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As filed with the Securities and Exchange
Commission on November 3, 2010.
Registration
No. 333-161632
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 6
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)
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Delaware
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6221
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20-4568600
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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Bedminster One
135 Route 202/206
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.
Bedminster One
135 Route
202/206
Bedminster, New Jersey 07921
(908) 731-0700
(Name, address including zip
code and telephone number, including area code, of agent for
service)
Copies to:
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Andrew P. Gilbert, Esq.
David C. Schwartz, Esq.
DLA Piper LLP
300 Campus Drive, Suite 100
Florham Park, New Jersey 07932
Tel:
(973) 520-2550
Fax:
(973) 520-2575
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Joseph A. Hall, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Tel: (212) 450-4500
Fax: (212) 450-3500
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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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(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 jurisdiction where the offer or sale is not
permitted.
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Subject to
Completion, Dated November 3, 2010
Shares
GAIN Capital Holdings,
Inc.
COMMON STOCK
This is an initial public offering of shares of common
stock of GAIN Capital Holdings, Inc. No public market currently
exists for our common stock. We anticipate the initial public
offering price will be between $
and $ per share.
We are
selling shares
of common stock and the selling stockholders are
selling
shares of common stock. We will not receive any of the proceeds
from the shares of common stock sold by the selling
stockholders.
We intend to list the common stock on the New York Stock
Exchange under the symbol GCAP.
Investing in our common stock involves risks. See
Risk Factors beginning on page 18.
PRICE
$
PER SHARE
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Underwriting
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Proceeds to
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Price to
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Discounts and
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Selling
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Public
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Commissions
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Proceeds to Us
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Stockholders
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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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 ,
2010.
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MORGAN
STANLEY |
DEUTSCHE BANK SECURITIES |
,
2010
TABLE OF
CONTENTS
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 of Financial Condition and Results of
Operations section, the consolidated financial statements
and related notes included in this prospectus before making an
investment decision. 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 and institutional foreign
exchange, or forex, trading and related services founded in 1999
by a group of experienced trading and technology 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 clearinghouse. We also offer some of our retail customers
access to other global markets on an OTC basis, including the
spot gold and silver markets, as well as equity indices and
commodities via instruments linked to the performance of the
price of an underlying security called
contracts-for-difference.
Our trading platforms provide a wide array of information and
analytical 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.
Forex trading is one of the fastest-growing areas of retail
trading in the financial services industry. In a forex trade,
participants buy one currency and simultaneously sell another
currency. We refer to the two currencies that make up a forex
trade as a currency pair. The first currency noted in the pair
is the base currency and the second is the counter currency.
According to the 2010 Triennial Bank Survey from the Bank for
International Settlements, average daily turnover in the global
forex market in April 2010 was $4.0 trillion, an increase of
approximately 20.0% from the $3.3 trillion reported by the Bank
for International Settlements in April 2007. The Bank for
International Settlements notes that the U.S. dollar is the
most commonly traded currency, with approximately 85.0% of all
forex trades involving the U.S. dollar. The forex market
has emerged from its previous role as a currency hedge to become
an investable asset class. Historically, access to the forex
market was only available to commercial and investment banks,
corporations, hedge funds and other large financial
institutions. In the last decade, retail investors have gained
increasing access to this market largely through the emergence
of online retail forex providers like us. According to a 2010
analysis by the Aite Group, a financial services market research
firm, global retail forex trading volumes have grown from
average daily volumes of approximately $10.0 billion in
2001 to approximately $125.0 billion in 2009 representing a
compound annual growth rate of 37.1%.
We have a geographically diverse customer base and currently
service customers residing in more than 140 countries
worldwide. For the year ended December 31, 2009, 49.7% of
our customer base was located in the United States, representing
approximately 54.5% of our total annual trading volume, while
approximately 50.3% of our customer base was located outside of
the United States, representing approximately 45.5% of our total
annual trading volume. We believe we are one of the largest
provider of retail forex trading to customers in the United
States based on active traded accounts. Our total annual
customer trading volume, which is based on the U.S. dollar
equivalent of notional amounts traded, grew from
$231.9 billion in 2005 to $1.2 trillion in 2009,
representing a compound annual growth rate of 50.8%. Our annual
net revenue grew from $37.9 million in 2005 to
$153.3 million
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in 2009, representing a compound annual growth rate of 41.8%.
Our net income grew from $8.2 million in 2005 to
$28.0 million in 2009, representing a compound annual
growth rate of 35.9%. 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 $8.2 million in 2005 to
$26.3 million in 2009, representing a compound annual
growth rate of 33.8%.
We are regulated in the United States by the Commodity Futures
Trading Commission, the Financial Industry Regulatory Authority,
the National Futures Association, and the U.S. Securities
Exchange Commission, in the United Kingdom by the Financial
Services Authority, in Japan by the Financial Services
Authority, in Hong Kong by the Securities and Futures Commission
and in Australia by the Australian Securities and Investments
Commission. For the nine months ended September 30, 2010,
71.6% of our trading volume was from customers in jurisdictions
in which we are currently licensed or authorized by local
government bodies or self-regulatory organizations.
We use financial metrics, including tradable retail accounts and
traded retail accounts, to measure our aggregate customer
account activity. Tradable retail accounts represent retail
customers who maintain cash balances with us that are sufficient
to execute a trade in compliance with our policies. As of
September 30, 2010 we had 70,618 tradable retail accounts
compared to 47,374 as of September 30, 2009. We believe the
number of tradable retail accounts is an important indicator of
our ability to attract new retail customers that can potentially
lead to trading volume and revenue in the future, however, 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 retail accounts, because this represents
retail customers who executed a transaction with us during a
particular period. During the nine months ended
September 30, 2010, 52,486 traded retail accounts executed
a forex transaction with us compared to 43,565 traded retail
accounts for the nine months ended September 30, 2009,
representing an increase of 20.5%.
Our customer base is comprised of self-directed retail traders,
managed retail traders and institutional customers who utilize
our online platforms and tools to trade forex and
contracts-for-difference. For the nine months ended
September 30, 2010, self-directed retail investors
represented 79.0% of our customer trading volume. Managed
accounts, which are accounts managed by authorized
intermediaries trading on behalf of a retail account holder,
represented 8.7% of our customer trading volume for the nine
months ended September 30, 2010. Institutional customers
represented 12.3% of our volume for the nine months ended
September 30, 2010.
We seek to attract and support customers through direct,
indirect and institutional channels. Our primary direct channel
for our retail business is our Internet website, FOREX.com,
which is available in English, traditional and simplified
Chinese, Japanese, Russian and Arabic. It provides retail
traders of all experience levels with full trading capabilities,
along with extensive educational and support tools. Our indirect
channel includes our relationships with retail financial
services firms, such as broker-dealers, futures commission
merchants, and retail banking institutions. These firms offer
our 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 currency brokers who refer their
customers to us for a fee. We refer to these firms as
introducing brokers. Globally, we have relationships
with more than 500 white label partners and introducing brokers
who were active for the nine months ended September 30,
2010. Our institutional channel, which we launched in
March 2010, sources our institutional customers, consisting
of commercial and investment banks, hedge funds and other
professional traders, through our direct sales team. Our total
customer trading volume sourced through direct, indirect, and
institutional channels was 50.4%, 37.3%, and 12.3%, respectively
for the nine months ended September 30, 2010. For the year
ended December 31, 2009, total customer trading volume
sourced through direct and indirect channels was 65.4% and
34.6%, respectively.
The majority of our revenue is derived from our retail
customers trading activity in our forex and
contracts-for-difference product offerings. We generally act as
the counterparty to our retail customers trades and as an
agent for trades conducted by our institutional customers. The
counterparties to our institutional customers trades are
third party financial institutions. We receive transaction fees
for our institutional customers trades and the third-party
financial institution who is counterparty to the transaction
incurs the market risk. For our retail customer business, we
have used our extensive experience in the global OTC markets and
online trading to develop risk-
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management systems and procedures that allow us to manage
market and credit risk in accordance with predefined exposure
limits in real-time. A key component of our approach to managing
risk is that we do not actively initiate market positions for
our own account in anticipation of future movements in the
relative prices of products we offer. We refer to such positions
as proprietary directional market positions. Instead, we
continuously evaluate market risk exposure and actively hedge a
portion of our customer transactions on a continuous basis. For
the nine months ended September 30, 2010, a minimum of
90.9% of our average daily trading volume, on any given day, was
either naturally hedged, where one of our customers executing a
trade in a currency is offset by a trade taken by another
customer, or hedged by us with a third party financial
institution. To facilitate our risk-management activities, we
maintain levels of capital in excess of those currently required
under applicable regulations. As of September 30, 2010, we
maintained capital levels of $92.5 million, which
represents approximately 2.9 times the capital we are required
to hold.
We believe that we provide our customers with access to forex
liquidity at competitive rates. We maintain relationships with
three established global prime brokers, including Deutsche
Bank AG, UBS AG, and The Royal Bank of Scotland plc as well
as relationships with 13 additional wholesale forex trading
partners and access to other trading platforms and other
wholesale forex trading partners, which give us access to over
25 potential liquidity providers. We believe these relationships
give us access to a pool of forex liquidity, which ensures that
we are able to execute our customers trades in any of the
39 currency pairs or six
contracts-for-difference
product offerings we offer and in the notional amount they
request.
We believe that our approach to managing market and credit risk
provides us with a diversified revenue stream that is governed
by both risk-management and profit maximization principles.
Our
Market Opportunity
The retail forex market has grown rapidly over the past decade,
with daily trading volumes growing at a compound annual growth
rate of 37.1% from average daily volumes of approximately
$10.0 billion in 2001 to approximately $125.0 billion
in 2009 according to a 2010 analysis performed by the Aite Group.
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.
We believe retail forex trading is poised for continued, rapid
growth as a result of the following trends:
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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;
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improved access to the forex market, reduced transaction costs
and more efficient execution;
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increased availability of investor education relating to the
forex market and trading opportunities;
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expansion of marketing efforts by many leading firms in the
forex industry;
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increasing media coverage of the forex market; and
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rising global broadband and wireless penetration.
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Despite the strong growth of the retail forex market, online
retail forex investors still represent a small fraction of total
online investors. The Aite Group estimates that, as of July
2010, there were more than 110 million online retail
investors globally, but only 1.1 million online retail
investors who trade forex. Since retail forex is an asset class
that can be traded 24 hours per day, five days a week, it
is convenient for many online investors as they can trade at any
time of the day.
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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 a leading brand
in the online forex trading industry. For the nine months ended
September 30, 2010, FOREX.com averaged approximately
1.7 million unique visitors per month (as
measured by Google Analytics, a website statistics service which
monitors our website over a specified period of time and then
subtracts all repeat visits by each individual visitor over such
period). We currently service customers from over 140 countries.
Our sales and marketing strategy leverages the strength of our
FOREX.com brand name by employing a combination of direct
marketing techniques and focused branding programs. Through our
direct marketing efforts, in 2009 we generated approximately
0.8 million registered users of our demonstration retail
trading accounts which simulate live trading on our proprietary
platform, referred to as registered practice trading accounts,
representing a compound annual growth rate of 41.4% from
approximately 0.2 million registered practice trading
account users in 2005. Complementing our direct marketing
strategy, we have assembled a multilingual retail sales force
that utilizes a highly interactive approach to convert
registered retail practice trading accounts into retail tradable
accounts and manage ongoing customer retention efforts.
We have successfully expanded the FOREX.com brand from one that
was U.S.-based, to a brand used in multiple international
markets. We currently market to retail traders in English,
Japanese, Arabic, traditional and simplified Chinese, and
Russian, and have global online and offline advertising
campaigns that direct prospective customers to the FOREX.com
website in each of our target markets.
We have grown our company internationally through an efficient
business model that combines our centralized trading, middle-
and back-office functions, which are 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.
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 other asset
classes and to prepare them for trading in the market. We 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. We also employ a multilingual
staff of trained, licensed customer service representatives
located in the United States to handle customer inquiries via
telephone, email and online chat seven days a week, with
continuous
24-hour
coverage beginning Sunday at 10:00 a.m. through Friday at
5:00 p.m. and on Saturday from 9:00 a.m. to
5:00 p.m. (Eastern Standard Time).
In May 2009, Forrester Research, a leading independent research
company, conducted a survey of nearly 500 of our customers in
the United States on our behalf in which more than 79.0%
indicated they were very satisfied with FOREX.com.
Consistent
Execution Quality
We believe our customers choose us in part because of the
consistent quality of our trade execution capabilities, which is
comprised of three main aspects: pricing, certainty of execution
and timing. 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 relationships with three established global prime
brokers, including Deutsche Bank AG, UBS AG, and The Royal Bank
of Scotland plc as well as relationships with 13 additional
wholesale forex trading partners, and access to other trading
platforms and other wholesale forex trading partners, which give
us access to over 25 potential liquidity providers. We believe
these relationships give us access to a pool of forex liquidity,
which ensures that we are able to
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execute our customers trades in any of
the 39 currency pairs or six
contracts-for-difference
product offerings we offer and in the notional amount they
request.
Proven
Track Record of Innovation
We believe that our proprietary technology infrastructure
provides us with significant competitive advantages and allows
us to quickly adapt to meet the rapidly changing needs of the
marketplace. As a result we have a long history of introducing
new products, services and innovative tools for our customers.
For example, over the past two years we have introduced the
following products and services:
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February 2009 We introduced trading of gold
and silver in the spot market.
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August 2009 For our customers located outside
of the United States, we introduced trading in oil
contracts-for-difference,
including Brent Crude Oil and West Texas
contracts-for-difference.
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September 2009 We launched a new version of
our active trader platform, FOREXTrader PRO, featuring an
updated user interface designed to improve overall usability and
deliver faster trade execution, enhanced charting tools and
improved chart-based trading capabilities.
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February 2010 We introduced website trading
into the FOREX.com offering, which provides streamlined trading,
research and account management features in a secure, web-based
environment. The availability of website trading complements our
downloadable active trader platform, FOREXTrader PRO, and is an
important part of our long-term strategy to attract a more
diverse customer base, including novice traders who desire an
easy-to-use trading experience that also includes education,
research and customer support tools in a secure,
customer-friendly website, and self-directed retail investors in
the United States who are already accustomed to trading via the
websites of their online brokerage firms.
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February 2010 We introduced a version of the
FOREX.com website designed for smartphones and web-enabled
mobile devices. This version provides customers and registered
practice trading account users with secure account access to
trade and manage their accounts from their mobile devices as
well as access to quotes, charts, news and research and an
extensive learning section featuring articles and video
tutorials.
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March 2010 We launched GAIN GTX, our
institutional electronic communications network, for our
institutional customers consisting of commercial and investment
banks, hedge funds, institutional asset managers, corporate
treasuries and proprietary trading firms. GAIN GTX allows our
institutional customers to enter forex bids and offers or to buy
or sell instantly at competitive prices from leading
participating banks including forex dealers, clearing banks and
prime brokers.
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April 2010 We launched a new Arabic language
service under our FOREX.com U.K. division to service growing
demand from retail traders in the Middle East.
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June 2010 We further expanded our product
offering to include equity index
contracts-for-difference.
Equity index
contracts-for-difference
give our customers outside the United States access to trade
popular global equity indices located in the United Kingdom,
Germany, France and United States.
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July 2010 We launched a full-featured iPhone
application that provides our customers and registered practice
trading account users with mobile trading capabilities along
with real-time news, charts, research and account information.
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Extensive
Risk-Management Experience and Capital Position in Excess of
Current Regulatory Requirements
We have leveraged our management teams extensive
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
actively initiate proprietary directional market positions in
anticipation of future movements in the relative prices of the
products we offer. Instead, we continuously evaluate market risk
exposure and actively hedge customer transactions through our
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wholesale forex trading platform on a continuous basis. As a
result of our hedging activities, we are likely to have open
positions with various products we offer. For the nine months
ended September 30, 2010, a minimum of 90.9% of our average
daily trading volume, on any given day, was either naturally
hedged where one of our customers executing a trade in a
currency was offset by a trade taken by another customer, or
hedged by us with a third-party financial institution.
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 compares favorably to that of many
of our competitors that operate primarily in forex trading and
positions us favorably for potential future increases of 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
of their 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 had more than 15 years of forex and global markets
experience including 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 British Pound Sterling desk of
Merrill Lynch & Co., Inc., prior to his joining us in
2000. We believe the experience of our senior management team,
including more than 25 years of forex trading experience
for our President and Chief Executive Officer and more than
20 years of forex trading experience for our Chief Dealer,
has been integral to our historical success 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:
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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.
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Our Operations May be Restricted by Existing and Evolving
Regulatory Requirements. We operate in a heavily
regulated environment that imposes significant compliance
requirements and where failure to comply may result in
regulatory actions and sanctions against us. For example, in
August 2010 the Commodity Futures Trading Commission released
new rules relating to the regulation of retail forex trading,
including minimum security deposits, registration, risk
disclosures relating to profits, record keeping, financial
reporting, minimum capital and other operational standards. In
addition, jurisdictions such as Japan and the United Kingdom
have imposed additional regulatory requirements on our business
operations in those jurisdictions.
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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 that are beyond
our control.
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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
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6
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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.
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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.
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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.
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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.
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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
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.
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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
because of the potential failure or default by the
counterparties with whom we do business.
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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 18 of this prospectus.
Our
Growth Strategies
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 believe we are one of the largest provider of retail forex
trading in the United States based on active traded accounts.
The Aite Group estimates that, as of July 2010, there were over
110 million retail online investors globally, but only
1.1 million online retail investors who traded forex. We
plan to increase our presence in the U.S. market and other
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 retail
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 retail
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.
7
Continue
the International Expansion of Our Retail 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 FOREX.com, our leading Internet domain name, as
well as our market-leading customer service enhances our ability
to promote our advanced trading technology and tools, 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. 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
sales and customer support to the local market. We operate in
the United Kingdom where our regulatory passport rights allow us
to operate in a number of European Economic Area jurisdictions,
and we believe Europe is an expanding market we will continue to
develop. We have expanded international offices and will
continue to deploy resources and capital to meet the global
requirements to service our customers. In 2006, we registered
with the Cayman Islands Monetary Authority in the Cayman
Islands. In 2008, we acquired RCG GAIN Limited (formerly a joint
venture with Rosenthal Collins Group, now known as GAIN
Capital-Forex.com U.K., Ltd.), in the United Kingdom, which is
registered with the Financial Services Authority, and a
U.S. registered broker-dealer (now known as GAIN Capital
Securities, Inc.), which is registered with the U.S. Securities
and Exchange Commission and the Financial Industry Regulatory
Authority. Between 2008 and 2009, we acquired Fortune Capital
Co. Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.),
which maintains a securities license with the Financial Services
Authority in Japan, and incorporated GAIN Capital-Forex.com Hong
Kong, Ltd., which is registered with the Securities and Futures
Commission. In 2009, we incorporated GAIN Capital-Forex.com
Australia, Pty. Ltd., which received regulatory approval from
Australian Securities and Investments Commission in March 2010.
Continue
Growth of Our Institutional Forex Business
The institutional forex trading market is composed of commercial
and investment banks, hedge funds, institutional asset managers,
corporate treasuries and other professional traders that trade
with each other predominantly through electronic communications
networks. We believe that we can continue to expand our
institutional forex customer trading base by offering these
institutions a superior technology product in the form of our
GAIN GTX electronic communications network trading platform.
GAIN GTX was designed specifically for institutional investors
and features advanced algorithmic trading capabilities, order
management and routing tools and, we believe, a pool of forex
liquidity from anonymous and disclosed liquidity providers via
our extensive network of wholesale forex trading partners.
Expand
Our Product Offering
We intend to grow our business by offering our customers
additional products complementary to our current product
offerings. Approximately two-thirds of our existing customers
have told us that they trade or have traded other financial
products, such as equities, futures and options. As a result, 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 scalable technology infrastructure,
as well as our track record of introducing new products to our
customers, will allow us to attract and satisfy our
customers increased trading needs, which will in turn
result in increased customer trading volume with us.
We intend to expand our existing forex offerings by increasing
the number of available currency pairs, as well as adding OTC
currency options and a range of other currency-related
investment products.
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Contracts-For-Difference
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We intend to build upon our existing
contracts-for-difference
product offerings outside of the United States to support
trading of other financial instruments and commodity products
located in various jurisdictions, including
8
Europe, Japan, Hong Kong, Australia and the United States.
Contracts-for-difference
are instruments linked to the performance of the price of an
underlying security, including precious metals, energy products
and other commodities, as well as stock indices and government
bonds. Because
contracts-for-difference
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.
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Listed Exchange Products
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Our status as a registered Futures Commission Merchant provides
us with the ability to offer a variety of exchange-traded
products, including futures and options on equity and
fixed-income indices, and commodities, to our customers. We also
intend to expand the offerings of GAIN Capital Securities, Inc.
to include advanced options trading, as well as fixed-income and
other equities products.
Increase
Our Partnerships with Other Financial Services
Firms
We currently support more than a dozen major white label
partnerships with major financial institutions, securities firms
and registered broker-dealers, representing 37.3% of our trade
volume for the nine months ended September 30, 2010. We
intend to continue to develop relationships with white label
partners and introducing brokers which provide us with
additional channels to attract prospective customers whom we
believe we could not otherwise efficiently solicit. These
prospective customers include individuals who have demonstrated
significant loyalty to their existing financial services firm as
well as individuals in jurisdictions where we are not currently
registered with the local regulator. 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.
White label partners and introducing broker relationships who
were first active in the nine months ended September 30,
2010 represented 9.0% of our total trading volume.
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 RCG GAIN Limited (now
known as GAIN Capital-Forex.com U.K., Ltd.), Fortune Capital Co.
Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.) and a
U.S. registered broker-dealer of equity securities (now
known as GAIN Capital Securities, Inc.). More recently, we
acquired assets of MG Financial LLC, a forex trading firm, on
September 14, 2010 and on October 5, 2010, we entered
into an asset purchase agreement with Capital Market Services,
LLC, and affiliated entities, to acquire the retail forex
trading accounts of this forex trading firm. 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 currency with which to pursue
future acquisitions.
Capture
Additional Market Share as a Result of Increased Regulatory
Requirements
Regulators in the United States and other jurisdictions have
established and continue to establish, a series of new
regulations that impact retail forex brokers, including
substantial increases in minimum required regulatory capital,
increased oversight of third-party introducing brokers and
regulations regarding the execution of trades. While complying
with these regulations may increase our operational costs, we
believe that these regulations have given retail investors more
confidence in retail forex as an asset class and in retail forex
firms that are able to comply with them. We believe that these
regulations have reduced the number of firms offering retail
forex services, even as the number of retail forex customers and
the retail forex trade volume has grown. As the retail forex
industry consolidates, scale and ability to comply with
regulation will become increasingly important for retail forex
brokers, presenting opportunities to larger firms, such as us,
that can meet the more stringent regulatory requirements.
9
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 the
National Futures Association, 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 this 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, 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 Bedminster One,
135 Route 202/206, 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 are using as our
new principal executive offices. The term of the lease runs from
January 1, 2010 to December 1, 2025, and we moved to
our new facilities in January 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, Hong Kong, and Australia 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, 2010,
we employed 361 individuals worldwide.
We are registered with the Commodity Futures Trading Commission
as a Future Commission Merchant, Forex Dealer Merchant and
Retail Foreign Exchange Dealer. We are also a member of the
National Futures Association. Our subsidiary, GAIN Capital
Forex.com Japan, Co. Ltd., a Tokyo-based introducing broker is
regulated by the Financial Services Authority in Japan. In
April 2010, GAIN Capital Forex.com Japan, Co. Ltd. became
our wholly-owned subsidiary. We also operate GAIN Capital
Securities, Inc., a registered broker-dealer (which is
registered with the U.S. Securities and Exchange Commission and
is a member of the Financial Industry Regulatory Authority). We
are authorized as principal and counterparty to spot foreign
currency trades, contracts-for-difference and gold and silver
spot contracts in the United Kingdom, Japan, and Australia. We
are also registered as a
10
Securities Arranger with the Cayman Islands Monetary Authority
in the Cayman Islands and registered with the Securities and
Futures Commission in Hong Kong and the Australian Securities
and Investment Commission in Australia, to act as an introducer
to GAIN Capital Group, LLC in the United States. Furthermore,
beginning in October 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or the Dodd-Frank Act, will require us
to ensure that all of our customers resident in the United
States have accounts with our National Futures
Association-registered operating entity.
Between 2006 and 2008, a significant portion of our trading
volume, trading revenue, net income and cash flow was 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
prohibition on forex trading firms providing retail forex
trading services through direct solicitation to Chinese
residents through the Internet without a China Banking and
Regulatory Commission permit. We do not have such a permit and
to our knowledge, no such permit exists. The regulatory rules
and process in China are complex and are not as clear as those
in many other jurisdictions. 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 accepted new customers.
Based on our most recent review of the relevant regulatory
requirements in China, we now believe that we can accept
customers from China if the customers come to our website
without being solicited by us to do so. As a result, we began
accepting non-solicited customers from China in June 2010.
We cannot provide any assurance that we will not be subject to
fines, penalties or sanctions, and if so in what amounts,
relating to our historical and current forex trading services
through the Internet to Chinese residents.
As a result of the termination of our trading operations in
China in December 2008, all references to China
refer to mainland China and exclude the Hong Kong and Macau
Special Administrative Regions. The historical financial
information presented in this prospectus may not be indicative
of our future performance. For the year ended December 31,
2009, net revenue associated with customers residing in China
was immaterial compared to $24.4 million for the year ended
December 31, 2008. Our total direct expenses attributable
to our operations in China were less than $0.4 million for
the year ended December 31, 2009, compared to
$5.9 million for the prior year.
11
THE
OFFERING
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Common stock offered by us |
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shares |
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Common stock offered by the selling stockholders |
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shares |
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Total common stock offered in this offering |
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shares |
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Common stock to be outstanding immediately after this offering |
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shares |
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Over-allotment option |
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shares
offered by selling stockholders |
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Use of proceeds |
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We intend to use the proceeds we receive from this offering only
to cover historical and expected costs from this offering. We
will not receive any of the proceeds from the sale of shares by
the selling stockholders. See Use of Proceeds. |
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Proposed New York Stock Exchange symbol |
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GCAP |
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Risk factors |
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See Risk Factors beginning on page 18 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 ,
2010. The number of shares of our common stock to be outstanding
after this offering does not take into account:
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shares
of common stock issuable upon the exercise of outstanding stock
options as
of ,
2010 at a weighted average exercise price of
$ per share;
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shares
of common stock issuable pursuant to outstanding restricted
stock units as
of ,
2010;
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an aggregate
of shares
of common stock that will be reserved for future issuance under
our 2010 Omnibus Incentive Compensation Plan as of the closing
of this offering; and
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an aggregate
of shares
of common stock that will be reserved for future issuance under
our 2010 Employee Stock Purchase Plan.
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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.
12
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,
2007, 2008 and 2009 and the consolidated statements of financial
condition data as of December 31, 2008 and 2009 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,
2005 and 2006 and the consolidated statements of financial
condition data as of December 31, 2005, 2006 and 2007 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, 2010 and 2009 and the
consolidated statement of financial condition data as of
September 30, 2010 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, 2009 are derived from
our consolidated financial statements not included in this
prospectus. The results of operations for the nine months ended
September 30, 2010 are not necessarily indicative of the
results to be expected for the full year ended December 31,
2010.
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 are not reflective of our
operating performance.
The pro forma consolidated statement of financial condition data
as of September 30, 2010 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, 2009 and the nine months ended
September 30, 2010 reflect the sale by us
of
newly issued shares of our common stock and 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.
