares of common stock.
|
|
4
|
.2**
|
|
Investor Rights Agreement, dated January 11, 2008, by and
among the Company, the Investors and the Founding Stockholder,
as defined therein.
|
|
5
|
.1*
|
|
Opinion of Morgan, Lewis & Bockius LLP.
|
|
10
|
.1**
|
|
2006 Equity Compensation Plan (amended and restated, effective
December 31, 2006).
|
|
10
|
.2*
|
|
2009 Omnibus Incentive Compensation Plan.
|
|
10
|
.3*
|
|
2009 Employee Stock Purchase Plan.
|
|
10
|
.4*
|
|
Form of Incentive Stock Option Agreement.
|
|
10
|
.5*
|
|
Form of Nonqualified Stock Option Agreement.
|
|
10
|
.6*
|
|
Form of Restricted Stock Agreement.
|
|
10
|
.7*
|
|
Form of Restricted Stock Unit Agreement (Time Vesting).
|
|
10
|
.8*
|
|
Form of Restricted Stock Unit Agreement (Performance Vesting).
|
|
10
|
.9*
|
|
Form of Restricted Stock Unit Agreement (Immediate Vesting).
|
|
10
|
.10**
|
|
Form of Indemnification Agreement with the Companys
Non-Employee Directors.
|
|
10
|
.11**
|
|
Loan and Security Agreement, dated as of March 29, 2006, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.12**
|
|
Pledge and Security Agreement, dated as of March 29, 2006,
by and among GAIN Capital Holdings, Inc., Silicon Valley Bank
and JPMorgan Chase Bank, N.A.
|
|
10
|
.13**
|
|
Unconditional Guaranty, dated as of March 29, 2006, by and
among GAIN Holdings, LLC, Silicon Valley Bank and JPMorgan Chase
Bank, N.A.
|
|
10
|
.14**
|
|
First Loan Modification Agreement, dated as of October 16,
2006, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JPMorgan Chase Bank, N.A.
|
|
10
|
.15**
|
|
Second Loan Modification Agreement, dated as of March 20,
2007, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JP Chase Bank, N.A.
|
|
10
|
.16**
|
|
Third Loan Modification Agreement, dated June 6, 2007, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.17**
|
|
Fourth Loan Modification Agreement, dated as of March 18,
2008, by and among GAIN Capital Holdings, Inc., Silicon Valley
Bank and JPMorgan Chase Bank, N.A.
|
|
10
|
.18**
|
|
Fifth Loan Modification Agreement, dated as of June 18,
2009 and effective as of March 17, 2009, by and among GAIN
Capital Holdings, Inc., Silicon Valley Bank and JPMorgan Chase
Bank, N.A.
|
|
10
|
.19**
|
|
Employment Agreement, dated as of January 1, 2008, by and
between GAIN Capital Holdings, Inc. and Glenn Stevens.
|
|
10
|
.20**
|
|
Employment Letter, dated as of August 26, 2009, by and
between GAIN Capital Holdings, Inc. and Christopher Calhoun.
|
|
10
|
.21**
|
|
Employment Letter, dated as of March 23, 2009, by and
between GAIN Capital Holdings, Inc. and Henry Lyons.
|
|
10
|
.22**
|
|
Employment Letter, dated as of March 8, 2000, by and
between GAIN Capital Holdings, Inc. and Timothy OSullivan.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.23**
|
|
Separation Agreement, dated as of January 11, 2008, by and
between Mark Galant and GAIN Capital Holdings, Inc.
|
|
10
|
.24**
|
|
FX Prime Brokerage Master Agreement, dated as of
December 6, 2006, by and between GAIN Capital Group, LLC
and The Royal Bank of Scotland, plc.
|
|
10
|
.25**
|
|
FX Prime Brokerage Agreement, dated as of July 8, 2005, by
and between UBS AG and GAIN Capital, Inc.
|
|
10
|
.26**
|
|
Foreign Exchange Prime Brokerage Agency Agreement, dated as of
July 12, 2006, by and between GAIN Capital Group, LLC and
The Royal Bank of Scotland, plc.