13
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|
|
|
|
|
|
|
|
|
|
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2005(1)
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|
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2006(2)
|
|
|
2007(2)
|
|
|
2008(2)
|
|
|
2009(2)
|
|
|
2009(2)
|
|
|
2010(2)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
36,249
|
|
|
$
|
69,471
|
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
|
$
|
153,375
|
|
|
$
|
114,332
|
|
|
$
|
147,667
|
|
Other revenue
|
|
|
223
|
|
|
|
242
|
|
|
|
437
|
|
|
|
2,366
|
|
|
|
2,108
|
|
|
|
1,119
|
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
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|
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36,472
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|
|
|
69,713
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|
|
|
118,613
|
|
|
|
188,370
|
|
|
|
155,483
|
|
|
|
115,451
|
|
|
|
149,581
|
|
Interest revenue
|
|
|
1,519
|
|
|
|
3,145
|
|
|
|
5,024
|
|
|
|
3,635
|
|
|
|
292
|
|
|
|
228
|
|
|
|
243
|
|
Interest expense
|
|
|
(110
|
)
|
|
|
(2,431
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)
|
|
|
(4,299
|
)
|
|
|
(3,905
|
)
|
|
|
(2,456
|
)
|
|
|
(1,848
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
1,409
|
|
|
|
714
|
|
|
|
725
|
|
|
|
(270
|
)
|
|
|
(2,164
|
)
|
|
|
(1,620
|
)
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
37,881
|
|
|
|
70,427
|
|
|
|
119,338
|
|
|
|
188,100
|
|
|
|
153,319
|
|
|
|
113,831
|
|
|
|
148,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
9,511
|
|
|
|
17,258
|
|
|
|
25,093
|
|
|
|
37,024
|
|
|
|
41,503
|
|
|
|
29,621
|
|
|
|
34,031
|
|
Selling and marketing
|
|
|
3,256
|
|
|
|
12,517
|
|
|
|
21,836
|
|
|
|
29,312
|
|
|
|
36,875
|
|
|
|
26,791
|
|
|
|
28,192
|
|
Trading expenses and commissions
|
|
|
7,279
|
|
|
|
10,321
|
|
|
|
10,436
|
|
|
|
16,310
|
|
|
|
14,955
|
|
|
|
10,431
|
|
|
|
18,601
|
|
Bank fees
|
|
|
507
|
|
|
|
935
|
|
|
|
2,316
|
|
|
|
3,754
|
|
|
|
4,466
|
|
|
|
3,415
|
|
|
|
3,170
|
|
Depreciation and amortization
|
|
|
494
|
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
2,689
|
|
|
|
2,013
|
|
|
|
2,568
|
|
Communications and data processing
|
|
|
424
|
|
|
|
873
|
|
|
|
1,659
|
|
|
|
2,467
|
|
|
|
2,676
|
|
|
|
1,950
|
|
|
|
2,209
|
|
Occupancy and equipment
|
|
|
530
|
|
|
|
1,045
|
|
|
|
1,616
|
|
|
|
2,419
|
|
|
|
3,548
|
|
|
|
2,391
|
|
|
|
2,963
|
|
Bad debt provision/(recovery)
|
|
|
836
|
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
760
|
|
|
|
593
|
|
|
|
514
|
|
Professional fees
|
|
|
761
|
|
|
|
1,295
|
|
|
|
1,380
|
|
|
|
3,104
|
|
|
|
3,729
|
|
|
|
2,549
|
|
|
|
2,623
|
|
Software expense
|
|
|
21
|
|
|
|
78
|
|
|
|
123
|
|
|
|
888
|
|
|
|
1,132
|
|
|
|
712
|
|
|
|
1,431
|
|
Professional dues and memberships
|
|
|
15
|
|
|
|
48
|
|
|
|
187
|
|
|
|
773
|
|
|
|
698
|
|
|
|
565
|
|
|
|
205
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible, redeemable preferred stock
embedded
derivative(2)
|
|
|
|
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
|
|
40,820
|
|
|
|
48,936
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
155
|
|
|
|
3,085
|
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
1,746
|
|
|
|
1,091
|
|
|
|
3,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,789
|
|
|
|
110,823
|
|
|
|
232,374
|
|
|
|
(78,496
|
)
|
|
|
113,090
|
|
|
|
122,942
|
|
|
|
149,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
14,092
|
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
40,229
|
|
|
|
(9,111
|
)
|
|
|
(1,141
|
)
|
Income tax expense
|
|
|
5,881
|
|
|
|
9,063
|
|
|
|
21,615
|
|
|
|
34,977
|
|
|
|
12,556
|
|
|
|
11,423
|
|
|
|
18,192
|
|
Equity in earnings of equity method investment
|
|
|
(3
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
8,208
|
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
27,673
|
|
|
|
(20,534
|
)
|
|
|
(19,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(321
|
)
|
|
|
(15
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
8,208
|
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
|
$
|
(20,519
|
)
|
|
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
(63,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred share accretion
|
|
|
(63
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
Common Shareholders
|
|
$
|
8,145
|
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
27,994
|
|
|
$
|
(20,519
|
)
|
|
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.96
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
21.41
|
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.49
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
1.88
|
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,157,464
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,307,379
|
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,634,016
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
14,909,184
|
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
(unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.12
|
|
|
$
|
15.54
|
|
|
$
|
22.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.76
|
|
|
$
|
1.36
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes
appear on the following page)
14
|
|
|
(1)
|
|
These amounts do not include the
impact of the embedded derivative liability of approximately
$37.6 million (unaudited) as of December 31, 2005 and
the change in fair value for the year ended December 31,
2005 of $28.8 million (unaudited).
|
|
|
|
(2)
|
|
For each of the periods indicated,
in accordance with Financial Accounting Standards Board
Accounting Standards Codification 815, Derivatives and
Hedging, 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.
|
|
|
|
(3)
|
|
These amounts do not include the
impact of the change in fair value of our preferred stock
embedded derivative, the effect of redemption of preferred stock
and the effect of preferred stock accretion. For the year ended
December 31, 2009 and the nine months ended
September 30, 2010, the change in fair value of our
preferred stock embedded derivative resulted in a gain of
$1.7 million and a loss of $48.9 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
(in thousands unless otherwise stated)
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,482
|
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
222,524
|
|
|
$
|
197,938
|
|
|
$
|
258,012
|
|
Receivables from brokers
|
|
$
|
59,080
|
|
|
$
|
71,750
|
|
|
$
|
74,630
|
|
|
$
|
50,817
|
|
|
$
|
76,391
|
|
|
$
|
100,171
|
|
|
$
|
89,569
|
|
Total assets
|
|
$
|
82,661
|
|
|
$
|
113,491
|
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
$
|
351,940
|
|
|
$
|
315,710
|
|
|
$
|
405,361
|
|
Payables to brokers, dealers, futures commission merchants, and
other regulated entities
|
|
$
|
4,577
|
|
|
$
|
5,248
|
|
|
$
|
2,163
|
|
|
$
|
1,679
|
|
|
$
|
2,769
|
|
|
$
|
1,732
|
|
|
$
|
5,857
|
|
Payables to customers
|
|
$
|
5,031
|
|
|
$
|
70,321
|
|
|
$
|
106,741
|
|
|
$
|
122,293
|
|
|
$
|
196,985
|
|
|
$
|
168,266
|
|
|
$
|
216,587
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
$
|
|
|
|
$
|
99,286
|
|
|
$
|
264,566
|
|
|
$
|
82,785
|
|
|
$
|
81,098
|
|
|
$
|
123,604
|
|
|
$
|
130,034
|
|
Notes payable
|
|
$
|
|
|
|
$
|
27,500
|
|
|
$
|
49,875
|
|
|
$
|
39,375
|
|
|
$
|
28,875
|
|
|
$
|
31,500
|
|
|
$
|
21,000
|
|
Total shareholders equity/(deficit)
|
|
$
|
23,605
|
|
|
$
|
(154,242
|
)
|
|
$
|
(316,340
|
)
|
|
$
|
(172,154
|
)
|
|
$
|
(139,890
|
)
|
|
$
|
(188,831
|
)
|
|
$
|
(154,983
|
)
|
Selected
Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
($ in thousands unless otherwise stated)
|
|
Number of opened retail
accounts(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,626
|
|
|
|
63,576
|
|
|
|
105,924
|
|
|
|
154,190
|
|
|
|
211,136
|
|
|
|
195,559
|
|
|
|
264,834
|
|
China
|
|
|
3,202
|
|
|
|
8,395
|
|
|
|
19,869
|
|
|
|
27,358
|
|
|
|
27,362
|
|
|
|
27,362
|
|
|
|
28,819
|
|
Number of tradable retail accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,761
|
|
|
|
27,836
|
|
|
|
41,120
|
|
|
|
36,744
|
|
|
|
51,652
|
|
|
|
47,374
|
|
|
|
70,618
|
|
China
|
|
|
1,631
|
|
|
|
4,799
|
|
|
|
9,702
|
|
|
|
2,839
|
|
|
|
1
|
|
|
|
8
|
|
|
|
1,029
|
|
Adjusted net capital in excess of regulatory
requirements(5)
|
|
$
|
20,065
|
|
|
$
|
15,296
|
|
|
$
|
44,856
|
|
|
$
|
98,571
|
|
|
$
|
71,087
|
|
|
$
|
68,604
|
|
|
$
|
60,565
|
|
(footnotes
continued on next page)
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
($ in thousands unless otherwise stated)
|
|
Number of traded retail accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,896
|
|
|
|
28,270
|
|
|
|
43,139
|
|
|
|
52,555
|
|
|
|
52,755
|
|
|
|
43,565
|
|
|
|
52,486
|
|
China
|
|
|
2,416
|
|
|
|
5,533
|
|
|
|
11,568
|
|
|
|
11,647
|
|
|
|
7
|
|
|
|
6
|
|
|
|
269
|
|
Total trading volume (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,246.7
|
|
|
$
|
928.3
|
|
|
$
|
1,093.9
|
|
China
|
|
$
|
24.4
|
|
|
$
|
50.8
|
|
|
$
|
103.4
|
|
|
$
|
172.4
|
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
Net deposits received from retail customers (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70.2
|
|
|
$
|
102.8
|
|
|
$
|
184.2
|
|
|
$
|
277.3
|
|
|
$
|
257.1
|
|
|
$
|
186.9
|
|
|
$
|
205.2
|
|
China
|
|
$
|
6.8
|
|
|
$
|
10.5
|
|
|
$
|
26.0
|
|
|
$
|
25.3
|
|
|
$
|
(1.4
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
0.3
|
|
Retail revenue per million traded
|
|
$
|
176.8
|
|
|
$
|
155.3
|
|
|
$
|
175.2
|
|
|
$
|
124.1
|
|
|
$
|
123.0
|
|
|
$
|
122.6
|
|
|
$
|
154.1
|
|
|
|
|
(4)
|
|
Opened retail 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
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
122.2
|
|
|
$
|
238.3
|
|
|
$
|
355.4
|
|
|
$
|
878.9
|
|
|
$
|
679.2
|
|
|
$
|
506.8
|
|
|
$
|
579.0
|
|
China(6)(7)
|
|
|
24.4
|
|
|
|
50.8
|
|
|
|
103.4
|
|
|
|
172.4
|
|
|
|
0.4
|
|
|
|
0.2
|
(7)
|
|
|
0.7
|
(8)
|
Canada
|
|
|
9.6
|
|
|
|
29.2
|
|
|
|
58.6
|
|
|
|
122.9
|
|
|
|
142.5
|
|
|
|
122.2
|
|
|
|
62.9
|
|
Europe, Middle East and Africa
|
|
|
27.9
|
|
|
|
42.9
|
|
|
|
64.3
|
|
|
|
153.1
|
|
|
|
179.5
|
|
|
|
126.5
|
|
|
|
182.3
|
|
Asia (ex-China)
|
|
|
33.8
|
|
|
|
42.7
|
|
|
|
54.0
|
|
|
|
96.4
|
|
|
|
159.1
|
|
|
|
110.0
|
|
|
|
194.5
|
|
Rest of World
|
|
|
14.0
|
|
|
|
43.5
|
|
|
|
38.8
|
|
|
|
74.9
|
|
|
|
86.0
|
|
|
|
62.6
|
|
|
|
74.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,246.7
|
|
|
$
|
928.3
|
|
|
$
|
1,093.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(7)
|
|
For the year ended
December 31, 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. All of these
accounts were closed as of December 31, 2009.
|
|
|
|
(8)
|
|
Based on our most recent review of
the relevant regulatory requirements in China, we now believe
that we can accept customers from China if the customers come to
our website without being solicited by us to do so. As a result,
we began accepting non-solicited customers from China in June
2010.
|
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 Financial Accounting
Standards Board Accounting Standards Codification 815,
Derivatives and Hedging. 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 redemption
feature and related accounting treatment will no longer be
applicable upon conversion of our preferred stock in connection
with our initial public offering.
16
Historically, in accordance with Financial Accounting Standards
Board Accounting Standards Codification 815, 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 of 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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
Net (loss)/income applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
|
$
|
(20,519
|
)
|
|
$
|
(18,931
|
)
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
|
|
40,820
|
|
|
|
48,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
30,629
|
|
|
$
|
49,644
|
|
|
$
|
26,307
|
|
|
$
|
20,301
|
|
|
$
|
30,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
16.13
|
|
|
$
|
38.56
|
|
|
$
|
20.12
|
|
|
$
|
15.54
|
|
|
$
|
22.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.05
|
|
|
$
|
3.31
|
|
|
$
|
1.76
|
|
|
$
|
1.36
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(in thousands)
|
|
|
Consolidated Statement of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
258,012
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
405,361
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
21,000
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
$
|
130,034
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
$
|
(154,983
|
)
|
|
|
|
|
|
|
|
|
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 of our common
stock.
The pro forma as adjusted financial information is based upon
the actual initial public offering price and other terms of this
offering determined at pricing.
17
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 and 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 domestic and global 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.
During the past few years, there has been significant disruption
and volatility in the global financial markets. Many countries,
including the United States, have recently experienced
recessionary conditions. 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 Reduce Our
Profitability.
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.
18
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 fluctuations in the market. 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:
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price changes in foreign currencies;
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lack of liquidity in foreign currencies in which we have
positions; and
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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.
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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. In a
forex trade, participants buy one currency and simultaneously
sell another currency. We refer to the two currencies that make
up a forex trade as a currency pair. The first currency noted in
the pair is the base currency and the second is the counter
currency. 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.
19
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 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
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.
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 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 also license or are permitted to use
intellectual property or technologies owned by others. In the
event such intellectual property or technology becomes material
to our business, our inability to continue use such technologies
would have a material adverse effect on our business. 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.
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Our
Cost Structure Is Largely Fixed. If Our Revenues Decline and We
Are Unable to Reduce Our Costs, Our Profitability Will Be
Adversely Affected.
Our cost structure is largely fixed. We base our cost structure
on historical and expected levels of demand for our products and
services, as well as our fixed operating infrastructure, such as
computer hardware and software, hosting facilities and security
and staffing levels. If demand for our products and services
declines and, as a result, our revenues decline, we may not be
able to adjust our cost structure on a timely basis and our
profitability may be materially adversely affected.
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, 2009, we incurred sales and
marketing expenses of $36.9 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.
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.
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 and may continue to increase.
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, regulators or
self-regulatory
21
organizations 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.
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
improperly record 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 or 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 76.7% of our customers deposits were
funded in this manner for the nine months ended
September 30, 2010. 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 or any increase in the fees associated with such use,
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. When there is unauthorized
access to credit card
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data that results in financial loss, there is the potential that
we could experience reputational damage and parties could seek
damages from us.
Failure
to Maintain the Anonymity of Our Institutional Customers on Our
GTX Electronic Communications Network, or ECN, Could Harm Our
Reputation and Result in a Material Adverse Effect on Our
Business, Financial Condition and Results of Operations and Cash
Flows.
We operate our GTX ECN as a fully anonymous trading environment
that offers our institutional customers direct market access and
trade execution capabilities. If outside individuals determine
the identity of our institutional customers, we may be subject
to customer claims against us for negligence, fraud, failure to
supervise, employee error and intentional misconduct, among
others. Any such claims may harm our reputation and result in a
material adverse effects on our business, financial condition
and results of operations and cash flows.
A
Financial Services 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, Samantha Roady, our chief
marketing officer, 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, 2010. 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.
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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.
The
Expansion of Our Trading 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 Operations and Cash
Flows.
All of the risks that pertain to our trading activities in the
forex market also apply to our listed securities, CFDs, OTC
currency derivatives and gold and silver spot trading and any
other products we may offer in the future. These risks include
market risk, counterparty risk, liquidity risk, technology risk,
third-party risk and risk of human error. In addition, we have
limited 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. In addition
we would be subject to local securities laws for all of these
offerings. Our
non-U.S. operating
subsidiaries, including, GAIN Capital-Forex.com U.K., Ltd.,
which is licensed with the Financial Services Authority in the
United Kingdom, GAIN Capital-Forex.com Australia, Pty. Ltd.,
which is licensed with the Australian Securities and Investment
Commission, and GAIN Capital Forex.com Japan, Co. Ltd., which is
licensed with the Financial Services Authority in Japan, offer
and sell CFDs outside the United States to non-U.S. persons.
CFDs are not and may not be offered in the United States by us
and are not eligible for resale to U.S. persons. They are
not currently registered with the U.S. Securities and
Exchange Commission or any other U.S. regulator. CFDs may
not be enforceable in the United States. To the extent our
current CFD product offerings constitute an offer or sale of
securities under the U.S. federal securities laws, we will
need to comply with those U.S. federal securities laws.
Failure to effectively manage these risks or properly comply
with local laws or regulations relating to our product
offerings, including U.S. federal securities laws, may
expose us to fines, penalties or other sanctions that could 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.
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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 trading is characterized by:
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changing customer demands;
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the need to enhance existing services and products or introduce
new services and products;
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evolving industry practices; and
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rapidly evolving technology solutions.
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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.
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 Are Able to Obtain Capital More
Easily Which Could Put Us at a Competitive
Disadvantage.
We compete in the OTC markets based in part 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:
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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;
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provide products and services we do not offer;
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provide execution and clearing services that are more rapid,
reliable or efficient, or less expensive than ours;
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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;
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adapt at a faster rate to market conditions, new technologies
and customer demands;
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offer better, faster and more reliable technology;
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outbid us for desirable acquisition targets;
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more efficiently engage in and expand existing relationships
with strategic alliances;
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market, promote and sell their products and services more
effectively; and
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develop stronger relationships with customers.
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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.
Our
International Operations Present Special Challenges and Our
Failure to Adequately Address Such Challenges or Compete in
These Markets, Either Directly or Through Joint Ventures With
Local Firms, Could Have a Material Adverse Effect on Our
Business, Financial Condition and Results of Operations and Cash
Flows.
In 2009, we generated approximately 45.5% of our trading volume
from customers outside the United States. Expanding our business
in other emerging markets is an important part of our growth
strategy. Due to certain cultural, regulatory and other
challenges 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. These challenges include:
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less developed or mature local technological infrastructure and
higher costs, which could make our products and services less
attractive or accessible in emerging markets;
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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;
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less developed and established local financial and banking
infrastructure, which could make our products and services less
accessible in emerging markets;
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reduced protection of intellectual property rights;
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inability to enforce contracts in some jurisdictions;
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difficulties and costs associated with staffing and managing
foreign operations, including reliance on newly hired local
personnel;
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tariffs and other trade barriers;
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currency and tax laws that may prevent or restrict the transfer
of capital and profits among our various operations around the
world; and
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time zone, language and cultural differences among personnel in
different areas of the world.
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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.
We may also face intense competition from other international
firms over relatively scarce opportunities for market entry.
Given the intense
26
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.
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 CFTC and 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. 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 Regulation
We
Operate in a Heavily Regulated Environment That Imposes
Significant Requirements and Costs on Us. Failure to Comply With
the Rapidly Evolving Laws and Regulations Governing Our Forex
and Other Businesses 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. We received local authorization
to conduct our forex trading services in Australia in March 2010.
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, the
U.S. Securities and Exchange Commission, or SEC, the
Financial Industry Regulatory Authority, or FINRA, and the NFA.
We are also regulated 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 United
Kingdom, the Australian Securities and Investment Commission in
Australia, and the Securities and Futures Commission in Hong
Kong, among others. After we have successfully completed our
initial public offering we plan to register for a license to
trade forex in Singapore. In addition, we operate GAIN Capital
Forex.com Japan, Co. Ltd., a Tokyo-based market maker authorized
by the Financial Supervisory Authority in Japan. 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; maintaining specified minimum amounts of
capital and limiting withdrawals of funds from our regulated
operating subsidiaries; making regular financial and other
reports to regulators; licensing for our operating subsidiaries
and our employees and the conduct of our directors, officers,
employees and affiliates. Compliance with these regulations is
complicated, time consuming and expensive. 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. In
addition, 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
27
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.
As a
Result of Recent Regulatory Changes in Certain Jurisdictions,
Our Operations and Profitability May Be Disrupted and We May Be
Subject to Regulatory Action Taken Against Us if a Regulatory
Authority Deems Our Operations Are Out of Compliance, or
Requires Us to Comply With Additional Regulatory
Requirements.
Recently, the legislative and regulatory environment in which we
operate has undergone significant changes and there are likely
to 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 on continued evolution of the regulatory
environment and our continued compliance. 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 are
modified. To the extent our current activities are deemed
noncompliant with the law in a given jurisdiction, we may incur
a disruption in services offered to current customers as we are
forced to comply with additional regulations.
In August 2010, the CFTC released new rules relating to retail
forex regarding, among other things, increased initial minimum
security deposits, registration, risk disclosures relating to
customer profits, record keeping, financial reporting, minimum
capital and other operational standards. The impact on us of
these new CFTC regulations, which became effective on
October 18, 2010, is uncertain. In particular, the
inability to offer customers who are U.S. residents
leverage in excess of 50-to-1 for major currency pairs
designated by the NFA and 20-to-1 for all other currency pairs
(as compared to 100-to-1 previously) may diminish the trading
volume of these customers which may affect our revenue and
profitability. In addition, we are uncertain of the effect the
required risk disclosures will have on our ability to attract
and retain our retail customers.
Furthermore, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act, enacted in July 2010 will
have broad effects on global derivatives markets generally. For
example, this legislation may affect the ability of forex market
makers to do business or affect the prices and terms on which
such market makers will do business with us. These effects may
adversely impact our ability to provide forex transactions to
our customers and could have a material adverse affect on our
business and profitability. Beginning in October 2010, the
Dodd-Frank Act will require us to ensure that our customers
resident in the United States have accounts with our
NFA-registered operating entity and not our international
entities. As a result, some of our customers may decide to
transact their trading with a forex broker who is not subject to
this requirement.
In the European Union, new laws have been proposed to regulate
OTC derivatives. These proposals would, among other things,
require mandatory central clearing of some derivatives, higher
collateral requirements, and higher capital charges for certain
OTC derivatives. These proposals are still at the consultation
stage and detailed legislative proposals have not yet been
published. Accordingly, it is difficult to ascertain what impact
these proposals, once adopted, will have on our business,
financial condition and results of operations and cash flows. If
the products that we trade are subjected to mandatory central
clearing, exchange trading, higher collateral requirements or
higher capital charges, this may have an impact upon the
economics of our business and, thus, have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
The Australian Securities and Investment Commission is
considering new regulations which would limit certain types of
advertising, provide disclosure benchmarks for OTC CFD
providers, and impose a policy on customer suitability. In
Japan, new regulations, which became effective in August 2010,
prohibit our ability to offer Japanese residents leverage in
excess of 50-to-1 and in August of 2011 the maximum allowable
the leverage in Japan will decrease to 25-to-1. Both of these
changes may diminish the trading volume of these customers which
may in turn affect our financial condition, results of
operations and cash flows. These and other future regulatory
changes could have a material adverse effect on our business and
profitability and the forex industry as a whole.
In addition, the regulatory enforcement environment has created
uncertainty with respect to certain practices or types of
transactions that, in the past, may have been considered
permissible and appropriate among financial
28
services firms. More recently, certain practices 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, or increase in the cost of, business.
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.
As We
Operate in Many Jurisdictions Without Local Registration,
Licensing or Authorization, We May Be Subject to Possible
Enforcement Action and Sanction for Our Operations in Such
Jurisdictions if Our Operations Are Deemed to Have Violated
Regulations in Those Jurisdictions. 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.
For the nine months ended September 30, 2010, 71.6% of our
trading volume was from customers in jurisdictions in which we
are currently licensed or authorized by local government bodies
or self-regulatory organizations. We determine the nature and
extent of services we can offer and the manner in which we
conduct our business in the various jurisdictions based on a
variety of factors.
In jurisdictions in which we are not currently licensed or
authorized by local government bodies or self-regulatory
organizations, we are generally restricted from:
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direct marketing to retail investors including the operation of
a website specifically targeted to investors in a particular
foreign jurisdiction; and
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dealing with customers unless they can be classified as
professional, sophisticated or high net worth investors.
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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 may be subject to possible enforcement action
and sanction if we are determined to have previously offered, or
currently offer, our services in violation of local
governments regulations. 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 is too onerous to justify making
the necessary changes to continue that business. For example,
between 2006 and 2008, 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 to residents of China in October 2003, we
believed that our operations were in compliance with applicable
Chinese regulations. The regulatory rules and process in China
are complex and are not as clear as those in many other
jurisdictions. 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
support operations located in that country. As of
December 31, 2008, we no longer accepted new
29
customers or maintained direct customer accounts from residents
of China. However, due to an ongoing relationship with one of
our introducing brokers, eight legacy accounts which were
originally sourced through that introducing broker prior to the
termination of our service offering in China, remained open. The
trading activity by these legacy accounts resulted in an
immaterial amount of trading volume to us and were all closed as
of December 31, 2009. Pursuant to our most recent review of
the relevant regulatory requirements in China, we now believe
that we can accept customers from China if the customers come to
our website without being solicited by us to do so. As a result,
we began accepting non-solicited customers from China in June
2010. We may be subject to fines, penalties or sanctions as a
result of our current and historical forex trading services
through the Internet to Chinese residents, including our
continuation of the eight legacy accounts in China during 2009.
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 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 5.7% of our customer trading volume for the nine
months ended September 30, 2010 was generated from
customers located in Canada, with approximately half of such
volume generated from accounts in the Province of Ontario. In
Canada, the securities industry is governed 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
do so without registering as a registered investment 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,
which would, absent exemptive relief, require, among other
things, us to comply with the dealer registration and prospectus
delivery requirements of Ontario securities law. Accordingly, if
we deem it advisable, we may seek exemptive relief from these
requirements. 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 need to enter into a white
label partnership, our profitability would decrease
significantly 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 to the potential
adverse effect on our results of operations as a result of a
need to enter into white label partnerships for our business in
Canada, we may also be subject to enforcement actions and
penalties or customer claims in any province or territory,
including Ontario despite our planned application for exemptive
relief, where our forex trading operations are deemed to have
violated local regulations.
We Are
Required to Maintain High Levels of Capital, Which Could
Constrain Our Growth and Subject Us to Regulatory
Sanctions.
Our 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. Additionally,
as a Futures Commission Merchant, or FCM, and a Forex Dealer
Merchant, or FDM, we are required to maintain adjusted net
capital of $20.0 million plus 5.0% of the amount of
customer liabilities over $10.0 million. As of
September 30, 2010, we were required to maintain
approximately $31.9 million minimum capital in the
aggregate across all jurisdictions, representing a
$9.2 million increase from our minimum regulatory capital
requirement at September 30, 2009. 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
30
financial system. 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 adversely affect our ability to
withdraw funds needed to satisfy our ongoing operating expenses,
debt service and other cash needs and could limit any future
decision by our board to declare dividends.
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 we know our 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 addition, as an online financial
services provider with customers worldwide, we may face
particular difficulties in identifying our customers and
monitoring their activities.
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, 2010,
we maintain relationships with three established global
prime brokers, including Deutsche Bank AG, or Deutsche Bank, UBS
AG, or UBS, and the Royal Bank of Scotland plc, or RBS, as well
as relationships with 13 additional wholesale forex trading
partners, and access to other trading platforms and other
wholesale forex trading partners, which give us access to over
25 potential liquidity providers. Through these
relationships, our access to a pool of forex liquidity ensures
that we are able to execute our customers trades in any of
the 39 currency pairs or six CFD product offerings we offer and
in notional amount they request. 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. 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.
31
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 major financial institutions,
including Deutsche Bank, UBS, and RBS, 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.
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.
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 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
32
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. 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, 2010, 32.8% 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.
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. In certain jurisdictions, we are only able to
provide our services through white label partnerships. For the
nine months ended September 30, 2010, approximately 29.9%
of our forex trading volume was derived from introducing
brokers. Many of our relationships with introducing brokers are
nonexclusive 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,
33
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.
For the nine months ended September 30, 2010, approximately
6.1% of our forex trading volume was derived from TradeStation
Securities, Inc., or TradeStation, our largest introducing
broker. However, TradeStation recently formed a wholly-owned
subsidiary, TradeStation Forex, Inc., with the intent that by
the end of 2010 TradeStation Forex Inc. will assume, own and
conduct all TradeStation forex brokerage business as an FDM of
the NFA, and registered under such classification with the CFTC.
TradeStation Forex Inc.s application for such CFTC
registration and NFA membership was made with the NFA in June
2010. We may be unable to offset the loss of TradeStation with
new introducing brokers, if at all. If 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 Reputational and Other Risks as We Could Be Harmed
by Introducing Broker Misconduct or Errors That Are Difficult to
Detect and Deter.
It may be perceived that we are responsible for the 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. While historically we have been responsible for the
activities of our introducing brokers that were not members or
associates of the NFA and subject to disciplinary action for
failure to adequately supervise them, under the new NFA and CFTC
rules, we are no longer responsible for the activities of any
party that solicits or introduces a customer to us, as our
introducing brokers will now be required to be members of the
NFA and therefore directly supervised by the NFA. However, it
may be perceived that we are responsible for any misleading
statements about us made on websites of our introducing brokers
and any disciplinary action taken against any of our 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.
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 who provide
forex trading to their customers by using our trading platform
and other services and, therefore, provide us with an additional
source of revenue. For the nine months ended September 30,
2010, approximately 7.4% of our forex trading volume was derived
from white label partners. 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, 2010,
trading volume generated through Questrade, Inc. represented
approximately 1.3% 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
34
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 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, there may be difficulty selling
any shares of our common stock.
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:
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quarterly variations in our results of operations and cash flows
or the results of operations and cash flows of our competitors;
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our failure to achieve actual operating results that meet or
exceed guidance that we may have provided due to factors beyond
our control, such as currency volatility and trading volumes;
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future announcements concerning us or our competitors, including
the announcement of acquisitions;
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changes in government regulations or in the status of our
regulatory approvals or licensure;
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public perceptions of risks associated with our services or
operations;
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developments in our industry; and
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general economic, market and political conditions and other
factors that may be unrelated to our operating performance or
the operating performance of our competitors.
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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
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.
35
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.
We
Cannot Predict Our Future Capital Needs. As a Result, We May
Need to Raise Significant Amounts of Additional Capital. We May
Be Unable 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:
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support more rapid expansion;
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develop new or enhanced services and products;
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respond to competitive pressures;
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acquire complementary businesses, products or
technologies; or
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respond to unanticipated requirements.
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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, 2010, our executive officers, directors
and our current investors and their affiliated entities together
beneficially own approximately 88.9% 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, 2011. 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.
Shareholders
May Be Diluted by the Future Issuance of Additional Common Stock
in Connection With Our Incentive Plans, Acquisitions or
Otherwise.
After this offering we will have
approximately shares
of common stock authorized but unissued. Our certificate of
incorporation authorizes us to issue these shares of common
stock and options, rights, warrants and appreciation rights
relating to common stock for the consideration and on the terms
and conditions established by our board of directors in its sole
discretion, whether in connection with acquisitions, in future
common stock offerings or otherwise. We have
reserved shares
for issuance under our 2010 Omnibus Incentive Compensation Plan
and shares under our 2010 Employee Stock Purchase Plan. Any
common stock that we issue, including under our 2010 Omnibus
Incentive Compensation Plan, 2010 Employee Stock Purchase Plan
or other equity incentive plans that we may adopt in the future,
would dilute the percentage ownership held by the investors who
purchase common stock in this offering.
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 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.
INDUSTRY
AND MARKET DATA
This prospectus includes market and industry data and forecasts
that we have derived from independent consultant reports,
publicly available information, various industry publications,
other published industry sources and our internal data and
estimates. Independent consultant reports, industry publications
and other published industry sources generally indicate that the
information contained therein was obtained from sources believed
to be reliable.
Our internal data and estimates are based upon information
obtained from trade and business organizations and other
contacts in the markets in which we operate and our
managements understanding of industry conditions. Although
we believe that such information is reliable, we have not had
this information verified by any independent sources.
38
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $ million,
based on an assumed initial offering price of
$ per share, which is the midpoint
of the estimated price range shown on the cover of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us. A
$1.00 increase (decrease) in the assumed initial public offering
price of $ would increase
(decrease) the net proceeds to us from this offering by
$ million.
We intend to use the net proceeds we receive from this offering
only to cover historical and expected costs from our initial
public offering.
We will not receive any proceeds from the sale of shares by the
selling stockholders.
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, 2010:
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on an actual basis;
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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); and
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on a pro forma as adjusted basis to reflect the sale
of shares
of our common stock at an assumed initial public offering price
of $ per share, the midpoint of
the estimated price range listed on the cover page of this
prospectus and after deducting the estimated underwriting
discount and estimated offering expenses payable by us,
including expenses related to the sale of shares of our common
stock by the selling stockholders.
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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.
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As of September 30, 2010
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Pro Forma
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Actual
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Pro Forma
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As Adjusted
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(in thousands, except share data)
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Cash and cash equivalents
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$
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258,012
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$
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$
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Long-term debt
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$
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21,000
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$
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$
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Convertible, redeemable preferred stock:
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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
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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
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2,009
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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
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5,412
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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
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5,319
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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
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39,840
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40
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As of September 30, 2010
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Pro Forma
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Actual
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Pro Forma
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As Adjusted
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(in thousands, except share data)
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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
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116,810
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Total convertible, redeemable preferred stock
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169,390
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Common stock, $0.00001 par value, 27,000,000 shares
authorized and 1,353,584 shares issued and outstanding on
an actual basis; shares authorized
and shares
issued and outstanding on a pro forma basis
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Additional paid-in capital
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(174,795
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)
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Accumulated other comprehensive income
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548
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Retained earnings
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19,264
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Total shareholders deficit
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(154,983
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)
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Total capitalization
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$
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35,407
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$
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ would increase
(decrease) each of additional paid-in capital and total
stockholders equity in the pro forma as adjusted column by
$ million.
The outstanding share information is based upon shares of our
common stock outstanding as
of ,
2010. This number excludes:
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shares
of our common stock issuable upon the exercise of options that
were outstanding as
of ,
2010, with a weighted average exercise price of
$ per share;
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shares
of common stock issuable pursuant to outstanding restricted
stock units as
of ,
2010;
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shares
of common stock reserved for future issuance under our 2010
Omnibus Incentive Compensation Plan, which will become effective
on the date of this prospectus; and
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shares
of common stock reserved for future issuance under our 2010
Employee Stock Purchase Plan, which will become effective on the
date of this prospectus.
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41
DILUTION
If you invest in our common stock in this offering, your
interest will be immediately diluted to the extent of the
difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share
of our common stock after this offering.
The historical net tangible book value of our common stock as of
September 30, 2010 was
$ million, or
$ per share of common stock.
Historical net tangible book value per share represents the
amount of our total tangible assets less total liabilities,
divided by the total number of shares of our common stock
outstanding as of September 30, 2010. On a pro forma basis,
after giving effect to the -for-1
stock split and conversion of all outstanding shares of our
preferred stock
into shares
of common stock immediately upon completion of this offering,
our pro forma net tangible book value as of September 30,
2010 was $ million, or
$ per share of common stock.
After giving effect to our sale in this offering
of shares
of our common stock at an assumed initial public offering price
of $ per share, the midpoint of
the estimated price range listed on the cover page of this
prospectus, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us,
our pro forma as adjusted net tangible book value as of
September 30, 2010 would have been
$ million, or
$ per share of our common stock.
This represents an immediate increase of net tangible book value
of $ per share to our existing
stockholders and an immediate dilution of
$ per share to investors
purchasing shares in this offering.
The following table illustrates this per share dilution:
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Initial public offering price per share of common stock
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$
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Historical net tangible book value per share as of
September 30, 2010
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$
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Decrease in net tangible book value per share attributable to
conversion of convertible preferred stock
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Pro forma net tangible book value per share as of
September 30, 2010
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$
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Increase in net tangible book value per share attributable to
this offering per share to existing investors
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Pro forma as adjusted net tangible book value given effect to
this offering
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Dilution per share to investors participating in this offering
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$
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the mid-point of the price range on the front cover of
this prospectus, would increase (decrease) our pro forma as
adjusted net tangible book value per share after this offering
by $ and increase (decrease) the
dilution to new investors in this offering by
$ .
The following table summarizes, as of September 30, 2010,
the differences between the number of shares of common stock
purchased from us, after giving effect to the conversion of our
preferred stock into common stock, the total effective cash
consideration paid, and the average price per share paid by our
existing stockholders and by our new investors purchasing stock
in this offering at an assumed initial public offering price of
$ per share, the midpoint of the
estimate price range listed on the cover page of this
prospectus, before deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Consideration
|
|
|
Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders before this offering
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Investors participating in this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the midpoint of the price range on the front cover of
this prospectus, would increase (decrease) total consideration
paid by new investors in this offering and by all investors by
$ , and would increase (decrease)
the average price per share paid by new investors by $1.00,
assuming the number of shares of common stock offered by us, as
set forth on the front cover of this prospectus, remains the
same and without deducting the estimated underwriting discounts
and offering expenses payable by us in connection with this
offering.
If the underwriters exercise their over-allotment option in
full, the percentage of shares of common stock held by existing
stockholders will decrease to
approximately % of the total number
of shares of our common stock outstanding after this offering,
and the number of shares held by new investors will be increased
to
or approximately % of the total
number of shares of our common stock outstanding after this
offering.
The tables and calculations above are based on the number of
shares of common stock outstanding after the completion of this
offering. 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 ,
2010 at a weighted average exercise price of
$ per share;
|
|
|
|
shares
of common stock issuable pursuant to outstanding restricted
stock units as
of ,
2010;
|
|
|
|
an aggregate
of shares
of common stock that will be reserved for future issuance under
our 2010 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 2010 Employee Stock Purchase Plan.
|
43
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, 2007, 2008 and 2009 and the consolidated
statements of financial condition data as of December 31,
2008 and 2009 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, 2005 and 2006 and the consolidated
statements of financial condition data as of December 31,
2005, 2006 and 2007 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, 2010 and 2009 and the
consolidated statement of financial condition data as of
September 30, 2010 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, 2009 are derived from
our consolidated financial statements not included in this
prospectus. The results of operations for the nine months ended
September 30, 2010 are not necessarily indicative of the
results to be expected for the full year ended December 31,
2010.
The historical information presented below includes 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 September 30, 2010 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, 2009 and the nine months ended
September 30, 2010 reflect the sale by us
of
newly issued shares of our common stock
and shares
of our common stock by our selling stockholders 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005(1)
|
|
|
2006(2)
|
|
|
2007(2)
|
|
|
2008(2)
|
|
|
2009(2)
|
|
|
2009(2)
|
|
|
2010(2)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
36,249
|
|
|
$
|
69,471
|
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
|
$
|
153,375
|
|
|
$
|
114,332
|
|
|
$
|
147,667
|
|
Other revenue
|
|
|
223
|
|
|
|
242
|
|
|
|
437
|
|
|
|
2,366
|
|
|
|
2,108
|
|
|
|
1,119
|
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
36,472
|
|
|
|
69,713
|
|
|
|
118,613
|
|
|
|
188,370
|
|
|
|
155,483
|
|
|
|
115,451
|
|
|
|
149,581
|
|
Interest revenue
|
|
|
1,519
|
|
|
|
3,145
|
|
|
|
5,024
|
|
|
|
3,635
|
|
|
|
292
|
|
|
|
228
|
|
|
|
243
|
|
Interest expense
|
|
|
(110
|
)
|
|
|
(2,431
|
)
|
|
|
(4,299
|
)
|
|
|
(3,905
|
)
|
|
|
(2,456
|
)
|
|
|
(1,848
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
1,409
|
|
|
|
714
|
|
|
|
725
|
|
|
|
(270
|
)
|
|
|
(2,164
|
)
|
|
|
(1,620
|
)
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
37,881
|
|
|
|
70,427
|
|
|
|
119,338
|
|
|
|
188,100
|
|
|
|
153,319
|
|
|
|
113,831
|
|
|
|
148,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
9,511
|
|
|
|
17,258
|
|
|
|
25,093
|
|
|
|
37,024
|
|
|
|
41,503
|
|
|
|
29,621
|
|
|
|
34,031
|
|
Selling and marketing
|
|
|
3,256
|
|
|
|
12,517
|
|
|
|
21,836
|
|
|
|
29,312
|
|
|
|
36,875
|
|
|
|
26,791
|
|
|
|
28,192
|
|
Trading expenses and commissions
|
|
|
7,279
|
|
|
|
10,321
|
|
|
|
10,436
|
|
|
|
16,310
|
|
|
|
14,955
|
|
|
|
10,431
|
|
|
|
18,601
|
|
Bank fees
|
|
|
507
|
|
|
|
935
|
|
|
|
2,316
|
|
|
|
3,754
|
|
|
|
4,466
|
|
|
|
3,415
|
|
|
|
3,170
|
|
Depreciation and amortization
|
|
|
494
|
|
|
|
897
|
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
2,689
|
|
|
|
2,013
|
|
|
|
2,568
|
|
Communications and data processing
|
|
|
424
|
|
|
|
873
|
|
|
|
1,659
|
|
|
|
2,467
|
|
|
|
2,676
|
|
|
|
1,950
|
|
|
|
2,209
|
|
Occupancy and equipment
|
|
|
530
|
|
|
|
1,045
|
|
|
|
1,616
|
|
|
|
2,419
|
|
|
|
3,548
|
|
|
|
2,391
|
|
|
|
2,963
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005(1)
|
|
|
2006(2)
|
|
|
2007(2)
|
|
|
2008(2)
|
|
|
2009(2)
|
|
|
2009(2)
|
|
|
2010(2)
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Bad debt provision/(recovery)
|
|
|
836
|
|
|
|
574
|
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
760
|
|
|
|
593
|
|
|
|
514
|
|
Professional fees
|
|
|
761
|
|
|
|
1,295
|
|
|
|
1,380
|
|
|
|
3,104
|
|
|
|
3,729
|
|
|
|
2,549
|
|
|
|
2,623
|
|
Software expense
|
|
|
21
|
|
|
|
78
|
|
|
|
123
|
|
|
|
888
|
|
|
|
1,132
|
|
|
|
712
|
|
|
|
1,431
|
|
Professional dues and memberships
|
|
|
15
|
|
|
|
48
|
|
|
|
187
|
|
|
|
773
|
|
|
|
698
|
|
|
|
565
|
|
|
|
205
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible, redeemable preferred stock
embedded
derivative(2)
|
|
|
|
|
|
|
61,732
|
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
|
|
40,820
|
|
|
|
48,936
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
155
|
|
|
|
3,085
|
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
1,746
|
|
|
|
1,091
|
|
|
|
3,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,789
|
|
|
|
110,823
|
|
|
|
232,374
|
|
|
|
(78,496
|
)
|
|
|
113,090
|
|
|
|
122,942
|
|
|
|
149,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
14,092
|
|
|
|
(40,396
|
)
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
40,229
|
|
|
|
(9,111
|
)
|
|
|
(1,141
|
)
|
Income tax expense
|
|
|
5,881
|
|
|
|
9,063
|
|
|
|
21,615
|
|
|
|
34,977
|
|
|
|
12,556
|
|
|
|
11,423
|
|
|
|
18,192
|
|
Equity in earnings of equity method investment
|
|
|
(3
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
8,208
|
|
|
|
(49,502
|
)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
27,673
|
|
|
|
(20,534
|
)
|
|
|
(19,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(321
|
)
|
|
|
(15
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
8,208
|
|
|
$
|
(49,502
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
|
$
|
(20,519
|
)
|
|
$
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
(39,006
|
)
|
|
|
|
|
|
|
(63,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred share accretion
|
|
|
(63
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
Common Shareholders
|
|
$
|
8,145
|
|
|
$
|
(86,303
|
)
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
27,994
|
|
|
$
|
(20,519
|
)
|
|
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.96
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
21.41
|
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.49
|
|
|
$
|
(30.90
|
)
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
1.88
|
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,157,464
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,307,379
|
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,634,016
|
|
|
|
2,792,895
|
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
14,909,184
|
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
(unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.12
|
|
|
$
|
15.54
|
|
|
$
|
22.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.76
|
|
|
$
|
1.36
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These amounts do not include the
impact of the embedded derivative liability of approximately
$37.6 million (unaudited) as of December 31, 2005 and
the change in fair value for the year ended December 31,
2005 of $28.8 million (unaudited).
|
(2)
|
|
For each of the periods indicated,
in accordance with FASB ASC 815, Derivatives and
Hedging, 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.
|
|
|
|
(3)
|
|
These amounts do not include the
impact of the change in fair value of our preferred stock
embedded derivative, the effect of redemption of preferred stock
and the effect of preferred share accretion. For the year ended
December 31, 2009 and for the nine months ended
|
(footnotes
continued on next page)
45
|
|
|
|
|
September 30, 2010 the change
in fair value of our preferred stock embedded derivative
resulted in a gain of $1.7 million and a loss of
$48.9 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(in thousands unless otherwise stated)
|
|
|
|
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,482
|
|
|
$
|
31,476
|
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
222,524
|
|
|
$
|
197,938
|
|
|
$
|
258,012
|
|
Receivables from brokers
|
|
$
|
59,080
|
|
|
$
|
71,750
|
|
|
$
|
74,630
|
|
|
$
|
50,817
|
|
|
$
|
76,391
|
|
|
$
|
100,171
|
|
|
$
|
89,569
|
|
Total assets
|
|
$
|
82,661
|
|
|
$
|
113,491
|
|
|
$
|
180,628
|
|
|
$
|
264,816
|
|
|
$
|
351,940
|
|
|
$
|
315,710
|
|
|
$
|
405,361
|
|
Payables to brokers, dealers,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures commission merchants, and other regulated entities
|
|
$
|
4,577
|
|
|
$
|
5,248
|
|
|
$
|
2,163
|
|
|
$
|
1,679
|
|
|
$
|
2,769
|
|
|
$
|
1,732
|
|
|
$
|
5,857
|
|
Payables to customers
|
|
$
|
5,031
|
|
|
$
|
70,321
|
|
|
$
|
106,741
|
|
|
$
|
122,293
|
|
|
$
|
196,985
|
|
|
$
|
168,266
|
|
|
$
|
216,587
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
$
|
|
|
|
$
|
99,286
|
|
|
$
|
264,566
|
|
|
$
|
82,785
|
|
|
$
|
81,098
|
|
|
$
|
123,604
|
|
|
$
|
130,034
|
|
Notes payable
|
|
$
|
|
|
|
$
|
27,500
|
|
|
$
|
49,875
|
|
|
$
|
39,375
|
|
|
$
|
28,875
|
|
|
$
|
31,500
|
|
|
$
|
21,000
|
|
Total shareholders equity/(deficit)
|
|
$
|
23,605
|
|
|
$
|
(154,242
|
)
|
|
$
|
(316,340
|
)
|
|
$
|
(172,154
|
)
|
|
$
|
(139,890
|
)
|
|
$
|
(188,831
|
)
|
|
$
|
(154,983
|
)
|
Selected
Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands unless otherwise stated)
|
|
|
Number of opened retail
accounts(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,626
|
|
|
|
63,576
|
|
|
|
105,924
|
|
|
|
154,190
|
|
|
|
211,136
|
|
|
|
195,559
|
|
|
|
264,834
|
|
China
|
|
|
3,202
|
|
|
|
8,395
|
|
|
|
19,869
|
|
|
|
27,358
|
|
|
|
27,362
|
|
|
|
27,362
|
|
|
|
28,819
|
|
Number of tradable retail accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,761
|
|
|
|
27,836
|
|
|
|
41,120
|
|
|
|
36,744
|
|
|
|
51,652
|
|
|
|
47,374
|
|
|
|
70,618
|
|
China
|
|
|
1,631
|
|
|
|
4,799
|
|
|
|
9,702
|
|
|
|
2,839
|
|
|
|
1
|
|
|
|
8
|
|
|
|
1,029
|
|
Adjusted net capital in excess of regulatory
requirements(5)
|
|
$
|
20,065
|
|
|
$
|
15,296
|
|
|
$
|
44,856
|
|
|
$
|
98,571
|
|
|
$
|
71,087
|
|
|
$
|
68,604
|
|
|
$
|
60,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands unless otherwise stated)
|
|
|
Number of traded retail accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,896
|
|
|
|
28,270
|
|
|
|
43,139
|
|
|
|
52,555
|
|
|
|
52,755
|
|
|
|
43,565
|
|
|
|
52,486
|
|
China
|
|
|
2,416
|
|
|
|
5,533
|
|
|
|
11,568
|
|
|
|
11,647
|
|
|
|
7
|
|
|
|
6
|
|
|
|
269
|
|
Total trading volume (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,246.7
|
|
|
$
|
928.3
|
|
|
$
|
1,093.9
|
|
China
|
|
$
|
24.4
|
|
|
$
|
50.8
|
|
|
$
|
103.4
|
|
|
$
|
172.4
|
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
Net deposits received from retail customers (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70.2
|
|
|
$
|
102.8
|
|
|
$
|
184.2
|
|
|
$
|
277.3
|
|
|
$
|
257.1
|
|
|
$
|
186.9
|
|
|
$
|
205.2
|
|
China
|
|
$
|
6.8
|
|
|
$
|
10.5
|
|
|
$
|
26.0
|
|
|
$
|
25.3
|
|
|
$
|
(1.4
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
0.3
|
|
Retail revenue per million traded
|
|
$
|
176.8
|
|
|
$
|
155.3
|
|
|
$
|
175.2
|
|
|
$
|
124.1
|
|
|
$
|
123.0
|
|
|
$
|
122.6
|
|
|
$
|
154.1
|
|
|
|
|
(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.
|
(footnotes
continued on next page)
46
Selected
Geographic Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
122.2
|
|
|
$
|
238.3
|
|
|
$
|
355.4
|
|
|
$
|
878.9
|
|
|
$
|
679.2
|
|
|
$
|
506.8
|
|
|
$
|
579.0
|
|
China(6)(7)
|
|
|
24.4
|
|
|
|
50.8
|
|
|
|
103.4
|
|
|
|
172.4
|
|
|
|
0.4
|
|
|
|
0.2
|
(7)
|
|
|
0.7
|
(8)
|
Canada
|
|
|
9.6
|
|
|
|
29.2
|
|
|
|
58.6
|
|
|
|
122.9
|
|
|
|
142.5
|
|
|
|
122.2
|
|
|
|
62.9
|
|
Europe, Middle East and Africa
|
|
|
27.9
|
|
|
|
42.9
|
|
|
|
64.3
|
|
|
|
153.1
|
|
|
|
179.5
|
|
|
|
126.5
|
|
|
|
182.3
|
|
Asia (ex-China)
|
|
|
33.8
|
|
|
|
42.7
|
|
|
|
54.0
|
|
|
|
96.4
|
|
|
|
159.1
|
|
|
|
110.0
|
|
|
|
194.5
|
|
Rest of World
|
|
|
14.0
|
|
|
|
43.5
|
|
|
|
38.8
|
|
|
|
74.9
|
|
|
|
86.0
|
|
|
|
62.6
|
|
|
|
74.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
231.9
|
|
|
$
|
447.4
|
|
|
$
|
674.5
|
|
|
$
|
1,498.6
|
|
|
$
|
1,246.7
|
|
|
$
|
928.3
|
|
|
$
|
1,093.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(7)
|
|
For the year ended
December 31, 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, and all were
closed as of December 31, 2009.
|
|
|
|
(8)
|
|
Based on our most recent review of
the relevant regulatory requirements in China, we now believe
that we can accept customers from China if the customers come to
our website without being solicited by us to do so. As a result,
we began accepting non-solicited customers from China in June
2010.
|
47
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 nonhistorical 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 and institutional foreign
exchange, or forex, trading and related services founded in 1999
by a group of experienced trading and technology 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 clearinghouse. We also offer some of our retail customers
access to other global markets on an OTC basis, including the
spot gold and silver markets, as well as equity indices and
commodities via instruments called
contracts-for-difference,
or CFDs. Our trading platforms provide a wide array of
information and analytical 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.
We use financial metrics, including tradable retail accounts and
traded retail accounts, to measure our aggregate customer
account activity. Tradable retail accounts represent retail
customers who maintain cash balances with us that are sufficient
to execute a trade in compliance with our policies. As of
September 30, 2010 we had 70,618 tradable retail accounts
compared to 47,374 as of September 30, 2009. We believe the
number of tradable retail accounts is an important indicator of
our ability to attract new retail customers that can potentially
lead to trading volume and revenue in the future, however, 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 retail accounts, because this represents
retail customers who executed a transaction with us during a
particular period. During the nine months ended
September 30, 2010, 52,486 traded retail accounts executed
a forex transaction with us compared to 43,565 traded retail
accounts for the nine months ended September 30, 2009,
representing an increase of 20.5%.
Our annual net revenue grew from $119.3 million in 2007 to
$153.3 million in 2009 representing a compound annual
growth rate of 13.3%. Our annual net revenue from customers
residing outside of China grew from $98.7 million for the
year ended December 31, 2007 to $153.3 million for the
year ended December 31, 2009 representing a compound annual
growth rate of 24.6%. For the nine months ended
September 30, 2010, we generated $148.1 million of
total net revenue and net income of $18.9 million,
including a loss of $48.9 million relating to the change in
fair value of our preferred stock embedded derivative. For the
year ended December 31, 2009 we generated
$153.3 million of total net revenue and net income of
$28.0 million, including a gain of $1.7 million
relating to the change in fair value of our preferred stock
embedded derivative. For the year ended December 31, 2008,
we generated $188.1 million of total net revenue, including
$24.4 million in total net revenue attributable to
customers residing in China, and net income of
$231.4 million, including $11.1 million in net income
attributable to customers residing in China and a gain of
$181.8 million relating to the change in the fair value of
our preferred stock embedded derivative. 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. The preferred
stock embedded derivative is a non-cash liability and,
therefore, causes net income to fluctuate but does 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
$48.9 million loss relating to the change in fair market
value of our embedded derivative, our adjusted net income for
the nine months ended September 30, 2010 was
$30.0 million. We believe our net capital position and
customer assets help make us one of the largest global retail
foreign exchange services providers.
48
We believe the following operating measurements are the main
drivers of our revenue:
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customer trading volume;
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retail trading revenue per million traded;
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net deposits received from retail customers;
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traded retail accounts, and
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retail customer equity.
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Customer trading volume is the aggregate notional value of
trades our customers execute. Retail trading revenue per million
traded is the revenue we realize from our forex, CFDs and metals
trading activities (including the revenue we realize from the
difference between the bid price and the
offer price for our customers executed trades, or
the spread revenue) per one million of
U.S. dollar-equivalent trading volume, and is calculated as
retail trading revenue divided by the result obtained from
dividing trading volume by one million. Net deposits received
from retail 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 retail
accounts impact our revenue because this represents the number
of customers who executed trades during a specific period, which
impacts customer trading volume. Retail customer equity
represents the total amount of cash and unrealized profit (loss)
in all of our customer accounts.
Our customer base resides in over 140 countries outside of the
United States and is comprised of three 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 is available in English, traditional and
simplified Chinese, Japanese, 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. The third are institutional customers
sourced through hedge funds, institutional asset managers, and
proprietary trading firms. For the nine months ended
September 30, 2010, 50.4% of customer trading volume was
generated from our direct customers, 37.3% was generated from
introducing brokers and white label partners, and 12.3% was
generated from our institutional customers. For the year ended
December 31, 2009, 65.4% of customer trading volume was
generated from our direct customers and 34.6% was generated from
introducing brokers and white label partners.
For the nine months ended September 30, 2010, customer
trading volume was $1,093.9 billion, retail trading revenue
per million traded was $154.1, net deposits received from retail
customers was $205.2 million and the number of traded
retail accounts was 52,486. For the year ended December 31,
2009, the total dollar value traded by our customers, or
customer trading volume, was $1.2 trillion, retail trading
revenue per million traded was $123.0, net deposits received
from retail customers was $257.1 million and the number of
traded retail accounts was 52,755.
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
managed flow portfolio trading positions where we act as
counterparty to our customers trades and our revenue
resulting from the dealing spreads (the difference between the
bid price and the offer price), on
customer transactions relating to offset flow 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 for our own account in anticipation of
future movements in the relative prices of the products we
offer. We refer to such positions as proprietary
directional market positions. However, as a result of our
hedging activities, we are likely to have open positions in
various currencies. For the nine months ended September 30,
2010, a minimum of 90.9% of our average daily trading volume, on
any given day, was either naturally hedged, where one of our
customers executing a trade in a currency is offset by a trade
taken by another customer, or hedged by us with a third-party
financial institution.
For the nine months ended September 30, 2010, approximately
78.1% of our customer trading volume was directed into our
managed flow portfolio, allowing us to keep part or all of the
dealing spread, and resulting in daily
49
mark-to-market
gains or losses based on the performance of the managed flow
portfolio. During the same period we offset 9.5% 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. The remaining volume for the nine
months ended September 30, 2010 of 12.4% was generated from
our institutional customers. For the year ended
December 31, 2009, 88.7% of our customer trade volume was
directed into our managed flow portfolio and we immediately
offset the remaining 11.3%. Trading revenue represented 99.7% of
our total net revenue for the nine months ended
September 30, 2010, and 100.0% of our total net revenue for
the year ended December 31, 2009. 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:
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changes in the financial strength of market participants;
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economic and political conditions;
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trends in business and finance;
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changes in the supply, demand and volume of foreign currency
transactions; and
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legislative changes; and regulatory changes.
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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 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:
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the effectiveness of our sales activities;
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the attractiveness of our superior website;
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the effectiveness of our customer service team; and
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the effectiveness of our marketing activities.
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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,
2010 and the year ended December 31, 2009, 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, revenue from GAIN GTX, our newly launched
institutional offering, as well as other miscellaneous items.
For the nine months ended September 30, 2010, other revenue
was $1.9 million, which consisted of GAIN GTX revenue of
$1.1 million and for the year ended December 31, 2009,
other revenue was $2.1 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 and interest expense on notes payable. 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 approximately 0.1% for the nine months
ended September 30, 2010, and 0.1% for the year ended
December 31, 2009. 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 $1.4 million for the nine months ended
September 30, 2010, and $2.2 million for the year
ended December 31, 2009.
50
Operating
Expenses
Employee
Compensation and Benefits
Employee compensation and benefits, includes salaries, bonuses,
stock-based compensation, group insurance, contributions to
benefit programs and other related employee costs. Compensation
and benefits as a percentage of net revenue has increased from
19.7% for the year ended December 31, 2008 to 27.1% for the
year ended December 31, 2009, primarily due to a decline in
net revenue for the year ended December 31, 2009 from the
prior year period. Compensation and benefits was 23.0% of net
revenue for the nine months ended September 30, 2010
compared to the prior year period which was 26.0% of net
revenue. The decrease in employee compensation and benefits as a
percentage of revenue for the nine months ended
September 30, 2010 compared to prior period is primarily
due to an increase in net revenue for the nine months ended
September 30, 2010. The revenue decline for the year ended
December 31, 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 21.8% of our employee compensation and benefits for
the nine months ended September 30, 2010 compared to 18.1%
for the year ended December 31, 2009, 26.4% for the year
ended December 31, 2008 and 31.8% for the year ended
December 31, 2007.
Selling
and Marketing
Selling and marketing expense 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 $21.8 million
for the year ended December 31, 2007 to $29.3 million
for the year ended December 31, 2008 to $36.9 million
for the year ended December 31, 2009. For the nine months
ended September 30, 2010 selling and marketing expense was
$28.2 million compared to $26.8 million for the nine
months ended September 30, 2009, as we continue to invest
in our global brand to increase trading volumes and customer
deposits.
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, 2010, we generated approximately 37.3% of our
trading volume through customers introduced to us by white label
partners and introducing brokers and paid approximately
$18.6 million in total trading expenses and commissions.