|
|
10
|
.27**
|
|
Foreign Exchange Prime Brokerage Agreement, dated
October 18, 2005, by and between Deutsche Bank AG, London
Branch and GCAM, LLC.
|
|
10
|
.28**
|
|
Amendment to Foreign Exchange Prime Brokerage Agreement, dated
January 26, 2006, by and between Deutsche Bank AG, London
Branch and GCAM, LLC.
|
|
10
|
.29*
|
|
Form of ISDA Master Agreement, 1992 edition.
|
|
10
|
.30**
|
|
Form of Introducing Broker Agreement.
|
|
10
|
.31**
|
|
Form of Agreement for White Label Services.
|
|
10
|
.32**
|
|
Sublease, dated March 31, 2005, by and between GAIN
Capital, Inc. and NUI Corporation.
|
|
10
|
.33**
|
|
Agreement of Sublease, dated November 14, 2005, by and
between Mellon Investor Services LLC and GAIN Capital, Inc.
|
|
10
|
.34**
|
|
First Amendment to Sublease, dated July 20, 2006, by and
between Mellon Investor Services LLC and GAIN Capital, Inc.
|
|
10
|
.35**
|
|
Services Agreement, dated February 1, 2008, by and between
GAIN Capital Group, LLC and Scivantage, Inc.
|
|
10
|
.36**
|
|
Schedule 1(b) to Services Agreement, dated
February 15, 2009, by and between GAIN Capital Group, LLC
and Scivantage, Inc.
|
|
10
|
.37**
|
|
Lease and Lease Agreement, dated August 18, 2009, by and
between S/K Bed One Associates LLC and GAIN Capital Holdings,
Inc.
|
|
10
|
.38**
|
|
Access Agreement, dated December 1, 2004, by and between
Questrade, Inc. and GAIN Capital, Inc.
|
|
10
|
.39**
|
|
Agreement for Lease, dated May 5, 2009, by and between
Pontsarn Investments Limited and GAIN Capital
Forex.com U.K., Ltd.
|
|
10
|
.40**
|
|
Addendum to Access Agreement, dated July 23, 2007, by and
between GAIN Capital Group, LLC and Questrade, Inc.
|
|
10
|
.41**
|
|
Addendum to Access Agreement, dated October 12, 2007, by
and between GAIN Capital Group, LLC and Questrade, Inc.
|
|
10
|
.42**
|
|
Software Licensing and Services Agreement, dated
December 1, 2004, by and between Questrade, Inc. and GAIN
Capital, Inc.
|
|
10
|
.43**
|
|
License Agreement, dated August 9, 2007, by and between
GAIN Capital Group, LLC and Metaquotes Software Corp.
|
|
10
|
.44
|
|
Agreement, dated November 22, 2004, by and between esignal,
a division of Interactive Data Corporation, and GAIN Capital,
Inc.
|
|
10
|
.45**
|
|
Sales Lead Agreement, dated October 9, 2006, by and between
GAIN Capital Group, LLC and Trading Central.
|
|
10
|
.46**
|
|
Forex Introducing Broker Agreement, dated April 20, 2005,
by and between GAIN Capital Group, Inc. and TradeStation
Securities, Inc.
|
|
10
|
.47**
|
|
Addendum to Introducing Broker Agreement, dated October 1,
2007, by and between GAIN Capital Group, LLC and TradeStation
Securities, Inc.
|
|
10
|
.48**
|
|
Second Addendum to Introducing Broker Agreement, dated
April 1, 2009, by and between GAIN Capital Group, LLC and
TradeStation Securities, Inc.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
23
|
.2*
|
|
Consent of Morgan, Lewis & Bockius LLP (included in
Exhibit 5.1).
|
|
23
|
.3**
|
|
Consent of Aite Group, LLC.
|
|
24
|
.1**
|
|
Power of Attorney.
|
|
|
|
*
|
|
To be filed by amendment.
|
**
|
|
Previously filed.
|
|
|
Confidential treatment requested.
Confidential materials omitted and filed separately with the
Securities and Exchange Commission.
|