The trading volume generated through customers introduced to us
by white label partners and introducing brokers has increased
significantly from the prior period ending September 30,
2009, resulting in the $8.2 million increase for the nine
months ended September 30, 2010. During the year ended
December 31, 2009, we generated approximately 34.6% of our
trading volume through customers introduced to us by white label
partners and introducing brokers and paid approximately
$15.0 million in total trading expenses and commissions
compared to the year ended December 31, 2008 when 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.
Other
Expenses
Other expense categories separately disclosed in our results of
operations include bank fees, depreciation and amortization,
communications and data processing, occupancy and equipment, bad
debt provision, professional fees and other miscellaneous
expenses.
51
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 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 FASB ASC 815,
Derivatives and Hedging. 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 FASB ASC 815, 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 Critical Accounting Policies and
Estimates Fair Value of 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 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.
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Nine Months
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Year Ended December 31,
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Ended September 30,
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2007
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2008
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2009
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2009
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2010
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(in thousands unless otherwise stated)
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Net (loss)/income applicable to GAIN Capital Holdings, Inc.
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$
|
(134,651
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)
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|
$
|
231,426
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|
|
$
|
27,994
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|
|
$
|
(20,519
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)
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|
$
|
(18,931
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)
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
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165,280
|
|
|
|
(181,782
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)
|
|
|
(1,687
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)
|
|
|
40,820
|
|
|
|
48,936
|
|
|
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Adjusted net income
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|
$
|
30,629
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|
|
$
|
49,644
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|
|
$
|
26,307
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|
|
$
|
20,301
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|
|
$
|
30,005
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|
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|
Adjusted earnings per common share
|
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|
Basic
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|
$
|
16.13
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|
$
|
38.56
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|
|
$
|
20.12
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|
|
$
|
15.54
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|
|
$
|
22.61
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|
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|
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|
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|
Diluted
|
|
$
|
2.05
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|
$
|
3.31
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|
|
$
|
1.76
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|
|
$
|
1.36
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|
|
$
|
2.01
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|
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Net revenue
|
|
$
|
119,338
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|
|
$
|
188,100
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|
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$
|
153,319
|
|
|
$
|
113,831
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|
|
$
|
148,148
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|
Total expenses
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|
|
232,374
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|
|
(78,496
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)
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|
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113,090
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|
122,942
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|
|
|
149,289
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(Loss)/income before income tax expense and equity in earnings
of equity method investment
|
|
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(113,036
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)
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|
|
266,596
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|
40,229
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|
(9,111
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)
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|
|
(1,141
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)
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
165,280
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|
|
|
(181,782
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)
|
|
|
(1,687
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)
|
|
|
40,820
|
|
|
|
48,936
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|
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|
|
|
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|
|
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|
Adjusted income before income tax expense and equity in earnings
of equity method investment
|
|
$
|
52,244
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|
|
$
|
84,814
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|
|
$
|
38,542
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|
|
$
|
31,709
|
|
|
$
|
47,795
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
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|
Income tax expense
|
|
$
|
21,615
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|
|
$
|
34,977
|
|
|
$
|
12,556
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|
|
$
|
11,423
|
|
|
$
|
18,192
|
|
|
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|
Adjusted effective tax rate
|
|
|
41.4
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%
|
|
|
41.2
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%
|
|
|
32.6
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%
|
|
|
36.0
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%
|
|
|
38.1
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%
|
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. As of December 31, 2009, we have capitalized
$1.7 million in anticipation of our initial public offering
in 2010.
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.
General
Market and Economic Conditions
In the past three 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 year ended December 31, 2009. We believe that
forex trading prices and volumes have been impacted by the
volatility created across the global markets. Over the past
twelve months (through September 30, 2010), we have
experienced periods of low and high volatility in reaction to
various market conditions. For example, the recent fiscal crisis
in Greece and other European Union nations has resulted in
elevated forex volatility levels across multiple markets,
resulting in fluctuating prices and an increase in our customer
trading activity during the period ended September 30,
2010. We are unable to predict the degree and duration of the
impact of the current global market and general economic
conditions on currency prices and on our business.
53
Results
of Operations
Nine
Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
The following table sets forth our Results of Operations for the
nine months ended September 30, 2010 and nine months ended
September 30, 2009.
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Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Increase/
|
|
|
|
September 30,
|
|
|
% of Net
|
|
|
September 30,
|
|
|
% of Net
|
|
|
(Decrease)
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
|
114,332
|
|
|
|
100.4
|
%
|
|
|
147,667
|
|
|
|
99.7
|
%
|
|
|
33,335
|
|
|
|
29.2
|
%
|
Other revenue
|
|
|
1,119
|
|
|
|
0.1
|
%
|
|
|
1,914
|
|
|
|
1.3
|
%
|
|
|
795
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
115,451
|
|
|
|
101.4
|
%
|
|
|
149,581
|
|
|
|
101.0
|
%
|
|
|
34,130
|
|
|
|
29.6
|
%
|
Interest revenue
|
|
|
228
|
|
|
|
0.2
|
%
|
|
|
243
|
|
|
|
0.2
|
%
|
|
|
15
|
|
|
|
6.6
|
%
|
Interest expense
|
|
|
(1,848
|
)
|
|
|
(1.6
|
)%
|
|
|
(1,676
|
)
|
|
|
(1.1
|
)%
|
|
|
172
|
|
|
|
(9.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
(1,620
|
)
|
|
|
(1.4
|
)%
|
|
|
(1,433
|
)
|
|
|
(1.0
|
)%
|
|
|
187
|
|
|
|
(11.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
113,831
|
|
|
|
100.0
|
%
|
|
|
148,148
|
|
|
|
100.0
|
%
|
|
|
34,317
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
29,621
|
|
|
|
26.0
|
%
|
|
|
34,031
|
|
|
|
23.0
|
%
|
|
|
4,410
|
|
|
|
14.9
|
%
|
Selling and marketing
|
|
|
26,791
|
|
|
|
23.5
|
%
|
|
|
28,192
|
|
|
|
19.0
|
%
|
|
|
1,401
|
|
|
|
5.2
|
%
|
Trading expenses and commissions
|
|
|
10,431
|
|
|
|
9.2
|
%
|
|
|
18,601
|
|
|
|
12.6
|
%
|
|
|
8,170
|
|
|
|
78.3
|
%
|
Bank fees
|
|
|
3,415
|
|
|
|
3.0
|
%
|
|
|
3,170
|
|
|
|
2.1
|
%
|
|
|
(245
|
)
|
|
|
(7.2
|
)%
|
Depreciation and amortization
|
|
|
2,013
|
|
|
|
1.8
|
%
|
|
|
2,568
|
|
|
|
1.7
|
%
|
|
|
555
|
|
|
|
27.6
|
%
|
Communications and data processing
|
|
|
1,950
|
|
|
|
1.7
|
%
|
|
|
2,209
|
|
|
|
1.5
|
%
|
|
|
259
|
|
|
|
13.3
|
%
|
Occupancy and equipment
|
|
|
2,391
|
|
|
|
2.1
|
%
|
|
|
2,963
|
|
|
|
2.0
|
%
|
|
|
572
|
|
|
|
23.9
|
%
|
Bad debt provision/(recovery)
|
|
|
593
|
|
|
|
0.5
|
%
|
|
|
514
|
|
|
|
0.3
|
%
|
|
|
(79
|
)
|
|
|
(13.3
|
)%
|
Professional fees
|
|
|
2,549
|
|
|
|
2.2
|
%
|
|
|
2,623
|
|
|
|
1.8
|
%
|
|
|
74
|
|
|
|
2.9
|
%
|
Software expense
|
|
|
712
|
|
|
|
0.6
|
%
|
|
|
1,431
|
|
|
|
1.0
|
%
|
|
|
719
|
|
|
|
101.0
|
%
|
Professional dues and memberships
|
|
|
565
|
|
|
|
0.5
|
%
|
|
|
205
|
|
|
|
0.1
|
%
|
|
|
(360
|
)
|
|
|
(63.7
|
)%
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
40,820
|
|
|
|
35.9
|
%
|
|
|
48,936
|
|
|
|
33.0
|
%
|
|
|
8,116
|
|
|
|
19.9
|
%
|
Other
|
|
|
1,091
|
|
|
|
1.0
|
%
|
|
|
3,846
|
|
|
|
2.6
|
%
|
|
|
2,755
|
|
|
|
252.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
122,942
|
|
|
|
108.0
|
%
|
|
|
149,289
|
|
|
|
100.8
|
%
|
|
|
26,347
|
|
|
|
21.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
|
(9,111
|
)
|
|
|
(8.0
|
)%
|
|
|
(1,141
|
)
|
|
|
(0.8
|
)%
|
|
|
7,970
|
|
|
|
(87.5
|
)%
|
Income tax expense
|
|
|
11,423
|
|
|
|
10.0
|
%
|
|
|
18,192
|
|
|
|
12.3
|
%
|
|
|
6,769
|
|
|
|
59.3
|
%
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
(20,534
|
)
|
|
|
(18.0
|
)%
|
|
|
(19,333
|
)
|
|
|
(13.0
|
)%
|
|
|
1,201
|
|
|
|
(5.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
(15
|
)
|
|
|
(0.0
|
)%
|
|
|
(402
|
)
|
|
|
(0.3
|
)%
|
|
|
(387
|
)
|
|
|
2,580.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
|
(20,519
|
)
|
|
|
(18.0
|
)%
|
|
|
(18,931
|
)
|
|
|
(12.8
|
)%
|
|
|
1,588
|
|
|
|
(7.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our total net revenue increased $34.3 million, or 30.1%, to
$148.1 million for the nine months ended September 30,
2010 compared to $113.8 million for the nine months ended
September 30, 2009. Our total net loss decreased by
$1.6 million to $18.9 million for the nine months
ended September 30, 2010 compared to a net loss of
$20.5 million for the nine months ended September 30,
2009. Our adjusted net income (a non-GAAP measure which excludes
the impact of the embedded derivative liability) increased
$9.7 million, or approximately 47.8%, to
54
$30.0 million for the nine months ended September 30,
2010 compared to $20.3 million for the nine months ended
September 30, 2009. Our results for the nine months ended
September 30, 2010 reflect the impact of the embedded
derivative liability associated with our outstanding preferred
stock and the following principal factors:
|
|
|
|
|
customer trading volume increased by $165.6 billion to
$1,093.9 billion, or 17.8%;
|
|
|
|
|
|
retail trading revenue per million traded increased by $31.5 to
$154.1, or 25.7%;
|
|
|
|
|
|
net deposits received from retail customers increased by
$18.3 million to $205.2 million, or 9.8%; and
|
|
|
|
|
|
traded retail accounts increased from 43,565 to 52,486, or 20.5%.
|
Revenue
Our total net revenue increased $34.3 million, or 30.1%, to
$148.1 million for the nine months ended September 30,
2010 compared to $113.8 million for the nine months ended
September 30, 2009. Trading revenue increased
$33.3 million to $147.7 million for the nine months
ended September 30, 2010 compared to $114.3 million
for the nine months ended September 30, 2009. The increase
in trading revenue was primarily due to an increase in retail
trading revenue per million for the nine months ended
September 30, 2010 of $31.5, or 25.7%, to $154.1, compared
to $122.6 for the nine months ended September 30, 2009. We
believe our revenue growth was primarily the result of increased
currency volatility in 2010 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.
Retail trading revenue per million traded increased by $31.5, or
25.7%, to $154.1 and net deposits received from retail customers
increased for the nine months ended September 30, 2010 by
$18.3 million, or 9.8%, to $205.2 million compared to
$186.9 million for the nine months ended September 30,
2009. We believe the increase in retail trading revenue per
million traded was primarily due to increased currency
volatility.
Our other revenue increased $0.8 million to
$1.9 million for the nine months ended September 30,
2010 from $1.1 million for the nine months ended
September 30, 2009.
Our net interest expense for the nine months ended
September 30, 2010 decreased $0.2 million to
$1.4 million compared to the nine months ended
September 30, 2009 as the average effective interest rate
earned on our deposits and investments remained consistent at
approximately 0.1%.
Interest expense on notes payable has been reclassified to
interest expense in the net interest revenue (expense) category
on the Consolidated Statements of Operations and Comprehensive
Income (Loss).
Operating
expenses
Our total expenses increased $26.4 million to
$149.3 million for the nine months ended September 30,
2010, including a loss of $48.9 million relating to the
change in fair value of our preferred stock embedded derivative,
compared to $122.9 million, including expense of
$40.8 million relating to the change in fair value of our
preferred stock embedded derivative, for the nine months ended
September 30, 2009. Other changes in our expenses were
primarily due to a $4.4 million increase in employee
compensation and benefits, a $8.2 million increase in
trading expenses and commissions, a $1.4 million increase
in selling and marketing expense, and a $2.8 million
increase in other expenses. The remaining decrease was due to
changes in each of our remaining expense categories with no
individual category increasing or decreasing more than
$0.8 million. We have estimated the fair market value of
our preferred stock embedded derivative based principally on the
results of a valuation model. The estimated fair value of the
derivative embedded within our preferred stock is based on the
value of our common stock. As our common stock price increases,
the liability to settle the embedded derivative within our
preferred stock increases, which results in a higher expense
related to the embedded derivative. Conversely, as our common
stock fair value decreases, the liability to settle the embedded
derivative within our preferred stock decreases, resulting in a
reversal of expense related to the embedded derivative. The
change in total expenses therefore relates to the change in fair
value of our preferred stock embedded derivative for the period.
55
Employee
Compensation and Benefits
Employee compensation and benefits expenses increased
$4.4 million, or 14.9%, to $34.0 million for the nine
months ended September 30, 2010, from $29.6 million
for the nine months ended September 30, 2009. Salaries and
benefits (excluding bonus and stock compensation) increased
$1.8 million primarily due to increases in salaries. Stock
compensation expense increased $0.8 million due to grants
distributed in 2009. Bonus expense increased $1.8 million
primarily due to the increase in operating results of our
business for the nine months ended September 30, 2010 as
compared to September 30, 2009.
Selling
and Marketing
Selling and marketing expenses increased $1.4 million, or
5.2%, to $28.2 million for the nine months ended
September 30, 2010 from $26.8 million for the nine
months ended September 30, 2009. Increased sales and
marketing expenses were primarily due to increased online,
search engine, consulting, print and television advertising.
This is in connection with the continued strategy of growing our
global brand.
Trading
Expense and Commissions
Trading expenses and commissions increased $8.2 million to
$18.6 million for the nine months ended September 30,
2010 compared to $10.4 million for the nine months ended
September 30, 2009, primarily due to an increase in
customer trading volume directed to us from our white label
partners and introducing brokers of $97.3 billion to
$407.7 billion for the nine months ended September 30,
2010, compared to $310.4 billion for the nine months ended
September 30, 2009. This expense is largely variable and is
directly associated with customer trading volume directed to us
from our white label partners and introducing brokers.
Other
Expenses
Other expense increased $2.8 million to $3.8 million
for the nine months ended September 30, 2010 compared to
$1.0 million for the nine months ended September 30,
2009, primarily due to increases in litigation, fines and
penalties of $1.1 million and regulatory assessment fees of
$0.2 million.
Bad
Debt Expense
The Companys bad debt provision decreased
$0.1 million to $0.5 million for the nine months ended
September 30, 2010.
Income
Taxes
Income taxes increased $6.8 million to $18.2 million
for the nine months ended September 30, 2010 from
$11.4 million for the nine months ended September 30,
2009. Our effective tax rate was (1,594.4%) for nine months
ended September 30, 2010 and 125.4% for the nine months
ended September 30, 2009. Our adjusted effective tax rate
was 38.1% for the nine months ended September 30, 2010
compared to 36.0% for the nine months ended September 30,
2009. 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 difference between our effective tax rate
and adjusted effective tax rate is due to the fact that our
income tax expense is not affected by the change in fair value
of our preferred stock embedded derivative from prior periods.
56
Year End
Results
The following table sets forth our Results of Operations for the
three years ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
2008 Over
|
|
|
2009 Over
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
2007
|
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
118,176
|
|
|
|
99.0
|
%
|
|
$
|
186,004
|
|
|
|
98.9
|
%
|
|
$
|
153,375
|
|
|
|
100.0
|
%
|
|
|
57.4
|
%
|
|
|
(17.5
|
)%
|
Other revenue
|
|
|
437
|
|
|
|
0.4
|
%
|
|
|
2,366
|
|
|
|
1.3
|
%
|
|
|
2,108
|
|
|
|
1.4
|
%
|
|
|
441.4
|
%
|
|
|
(10.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
118,613
|
|
|
|
99.4
|
%
|
|
|
188,370
|
|
|
|
100.1
|
%
|
|
|
155,483
|
|
|
|
101.4
|
%
|
|
|
58.8
|
%
|
|
|
(28.4
|
)%
|
Interest revenue
|
|
|
5,024
|
|
|
|
4.2
|
%
|
|
|
3,635
|
|
|
|
1.9
|
%
|
|
|
292
|
|
|
|
0.2
|
%
|
|
|
(27.6
|
)%
|
|
|
(92.0
|
)%
|
Interest expense
|
|
|
(4,299
|
)
|
|
|
(3.6
|
)%
|
|
|
(3,905
|
)
|
|
|
(2.1
|
)%
|
|
|
(2,456
|
)
|
|
|
(1.6
|
)%
|
|
|
(9.2
|
)%
|
|
|
(37.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue
|
|
|
725
|
|
|
|
0.6
|
%
|
|
|
(270
|
)
|
|
|
(0.1
|
)%
|
|
|
(2,164
|
)
|
|
|
(1.4
|
)%
|
|
|
(137.2
|
)%
|
|
|
701.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
119,338
|
|
|
|
100.0
|
%
|
|
|
188,100
|
|
|
|
100.0
|
%
|
|
|
153,319
|
|
|
|
100.0
|
%
|
|
|
57.6
|
%
|
|
|
(18.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
25,093
|
|
|
|
21.0
|
%
|
|
|
37,024
|
|
|
|
19.7
|
%
|
|
|
41,503
|
|
|
|
27.1
|
%
|
|
|
47.5
|
%
|
|
|
12.1
|
%
|
Sellings and marketing
|
|
|
21,836
|
|
|
|
18.3
|
%
|
|
|
29,312
|
|
|
|
15.6
|
%
|
|
|
36,875
|
|
|
|
24.1
|
%
|
|
|
34.2
|
%
|
|
|
25.8
|
%
|
Trading expenses and commissions
|
|
|
10,436
|
|
|
|
8.7
|
%
|
|
|
16,310
|
|
|
|
8.7
|
%
|
|
|
14,955
|
|
|
|
9.8
|
%
|
|
|
56.3
|
%
|
|
|
(8.3
|
)%
|
Bank fees
|
|
|
2,316
|
|
|
|
1.9
|
%
|
|
|
3,754
|
|
|
|
2.0
|
%
|
|
|
4,466
|
|
|
|
2.9
|
%
|
|
|
62.1
|
%
|
|
|
19.0
|
%
|
Depreciation and amortization
|
|
|
1,911
|
|
|
|
1.6
|
%
|
|
|
2,496
|
|
|
|
1.3
|
%
|
|
|
2,689
|
|
|
|
1.8
|
%
|
|
|
30.6
|
%
|
|
|
7.7
|
%
|
Communications and data processing
|
|
|
1,659
|
|
|
|
1.4
|
%
|
|
|
2,467
|
|
|
|
1.3
|
%
|
|
|
2,676
|
|
|
|
1.7
|
%
|
|
|
48.7
|
%
|
|
|
8.5
|
%
|
Occupancy and equipment
|
|
|
1,616
|
|
|
|
1.4
|
%
|
|
|
2,419
|
|
|
|
1.3
|
%
|
|
|
3,548
|
|
|
|
2.3
|
%
|
|
|
49.7
|
%
|
|
|
46.7
|
%
|
Bad debt provision/(recovery)
|
|
|
1,164
|
|
|
|
1.0
|
%
|
|
|
1,418
|
|
|
|
0.8
|
%
|
|
|
760
|
|
|
|
0.5
|
%
|
|
|
21.8
|
%
|
|
|
(46.4
|
)%
|
Professional fees
|
|
|
1,380
|
|
|
|
1.2
|
%
|
|
|
3,104
|
|
|
|
1.7
|
%
|
|
|
3,729
|
|
|
|
2.4
|
%
|
|
|
124.9
|
%
|
|
|
20.1
|
%
|
Software expense
|
|
|
123
|
|
|
|
0.1
|
%
|
|
|
888
|
|
|
|
0.5
|
%
|
|
|
1,132
|
|
|
|
0.7
|
%
|
|
|
622.0
|
%
|
|
|
27.5
|
%
|
Professional dues and memberships
|
|
|
187
|
|
|
|
0.2
|
%
|
|
|
773
|
|
|
|
0.4
|
%
|
|
|
698
|
|
|
|
0.5
|
%
|
|
|
313.4
|
%
|
|
|
(9.7
|
)%
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1,897
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
(100.0
|
)%
|
Change in fair value of convertible preferred stock embedded
derivative
|
|
|
165,280
|
|
|
|
138.5
|
%
|
|
|
(181,782
|
)
|
|
|
(96.6
|
)%
|
|
|
(1,687
|
)
|
|
|
(1.1
|
)%
|
|
|
(210.0
|
)%
|
|
|
(99.1
|
)%
|
Other
|
|
|
(627
|
)
|
|
|
(0.5
|
)%
|
|
|
1,424
|
|
|
|
0.8
|
%
|
|
|
1,746
|
|
|
|
1.1
|
%
|
|
|
(327.1
|
)%
|
|
|
22.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
232,374
|
|
|
|
194.7
|
%
|
|
$
|
(78,496
|
)
|
|
|
(41.7
|
)%
|
|
$
|
113,090
|
|
|
|
73.8
|
%
|
|
|
(133.8
|
)%
|
|
|
(244.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
$
|
(113,036
|
)
|
|
|
(94.7
|
)%
|
|
$
|
266,596
|
|
|
|
141.7
|
%
|
|
$
|
40,229
|
|
|
|
26.2
|
%
|
|
|
(335.9
|
)%
|
|
|
(84.9
|
)%
|
Income tax expense
|
|
|
21,615
|
|
|
|
18.1
|
%
|
|
|
34,977
|
|
|
|
18.6
|
%
|
|
|
12,556
|
|
|
|
8.2
|
%
|
|
|
61.8
|
%
|
|
|
(64.1
|
)%
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(214
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
2008 Over
|
|
|
2009 Over
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
2007
|
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
|
NET INCOME/(LOSS)
|
|
|
(134,651
|
)
|
|
|
(112.8
|
)%
|
|
|
231,405
|
|
|
|
123.0
|
%
|
|
|
27,673
|
|
|
|
18.0
|
%
|
|
|
(271.9
|
)%
|
|
|
(88.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(21
|
)
|
|
|
0.0
|
%
|
|
|
(321
|
)
|
|
|
(0.2
|
)%
|
|
|
0.0
|
%
|
|
|
1428.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(134,651
|
)
|
|
|
(112.8
|
)%
|
|
$
|
231,426
|
|
|
|
123.0
|
%
|
|
$
|
27,994
|
|
|
|
18.3
|
%
|
|
|
(271.9
|
)%
|
|
|
(87.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Overview
Our total net revenue decreased $34.8 million, or 18.5%, to
$153.3 million for the year ended December 31, 2009,
compared to $188.1 million for the year ended
December 31, 2008. Our total net income decreased by
$203.4 million to $28.0 million for the year ended
December 31, 2009, compared to $231.4 million for the
year ended December 31, 2008. Our adjusted net income (a
non-GAAP measure which excludes the impact of the embedded
derivative liability) decreased $23.3 million, or
approximately 47.0%, to $26.3 million for the year ended
December 31, 2009, compared to $49.6 million for the
year ended December 31, 2008. Except where specifically
stated, our results for the year ended December 31, 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 $251.9 billion to
$1,246.7 billion, or 16.8% ($0.4 million of trading
volume was attributable to customers residing in China for the
year ended December 31, 2009 compared to
$172.4 billion for the year ended December 31, 2008);
|
|
|
|
|
|
retail trading revenue per million traded decreased by $1.1 to
$123.0, or 0.9%;
|
|
|
|
net deposits received from retail customers decreased by
$20.2 million to net deposits of $257.1 million, or
7.3% ($1.4 million of withdrawals were attributable to
customers residing in China for the year ended December 31,
2009 compared to $25.3 million of net deposits during the
year ended December 31, 2008); and
|
|
|
|
traded retail accounts increased from 52,555 to 52,755 (seven
traded retail accounts were attributable to customers residing
in China for year ended December 31, 2009 compared to
11,647 traded retail accounts for the year ended
December 31, 2008).
|
Revenue
Our total net revenue decreased $34.8 million, or 18.5%, to
$153.3 million for the year ended December 31, 2009,
compared to $188.1 million for the year ended
December 31, 2008. Trading revenue decreased
$32.6 million to $153.4 million for the year ended
December 31, 2009, compared to $186.0 million for the
year ended December 31, 2008. The decrease in trading
revenue was primarily due to a decrease in customer trading
volume for the year ended December 31, 2009 of
$251.9 billion, or 16.8%, to $1,246.7 billion,
compared to $1,498.6 billion for the year ended
December 31, 2008. 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. For the
year ended December 31, 2009 net revenue associated
with customers residing in China was immaterial compared to
$24.4 million for the year ended December 31, 2008.
Retail trading revenue per million traded decreased by $1.1, or
0.9%, to $123.0 and net deposits received from customers
decreased for the year ended December 31, 2009 by
$20.2 million, or 7.3%, to $257.1 million compared to
$277.3 million for the year ended December 31, 2008.
We do not believe that our retail trading revenue per million
traded results were materially impacted by our termination of
our business with customers residing in China.
58
Our other revenue decreased $0.3 million to
$2.1 million for the year ended December 31, 2009 from
$2.4 million for the year ended December 31, 2008.
Our net interest expense increased $1.9 million to
$2.2 million for the year ended December 31, 2009
compared to $0.3 million for the year ended
December 31, 2008 due to a decrease in the average
effective interest rate earned on our deposits and investments
which was 0.1% for the year ended December 31, 2009
compared to 1.5% for the year ended December 31, 2008.
Interest expense on notes payable has been reclassified to
interest expense in the net interest revenue (expense) category
on the Consolidated Statements of Operations and Comprehensive
Income (Loss).
Operating
Expenses
Our total expenses increased $191.6 million to a net
expense of $113.1 million for the year ended
December 31, 2009, including a gain of $1.7 million
relating to the change in fair value of our preferred stock
embedded derivative, compared to a net gain of
$78.5 million, including a net gain of $181.8 million
relating to the change in fair value of our preferred stock
embedded derivative, for the year ended December 31, 2008.
Other changes in our expenses were primarily due to a
$4.5 million increase in employee compensation and
benefits, a $7.6 million increase in selling and marketing,
a $1.1 million increase in occupancy and equipment offset
by a $1.9 million decrease in write-off of deferred public
offering costs, and a $1.3 million decrease in trading
expenses. The remaining increase of $0.6 million was due to
changes in each of our remaining expense categories with no
individual category increasing or decreasing more than
$0.7 million. For the year ended December 31, 2009,
there were no material direct expenses associated with our
operations in China compared to $5.9 million for the year
ended December 31, 2008.
Employee
Compensation and Benefits
Employee compensation and benefits expenses increased
$4.5 million, or 12.2%, to $41.5 million for the year
ended December 31, 2009, from $37.0 million for the
year ended December 31, 2008. Salaries and benefits
(excluding bonus and stock compensation) increased
$5.6 million primarily due to increases in head count from
319 at December 31, 2008 to 378 at December 31,
2009. The increase in the head count was required to support the
overall growth in our business and continued international
expansion. Stock compensation expense increased
$1.1 million due to grants distributed in 2009. Bonus
expense decreased $2.3 million primarily due to the
decrease in operating results of our business for the year ended
December 31, 2009 as compared to December 31, 2008.
For the year ended December 31, 2009, there were no
material direct employee compensation and benefits expenses
associated with our operations in China compared to
$1.4 million for the year ended December 31, 2008.
Selling
and Marketing Expense
Selling and marketing expenses increased $7.6 million, or
26.0%, to $36.9 million for the year ended
December 31, 2009 from $29.3 million for the year
ended December 31, 2008. Increased sales and marketing
expenses were primarily due to increased online, search engine,
consulting, print and television advertising. For the year ended
December 31, 2009, there were no direct selling and
marketing expenses associated with our operations in China
compared to $3.1 million for the year ended
December 31, 2008.
Trading
Expense and Commissions
Trading expenses and commissions decreased $1.3 million to
$15.0 million for the year ended December 31, 2009
compared to $16.3 million for the year ended
December 31, 2008, primarily due to an decrease in customer
trading volume directed to us from our white label partners and
introducing brokers of $58.0 billion to $431.4 billion
for the year ended December 31, 2009, compared to
$489.4 billion for the year ended December 31, 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. For the year ended
December 31, 2009, there were no direct trading expenses
and commissions from our operations in China compared to
$0.7 million for the year ended December 31, 2008.
59
Other
Expenses
Other expense increased $0.3 million to $1.7 million
for the year ended December 31, 2009 compared to
$1.4 million for the year ended December 31, 2008,
primarily due to an increase on the loss on disposal of property
and equipment of $0.3 million, an increase in litigation
expenses of $0.2 million, and an increase in office
supplies expense of $0.1 million. These increases were
offset by a decrease in travel expenses of $0.3 million.
These increased expenses were required to support the overall
growth of our business.
Professional fee expense increased $0.6 million to
$3.7 million for the year ended December 31, 2009
compared to $3.1 million for the year ended
December 31, 2008 due to a $0.3 million increase in
professional fees, $0.3 million in tax services,
$0.9 million increase in consulting expense and
$0.2 million increase in audit fees, offset by a decrease
in legal expenses of $1.1 million. These increased expenses
were required to support the overall growth of our business.
Bank fees increased $0.7 million to $4.5 million for
the year ended December 31, 2009 from $3.8 million for
the year ended December 31, 2008. Increased bank fees were
primarily due to an increase in credit card processing fees as a
result of an increase of $30.1 million in the total net
deposits received from customers funded through the use of
customer credit cards.
Communications and data processing expenses increased
$0.2 million, occupancy and equipment expenses increased
$1.1 million, and depreciation and amortization expense
increased $0.2 million. These increased expenses were
required to support the overall growth of our business.
The change in fair value of the preferred stock embedded
derivative amounted to a gain of $1.7 million for the year
ended December 31, 2009 compared to a gain of
$181.8 million for the year ended December 31, 2008.
We have determined that the convertible feature in our preferred
stock meets the definition of an embedded derivative
in accordance with FASB ASC 815. 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 (Loss).
Income
Taxes
Income taxes decreased $22.4 million to $12.6 million
for the year ended December 31, 2009 from
$35.0 million for the year ended December 31, 2008.
Our effective tax rate was 31.2% for year ended
December 31, 2009 and 13.1% for the year ended
December 31, 2008. Our adjusted effective tax rate was
32.6% for the year ended December 31, 2009 compared to
41.2% for the year ended December 31, 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 year ended December 31, 2009,
there was no income tax expense related to our operations in
China compared to $7.5 million for the year ended
December 31, 2008. The difference between our effective tax
rate and adjusted effective tax rate is due to the fact that our
income tax expense is not affected by the change in fair value
of our preferred stock embedded derivative from prior periods.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Overview
Our total net revenue increased $68.8 million, or 57.6%, to
$188.1 million for the year ended December 31, 2008,
compared to $119.3 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
60
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
year ended December 31, 2008 compared to
$103.4 million for the year ended December 31, 2007);
|
|
|
|
retail trading revenue per million traded decreased by $51.1 to
$124.1, or 29.2%;
|
|
|
|
net deposits received from retail 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 for the year ended December 31,
2008 compared to $26.0 for the year ended December 31,
2007); and
|
|
|
|
traded retail accounts increased from 43,139 to 52,555, or 21.8%
(11,647 traded retail accounts were attributable to customers
residing in China for the year ended December 31, 2008).
|
Revenue
Our total net revenue increased $68.8 million, or 57.6%, to
$188.1 million for the year ended December 31, 2008,
compared to $119.3 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 retail 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
retail accounts, compared to $103.4 billion of our customer
trading volume, $26.0 million of our net deposits and
11,568 of our traded retail accounts for the year ended
December 31, 2007.
Retail trading revenue per million traded decreased by $51.1, or
29.2%, to $124.1 and net deposits received from retail 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 retail 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.
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 customers 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.
61
Our net interest revenue decreased $1.0 million to interest
expense of $0.3 million for the year ended
December 31, 2008 compared to $0.7 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.
Certain balances have been reclassified to conform with the
concepts of
Regulation S-X,
Rule 9.04. These include the reclassification of
$3.7 million, $2.7 million, and $1.7 million for
the year ended December 31, 2007, 2008 and 2009,
respectively, from interest expense on notes payable to interest
expense in the net interest revenue (expense) category on the
Consolidated Statements of Operations and Comprehensive Income
(Loss).
Operating
Expenses
Our total expenses decreased $310.9 million, or 133.8%, to
a net gain of $78.5 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 $232.4 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 an
$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. 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
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 head count from
299 at December 31, 2007 to 319 at December 31, 2008.
The increase in the head count 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
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
Expense and Commissions
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 $261.6 billion to
$489.4 billion for the year ended December 31, 2008,
compared to $227.8 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.
62
Other
Expenses
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 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 $3.8 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.
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 our preferred
stock meets the definition of an embedded derivative
in accordance with FASB ASC 815. 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 (Loss).
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 effective tax rate is due to the
fact that our income tax expense is not affected by the change
in fair value of our preferred stock embedded derivative from
prior periods.
63
Quarterly
Results of Operations for the Three-Month Periods Ended
September 30, 2008 through September 30,
2010
The following table sets forth our unaudited quarterly Results
of Operations for the three-month periods ended
September 30, 2008 through September 30, 2010. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008(1)
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(dollars in thousands)
|
|
|
|
(unaudited)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
42,921
|
|
|
$
|
56,673
|
|
|
$
|
31,885
|
|
|
$
|
45,208
|
|
|
$
|
37,239
|
|
|
$
|
39,043
|
|
|
$
|
42,059
|
|
|
$
|
54,459
|
|
|
$
|
51,149
|
|
Other Revenue
|
|
|
1,226
|
|
|
|
383
|
|
|
|
710
|
|
|
|
257
|
|
|
|
152
|
|
|
|
989
|
|
|
|
446
|
|
|
|
730
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
44,147
|
|
|
|
57,056
|
|
|
|
32,595
|
|
|
|
45,465
|
|
|
|
37,391
|
|
|
|
40,032
|
|
|
|
42,505
|
|
|
|
55,189
|
|
|
|
51,887
|
|
Interest revenue
|
|
|
1,008
|
|
|
|
455
|
|
|
|
91
|
|
|
|
79
|
|
|
|
57
|
|
|
|
65
|
|
|
|
63
|
|
|
|
103
|
|
|
|
77
|
|
Interest expense
|
|
|
(999
|
)
|
|
|
(747
|
)
|
|
|
(631
|
)
|
|
|
(614
|
)
|
|
|
(603
|
)
|
|
|
(608
|
)
|
|
|
(599
|
)
|
|
|
(585
|
)
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
9
|
|
|
|
(292
|
)
|
|
|
(540
|
)
|
|
|
(535
|
)
|
|
|
(546
|
)
|
|
|
(543
|
)
|
|
|
(536
|
)
|
|
|
(482
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
44,156
|
|
|
|
56,764
|
|
|
|
32,055
|
|
|
|
44,930
|
|
|
|
36,845
|
|
|
|
39,489
|
|
|
|
41,969
|
|
|
|
54,707
|
|
|
|
51,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
10,026
|
|
|
|
9,571
|
|
|
|
9,350
|
|
|
|
10,232
|
|
|
|
10,038
|
|
|
|
11,883
|
|
|
|
11,218
|
|
|
|
11,379
|
|
|
|
11,434
|
|
Selling and marketing
|
|
|
6,474
|
|
|
|
7,337
|
|
|
|
8,539
|
|
|
|
9,407
|
|
|
|
8,845
|
|
|
|
10,084
|
|
|
|
9,863
|
|
|
|
8,940
|
|
|
|
9,389
|
|
Trading expenses and commissions
|
|
|
4,042
|
|
|
|
3,319
|
|
|
|
2,729
|
|
|
|
3,702
|
|
|
|
4,000
|
|
|
|
4,524
|
|
|
|
5,141
|
|
|
|
7,129
|
|
|
|
6,331
|
|
Bank fees
|
|
|
874
|
|
|
|
1,159
|
|
|
|
1,082
|
|
|
|
1,115
|
|
|
|
1,218
|
|
|
|
1,051
|
|
|
|
1,042
|
|
|
|
1,141
|
|
|
|
987
|
|
Depreciation and amortization
|
|
|
711
|
|
|
|
599
|
|
|
|
652
|
|
|
|
699
|
|
|
|
662
|
|
|
|
676
|
|
|
|
789
|
|
|
|
860
|
|
|
|
919
|
|
Communications and data processing
|
|
|
576
|
|
|
|
786
|
|
|
|
651
|
|
|
|
629
|
|
|
|
669
|
|
|
|
727
|
|
|
|
751
|
|
|
|
719
|
|
|
|
739
|
|
Occupancy and equipment
|
|
|
714
|
|
|
|
704
|
|
|
|
729
|
|
|
|
779
|
|
|
|
883
|
|
|
|
1,157
|
|
|
|
962
|
|
|
|
956
|
|
|
|
1,045
|
|
Bad debt provision/(recovery)
|
|
|
917
|
|
|
|
129
|
|
|
|
(167
|
)
|
|
|
156
|
|
|
|
603
|
|
|
|
168
|
|
|
|
242
|
|
|
|
113
|
|
|
|
159
|
|
Professional fees
|
|
|
1,119
|
|
|
|
1,123
|
|
|
|
736
|
|
|
|
920
|
|
|
|
892
|
|
|
|
1,181
|
|
|
|
692
|
|
|
|
821
|
|
|
|
1,110
|
|
Software expense
|
|
|
283
|
|
|
|
347
|
|
|
|
284
|
|
|
|
250
|
|
|
|
177
|
|
|
|
421
|
|
|
|
426
|
|
|
|
600
|
|
|
|
405
|
|
Professional dues and memberships
|
|
|
237
|
|
|
|
207
|
|
|
|
181
|
|
|
|
207
|
|
|
|
177
|
|
|
|
133
|
|
|
|
67
|
|
|
|
70
|
|
|
|
68
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of convertible preferred stock embedded
derivative
|
|
|
(56,944
|
)
|
|
|
(11,502
|
)
|
|
|
4,303
|
|
|
|
57,654
|
|
|
|
(21,137
|
)
|
|
|
(42,507
|
)
|
|
|
(59,463
|
)
|
|
|
(820
|
)
|
|
|
109,219
|
|
Other
|
|
|
417
|
|
|
|
382
|
|
|
|
179
|
|
|
|
560
|
|
|
|
352
|
|
|
|
655
|
|
|
|
589
|
|
|
|
1,615
|
|
|
|
1,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(30,554
|
)
|
|
$
|
16,058
|
|
|
$
|
29,248
|
|
|
$
|
86,310
|
|
|
$
|
7,379
|
|
|
$
|
(9,847
|
)
|
|
$
|
(27,681
|
)
|
|
$
|
33,523
|
|
|
$
|
143,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS
OF EQUITY METHOD INVESTMENT
|
|
$
|
74,710
|
|
|
$
|
40,706
|
|
|
$
|
2,807
|
|
|
$
|
(41,380
|
)
|
|
$
|
29,466
|
|
|
$
|
49,336
|
|
|
$
|
69,650
|
|
|
$
|
21,184
|
|
|
$
|
(91,975
|
)
|
Income tax expense
|
|
|
8,167
|
|
|
|
10,935
|
|
|
|
2,948
|
|
|
|
7,198
|
|
|
|
1,277
|
|
|
|
1,133
|
|
|
|
4,090
|
|
|
|
7,389
|
|
|
|
6,713
|
|
Equity in earnings of equity method investment
|
|
|
(44
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
66,499
|
|
|
|
29,637
|
|
|
|
(141
|
)
|
|
|
(48,578
|
)
|
|
|
28,189
|
|
|
|
48,203
|
|
|
|
65,560
|
|
|
|
13,795
|
|
|
|
(98,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to
non-controlling
Interest
|
|
|
|
|
|
|
(21
|
)
|
|
|
(45
|
)
|
|
|
34
|
|
|
|
(4
|
)
|
|
|
(306
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to
GAIN Capital Holdings, Inc.
|
|
$
|
66,499
|
|
|
$
|
29,658
|
|
|
$
|
(96
|
)
|
|
$
|
(48,612
|
)
|
|
$
|
28,193
|
|
|
$
|
48,509
|
|
|
$
|
65,962
|
|
|
$
|
13,795
|
|
|
|
(98,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2008, we
terminated our service offerings to residents of China and
ceased our trading operations located in that country.
|
64
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 lines of credit from time to time. 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 CFTC and 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, the Australian Securities and
Investment Commission, 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, 2010 and the actual amounts of capital that
were maintained (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Regulatory
|
|
Capital Levels
|
|
Excess Net
|
Entity Name
|
|
Capital Requirements
|
|
Maintained
|
|
Capital
|
|
GAIN Capital Group, LLC
|
|
$
|
25.84
|
|
|
$
|
63.12
|
|
|
$
|
37.28
|
|
GAIN Capital Securities, Inc.
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
$
|
2.03
|
|
|
$
|
18.33
|
|
|
$
|
16.30
|
|
GAIN Capital-Forex.com Japan, Co. Ltd.
|
|
$
|
3.37
|
|
|
$
|
8.71
|
|
|
$
|
5.34
|
|
GAIN Capital-Forex.com Australia, Pty. Ltd.
|
|
$
|
0.14
|
|
|
$
|
0.73
|
|
|
$
|
0.59
|
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
$
|
0.39
|
|
|
$
|
0.91
|
|
|
$
|
0.52
|
|
GAIN Global Markets, Inc.
|
|
$
|
0.10
|
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
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 of $20.0 million plus 5.0%
of the total payables to customers over $10.0 million, as
these terms are defined under applicable rules. 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, 2010,
GAIN Capital Group, LLC had net capital of approximately
$96.1 million, adjusted net capital of $63.1 million
and net capital requirements of $25.8 million. As of
September 30, 2010, our excess net capital was
$37.3 million. We believe that we currently have sufficient
capital to satisfy these on-going minimum net capital
requirements.
65
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, 2010, we posted
$89.6 million in cash with wholesale forex trading
partners, of which $18.2 million was required as collateral
pursuant to our agreements for holding spot foreign exchange
positions with such institutions, and the remaining
$71.4 million represented available cash in excess of
required collateral. As of September 30, 2010, total
customer assets on deposit were $222.4 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 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 Exchange
Act, or the other rules and regulations of the 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 New York Stock Exchange, or
NYSE. We anticipate annual legal and financial compliance
expenditures of approximately $3.0 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. On
June 16, 2010, the Company entered into a sixth loan
modification agreement related to the term loan. The loan
modification reduces the prime rate margin on the term loan from
0.75% to 0.5% and reduces the prime rate margin on the revolving
credit line from 0.75% to 0% and amends the revolving line
maturity date from June 17, 2010 to June 16, 2011.
There was no amount due on the revolving credit line at
September 30, 2010. 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 0.5%. 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, 2010
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 prime rate of interest plus 0.5%. 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 16, 2011. We intend to renew the
revolving line of credit upon maturity. As of September 30,
2010, we had $21.0 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, 2010 and during
the entire term of such loan, we were in compliance with such
covenants.
66
Cash
Flow
The following table sets forth a summary of our cash flow for
the three years ended December 31, 2009, amounts in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Cash provided by operating activities
|
|
$
|
77,774
|
|
|
$
|
69,320
|
|
|
$
|
62,127
|
|
|
$
|
32,349
|
|
|
$
|
55,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(2,528
|
)
|
|
|
(3,792
|
)
|
|
|
(5,003
|
)
|
|
|
(2,748
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
(7,828
|
)
|
|
|
12,062
|
|
|
|
(11,788
|
)
|
|
|
(8,573
|
)
|
|
|
(8,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
(53
|
)
|
|
|
757
|
|
|
|
479
|
|
|
|
(7,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,894
|
|
|
|
176,431
|
|
|
$
|
222,524
|
|
|
$
|
197,938
|
|
|
$
|
258,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 retail 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 retail customers increase
when we receive initial deposits from new retail customers or
additional deposits from existing retail customers. Net deposits
received from retail customers decrease when a retail 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 retail 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,
67
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, 2010 Compared to Nine Months
Ended September 30, 2009
Cash provided by operating activities was $55.1 million for
the nine months ended September 30, 2010, compared to
$32.3 million for the nine months ended September 30,
2009. Net loss decreased $1.2 million for the nine months
ended September 30, 2010 compared to the nine months ended
September 30, 2009. The primary reason for the increase in
cash provided by operating activities was an $8.1 million
increase in the change in fair value of the preferred stock
embedded derivative, a $7.5 million increase in receivables
from brokers, a $16.6 million increase in net taxes
receivable and payable, offset by a $7.7 million increase
in prepaid assets.
Cash used in investing activities was $3.8 million for the
nine months ended September 30, 2010, compared to cash used
in investing activities of $2.7 million for the nine months
ended September 30, 2009. The increase in cash used in
investing activities is primarily due to an increase of
$0.6 million in spending on computers, software and the
development of our trading platform and $0.5 million for
the purchase of MG Financial LLCs customer and
marketing lists.
Cash used for financing activities was $8.3 million for the
nine months ended September 30, 2010, compared to cash used
for financing activities of $8.6 million for the nine
months ended September 30, 2009. The decrease in cash used
was primarily due to $0.7 million spend in 2009 related to
our initial public offering offset by purchase of subsidiary
shares from noncontrolling interest of $0.4 million.
Twelve
Months Ended December 31, 2009 Compared to Twelve Months
Ended December 31, 2008
Cash provided by operating activities was $62.1 million for
the year ended December 31, 2009, compared to
$69.3 million for the year ended December 31, 2008.
Net income decreased $203.7 million for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 primarily due to a $180.1 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 $48.7 million decrease in
receivables from brokers, a $16.8 million decrease in net
taxes receivable and payable, offset by a $67.8 million
increase in amounts payable to customers, a $20.6 million
net increase in investments, a $9.5 million increase in
unrealized forex losses, and a $1.1 million increase in
stock compensation expense.
Cash used in investing activities was $5.0 million for the
year ended December 31, 2009, compared to $3.8 million
for the year ended December 31, 2008. The increase in cash
used in investing activities is primarily due to the acquisition
of an additional 19% ownership interest in Fortune Capital Co.,
Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.) for
$0.9 million, and an increase in capital expenditures of
$1.4 million.
Cash used for financing activities was $11.8 million for
the year ended December 31, 2009, compared to cash provided
by financing activities of $12.1 million for the year ended
December 31, 2008. The increase in cash used was primarily
due to the net proceeds in 2008 from our Series E preferred
stock offering of $116.8 million, offset by
$94.2 million related to repurchase of common and preferred
shares in 2008, with no comparable transactions in 2009.
68
Capital
Expenditures
Capital expenditures were $4.1 million for the year ended
December 31, 2009 compared to $2.7 million for the
year ended December 31, 2008. Capital expenditures for the
years ended December 31, 2009 and 2008 were primarily
related to the development of our trading platforms, websites,
and new corporate headquarters, which included furniture and
technology infrastructure to support our facility.
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, 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 due to acquisition of
and investment in Fortune Capital Co., Ltd. (now known as GAIN
Capital Forex.com 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-Party
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.
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, 2009:
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|
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|
|
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Payments Due by Period
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Less Than 1
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1-3
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3-5
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More Than
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Contractual
Obligations
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Total
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|
Year
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|
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Years
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|
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Years
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5 Years
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|
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(in thousands)
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|
|
Lease obligations
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|
$
|
17,316
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|
|
$
|
1,127
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|
|
$
|
2,156
|
|
|
$
|
1,980
|
|
|
$
|
12,053
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|
Long term debt
|
|
|
28,875
|
|
|
|
10,500
|
|
|
|
18,375
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|
|
|
|
|
|
|
|
|
Long term debt interest
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|
|
1,444
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|
|
|
893
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|
|
|
551
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|
|
|
|
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Vendor obligations
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|
|
2,755
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|
|
|
2,117
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|
|
|
638
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Total
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$
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50,390
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|
|
$
|
14,637
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|
|
$
|
21,720
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|
|
$
|
1,980
|
|
|
$
|
12,053
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|
|
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69
Off-Balance
Sheet Arrangements
At September 30, 2010, December 31, 2009 and 2008, 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.
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 $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 GAIN Capital Group, LLC
and $17,155 from GCAM, LLC. We reported managed account fees of
$55,070 in Other revenue for the year ended
December 31, 2009, with $11,693 from GAIN Capital Group,
LLC and $43,376 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 $0.4 million at
September 30, 2010 and $0.3 million at
December 31, 2009. 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.
70
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 Financial Accounting Standards Board
Accounting Standards Codification, or FASB ASC,
740-10,
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 $0.7 million as of December 31,
2009.
Effective December 2007, we use estimates in determining income
tax positions under FASB
ASC 740-10-25,
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 FASB
ASC 360-10,
Property, Plant and Equipment, 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
FASB
ASC 350-30,
General Intangibles, 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 FASB
350-30, our
URLs (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-share 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, 2010 was
$4.3 million.
71
Fair
Value of Derivative Liabilities
FASB
ASC 815-10,
Derivatives and Hedging Activities, as amended,
establishes accounting and reporting standards for derivative
instruments. We have determined that the redemption feature
contained in our preferred stock 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 FASB
ASC 815-40-25,
Contract in Entitys Own Equity.
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 gain on the change in fair value
of preferred stock embedded derivative amounted to
$181.8 million at December 31, 2008, and the gain on
the change in fair value of the preferred stock embedded
derivative amounted to $1.7 million at December 31,
2009. As of December 31, 2009, the derivative liabilities
had a fair value of $81.1 million, compared to a fair value
of $82.8 million for the conversion as of December 31,
2008.
Share
Based Payments
FASB
ASC 718-10,
Compensation Stock Compensation, requires
measurement of share based payment arrangements at fair value
and recognition of compensation cost over the service period,
net of estimated forfeitures. The fair value of restricted 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.
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:
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The volatility of our stock price;
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The expected life of the option;
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Risk free interest rates; and
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|
|
|
Expected dividend yield.
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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-a replacement of
FASB No. 162, or SFAS No. 168. 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
and GAAP. The Codification is effective for financial statements
issued for interim and annual reporting period 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 consolidated financial statements and references
to both GAAP and the Codification are included in this filing.
72
In June 2009, the FASB issued ASC 810,
Consolidation, or SFAS No. 167, Amendments
to FASB Interpretation No. 46R. FASB ASC 815
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 is effective
January 1, 2010. The adoption of SFAS No. 167 by
the Company in January 1, 2010 did not have a material
impact on the Companys consolidated financial statements.
In May 2009, the FASB issued FASB ASC 855, Subsequent
Events. FASB ASC 855 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. FASB ASC 855 is
effective for interim or annual financial periods ending after
June 15, 2009. The Company adopted FASB ASC 855 in the
second quarter of 2009 and has included the required disclosures
in the consolidated financial statements.
In April 2009, the FASB issued FASB
ASC 820-10-65-4,
or 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
during the second quarter of 2009 did not have a material impact
on the Companys consolidated financial statements.
In October 2008, the FASB issued FASB
ASC 820-10-65-2,
or 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
during the third quarter of 2008 did not have a material effect
on the Companys consolidated financial statements.
In April 2008, the FASB issued FASB
ASC 350-30,
or FSP
SFAS 142-3,
Determination of the Useful Life of Intangible Assets.
FSP
SFAS 142-3
removes the requirement of SFAS No. 142, Goodwill and
Other Intangible Assets 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 adoption of FSP
SFAS No. 142-3
during 2008 did not have a material effect on the Companys
consolidated financial statements.
In March 2008, the FASB issued FASB
ASC 815-10-65,
Derivatives and Hedging, or 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 and
has included the required disclosures in the consolidated
financial statements.
On December 4, 2007, the FASB issued FASB
ASC 810-10-65,
or SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 clarifies
that a noncontrolling or minority interest in a subsidiary is
73
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 and
has included the noncontrolling interest in GAIN Capital
Forex.com Japan, Co. Ltd. as equity in the consolidated
financial statements.
In December 2007, the FASB issued SFAS ASC
805-10, or
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. SFAS No. 141R applies
prospectively to business combinations for which the acquisition
date is on or after December 15, 2008. The Company adopted
SFAS No. 141R during 2009 and will apply the guidance
to future acquisitions.
In January 2010, the FASB issued Accounting Standards Update, or
ASU, 2010-6,
Improving Disclosures About Fair Value Measurements. ASU
2010-6
provides new disclosures and clarifications of existing
disclosures and is effective for interim and annual reporting
periods beginning after December 15, 2009, except for
disclosures about purchases, sales, issuances, and settlements
in the roll-forward activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years. The Company adopted ASU
2010-6
during 2009 and has included the required disclosures in the
Companys consolidated financial statements.
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,
2010, 87.3% of our assets, 89.6% of our liabilities, 99.1% of
our revenue, and 84.7% 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. For the nine months ended
September 30, 2010, a minimum of 90.9% of our average daily
trading volume, on any given day, was either naturally hedged,
where one of our customers executing a trade in a currency is
offset by a trade taken by another customer, or hedged by us
with a third-party financial institution. 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
74
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, 2010, an immediate 100 basis
point increase in short-term interest rates would result in
approximately $3.6 million more in annual pretax income.
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 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 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. For the
nine months ended September 30, 2010, a minimum of 90.9% of
our average daily trading volume, on any given day, was either
naturally hedged, where one of our customers executing a trade
in a currency is offset by a trade taken by another customer, or
hedged by us with a third party financial institution.
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
75
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 $50.4 million to
$83.9 million in the aggregate.
Additionally, we do not actively initiate proprietary positions
in anticipation of future movements in the relative 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 relative
prices of 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 39 currency pairs, CFD contracts and
gold and silver contracts. For the nine months ended
September 30, 2010, a minimum of 90.9% of our average daily
trading volume, on any given day, was either naturally hedged,
where one of our customers executing a trade in a currency is
offset by a trade taken by another customer, or hedged by us
with a third-party financial institution. 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 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 heighten 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 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 evaluate 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
76
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, 2010, 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.
On June 30, 2010, the National Futures Association, or NFA,
filed a complaint against GAIN Capital Group, LLC, our
wholly-owned operating subsidiary, and Glenn H. Stevens, our
president and chief executive officer, alleging, among other
things, that certain aspects of our liquidation, trade execution
and records maintenance, along with our supervisory management
of introducing brokers were not compliant with certain NFA rules
and standards. On October 27, 2010 we settled the matter
with the NFA. Pursuant to the settlement, the NFA made no
findings with respect to allegations that GAIN Capital Group,
LLCs and Mr. Stevens supervisory management
were not compliant with certain NFA rules and standards. As part
of the settlement that resulted in the NFA action being
terminated, we and Mr. Stevens neither admitted nor denied the
allegations in the complaint and we will pay a fine of
approximately $0.5 million. We have agreed to no longer use
certain liquidation and trade execution processes. For those
customers that were impacted by these liquidation and trade
executions processes, we have also agreed to reimburse them
within 30 days of the settlement. We have fully accrued
these amounts as of September 30, 2010.
77
BUSINESS
Overview
We are an online provider of retail and institutional foreign
exchange, or forex, trading and related services founded in 1999
by a group of experienced trading and technology 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 clearinghouse. We also offer some of our retail customers
access to other global markets on an OTC basis, including the
spot gold and silver markets, as well as equity indices and
commodities via instruments linked to the performance of the
price of an underlying security called
contracts-for-difference,
or CFDs. Our trading platforms provide a wide array of
information and analytical 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.
Forex trading is one of the fastest-growing areas of retail
trading in the financial services industry. In a forex trade,
participants buy one currency and simultaneously sell another
currency. We refer to the two currencies that make up a forex
trade as a currency pair. The first currency noted in the pair
is the base currency and the second is the counter currency.
According to the 2010 Triennial Bank Survey from the Bank for
International Settlements, or the BIS, average daily turnover in
the global forex market in April 2010 was $4.0 trillion, an
increase of approximately 20.0% from the $3.3 trillion reported
by the BIS in April 2007. The BIS notes that the
U.S. dollar is the most commonly traded currency, with
approximately 85.0% of all forex trades involving the
U.S. dollar. The forex market has emerged from its
previous role as a currency hedge to become an investable asset
class. Historically, access to the forex market was only
available to commercial and investment banks, corporations,
hedge funds and other large financial institutions. In the last
decade, retail investors have gained increasing access to this
market largely through the emergence of online retail forex
providers like us. According to a 2010 analysis by the Aite
Group, a financial services market research firm, global retail
forex trading volumes have grown from average daily volumes of
approximately $10.0 billion in 2001 to approximately
$125.0 billion in 2009 representing a compound annual
growth rate of 37.1%.
We have a geographically diverse customer base and currently
service customers residing in more than 140 countries
worldwide. For the year ended December 31, 2009, 49.7% of
our customer base was located in the United States, representing
approximately 54.5% of our total annual trading volume, while
approximately 50.3% of our customer base was located outside of
the United States, representing approximately 45.5% of our total
annual trading volume. We believe we are one of the largest
provider of retail forex trading to customers in the United
States based on active traded accounts. Our total annual
customer trading volume, which is based on the U.S. dollar
equivalent of notional amounts traded, grew from
$231.9 billion in 2005 to $1.2 trillion in 2009,
representing a compound annual growth rate of 50.8%. Our annual
net revenue grew from $37.9 million in 2005 to
$153.3 million in 2009, representing a compound annual
growth rate of 41.8%. Our net income grew from $8.2 million
in 2005 to $28.0 million in 2009, representing a compound
annual growth rate of 35.9%. 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 $8.2 million in 2005 to
$26.3 million in 2009, representing a compound annual
growth rate of 33.8%.
We are regulated in the United States by the Commodity Futures
Trading Commission, or CFTC, the Financial Industry Regulatory
Authority, or FINRA, the National Futures Association, or NFA,
and the U.S. Securities Exchange Commission, or SEC, in the
United Kingdom by the Financial Services Authority, or U.K. FSA,
in Japan by the Financial Services Authority, or Japan FSA, in
Hong Kong by the Securities and Futures Commission, or SFC, and
in Australia by the Australian Securities and Investments
Commission, or ASIC. For the nine months ended
September 30, 2010, 71.6% of our trading volume was from
customers in jurisdictions in which we are currently licensed or
authorized by local government bodies or self-regulatory
organizations.
78
We use financial metrics, including tradable retail accounts and
traded retail accounts, to measure our aggregate customer
account activity. Tradable retail accounts represent retail
customers who maintain cash balances with us that are sufficient
to execute a trade in compliance with our policies. As of
September 30, 2010 we had 70,618 tradable retail accounts
compared to 47,374 as of September 30, 2009. We believe the
number of tradable retail accounts is an important indicator of
our ability to attract new retail customers that can potentially
lead to trading volume and revenue in the future, however, 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 retail accounts, because this represents
retail customers who executed a transaction with us during a
particular period. During the nine months ended
September 30, 2010, 52,486 traded retail accounts executed
a forex transaction with us compared to 43,565 traded retail
accounts for the nine months ended September 30, 2009,
representing an increase of 20.5%.
Our customer base is comprised of self-directed retail traders,
managed retail traders and institutional customers who utilize
our online platforms and tools to trade forex and CFDs. For the
nine months ended September 30, 2010, self-directed retail
investors represented 79.0% of our customer trading volume.
Managed accounts, which are accounts managed by authorized
intermediaries trading on behalf of a retail account holder,
represented 8.7% of our customer trading volume for the nine
months ended September 30, 2010. Institutional customers
represented 12.3% of our volume for the nine months ended
September 30, 2010.
We seek to attract and support customers through direct,
indirect and institutional channels. Our primary direct channel
for our retail business is our Internet website, FOREX.com,
which is available in English, traditional and simplified
Chinese, Japanese, Russian and Arabic. It provides retail
traders of all experience levels with full trading capabilities,
along with extensive educational and support tools. Our indirect
channel includes our relationships with retail financial
services firms, such as broker-dealers, futures commission
merchants, or FCMs, and retail banking institutions. These firms
offer our 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 currency brokers
who refer their customers to us for a fee. We refer to these
firms as introducing brokers. Globally, we have
relationships with more than 500 white label partners and
introducing brokers who were active for the nine months ended
September 30, 2010. Our institutional channel, which we
launched in March 2010, sources our institutional customers,
consisting of commercial and investment banks, hedge funds and
other professional traders, through our direct sales team. Our
total customer trading volume sourced through direct, indirect,
and institutional channels was 50.4%, 37.3%, and 12.3%,
respectively for the nine months ended September 30, 2010.
For the year ended December 31, 2009, total customer
trading volume sourced through direct and indirect channels was
65.4% and 34.6%, respectively.
The majority of our revenue is derived from our retail
customers trading activity in our forex and CFD product
offerings. We generally act as the counterparty to our retail
customers trades and as an agent for trades conducted by
our institutional customers. The counterparties to our
institutional customers trades are third party financial
institutions. We receive transaction fees for our institutional
customers trades and the third-party financial institution
who is counterparty to the transaction incurs the market risk.
For our retail customer business, we have used our extensive
experience in the global OTC markets and online trading to
develop risk-management systems and procedures that allow us to
manage market and credit risk in accordance with predefined
exposure limits in real-time. A key component of our approach to
managing risk is that we do not actively initiate market
positions for our own account in anticipation of future
movements in the relative prices of products we offer. We refer
to such positions as proprietary directional market
positions. Instead, we continuously evaluate market risk
exposure, and actively hedge a portion of our customer
transactions on a continuous basis. For the nine months ended
September 30, 2010, a minimum 90.9% of our average daily
trading volume, on any given day, was either naturally hedged,
where one of our customers executing a trade in a currency is
offset by a trade taken by another customer, or hedged by us
with a third party financial institution. To facilitate our
risk-management activities, we maintain levels of capital in
excess of those currently required under applicable regulations.
As of September 30, 2010, we maintained capital levels of
$92.5 million, which represents approximately
2.9 times the capital we are required to hold.
We believe that we provide our customers with access to forex
liquidity at competitive rates. We maintain relationships with
three established global prime brokers, including Deutsche Bank
AG, or Deutsche Bank, UBS
79
AG, or UBS, and The Royal Bank of Scotland plc, or RBS, as well
as relationships with 13 additional wholesale forex trading
partners and access to other trading platforms and other
wholesale forex trading partners, which gives us access to over
25 potential liquidity providers. We believe these relationships
gives us access to a pool of forex liquidity, which ensures that
we are able to execute our customers trades in any of the
39 currency pairs or six CFD product offerings we offer and in
the notional amount they request.
We believe that our approach to managing market and credit risk
provides us with a diversified revenue stream that is governed
by both risk-management and profit maximization principles.
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. As of September 30, 2010, the
following companies were our principal operating subsidiaries
and intermediate holding companies:
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|
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|
|
Entity Name
|
|
Business/Services
|
|
Applicable Regulator
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|
GAIN Capital Holdings, Inc.
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Parent holding company
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N/A
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GCAM, LLC
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Managed account forex trading services
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N/A
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GAIN Holdings, LLC
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Holding company, U.S. operating entities
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N/A
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GAIN Capital Group, LLC
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A registered FCM and Forex Dealer Merchant, or FDM, engaging in
forex trading services and precious metals spot trading services
|
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CFTC and NFA
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S.L. Bruce Financial Corporation
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Holding company, U.S. broker-dealer
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N/A
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GAIN Capital Securities, Inc.
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Registered U.S. broker-dealer
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SEC and FINRA
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Jia Shen Forex Technology, LLC
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Technology support services
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N/A
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GAIN Capital Holdings International, LLC
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Holding company, international operating entities
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N/A
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GAIN Global Markets, Inc.
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Forex trading services and CFD trading services
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Cayman Islands Monetary Authority (Cayman Islands)
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Island Traders (Cayman), Limited
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Forex trading services corporate funds
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N/A
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GAIN Capital-Forex.com Hong Kong, Ltd.
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|
Forex trading services and precious metals spot trading services
|
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Hong Kong Securities and Futures Commission
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GAIN Capital Forex.com Japan, Co. Ltd.
|
|
Forex trading services and CFD trading services
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|
Japan Financial Supervisory Authority
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GAIN Capital-Forex.com Australia, Pty. Ltd.
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|
Forex trading services and CFD trading services
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Australian Securities and Investments Commission
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GAIN Capital-Forex.com Singapore, Ltd.
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|
Plan to register to provide forex trading services after we have
successfully completed our initial public offering
|
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Monetary Authority of Singapore
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GAIN Capital-Forex.com U.K., Ltd.
|
|
Forex trading services and CFD trading service
|
|
U.K. Financial Services Authority
|
80
Market
Opportunity
The retail forex market has grown rapidly over the past decade,
with daily trading volumes growing at a compound annual growth
rate of 37.1% from average daily volumes of approximately
$10.0 billion in 2001 to approximately $125.0 billion
in 2009 according to a 2010 analysis performed by the Aite Group.
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.
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:
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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;
|
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increasing media coverage of the forex market; and
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rising global broadband and wireless penetration.
|
Despite the strong growth of the retail forex market, online
retail forex investors still represent a small fraction of total
online investors. The Aite Group estimates that, as of July
2010, there were more than 110 million online retail
investors globally, but only 1.1 million online retail
investors who trade forex. Since retail forex is an asset class
that can be traded 24 hours per day, five days a week, it
is convenient for many online investors as they can trade at any
time of the day.
81
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 a leading brand
in the online forex trading industry. For the nine months ended
September 30, 2010, FOREX.com averaged approximately
1.7 million unique visitors per month (as
measured by Google Analytics, a website statistics service which
monitors our website over a specified period of time and then
subtracts all repeat visits by each individual visitor over such
period). We currently service customers from over 140 countries.
Our sales and marketing strategy leverages the strength of our
FOREX.com brand name by employing a combination of direct
marketing techniques and focused branding programs. Through our
direct marketing efforts, in 2009 we generated approximately
0.8 million registered users of our demonstration retail
trading accounts which simulate live trading on our proprietary
platform, referred to as registered practice trading accounts,
representing a compound annual growth rate of 41.4% from
approximately 0.2 million registered practice trading
account users in 2005. Complementing our direct marketing
strategy, we have assembled a multilingual retail sales force
that utilizes a highly interactive approach to convert
registered retail practice trading accounts into retail tradable
accounts and manage ongoing customer retention efforts.
We have successfully expanded the FOREX.com brand from one that
was
U.S.-based,
to a brand used in multiple international markets. We currently
market to retail traders in English, Japanese, Arabic,
traditional and simplified Chinese, and Russian, and have global
online and offline advertising campaigns that direct prospective
customers to the FOREX.com website in each of our target markets.
We have grown our company internationally through an efficient
business model that combines our centralized trading, middle-
and back-office functions, which are 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.
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 other asset
classes and to prepare them for trading in the market. We 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. We also employ a multilingual
staff of trained, licensed customer service representatives
located in the United States to handle customer inquiries via
telephone, email and online chat seven days a week, with
continuous
24-hour
coverage beginning Sunday at 10:00 a.m. through Friday at
5:00 p.m. and on Saturday from 9:00 a.m. to
5:00 p.m. (Eastern Standard Time).
In May 2009, Forrester Research, a leading independent research
company, conducted a survey of nearly 500 of our customers in
the United States on our behalf in which more than 79.0%
indicated they were very satisfied with FOREX.com.
Consistent
Execution Quality
We believe our customers choose us in part because of the
consistent quality of our trade execution capabilities, which is
comprised of three main aspects: pricing, certainty of execution
and timing. 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 relationships with three established global prime
brokers, including Deutsche Bank, UBS, and RBS as well as
relationships with 13 additional wholesale forex trading
partners, and access to other trading platforms and other
wholesale forex trading partners, which give us access to over
25 potential liquidity providers. We believe these
82
relationships give us access to a pool of forex liquidity, which
ensures that we are able to execute our customers trades
in any of the 39 currency pairs or six CFD product
offerings we offer and in the notional amount they request.
Proven
Track Record of Innovation
We believe that our proprietary technology infrastructure
provides us with significant competitive advantages and allows
us to quickly adapt to meet the rapidly changing needs of the
marketplace. As a result we have a long history of introducing
new products, services and innovative tools for our customers.
For example, over the past two years we have introduced the
following products and services:
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February 2009 We introduced trading of gold
and silver in the spot market.
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August 2009 For our customers located outside
of the United States we introduced trading in oil CFDs,
including Brent Crude Oil and West Texas
CFDs.
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September 2009 We launched a new version of
our active trader platform, FOREXTrader PRO, featuring an
updated user interface designed to improve overall usability and
deliver faster trade execution, enhanced charting tools and
improved chart-based trading capabilities.
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February 2010 We introduced website trading
into the FOREX.com offering, which provides streamlined trading,
research and account management features in a secure, web-based
environment. The availability of website trading complements our
downloadable active trader platform, FOREXTrader PRO, and is an
important part of our long-term strategy to attract a more
diverse customer base, including novice traders who desire an
easy-to-use trading experience that also includes education,
research and customer support tools in a secure,
customer-friendly website, and self-directed retail investors in
the United States who are already accustomed to trading via the
websites of their online brokerage firms.
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February 2010 We introduced a version of the
FOREX.com website designed for smartphones and web-enabled
mobile devices. This version provides customers and registered
practice trading account users with secure account access to
trade and manage their accounts from their mobile devices as
well as access to quotes, charts, news and research and an
extensive learning section featuring articles and video
tutorials.
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|
|
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March 2010 We launched GAIN GTX, our
institutional electronic communications network, or ECN, for our
institutional customers consisting of commercial and investment
banks, hedge funds, institutional asset managers, corporate
treasuries and proprietary trading firms. GAIN GTX allows our
institutional customers to enter forex bids and offers or to buy
or sell instantly at competitive prices from leading
participating banks including forex dealers, clearing banks and
prime brokers.
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April 2010 We launched a new Arabic language
service under our FOREX.com U.K. division to service growing
demand from retail traders in the Middle East.
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June 2010 We further expanded our product
offering to include equity index CFDs. Equity index CFDs give
our customers outside the United States access to trade popular
global equity indices located in the United Kingdom, Germany,
France and United States.
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|
|
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July 2010 We launched a full-featured iPhone
application that provides our customers and registered practice
trading account users with mobile trading capabilities along
with real-time news, charts, research and account information.
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Extensive
Risk-Management Experience and Capital Position in Excess of
Current Regulatory Requirements
We have leveraged our management teams extensive
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
actively initiate proprietary directional market positions in
anticipation of future movements in the relative prices of the
products we offer. Instead, we continuously evaluate market risk
exposure and actively hedge customer transactions through our
83
wholesale forex trading platform on a continuous basis. As a
result of our hedging activities, we are likely to have open
positions with various products we offer. For the nine months
ended September 30, 2010, a minimum of 90.9% of our average
daily trading volume, on any given day, was either naturally
hedged, where one of our customers executing a trade in a
currency was offset by a trade taken by another customer, or
hedged by us with a third-party financial institution.
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 compares favorably to that of many
of our competitors that operate primarily in forex trading and
positions us favorably for potential future increases of 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
of their minimum capital requirements.
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,
2010 (amounts in millions).
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Minimum Regulatory
|
|
Capital Levels
|
|
Excess Net
|
Entity Name
|
|
Capital Requirements
|
|
Maintained
|
|
Capital
|
|
GAIN Capital Group, LLC
|
|
$
|
25.84
|
|
|
$
|
63.12
|
|
|
$
|
37.28
|
|
GAIN Capital Securities, Inc.
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
$
|
2.03
|
|
|
$
|
18.33
|
|
|
$
|
16.3
|
|
GAIN Capital Forex.com Japan, Co. Ltd.
|
|
$
|
3.37
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|
|
$
|
8.71
|
|
|
$
|
5.34
|
|
GAIN Capital-Forex.com Australia, Pty. Ltd.
|
|
$
|
0.14
|
|
|
$
|
0.73
|
|
|
$
|
0.59
|
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
$
|
0.39
|
|
|
$
|
0.91
|
|
|
$
|
0.52
|
|
GAIN Global Markets, Inc.
|
|
$
|
0.10
|
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
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 of 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 more than 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 English,
traditional and simplified Chinese, Russian, Arabic and
Japanese, and currently our customer support services are
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, 2009, customers in the
United States represented approximately 54.5% 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 45.5% of our total customer trading
volume, with residents in no single country, other than the
United States, representing customer trading volume in excess of
11.4%. For the nine months ended September 30, 2010,
customers in the United States represented approximately 52.9%
of our total customer trading
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volume and all other customers residing in other parts of the
world represented approximately 47.1% of our total customer
trading volume, with residents in no single country representing
customer trading volume in excess of 7.6%.
Trading
Volume
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 had more than 15 years of forex and global markets
experience including 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 British Pound Sterling desk of
Merrill Lynch & Co., Inc., prior to his joining us in
2000. We believe the experience of our senior management team,
including more than 25 years of forex trading experience
for our President and Chief Executive Officer and more than
20 years of forex trading experience for our Chief Dealer,
has been integral to our historical success and will be critical
to our successful expansion into new markets and products in the
future.
Our
Growth Strategies
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 believe we are one of the largest provider of retail forex
trading in the United States based on active traded accounts.
The Aite Group estimates that, as of July 2010 there were over
110 million retail online investors globally, but only
1.1 million online retail investors who traded forex. We
plan to increase our presence in the U.S. market and other
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 retail
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 retail
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.
85
Continue
the International Expansion of Our Retail 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 FOREX.com, our leading Internet domain name, as
well as our market-leading customer service enhances our ability
to promote our advanced trading technology and tools, 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. 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
sales and customer support to the local market. We operate in
the United Kingdom where our regulatory passport rights allow us
to operate in a number of European Economic Area jurisdictions,
and we believe Europe is an expanding market we will continue to
develop. We have expanded international offices and will
continue to deploy resources and capital to meet the global
requirements to service our customers. In 2006, we registered
with the Cayman Islands Monetary Authority in the Cayman
Islands. In 2008, we acquired RCG GAIN Limited (formerly a joint
venture with Rosenthal Collins Group, now known as GAIN
Capital-Forex.com U.K., Limited), in the United Kingdom,
which is registered with the U.K. FSA, and a
U.S. registered broker-dealer (now known as GAIN Capital
Securities, Inc.), which is registered with the SEC and FINRA.
Between 2008 and 2009, we acquired Fortune Capital Co. Ltd. (now
known as GAIN Capital Forex.com Japan, Co. Ltd.), which
maintains a securities license with the Japan FSA and
incorporated GAIN Capital-Forex.com Hong Kong, Ltd., which is
registered with the SFC. In 2009, we incorporated GAIN
Capital-Forex.com Australia, Pty. Ltd., which received
regulatory approval from ASIC in March 2010.
Continue
Growth of Our Institutional Forex Business
The institutional forex trading market is composed of commercial
and investment banks, hedge funds, institutional asset managers,
corporate treasuries and other professional traders that trade
with each other predominantly through ECNs. We believe that we
can continue to expand our institutional forex customer trading
base by offering these institutions a superior technology
product in the form of our GAIN GTX ECN trading platform. GAIN
GTX was designed specifically for institutional investors and
features advanced algorithmic trading capabilities, order
management and routing tools and, we believe, a pool of forex
liquidity from anonymous and disclosed, liquidity providers via
our extensive network of wholesale forex trading partners.
Expand
Our Product Offering
We intend to grow our business by offering our customers
additional products complementary to our current product
offerings. Approximately two-thirds of our existing customers
have told us that they trade or have traded other financial
products, such as equities, futures and options. As a result, 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 scalable technology infrastructure,
as well as our track record of introducing new products to our
customers, will allow us to attract and satisfy our
customers increased trading needs, which will in turn
result in increased customer trading volume with us.
We intend to expand our existing forex offerings by increasing
the number of available currency pairs, as well as adding OTC
currency options and a range of other currency-related
investment products.
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|
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Contracts-For-Difference
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We intend to build upon our existing CFD product offerings
outside of the United States to support trading of other
financial instruments and commodity products located in various
jurisdictions, including Europe, Japan, Hong Kong, Australia and
the United States. CFDs are instruments linked to the
performance of the price of an underlying security, including
precious metals, energy products and other commodities, as well
as stock indices and
86
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.
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Listed Exchange Products
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Our status as a registered FCM provides us with the ability to
offer a variety of exchange-traded products, including futures
and options on equity and fixed-income indices, and commodities,
to our customers. 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 currently support more than a dozen major white label
partnerships with major financial institutions, securities firms
and registered broker-dealers, representing 37.3% of our trade
volume for the nine months ended September 30, 2010. We
intend to continue to develop relationships with white label
partners and introducing brokers which provide us with
additional channels to attract prospective customers whom we
believe we could not otherwise efficiently solicit. These
prospective customers include individuals who have demonstrated
significant loyalty to their existing financial services firm as
well as individuals in jurisdictions where we are not currently
registered with the local regulator. 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.
White label partners and introducing broker relationships who
were first active in the nine months ended September 30,
2010 represented 9.0% of our total trading volume.
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 RCG GAIN Limited (now
known as GAIN Capital-Forex.com U.K., Ltd.), Fortune Capital Co.
Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.) and,
a U.S. registered broker-dealer of equity securities (now
known as GAIN Capital Securities, Inc.). More recently, we
acquired assets of MG Financial LLC, a forex trading firm, on
September 14, 2010 and on October 5, 2010, we entered
into an asset purchase agreement with Capital Market Services,
LLC, and affiliated entities, to acquire the retail forex
trading accounts of this forex trading firm. 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 currency with which to pursue
future acquisitions.
Capture
Additional Market Share as a Result of Increased Regulatory
Requirements.
Regulators in the United States and other jurisdictions have
established, and continue to establish, a series of new
regulations that impact retail forex brokers, including
substantial increases in minimum required regulatory capital,
increased oversight of third-party introducing brokers and
regulations regarding the execution of trades. While complying
with these regulations may increase our operational costs, we
believe that these regulations have given retail investors more
confidence in retail forex as an asset class and in retail forex
firms that are able to comply with them. We believe that these
regulations have reduced the number of firms offering retail
forex services, even as the number of retail forex customers and
the retail forex trade volume has grown. As the retail forex
industry consolidates, scale and ability to comply with
regulation will become increasingly important for retail forex
brokers, presenting opportunities to larger firms, such as us,
that can meet the more stringent regulatory requirements.
Trading
Platforms and Tools
Our trading platforms provides traders of all experience levels
a full-service trading capability along with extensive
educational and support tools.
87
FOREXTrader
PRO
FOREXTrader PRO, our downloadable, Windows-based trading
platform, is designed to provide our retail customers with
split-second trade execution, real-time position and account
information, advanced order management features, including
advanced order types that allow customers to automate their
individual trading strategies, and comprehensive analytical and
decision support tools, including charting, real-time news feeds
and market research.
Website
Trading
In 2010, we introduced website trading to FOREX.com, which
provides our retail customers with streamlined trading, research
and account management features in a secure, web-based
environment. The availability of web-based trading complements
our downloadable active trader platform, FOREXTrader PRO, which
is designed for more active, experienced traders. We believe
website trading is an important part of our long-term strategy
to attract a more diverse customer base, including novice
traders who desire easy-to-use trading tools and education,
research and customer support features in a customer-friendly
website, as well as self-directed retail investors in the
United States who are already accustomed to trading via the
websites of their online brokerage firms.
Mobile
Trading
We also offer our retail customers a version of our FOREX.com
website designed for smartphones and other web-enabled mobile
devices, including the iPhone/iPad, BlackBerry and Android-based
mobile devices. This version provides customers and registered
practice trading account users with secure account access to
trade and manage their accounts as well as access to quotes,
charts, news and research and an extensive learning section
featuring articles and video tutorials. We offer a specifically
designed iPhone application, providing our customers and
registered practice trading account users full trading
capabilities, along with news, charts, research and account
information. We also offer a WAP-based mobile trading solution
for older web-enabled mobile devices, which allows customers and
registered practice trading account users to view rates, place
trades and manage positions.
Third-Party
Tools
To meet the needs of a growing customer segment interested in
automated trading solutions, in 2007 we licensed a third-party
turn-key trading platform, MetaTrader, provided by MetaQuotes
Software Corp. 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 eSignal FOREX
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 nonexclusive 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.
88
The following table identifies our key technology tools and
their functionality:
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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.
|
Website 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.
|
Mobile Trading
|
|
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 $6.7 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.
Our
Customers
Our customer base consists 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, 2010.
Self-Directed
Traders
Self-directed retail forex traders constitute the majority of
our customer base. For the nine months ended September 30,
2010, self-directed customers represented approximately 79.0% of
our customer trading volume. We believe that our leading
industry reputation, advanced trading technology and high level
of customer service are the
89
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, 2010,
authorized traders collectively represented approximately 8.7%
of our customer trading volume.
Institutional
Customers
Institutional customers include hedge funds, institutional asset
managers, corporate treasuries and proprietary trading firms.
For the nine months ended September 30, 2010, institutional
customers represented approximately 12.3% of our customer
trading volume. The GTX ECN platform provides buy-side customers
a fully anonymous trading environment that offers transparent
direct market access and trade execution capabilities. This
allows the buy-side customers to enter bids and offers or buy or
sell instantly on competitive prices from leading participating
banks including forex dealers, clearing banks and prime brokers.
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 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:
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Traditional financial services firms, such as banks or other
financial institutions seeking to provide an online forex
trading platform quickly and cost-effectively; or
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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.
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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
90
white label partner relationships. White label partners
typically establish their own fee structure through commissions
or markups to the bid price and offer
price, or dealing spreads, we offer. 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 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. White label partners and introducing broker
relationships who were first active in the nine months ended
September 30, 2010 represented 9.0% of total volume. For
the nine months ended September 30, 2010, 6.1% of our forex
trading volume was derived from TradeStation Securities, Inc, or
TradeStation. We entered into an introducing broker agreement
with TradeStation in April 2005, and the current agreement
expires in December 2010. Tradestation recently formed a
wholly-owned subsidiary, TradeStation Forex, Inc. with the
intent that TradeStation Forex, by the end of the
2010 year, will assume and conduct all TradeStation forex
brokerage business as a FDM of the NFA, and registered under
such classification with the CFTC. TradeStation Forexs
application for such CFTC registration and NFA membership was
made with the NFA in June 2010.
Our Forex
Trading Business
Our
Retail Forex 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 39 different currency pairs or, for customers outside
of the United States, six CFD product offerings. We offer both
standard and mini accounts, which allow our GAIN
Capital-Forex.com U.K., Ltd. customers up to 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 $5.0 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
September 30, 2010, less than one percent (1.0%) 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. Beginning in October
2010, in the United States we will offer maximum leverage
of 50-to-1 to our customers. As a result, we will require that
91
U.S. customers fund their accounts with a minimum of
approximately $200 in order to execute the minimum notional
trade amount in a currency, which is equal to a maximum
equivalent of $10,000. Outside of the United States, the
maximum leverage that we are able to offer our customers depends
upon the jurisdiction. For instance, in Japan the maximum
leverage that we will be able to offer our customers beginning
in August 2011 is 25-to-1, while in other jurisdictions we will
continue offering maximum leverage of up to 200-to-1.
We continuously receive market quotes from our wholesale forex
trading partners and identify the midpoint price between the
available best bid and best offer, which
then becomes the basis for our dealing 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-size retail customers with the consistent liquidity and
dealing spreads generally only available to the large
institutional customers of major banks.
We stand ready to make simultaneous bids/offers for transactions
in any of our 39 currency pairs or, for customers outside of the
United States, six CFD product offerings. We treat order flow
from our retail customers as follows:
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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 2007 to September 30,
2010, between 2.4% and 25.3% of our monthly executed forex trade
volume was immediately offset. For the nine months ended
September 30, 2010, 9.5% of our executed trade volume was
handled in this manner.
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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 2007 to September 30, 2010,
between 68.1% and 97.4% of our executed forex trade volume was
either naturally hedged or managed pursuant to our
risk-management policies and procedures. For the nine months
ended September 30, 2010, 78.1% of our executed trade
volume was handled in this manner.
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Trades in our managed flow portfolio are evaluated and hedged on
a continuous basis. Our managed flow portfolio is treated in the
following manner:
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Natural Hedging Many trades are naturally
hedged, where one customer executing a trade in a currency is
offset by a trade made 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.
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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
proprietary directional market positions in anticipation of
future movements in the relative prices of the products we offer
in the market. However, as a result of our hedging activities,
we are likely to have open positions in various products at any
given time. In the event of unfavorable market movements, we may
take a loss on such positions.
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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.
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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. In
accordance with our predefined exposure limits, for the nine
months ended September 30, 2010, a minimum of 90.9% of our
average daily trading
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volume, on any given day, was either naturally hedged, where one
of our customers executing a trade in a currency is offset by a
trade taken by another customer, or hedged by us with a
third-party financial institution.
Each month, approximately 3.3% to 14.9% of retail 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 because
of regulatory noncompliance and technical errors. When a trade
request s rejected, the customer is immediately notified
on-screen
that such request has been rejected and 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 because of insufficient
trading account margin, the customer may either reduce his or
her position(s) in order to place another trade or add
additional funds to his or her account. When a trade is rejected
because of 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 because of 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 consists 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 midpoint 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 dealing spread quoted to our customers. Depending on the
currency pair being traded, the dealing spread recognized by us
over the midpoint 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
dealing 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.
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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.
Quote
Aggregation Example
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Bid
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Ask
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Wholesale Forex Trading Partner A
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0.0054
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0.0057
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Wholesale Forex Trading Partner B
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0.0053
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0.0056
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Wholesale Forex Trading Partner C
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0.0055
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0.0058
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Wholesale Forex Trading Partner D
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0.0054
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0.0057
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Best Execution Wholesale Spread
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0.0055
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0.0056
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Best Execution Wholesale Midpoint Price
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0.00555
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Our Bid/Offer Spread
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(0.0002) 2 pips
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Our Bid/Offer Quoted to Customers
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0.00545
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0.00565
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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 the nine months ended September 30, 2010, a
minimum of 90.9% of our average daily trading volume, on any
given day, was either naturally hedged, where one of our
customers executing a trade in a currency is offset by a trade
taken by another customer, or hedged by us with a third party
financial institution. 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 trading operations require a commitment of our capital and
involve risk of loss because of 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 his or her account
before we execute their
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trades. If at any point in time a customers trading
position does not comply with the applicable margin requirement
because our predetermined 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. 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 no aggregate negative equity amounts at
December 31, 2009, $1.3 million at December 31,
2008 and $0.3 million at December 31, 2007. The
aggregate negative customer equity amount at September 30,
2010 was $0.1 million.
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 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 liquidity
relationships with three established global prime brokers,
including Deutsche Bank, UBS, and RBS as well as relationships
with 13 additional wholesale forex trading partners, and access
to other trading platforms and other wholesale forex trading
partners, which give us access to over 25 potential
liquidity providers. Through these relationships, our access to
a pool of forex liquidity ensures that we are able to execute
our customers trades in any of the 39 currency pairs or
six CFD product offerings we offer and in notional amount they
request 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 $50.4 million to $83.9 million in the
aggregate, with the average monthly balances for the nine months
ended September 30, 2010 being approximately
$82.3 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 more than 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 fifteen
additional prime brokerage relationships with major financial
institutions, including Deutsche Bank, UBS, JP Morgan, and RBS.
As our prime brokers, these institutions 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
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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.
Our
Institutional Model
We have also introduced GAIN GTX, or GTX, an ECN trading
platform for institutional customers. The GTX ECN platform
provides buy-side institutional customers a fully anonymous
trading environment that offers transparent direct market access
and trade execution capabilities. Buy-side institutional
customers include hedge funds, institutional asset managers,
corporate treasuries and proprietary trading firms. This allows
buy-side institutional customers to enter bids and offers or buy
or sell instantly on competitive prices from participating
banks, including forex dealers, clearing banks and prime
brokers. On our GTX ECN, institutional customers remain
anonymous, with their identities only revealed to their
designated prime broker. The system does not embed customer
identities in a trade or reveal identities post-trade. Instead,
the prime broker is identified in the trade. Additionally, we do
not act as a principal to a trade on the GTX ECN. This structure
enables institutional customers to trade anonymously on the GTX
ECN, with access to prices from various liquidity providers,
including market-maker banks or other institutional customers.
Because the global forex markets are extremely large and liquid,
we believe the risk of identifying an institutional customer
trading on our GTX ECN is limited. Our two main institutional
forex trading product offerings are GTX Prime to Prime, for
companies with preexisting credit with a prime broker, and GAIN
Capital Direct Prime, for such companies without preexisting
prime broker relationships. For the nine months ended
September 30, 2010 institutional forex trading volume
represented 12.3% of our executed forex trading volume.
Our GTX ECN is powered by software and services that we license.
We have entered into an Exclusive Marketing Agreement, or EMA,
and related agreements, with Forexster Limited, or Forexster,
pursuant to which we receive, subject to certain excluded
customers and geographic regions, exclusive rights to use
certain Forexster trading services in the field of forex trading
and non-exclusive rights to use such trading services in the
field of precious metals trading. The EMA expands the rights and
obligations provided under preexisting agreements among the
parties. Pursuant to the terms of the EMA, we paid Forexster an
up-front, non-refundable $7.5 million prepayment for use of
the Forexster trading services. During the term of the
agreement, we will also pay Forexster a monthly revenue share
equal to a percentage of all gross revenues earned by us from
use of the Forexster trading services, provided certain minimum
net income thresholds are met. Our aggregate revenue share
payment obligations under the EMA are capped at
$60.0 million, or the Cap, if paid in-full on or before
July 31, 2013 or $65.0 million, or the Additional Cap,
if paid in-full on or before July 31, 2015. We are under no
duty to pay the Cap or Additional Cap if not earned, but we may
choose to prepay all or part of the Cap or Additional Cap
without penalty. In the event the Additional Cap is not paid
in-full on or before July 31, 2015, then all payment
provisions of the EMA shall cease and the payment provisions of
our pre-existing agreement with Forexster will resume. In the
event we pay the Cap in-full on or before July 31, 2013 or
the Additional Cap in-full on or before July 31, 2015, as
applicable, then we shall owe no further fees, costs or expenses
to Forexster for use of the Forexster trading services and our
rights to the Forexster trading services under the EMA shall
continue for 100 years. The term of the EMA began on
July 14, 2010 and continues through July 31, 2015.
Thereafter, the EMA shall automatically renew for additional
twelve (12) month periods unless otherwise terminated by
the parties.
Our
Broker-Dealer Business
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, 2010. 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.
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We offer brokerage and related products and services primarily
to individual self-directed retail investors primarily to
customers in the United States through our Internet website at
www.gainsecurities.com. Unlike our OTC 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, Penson Financial
Services Inc., and therefore do not accept customer funds
directly nor maintain custody of client assets.
Customers interact with us through the following channels:
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Branch Office we maintain one branch office.
Our retail office is located in Woodmere, Ohio which allows
customers to receive
face-to-face
customer support.
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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.
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Telephone we have toll-free and local
telephone numbers that route calls to our branch office. In
addition, we allow customers to access an automated phone system
for trading and account access.
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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
8.4% are immediately rejected to customers directly on the
website, and approximately 1.1% 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 problems 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:
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Automated order placement and execution of U.S. equities,
options, exchange-traded funds and mutual funds;
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Advanced trading capabilities (contingent, trailing stops),
real-time quotes, research and analysis tools;
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Access to comprehensive listing of nonproprietary load, no-load
and no transaction fee mutual funds;
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FDIC-insured sweep deposit accounts; and
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Interest-earning checking, money market, and certificates of
deposit.
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Our
Contracts-for-Difference
Business
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We offer our
non-U.S. customers
the ability to trade CFDs which are linked to the performance of
an underlying commodity, index or security. Our CFD product
offerings, which we began offering in August 2009, currently
include contracts for energy products, and, in the future, we
plan to offer additional CFDs as permitted by applicable laws
and regulations. Because of U.S. regulatory requirements,
GAIN and its affiliates do not trade or offer CFDs in the United
States or to U.S. residents.
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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., and GAIN Capital-Forex.com
Australia, Pty. Ltd., or GAIN A.U. Customers of GAIN U.K.
and GAIN A.U. place trade requests directly with GAIN
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U.K. and GAIN A.U. and the trades are then executed with GAIN
U.K. and GAIN A.U. as counterparty. GAIN U.K. and GAIN A.U.
hedges their respective CFD exposure in accordance with
preestablished risk parameters through a variety of liquidity
sources, including futures and commodity options exchanges.
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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, 2010, we had 264,834 opened
customer accounts, of which 70,618 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:
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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
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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.
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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 four-year compound
annual growth rate of our registered practice trading account
users is 41.4%, growing from approximately 0.2 million
registered practice trading account users in 2005, to
approximately 0.8 million registered practice trading
account users in 2009. 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 12 employees
who 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
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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 and a comprehensive web-based
training course coupled with access to an experienced forex
instructor. Educational resources available on the FOREX.com
website include a variety of interactive webinars (web-based
seminars), video tutorials, article and other materials. In
2009, we conducted more than 800 live webinars covering topics
ranging from getting started in forex trading, to developing
advanced technical analysis skills. We also offer a
comprehensive web-based training course coupled with access to
an experienced forex instructor.
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, 2009, we
received approximately 1.0 million customer inquiries,
including approximately 0.2 million inbound telephone
calls, 0.6 million online chats and 0.1 million
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:
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Customer contact information;
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Account setup details;
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Recent and historical account activity and status;
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Customer-specific time and sales data;
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Customer interaction review/research; and
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Management metrics (including new accounts by date, account
representative and account type).
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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.
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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:
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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.
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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.
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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.
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Multiproduct 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.
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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:
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Functionality, performance and reliability of trading platform;
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Speed and quality of trade executions;
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Pricing;
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Level of customer service;
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Brand reputation;
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Efficacy of sales and marketing efforts;
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Strategic partnerships with financial services firms;
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The ability to offer ancillary services, such as research and
education;
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Range of product offering; and
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Capacity of trading platform to handle large volumes of customer
transactions.
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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.
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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
(registered service mark), FOREX.com (pending service mark),
ForexPlus (registered 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:
downloadable ForexTrader PRO, website trading and mobile
trading. 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.
GAIN
GTX Platform
Our GAIN GTX ECN platform is powered by software and services
that we license. We have entered into an EMA, and related
agreements, with Forexster pursuant to which we receive, subject
to certain excluded customers and geographic regions, exclusive
rights to use certain Forexster trading services in the field of
forex trading and non-exclusive rights to use such trading
services in the field of precious metals trading. For the nine
months ended September 30, 2010, 12.3% of our forex trading
volume was derived from trades utilizing our GTX ECN platform.
MetaTrader
Platform
In addition to our proprietary trading platform, in August 2007
we licensed MetaTrader, a third-party turn-key trading platform,
from MetaQuotes Software Corp., in order to meet the needs of a
growing customer segment. Although we do not own the source
code, the MetaTrader platform utilizes the same infrastructure
as our proprietary trading platform and benefits from the
investment in our offsite environmentally controlled, secure
facilities housing our hardware and network connections. For the
nine months ended September 30, 2010, 32.8% of our forex
trading volume was derived from trades utilizing our MetaTrader
platform. For the year ended December 31, 2009, 25.9% 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
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to efficiently and effectively address costs required to support
our current business and provide for rapid, real-time growth in
the future.
At any given time, we believe our forex trading platforms have
adequate capacity to support our customer activity. On average,
we have at least 5,000 customers logged on to our trading
platforms at any given time and exceed 10,000 customers logged
on to our platforms at peak times. We handle an average of
approximately 120,000 retail trade requests per day and
have exceeded 295,000 retail trade requests on active days.
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, nonfarm payroll and the Federal Open Market Committee
decisions on the federal funds rate. Our current trading
platform configuration is capable of handling at least 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. Average trade execution
times on our proprietary trading platform are currently less
than .07 seconds, or 70 milliseconds.
If a customer has difficulty logging on to 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 multisite, 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, 2009 and ending
September 30, 2010, we achieved an uptime of 99.3%.
We relocated our corporate headquarters in the fourth quarter of
fiscal year 2009. In addition to our corporate relocation, we
made significant investments in our business continuity and
disaster recovery infrastructure during this same time period.
Capital expenditures for our corporate relocation were
$2.0 million and capital expenditures for our
infrastructure investment were $1.0 million.
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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 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 and director of
information security is primarily responsible for the security
of our technology infrastructure and application development. We
have also engaged an independent registered public accounting
firm to perform an audit of our internal controls and procedures
and issue an audit report in accordance with Statement of
Auditing Standards, or SAS, No. 70 in 2011.
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 6:00 a.m. until 10:00 p.m.
(Eastern Standard time) Mondays through Fridays. 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, multilayered high speed circuits, allowing
real-time, two way data replication for all of our trading
technologies. Each of our locations provides 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 made 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.
Capital expenditures for our infrastructure investment were
approximately $1.0 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
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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 rechecked 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 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, 2010, we had 353 full-time employees and
8 part-time employees. Ten of our current employees have
been with us since 2000, 14 of our current employees have been
with us since 2001, and 15 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. Our operating
subsidiaries are regulated in a number of jurisdictions,
including the United States, the United Kingdom (where
regulatory passport rights have been exercised to operate in a
number of European Economic Area jurisdictions), Hong Kong,
Japan and Australia. These government regulators and
self-regulatory organizations oversee the conduct of our
business in many ways, and several conduct regular examinations
to monitor our compliance with applicable statutes and
regulations. We are subject to statutes, regulations and rules
that cover all aspects of the forex business, including:
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sales practices, including our interaction with and solicitation
of customers and our marketing activities;
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trading practices, including restrictions on our execution of
certain forex transactions and surveillance to detect potential
regulatory violations;
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treatment of customer assets, including custody, control,
safekeeping and segregation of our customers funds and
securities;
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licensing for our operating subsidiaries and registration and
continuing education requirements for our employees;
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maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
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anti-money laundering practices;
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recordkeeping and making financial and other reports to
regulators; and
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supervision of our business, including the conduct of directors,
officers and employees.
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Our executive vice president, operations oversees our compliance
department, which currently consists of 14 individuals,
including one lawyer. The primary role of our compliance
department is to ensure that we conduct our business activities
in accordance with all statutory and regulatory requirements.
Additionally, the compliance department provides education,
supervision, surveillance, mediation and communication review.
In addition, in jurisdictions in which we are currently
regulated, certain of our subsidiaries are subject to minimum
regulatory capital requirements.
U.S.
Regulation
In the United States, we are regulated by the CFTC and NFA.
These regulatory bodies are charged with safeguarding the
integrity of the forex and futures 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. In
2008, Congress passed the CFTC Reauthorization Act, which
amended the Commodity Exchange Act and gave the CFTC the power
to regulate the retail forex industry. The CFTC subsequently
passed rules in 2010 which formalized forex as an instrument
authorized by Congress for retail trading and which recognized
retail FDMs as a new category of regulated providers of forex.
In August 2010, the CFTC released new rules relating to retail
forex regarding, among other things, registration, disclosure,
recordkeeping, financial reporting, minimum capital and other
operational standards. Most significantly the regulations:
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impose an initial minimum security deposit amount of 2.0% of the
notional value for major currency pairs and 5.0% of the notional
value for all other retail forex transactions and provide that
the NFA will designate which currencies are major
currencies and review, at least annually, major currency
designations and security deposit requirements and adjust such
designations and requirements as necessary in light of changes
in the volatility of currencies and other economic and market
factors;
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provide that introducing brokers must either meet the minimum
net capital requirements applicable to futures and commodity
options introducing brokers or enter into a guarantee agreement
with a
CFTC-regulated
forex dealer member, along with a requirement that such
introducing broker may be a party to only one guarantee
agreement at a time;
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require that the risk disclosure statement provided to every
retail forex customer include disclosure of the number of
non-discretionary accounts maintained by the FCM or retail
foreign exchange dealer, or RFED, that were profitable and those
that were not during the four most recent calendar quarters;
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prohibit the making of guarantees against loss to retail forex
customers by FCMs, RFEDs and introducing brokers and require
that FCMs, RFEDs and introducing brokers provide retail forex
customers with enhanced written disclosure statements that,
among other things, inform customers of the risk of loss;
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require RFEDs to maintain net capital of at least
$20.0 million, plus 5.0% of such a RFEDs customer
obligations in excess of $10.0 million. Additionally, in
the event an RFEDs net capital position falls below 110.0%
of the minimum net capital requirement, then the RFED is subject
to additional reporting requirements;
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require that introducing brokers, commodity trading advisors, or
CTAs, and commodity pool operators, or CPOs, become registered
or apply for exemptions from such registration
requirements; and
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require that CTAs and CPOs provide information about their
trading programs, principals, conflicts of interest and past
performance results in accordance with provisions detailed in
the Commodity Exchange Act.
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In July 2010, Congress passed the Dodd-Frank Act which, among
other things, authorizes the CFTC and SEC to mandate central
clearing of OTC derivatives and may have broad effects on the
derivatives markets generally. For example, this legislation may
affect the ability of forex market makers to do business or
affect the prices and terms
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on which such market makers will do business with us. Such
legislation may also affect the structure, size, depth and
liquidity of the forex markets generally. These effects may
adversely impact our ability to provide forex transactions to
our customers and could have a material adverse affect on our
business and profitability. In addition, beginning in October
2010, the Dodd-Frank Act will require us to ensure that our
customers resident in the United States have accounts with our
NFA-registered operating entity, GAIN Capital Group, LLC.
Firms operating in the financial services industry are subject
to a variety of statutory and regulatory requirements that
require them to know their customers and monitor their
customers transactions for suspicious financial and
trading activities. With the passage of the Patriot Act, we are
subject to more stringent requirements. As required by the
Patriot Act, we have established a comprehensive anti-money
laundering, or AML, and customer identification program, or CIP,
designated an anti-money laundering compliance officer, trained
employees as required and conducted an annual independent audit
of our AML program. Our CIP may include both a documentary and a
nondocumentary review and analysis of the potential customer. In
addition to our internal review of a prospective customers
identity we also contract with a third-party global providers of
background checks to perform extensive non-documentary, database
reviews on each prospective customer. In addition to identity
verification, we review any negative information on customers
that appears on the U.S. Treasury Departments Office
of Foreign Assets and Control, Specially Designated Nationals
and Blocked Persons lists. These procedures and tools coupled
with our periodic training assist us in complying with the
Patriot Act as well as all CFTC and NFA requirements in this
area.
On a global basis, our anti-money laundering and customer
identification program, or AML-CIP, has been structured to
comply with applicable statutes and regulations in all the
jurisdictions where we operate. Additionally, we have developed
proprietary methods for risk-management and continue to add
specialized processes, queries and automated reports designed to
identify potential money laundering, fraud and other suspicious
activities.
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 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 and monitoring assists 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.
International
Regulation
Outside the United States, we are regulated by, among others:
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the Financial Services Authority in the United Kingdom;
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the Cayman Islands Monetary Authority;
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the Financial Services Authority in Japan;
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the Securities and Futures Commission in Hong Kong; and
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the Australian Securities and Investment Commission in Australia.
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For the nine months ended September 30, 2010, 71.6% of our
trading volume was from customers in jurisdictions in which we
are currently licensed or authorized by local government bodies
or self-regulatory
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organizations. We determine the nature and extent of services we
can offer and the manner in which we conduct our business in the
various jurisdictions based on a variety of factors. In those
jurisdictions outside the United States where we have no
significant local presence 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. 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.
Although we may lose some potential revenue by adhering to this
policy, we have a general policy of trying to respect the wishes
of foreign nations, whether explicit or otherwise. For example,
we do not permit deposits in currencies from jurisdictions with
capital controls in an attempt to avoid circumventing the
capital control regime of such jurisdiction. We also do not
offer trading in currencies where the government of such
jurisdiction does not desire speculation in its currency for
fears of destabilization or manipulation, among others.
Effective December 31, 2009, we consulted with legal
counsel in selected jurisdictions, including each jurisdiction
in which residents of such jurisdiction account for one percent
(1.0%) or greater of our customer trading volume, for advice
regarding whether we are operating in compliance with local laws
and regulations (including whether we are required to be
licensed or authorized) or, in some cases, where licensing or
authorization requirements could be read to be applicable to
foreign dealers without a local presence, whether or not such
requirements are generally enforced. For the nine months ended
September 30, 2010 four additional countries account for
more than 1.0% of our total retail customer trading volume. We
are in the process of obtaining legal counsel advice on whether
we are operating in compliance with local laws and regulations
for these additional countries. Based on our recent review of
relevant regulatory requirements in China, we now believe that
we can accept customers from China if the customers come to our
website without being solicited by us. As a result, we began
accepting non-solicited customers from China in June 2010.
Trading volume from customers in jurisdictions in which we are
not currently licensed or authorized by local government or
self-regulatory organizations accounts for approximately 28.1%
of our total annual retail customer trading volume. We are
accordingly exposed to the risk that we may be found to be
operating in jurisdictions without required licenses or
authorizations or without being in compliance with local legal
or regulatory requirements. Furthermore, where we have taken
legal advice we are exposed to the risk that our legal and
regulatory analysis is subsequently determined by a local
regulatory agency or other authority to be incorrect and that we
have not been in compliance with local laws or regulations
(including local licensing or authorization requirements) and to
the risk that the regulatory environment in a jurisdiction may
change, including in a circumstance where laws or regulations or
licensing or authorization requirements that previously were not
enforced become subject to enforcement. In any of these
circumstances, we may be subject to sanctions, fines and
restrictions on our business or other civil or criminal
penalties and our contracts with customers may be void or
unenforceable, which could lead to losses relating to
restitution of client funds or principal risk on open positions.
Any such action in one jurisdiction could also trigger similar
actions in other jurisdictions. We may also be required to cease
the conduct of our business with customers in any such
jurisdiction,
and/or we
may determine that compliance with the laws or licensing,
authorization or other regulatory requirements for continuance
of the business are too onerous to justify making the necessary
changes to continue that business. In addition, any such event
could impact our relationship with the regulators or
self-regulatory organizations in the jurisdictions where we are
subject to regulation, including our regulatory compliance or
authorizations. In Japan the leverage ratio has changed to
50-to-1 effective August of 2010 and will be 25-to-1 effective
August 2011. We are unable to quantify the impact of the change
in Japans leverage requirement on the future financial
results.
Approximately 5.8% of our customer trading volume for the year
ended December 31, 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
107
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 do so without registering as a registered
investment 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,
which would, absent exemptive relief, require, among other
things, us to comply with the dealer registration and prospectus
delivery requirements of Ontario securities law. Accordingly, if
we deem it advisable we may seek exemptive relief from these
requirements. 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. We
anticipate that our profitability in Canada will decrease due to
the restructuring of our Canadian activities because, among
other things, we may have to share a portion of our revenue. In
addition to the potential adverse effect on our results of
operations as a result of a need to restructure our Canadian
activities, 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 the past.
We evaluate our activities in relation to jurisdictions in which
we are not currently regulated by governmental bodies
and/or
self-regulatory organizations on an ongoing basis. As a result
of these evaluations we may determine to alter our business
practices in order to comply with legal or regulatory
developments in such jurisdictions and, at any given time, are
generally in various stages of updating our business practices
in relation to various jurisdictions, including jurisdictions
which account for one percent (1%) or less of our total retail
customer trading volume. Depending on the circumstances, such
changes to our business practices may result in increased costs
or reduced revenues and negatively impact our financial results.
On a global basis, our AML-CIP has been structured to comply
with applicable statutes and regulations in all jurisdictions
where we operate. Firms operating in the financial services
industry are subject to a variety of statutory and regulatory
requirements that require them to know their customers and
monitor their customers transactions for suspicious
financial and trading activities. We have established a
comprehensive AML and CIP, designated an anti-money laundering
compliance officer, and trained employees as required. Our CIP
may include both a documentary and a non documentary review and
analysis of the potential customer. In addition to our internal
review of a prospective customers identity we also
contract with third party global providers of background checks
to perform extensive non-documentary, database reviews on each
prospective customer. These procedures and tools, coupled with
our periodic training, assist us in complying with the AML-CIP
requirements in this area.
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.
108
Regulators in the United States and other jurisdictions have
established a series of new regulations that impact retail forex
brokers, including substantial increases in minimum required
regulatory capital, increased oversight of third-party
introducing brokers and regulations regarding the execution of
trades. Complying with these regulations may increase our
operational costs, however we believe that these regulations
have reduced the number of firms offering retail forex services,
even as the number of retail forex customers and the volume
traded has grown. As the retail forex industry consolidates
scale will become increasingly important for retail forex
brokers, presenting opportunities to larger firms, such as us,
that can meet the more stringent regulatory requirements.
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 compares favorably to that of many
of our competitors that operate primarily in forex trading and
positions us favorably for potential future increases of 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
of minimum capital requirements. The following table illustrates
the excess capital levels we maintained as of September 30,
2010, amounts in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Regulatory
|
|
Capital Levels
|
|
Excess Net
|
Entity Name
|
|
Capital Requirements
|
|
Maintained
|
|
Capital
|
|
GAIN Capital Group, LLC
|
|
$
|
25.8
|
|
|
$
|
63.1
|
|
|
$
|
37.28
|
|
GAIN Capital Securities, Inc.
|
|
$
|
0.05
|
|
|
$
|
0.4
|
|
|
$
|
0.37
|
|
GAIN Capital-Forex.com U.K., Ltd.
|
|
$
|
2.0
|
|
|
$
|
18.3
|
|
|
$
|
16.3
|
|
GAIN Capital Forex.com Japan, Co. Ltd.
|
|
$
|
3.4
|
|
|
$
|
8.7
|
|
|
$
|
5.34
|
|
GAIN Capital-Forex.com Australia, Pty. Ltd.
|
|
$
|
0.1
|
|
|
$
|
0.7
|
|
|
$
|
0.59
|
|
GAIN Capital-Forex.com Hong Kong, Ltd.
|
|
$
|
0.4
|
|
|
$
|
0.9
|
|
|
$
|
0.52
|
|
GAIN Global Markets, Inc.
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.16
|
|
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.
109
Corporate
Structure, Facilities and Properties
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. These sites comprise
approximately 91,200 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.
GAIN
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
|
|
|
|
|
|
Lease
|
|
September 30,
|
|
Location
|
|
Function
|
|
Square Feet
|
|
|
Expiration
|
|
2010
|
|
|
Bedminster, New Jersey
|
|
Management, Marketing, Operations, Compliance, Legal, Human
Resources, Call Center
|
|
|
45,000
|
|
|
December 2025
|
|
|
215
|
|
New York City, New York
|
|
Sales and Customer Service
|
|
|
23,294
|
|
|
May 2011
|
|
|
77
|
|
Tokyo, Japan
|
|
Management, Sales, Compliance, Operations
|
|
|
4,090
|
|
|
May 2011
|
|
|
20
|
|
Woodmere, Ohio
|
|
Management, Operations, Customer Service, Compliance
|
|
|
2,496
|
|
|
October 2010
|
|
|
6
|
|
London, England
|
|
Management, Sales, Compliance, Operations
|
|
|
2,160
|
|
|
March 2011
|
|
|
30
|
|
Hong Kong
|
|
Management, Sales, Compliance
|
|
|
1,804
|
|
|
February 2012
|
|
|
4
|
|
Grand Cayman, Cayman Islands
|
|
Management, Sales, Customer Service
|
|
|
200
|
|
|
Month to Month
|
|
|
0
|
|
Singapore
|
|
Management, Sales, Compliance, Operations
|
|
|
1,969
|
|
|
January 2013
|
|
|
3
|
|
Australia
|
|
Management, Sales, Compliance, Operations
|
|
|
1,888
|
|
|
March 2013
|
|
|
6
|
|
South Korea
|
|
Sales
|
|
|
103
|
|
|
Month to Month
|
|
|
0
|
|
110
MANAGEMENT
Our executive officers, directors and other significant
employees, and their ages and positions are set forth below:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Executive Officers
|
|
|
|
|
|
|
Glenn H.
Stevens(4)
|
|
|
47
|
|
|
President, Chief Executive Officer and Director
|
Henry C. Lyons
|
|
|
47
|
|
|
Chief Financial Officer and Treasurer
|
Timothy OSullivan
|
|
|
46
|
|
|
Chief Dealer
|
Samantha
Roady(5)
|
|
|
40
|
|
|
Chief Marketing Officer
|
Directors
|
|
|
|
|
|
|
Mark E.
Galant(4)
|
|
|
52
|
|
|
Chairman of the Board of Directors
|
Crevan
OGrady(2)(3)(7)
|
|
|
39
|
|
|
Director
|
Gerry
McCrory(1)(6)
|
|
|
48
|
|
|
Director
|
James C.
Mills(3)
|
|
|
43
|
|
|
Director
|
Peter
Quick(1)(2)(3)
|
|
|
54
|
|
|
Director and Lead Independent Director
|
Joseph
Schenk(1)(4)
|
|
|
51
|
|
|
Director
|
Christopher S.
Sugden(1)(3)
|
|
|
40
|
|
|
Director
|
Christopher W.
Calhoun(4)(8)
|
|
|
40
|
|
|
Director
|
Susanne D.
Lyons(3)
|
|
|
53
|
|
|
Director
|
Significant Employees
|
|
|
|
|
|
|
Alexander Bobinski
|
|
|
46
|
|
|
Executive Vice President, Operations
|
Andrew Haines
|
|
|
45
|
|
|
Chief Information Officer
|
Kenneth OBrien
|
|
|
38
|
|
|
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.
|
|
|
|
(7)
|
|
Mr. OGrady was elected to the
board of directors in October 2010.
|
|
|
|
(8)
|
|
Mr. Calhoun was elected to the
board of directors in October 2010.
|
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 forex
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.
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
111
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 Trader Tools, Inc. and Faros Trading, LLC.
Mr. Galant received a BS in Finance from the University of
Virginia and an MBA from Harvard Business School.
Christopher W. Calhoun has served as a member of our
board of directors since October 2010. From April 2009 to
October 2010, Mr. Calhoun served as our part-time senior advisor
and our corporate secretary from June 2007 to October 2010. 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
currently serves on the board of directors of SciVantage, Inc.
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.
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.
Crevan OGrady has served as a member of our board
of directors since October 2010. Since 1997,
Mr. OGrady has served in various capacities,
including a partner within 3is North American business,
112
3i Corporation, as well as other related 3i entities.
Prior to joining 3i, Mr. Crevan worked for KPMG LLP.
Mr. Crevan is a qualified chartered accountant and received
his business and accounting degree from Dundee 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 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 our 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.
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 executive 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 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.
113
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
Leadership Structure
Currently, the chairman of our board of directors is a
nonexecutive position separate from our chief executive officer.
The chairman of our board of directors, Mr. Galant, is
uniquely positioned as our founder and former president and
chief executive officer and a leader in the industry to help our
board of directors provide guidance to management set our
strategic direction and provide appropriate oversight.
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 nonexclusive 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 our board of
directors meetings and facilitates discussions among the
independent directors as appropriate between board of
directors meetings. Mr. Quick, with more than
20 years of experience in the financial services industry
and corporate governance experience as the President of the
American Stock Exchange, currently serves as our lead
independent director.
Although we recognize that different board leadership structures
may be appropriate for companies in different situations and
believe that no one structure is suitable for all companies, we
believe our current board leadership structure, which includes a
chairman and lead independent director, is optimal to provide
strong independent exercise of oversight responsibilities of our
board of directors.
Our board of directors has an active role, as a whole and at the
committee level, in overseeing management of our business and
risks. Our board of directors regularly reviews information
regarding our financial results, liquidity and operations, as
well as risks associated with each. Our compensation committee
is responsible for overseeing and managing our compensation
plans and arrangements. The audit committee oversees, reviews
and manages our financial risks. The nominating and corporate
governance committee monitors and manages independence of our
board of directors and potential conflicts of interest. The risk
committee oversees our risk-management practices. While each
committee is responsible for evaluating certain risks and
overseeing the management of such risks, the entire board of
directors is regularly informed through committee reports and
management presentations to the full board of directors about
such risks.
Each member of our board of directors possesses certain
attributes, skills and experiences that we, and the board of
directors, believe uniquely qualify each director to serve on
our board of directors. Specifically,
Mr. Galant has extensive experience in the forex and
financial services industries and is our founder, former
president and chief executive officer.
Mr. Stevens, our current president and chief
executive officer, has more than 25 years of experience in
the forex industry.
114
Mr. OGrady, a representative of 3i Growth
Capital, one of our largest stockholders, has extensive private
equity and investment experience in the financial services
industry.
Mr. McCrory, a representative of Cross Atlantic
Capital Partners, one of our stockholders, has extensive private
equity and investment experience in the financial services
industry.
Mr. Mills, a representative of VantagePoint Venture
Partners, one of our stockholders, has extensive expertise in
the technology, software and private equity industries.
Mr. Quick, the former president of the American
Stock Exchange and president and chief executive officer of
Quick & Reilly, Inc., has significant operational and
corporate governance experience.
Mr. Schenk, the former chief financial officer of
Jefferies Group, has both financial expertise and financial
markets experience.
Mr. Sugden, a representative of Edison Venture Fund,
one of our stockholders, has extensive investment experience as
a venture capitalist and financial expertise as a former chief
financial officer.
Mr. Calhoun, our former managing director and chief
operating officer, has both operational and forex industry
experience.
Ms. Lyons, the former chief marketing officer of
Visa USA, has extensive marketing experience.
Board of
Directors 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 our
board of directors immediately upon completion of this offering.
Messrs. OGrady, Mills, Sugden, Quick and Schenk and
Ms. Lyons qualify as independent directors in accordance
with the published listing requirements of the NYSE. The NYSE
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 NYSE 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.
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 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 of directors will be divided as follows:
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the class I directors will be Peter Quick, James C. Mills
and Glenn H. Stevens, and their terms will expire at the first
annual meeting of stockholders following consummation of this
offering;
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the class II directors will be Mark E. Galant, Crevan
OGrady and Christopher S. Sugden and their terms will
expire at the second annual meeting of stockholders following
consummation of this offering; and
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the class III directors will be Susanne D. Lyons, Joseph
Schenk and Christopher W. Calhoun, and their terms will expire
at the third annual meeting of stockholders following
consummation of this offering.
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Our amended and restated certificate of incorporation and
amended and restated bylaws, which 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.
115
Election
Arrangements
Messrs. Galant, McCrory, Sugden, OGrady, Mills,
Stevens, Quick, Schenk and Calhoun 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 NYSE 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, 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 the NYSE, 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.
116
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 also determines the
compensation of our other executive officers. In addition, our
compensation committee administers 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. OGrady, 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 time 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 the NYSE,
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. When identifying director nominees, our
board of directors considers the qualifications and skills
represented on our board of directors. One of the considerations
evaluated by our board of directors is the diversity of
experience and background of directors. This consideration is
broad and is consistent with our companys
non-discrimination policies, and includes diversity of skill
sets and experience as well as background, including race and
gender. Our board of directors seeks candidates who possess the
background, skills and expertise to make a significant
contribution to our board of directors, to the Company and to
its stockholders. There are no specific minimum qualifications
that the nominating committee believes must be met by a nominee;
however, desired qualities to be considered include: high-level
leadership experience in business or administrative activities
and significant accomplishments related thereto; breadth of
knowledge about issues affecting us; proven ability and
willingness to contribute special competencies to board of
directors activities; personal integrity; loyalty to us and
concern for our success and welfare; willingness to apply sound
and independent business judgment; awareness of a
directors vital role in assuring the our good corporate
citizenship and corporate image; no present conflicts of
interest; availability for meetings and consultation on Company
matters; enthusiasm about the prospect of serving; and
willingness to assume broad fiduciary responsibility.
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. OGrady and Quick. 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. OGrady and Quick. 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 the NYSE, taking into
account the relevant transition rules for IPO issuers.
117
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 our 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, Calhoun and Schenk.
Mr. Galant will chair the risk committee. Mr. Schenk
is an independent director under the applicable
rules and regulations of the NYSE.
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
2009 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 nonemployee 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
nonemployee 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
nonemployee directors for reasonable expenses incurred in
connection with attending board of directors and committee
meetings. Each nonemployee director will also be entitled to an
annual grant of options or restricted stock valued at $75,000 of
our common stock under our 2010 Omnibus Incentive Compensation
Plan. The chairman of our board of directors will be entitled to
equity grants at a ratio of 1.375 equity grants for every one
equity grant made to the other nonemployee directors when equity
grants
118
are made. Nonemployee directors may elect to receive restricted
stock units under our 2010 Omnibus Incentive Compensation Plan
in lieu of the annual cash fees described above.
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Change in
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Pension
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Value and
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Fees
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Non-Equity
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Nonqualified
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Earned or
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Incentive
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Deferred
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Paid in
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Stock
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Option
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Plan
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Compensation
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All Other
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Cash
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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(h)
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Name(a)
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($)(b)
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($)(1)(2)(c)
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($)(d)
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($)(e)
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($)(f)
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($)(g)
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Total ($)
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Roger
Tarika(2)
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$
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9,750
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$
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65,492
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$
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75,242
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Peter Quick
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$
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13,000
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$
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65,492
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$
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78,492
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Mark E.
Galant(3)
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$
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6,500
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$
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90,044
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$
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96,544
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Joseph Schenk
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$
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11,500
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$
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65,492
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$
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76,992
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Susanne D.
Lyons(4)
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$
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2,250
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$
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91,681
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$
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93,931
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Gerry McCrory
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Ken
Hanau(5)
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James C. Mills
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Christopher S. Sugden
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Christopher W.
Calhoun(6)
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Crevan
OGrady(7)
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(1)
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Represents the grant date fair
value of the stock awards granted in 2009 under FASB
ASC 718, Compensation Stock Compensation.
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(2)
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Mr. Tarika resigned from our board
of directors in October 2010. There are no disagreements between
Mr. Tarika and the Company on any matter relating to the
Companys operations, policies or procedures
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(3)
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The amount set forth under Stock
Awards consists of (i) $90,044 that vested in 2009 from his
immediately vested 2009 director grants.
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(4)
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Ms. Lyons was elected to our
board of directors in January 2009.
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(5)
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Mr. Hanau was elected to our
board of directors in June 2009 and resigned from our board of
directors in October 2010. There are no disagreements between
Mr. Hanau and the Company on any matter relating to the
Companys operations, policies or procedures.
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(6)
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Mr. Calhoun was elected to our
board of directors in October 2010.
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(7)
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Mr. OGrady was elected to our
board of directors in October 2010.
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Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of our 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
Risk Analysis
We believe our approach to goal setting and setting of targets
with payouts at multiple levels of performance assists in
mitigating excessive risk taking that could harm our value or
reward poor judgment by our executives. We believe we have
allocated our compensation among base salary and short- and
long-term compensation target opportunities in such a way as to
not encourage excessive risk taking. In addition, we believe
that the mix of equity
119
award instruments used under our long-term incentive program
also mitigates risk and properly accounts for the time horizon
of risk.
Risk
assessment
Management and the compensation committee, in consultation with
Frederic W. Cook & Co., Inc., an independent
compensation consulting firm, have reviewed our compensation
policies and practices for executive officers and employees and
determined that our compensation policies and practices do not
encourage unnecessary risk taking and are not reasonably likely
to have a material adverse effect on us. The compensation
committee also reviewed our compensation policies and practices
for certain design features that have been identified as having
the potential to encourage excessive risk-taking, including:
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too much focus on equity;
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highly leveraged payout curves and uncapped payouts;
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unreasonable goals or thresholds; and
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steep payout cliffs at certain performance levels that may
encourage short-term business decisions to meet payout
thresholds.
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The compensation committee noted several design features of our
cash and equity incentive programs for executive officers that
reduce the likelihood of excessive risk-taking:
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the program design provides a balanced mix of cash and equity,
annual and longer-term incentives, and performance metrics
(revenue and strategic objectives);
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maximum payout levels for bonuses and performance awards are
currently capped at 135% of target; and
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compliance and ethical behaviors are integral factors considered
in all performance assessments.
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Similar bonus and compensation principles apply to all employees
throughout the Company.
Compensation
Discussion and Analysis
This section is intended to explain how and why our compensation
committee made decisions with respect to the 2009 compensation
of Glenn Stevens, our president and chief executive officer, or
CEO, Henry Lyons, our Executive Vice President, Chief Financial
Officer, or CFO, and Treasurer and the two most highly
compensated executive officers other than our CEO and CFO who
were serving as executive officers on December 31, 2009:
Timothy OSullivan, executive vice president and chief
dealer, and Samantha Roady, Executive Vice President and Chief
Marketing Officer. This section also includes compensation for
Christopher W. Calhoun, our Senior Advisor and Corporate
Secretary from April 2009 to October 2010, who would have been
considered an executive officer had he remained a full-time
employee after April 2009. The compensation of these executive
officers, whom we refer to as the named executive
officers, or NEOs, is disclosed in the Summary
Compensation Table and supplemental tables presented in this
prospectus. This Compensation Discussion and Analysis, or
CD&A, includes information regarding, among other things,
our executive compensation philosophy, objectives and policies,
as well as a discussion of each element of compensation.
Introduction
We are a global provider of online trading services,
specializing in foreign exchange and contracts for difference.
Customers and trading partners in more than 140 countries
worldwide have utilized our award-winning trading platform;
which transacts nearly $250.0 billion per month. In an
effort to maintain our leadership position in our industry, we
must attract and retain executives who are experienced in this
industry and in running growing global businesses. Our long-term
success is dependent on a leadership team with the integrity,
skills and dedication necessary to oversee a dynamic
organization and the vision to anticipate and respond to
constant developments. Our executive compensation program is
designed to motivate and reward individuals who possess these
characteristics.
120
Summary
of Our Executive Compensation Program
Program
Objectives
Our executive compensation program is designed to further the
Companys annual and long-term business objectives by
providing our executives with compensation that is competitive
within our industry sector and that continues to offer an
incentive to our executives to enhance the value of our
stockholders investment. During 2009, our annual incentive
program linked cash compensation directly to the attainment of
annual revenue and EBITDA targets for the Company. Our long-term
incentive awards help to ensure that our executives make a
long-term commitment to the growth and profitability of the
Company and provide further alignment with stockholder interests.
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 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 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 and retaining
employees within our industry.
Elements
of Compensation
The primary compensation elements for our executives, including
the named executive officers, are:
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base salary;
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annual incentive awards;
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long-term equity incentive awards; and
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retirement and other benefits.
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In addition, certain executives, including Messrs. Stevens
and Lyons, have employment arrangements with the Company that
provide potential payments and benefits upon termination of
employment for a variety of reasons, including following a
change in control of the Company. We believe that terminations
of employment, both within and outside of the change in control
context, are a cause of great concern and uncertainty for senior
executives and that providing protections to our executives in
such situations is appropriate in order to allow our executives
to remain focused on their duties and responsibilities to the
Company in all situations.
Competitive
Market Analysis
In 2008, the compensation committee engaged Frederic W.
Cook & Co., Inc., or Frederic Cook, an independent
compensation consulting firm, to provide services relating to a
competitive market analysis of the compensation of our named
executive officers for the purpose of establishing 2009
compensation targets. The competitive market analysis was based
on data gathered from proprietary surveys of executive
compensation at a group of peer companies, or the Peer Group. In
2009, the Peer Group, which consisted of companies with
businesses that compete in the same talent market as the
Company, including primarily companies in the technology and
online trading industries, was as follows:
|
|
|
|
|
E*TRADE
|
|
|
|
GFI Group
|
|
|
|
Knight Capital
|
|
|
|
thinkorswim Group
|
|
|
|
OptionsXpress
|
|
|
|
TradeStation Group
|
121
|
|
|
|
|
BGC Partners
|
|
|
|
Marketaxess
|
|
|
|
LaBranche & Company
|
|
|
|
DST Systems
|
|
|
|
Interactive Data
|
|
|
|
Factset Research Systems
|
|
|
|
Advent Software
|
Actions
Relative to 2009 Compensation
Summary
Our compensation committee annually reviews each of the named
executive officers total compensation, which includes base
salary, annual incentive awards and long-term equity incentive
awards. At the beginning of each year, our compensation
committee, with the input of our chief executive officer,
develops an annual management incentive plan for the year for
our executives, including the named executive officers, which we
refer to as the MIP. Awards under the MIP are
determined based on the achievement of annual revenue and EBITDA
targets. These targets are approved by our compensation
committee. Fifty percent (50.0%) of the awards are paid
quarterly, typically in the month following each quarter, based
on quarterly progress towards our annual revenue and EBITDA
targets. The remaining 50.0% of the awards are paid in the first
quarter of the following year and are based on the achievement
of our annual revenue and EBITDA targets.
The following is a summary of the actions taken in 2009
affecting the 2009 compensation of the named executive officers.
Each of these actions was recommended by the compensation
committee and approved by our board of directors. For a more
detailed description of these actions, please refer to the
sections entitled Base Salary,
Annual Incentive Awards and
Long-Term Equity Incentive Awards
following this summary.
In January 2009, the compensation committee reviewed an analysis
prepared by Frederic Cook and determined to continue for 2009
the philosophies it used historically, which is to continue to
pay for performance with nominally competitive salaries offset
by rewarding employees through performance based annual
incentives and long-term equity compensation, but to transition
the programs toward public company pay levels.
|
|
|
|
|
In April 2009, the 2009 annual revenue and EBITDA targets were
approved by our compensation committee and our board of
directors.
|
|
|
|
In April 2009, July 2009, and October 2009, the named executive
officers were paid their quarterly 2009 incentive award payouts
under the MIP based on quarterly progress toward the incremental
achievement of our annual revenue and EBITDA targets.
|
|
|
|
In December 2009, the named executive officers were provided
long-term equity incentive awards, consisting of restricted
stock units, which were based on an analysis by Frederic Cook of
our Peer Group from the January 2009 review.
|
|
|
|
In January 2010, the named executive officers received the
fourth quarter 2009 incentive award payouts under the MIP based
on quarterly progress toward incremental achievement of our
annual revenue and EBITDA targets for 2009.
|
|
|
|
In March 2010, the named executive officers received the
remaining portion of their 2009 incentive award payouts under
the MIP. Despite the shortfall in our annual revenue and EBITDA
performance compared to target, several operating metrics,
including new accounts and customer deposits, grew significantly
in 2009. In addition, several strategic initiatives were
successfully accomplished. As a result, our CEO proposed and the
compensation committee approved, higher payouts for the
remaining portion of the 2009 incentive award payouts. The
compensation committee considered all of these factors in
determining the final 2009 non-equity incentive award payments
for the named executive officers.
|
122
The table below shows total cash compensation for our NEOs as
calculated based on our achievement of our annual revenue and
EBITDA targets as paid out after additional consideration by our
CEO and compensation committee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
Calculated (Base
|
|
|
|
|
|
|
|
|
Salary Plus Annual
|
|
Total Cash Compensation
|
|
|
Awards Based on
|
|
Annual Incentive
|
|
Incentive Based on
|
|
Paid (Base Salary Plus
|
|
|
Revenue and EBITDA
|
|
Awards Actually
|
|
Revenue and EBITDA
|
|
Annual Incentive Actually
|
Name
|
|
Achievement
|
|
Paid
|
|
Achievement)
|
|
Paid)
|
|
Glenn H. Stevens
|
|
$
|
552,000
|
|
|
$
|
694,000
|
|
|
$
|
1,202,000
|
|
|
$
|
1,344,000
|
|
Henry C. Lyons
|
|
$
|
88,000
|
|
|
$
|
91,000
|
|
|
$
|
413,000
|
|
|
$
|
416,000
|
|
Timothy OSullivan
|
|
$
|
315,000
|
|
|
$
|
478,000
|
|
|
$
|
555,000
|
|
|
$
|
718,000
|
|
Samantha Roady
|
|
$
|
98,000
|
|
|
$
|
159,000
|
|
|
$
|
338,000
|
|
|
$
|
399,000
|
|
Christopher W.
Calhoun(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
126,250
|
|
|
$
|
126,250
|
|
|
|
|
(1)
|
|
In April 2009, Mr. Calhoun
agreed to modify his position as our managing director and he
assumed a part-time position as a senior advisor, overseeing
certain strategic initiatives. In connection with this change in
responsibility, Mr. Calhouns compensation was
modified to reflect his part-time employment, his salary was
reduced and he was no longer eligible to take part in the MIP
and other benefits. In October 2010, Mr. Calhoun was
elected to the board of directors.
|
Mr. Stevens
Mr. Stevens total cash compensation is positioned
higher than other NEOs of our Peer Group due to his unique
background and experience in the financial services and the
forex industries. Mr. Stevens was previously chief forex
dealer at Merrill Lynch & Co., Inc. and was head of
North American sales and trading at National Westminster Bank
plc. Before moving to the position of CEO of our Company,
Mr. Stevens was our Chief Dealer. The compensation paid to
individuals that are head traders is among the highest paid at
large banks and broker-dealers. Mr. Stevens
background as a trader and his management skills make him a
highly sought after executive. To retain his services, we have
determined that his compensation is required to be at a level
commensurate with positions at larger firms. To attract and
retain Mr. Stevens, and those with his skill set, these
firms would pay higher levels of compensation than those in our
current Peer Group. Based on these factors,
Mr. Stevens target compensation was set to rank above
the 50th but below the 75th percentile for total cash
compensation compared to our Peer Group. Consistent with the
financial services and forex industries a greater portion of
Mr. Stevens compensation is derived from variable
incentive compensation. For 2009, Mr. Stevens
compensation was set at 33% base salary and 67% variable
incentive compensation. Mr. Stevens variable
incentive compensation is above the 75th percentile of our
Peer Group, however, when combined with his fixed compensation,
Mr. Stevens overall compensation was 10% greater than
the 50th and 20% below the 75th percentile of our Peer
Group for total cash compensation. Mr. Stevens 2009
long term equity award of 43,130 restricted stock units was
based on an analysis by our compensation consultant, Frederic
Cook, of our Peer Group for a similar position, which factored
in the amount of total shares authorized by our stockholders for
this annual grant pool. Given that Mr. Stevens is the
highest paid employee and has the most responsibility,
Mr. Stevens was issued the largest amount of restricted
stock units.
Mr. Lyons
Mr. Lyons joined the Company in 2009. Mr. Lyons has
experience as a public company CFO and possesses a variety of
financial and accounting skills; however, Mr. Lyons does
not have the industry background and knowledge possessed by
Mr. Stevens or Mr. OSullivan.
Mr. Lyons overall compensation was 19% less than the
25th percentile of our Peer Group, with a higher portion of
Mr. Lyons total cash compensation being comprised of
fixed, in the form of base salary. For 2009,
Mr. Lyons base salary accounts for 62% of his total
cash compensation, and his variable incentive compensation
accounts for 38% of his total cash compensation. Because a
greater portion of Mr. Lyons compensation is fixed,
our bonus calculations for the quarter ended March 31, 2009
determined that a bonus payment to Mr. Lyons was not
warranted although bonus payments were made to the other NEOs
with a higher variable incentive compensation percentage
relative to Mr. Lyons. Mr. Lyons 2009 long term
equity award of 10,000 restricted
123
stock units was based on an analysis by our compensation
consultant, Frederic Cook, of our Peer Group for a similar
position, which factored in the amount of total shares
authorized by our stockholders for this annual grant pool.
Mr. OSullivan
Mr. OSullivan is the Companys Chief Dealer and
has developed a very specific skill set through his years in the
forex industry and his ten years of employment with us. As Chief
Dealer, Mr. OSullivan manages our trade desk and
monitors our risk exposure and profitability. Consistent with
traders and chief dealers within the industry.
Mr. OSullivans variable incentive compensation
target is higher than his fixed compensation, currently set at
23% base salary and 77% variable incentive compensation. This
payment mix is consistent with the payment mix for
Mr. Stevens, who was formerly our Chief Dealer and is now
our CEO. Mr. OSullivans total cash compensation
is between the 25th and 50th percentile of our Peer
Group for 2009. Mr. OSullivans overall
compensation was 121% greater than the 25th percentile, but 20%
less than the 50th percentile of our Peer Group. Historically,
the Company has paid higher variable incentive compensation with
lower base salaries. In order to be more in line with our Peer
Group, in 2009 Mr. OSullivan was given a raise to
increase his base salary, which is the fixed portion of his
total cash compensation. Mr. OSullivans 2009
long term equity award of 7,500 restricted stock units was based
on an analysis by our compensation consultant, Frederic Cook, of
our Peer Group for a similar position, which factored in the
amount of total shares authorized by our stockholders for this
annual grant pool.
Ms. Roady
Ms. Roady is the Companys Chief Marketing Officer and
joined the Company in 1999. According to the Peer Group data,
Ms. Roadys total compensation was 1% less than the
25th percentile of our Peer Group. With over ten years of
experience in the retail forex industry, Ms. Roady has
developed a unique marketing skill set; however, she does not
have the trading background and knowledge possessed by
Mr. Stevens or Mr. OSullivan. As a result, a
higher portion of Ms. Roadys total cash compensation
has been fixed, in the form of base salary, but her variable
incentive compensation has been fixed at a higher percentage
than Mr. Lyons, since Ms. Roadys position is
focused upon driving revenue for the Company. For 2009,
Ms. Roadys base salary accounts for 50% of her total
cash compensation and her variable incentive compensation
accounts for 50% of her total cash compensation. Historically,
the Company has paid higher incentive compensation with lower
base salaries. In order to be more in line with our Peer Group,
in 2009 Ms. Roady was given a raise to increase the fixed
portion of her total cash compensation. Ms. Roadys
2009 long term equity award of 8,000 restricted share units was
based on an analysis by our compensation consultant, Frederic
Cook, of our Peer Group for a similar position, which factored
in the amount of total shares authorized by our stockholders for
this annual grant pool.
Ms. Roady and Mr. Lyons received higher equity awards
than Mr. OSullivan based on their peers in similar
roles. Traders such as Mr. OSullivan have a higher
cash compensation and lower equity portion of overall
compensation compared to Mr. Lyons and Ms. Roady.
Base
Salary
We fix executive officer base compensation at a level that is
based on the collective industry experience of our compensation
committee, survey data based on publicly available sources and
the executive officers previous compensation history. We
aim to set base salaries at levels which we believe best enable
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 Mr. OSullivan and Ms. Roady were
increased by approximately 20% and 17%, respectively, for 2009.
The 2009 salary increases for Mr. OSullivan and
Ms. Roady were awarded to increase the base compensation
portion of their total cash compensation target. Based upon
benchmarking data within the Frederic Cook Peer Group study
received from our compensation consultant, Frederic Cook, our
compensation committee determined that it was advisable to
allocate a larger portion of the total target compensation to
the base compensation paid to Mr. OSullivan and
Ms. Roady. The salaries of Messrs. Stevens and Lyons
did not change for 2009. The base salaries earned by the named
executive officers during 2009 are reported in the Summary
Compensation Table on page 130 of this prospectus.
124
Annual
Incentive Awards
At the beginning of each year, our compensation committee, with
the input of our chief executive officer, develops the MIP for
the year for our executives, including the named executive
officers and other key employees. This plan is then submitted to
Frederic Cook for analysis and the compensation committee for
consideration and approval. The MIP serves to attract, retain
and motivate our executives by tying potential cash awards to
the achievement of a mix of corporate and individual performance
objectives approved by our compensation committee on an annual
basis.
Establishment
of Target Award Levels and Measures
In January 2009, the compensation committee reviewed an analysis
prepared by Frederic Cook. We continue to pay for performance
with above-market incentive compensation opportunities, but we
are transitioning the programs toward public company pay levels.
The 2009 executive compensation levels were rebalanced to adjust
Mr. OSullivans and Ms. Roadys
salaries higher and to adjust their incentive compensation
opportunities in line with total annual cash compensation at
targets based on the Frederic Cook Peer Group study. In
addition, we established target award performance measures under
the MIP, with target award opportunities consistent with the
employment agreements of the named executive officers.
|
|
|
|
|
|
|
Target
|
|
|
Incentive
|
|
|
Compensation
|
|
|
as a %
|
Name
|
|
Base Salary
|
|
Glenn H. Stevens
|
|
|
225
|
%
|
Henry C. Lyons
|
|
|
62
|
%
|
Timothy OSullivan
|
|
|
348
|
%
|
Samantha Roady
|
|
|
108
|
%
|
Christopher W. Calhoun
|
|
|
|
|
For 2009, the target corporate revenue was $210 million and
target EBITDA was $90 million. The table below shows each
NEOs MIP payout, assuming 100% achievement of target:
|
|
|
|
|
|
|
Target Total
|
|
|
Incentive
|
Name
|
|
Compensation
|
|
Glenn H. Stevens
|
|
$
|
1,462,500
|
|
Henry C. Lyons
|
|
$
|
201,000
|
|
Timothy OSullivan
|
|
$
|
836,000
|
|
Samantha Roady
|
|
$
|
260,000
|
|
Christopher W. Calhoun
|
|
$
|
|
|
Target award opportunities were based on the results of
executive compensation market analysis conducted by Frederic
Cook, commencing in November 2008. Based on its analysis of the
market comparable compensation data, including proprietary
survey sources containing functional position matches of
comparable scope to the named executive officers and
compensation data from the Peer Group, the compensation
committee noted that the target annual incentive award
opportunities for the named executive officers ranked between
the 50th
and 75th
percentile, with the exception of the CEO, who ranked above the
75th
percentile, reflected in the survey and aggregate Peer Group
data.
125
2009
Award Payouts
In February 2010, our CEO formulated his recommendations for the
compensation committee with respect to proposed annual incentive
award payouts under the 2009 MIP. In developing his
recommendations, our CEO considered the quarterly award payments
made throughout 2009 based on quarterly achievement of our
annual revenue and EBITDA targets for 2009 and reviewed the
Companys performance against the corporate revenue and
EBITDA targets for the full year. During 2009, we achieved
revenue of $155 million and EBITDA of $44 million
compared to targets of $210 million, and $90 million,
respectively. In addition, our CEO made subjective assessments
of each NEOs contribution towards corporate strategic
initiatives. Our CEO determined, and the compensation committee
concurred, that despite the shortfall in revenue and EBITDA
compared to our targets, several operating metrics, including
new accounts and customer deposits, grew significantly in 2009.
In addition, several strategic initiatives, including the
integration of MetaTrader, the launch of GAIN Securities, the
acquisition and integration of GAIN Capital Forex.com Japan, Co.
Ltd., the launch of CFDs, and the addition of several new white
label partners, were successfully accomplished. The compensation
committee considered all of these factors in determining 2009
non-equity incentive compensation payments for senior
management. After discussion with our CEO, the compensation
committee approved the 2009 MIP award payouts. Quarterly and
annual payments for the entire year for each of the named
executive officers are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Non-Equity Incentive Compensation Payments
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
|
Total
|
|
Glenn H. Stevens
|
|
$
|
44,000
|
|
|
$
|
145,000
|
|
|
$
|
50,000
|
|
|
$
|
51,000
|
|
|
$
|
404,000
|
|
|
$
|
694,000
|
|
Henry C. Lyons
|
|
$
|
|
|
|
$
|
18,000
|
|
|
$
|
8,000
|
|
|
$
|
7,000
|
|
|
$
|
58,000
|
|
|
$
|
91,000
|
|
Timothy OSullivan
|
|
$
|
40,000
|
|
|
$
|
85,000
|
|
|
$
|
42,000
|
|
|
$
|
40,000
|
|
|
$
|
271,000
|
|
|
$
|
478,000
|
|
Samantha Roady
|
|
$
|
9,000
|
|
|
$
|
30,000
|
|
|
$
|
10,000
|
|
|
$
|
8,000
|
|
|
$
|
102,000
|
|
|
$
|
159,000
|
|
Christopher W. Calhoun
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2010
MIP Targets
In March of 2010, the compensation committee reviewed an
analysis prepared by Frederic Cook to assist the company in
transitioning executive compensation toward public company pay
levels. The 2010 MIP, approved by the compensation committee,
targeted payments based on the firms financial results for
revenue and no longer will include EBITDA. The rationale for the
deletion of the EBITDA was the potential ability of management
to limit marketing and other expenses, which could be an
impediment to future growth for strategic initiatives, in an
effort to achieve short-term EBITDA results. The 2010 MIP payout
weighting is 65% based on achievement of annual revenue targets
and 35% based on specific objectives for each NEO. The 2010 MIP
targets, based on 100% achievement of revenue and personal
objectives, are outlined below.
|
|
|
|
|
|
|
|
|
|
|
Target Total
|
|
Target %
|
|
|
Incentive
|
|
of
|
Name
|
|
Compensation
|
|
Base Salary
|
|
Glenn H. Stevens
|
|
$
|
1,465,000
|
|
|
|
225
|
%
|
Henry C. Lyons
|
|
$
|
201,000
|
|
|
|
62
|
%
|
Timothy OSullivan
|
|
$
|
813,000
|
|
|
|
339
|
%
|
Samantha Roady
|
|
$
|
250,000
|
|
|
|
104
|
%
|
Christopher W. Calhoun
|
|
$
|
|
|
|
|
|
%
|
Long-Term
Equity Incentive Awards
Historically, our long-term equity incentive awards have
consisted of restricted stock units. We believe that the upside
potential in restricted stock units is attractive to our
executives and other key employees. By providing our executives
and other key employees with a direct stake in the
Companys success, these incentives are intended to assure
a closer identification of their interests with those of our
stockholders, stimulate their efforts on the Companys
behalf and strengthen their desire to remain with the Company.
Typically, recommendations for long-
126
term equity incentive awards for our executives, including the
named executive officers, are made to our board of directors by
the compensation committee taking into account the
recommendations of our CEO, as appropriate. Our board of
directors must approve all stock option grants and other equity
awards to executives and directors.
In December 2009, the compensation committee approved long-term
equity incentive awards in the form of restricted stock units to
our executives, including the named executive officers, and
other key employees. The recommended restricted stock unit
grants were based on an analysis performed by Frederic Cook,
which reviewed our Peer Group to formulate the grant to the
NEOs. The decision to grant restricted stock units was based on
our board of directors desire to incentivize management,
in an uncertain economic climate, with the attractions of a
full value share award (since restricted stock units
have an intrinsic value equal to the market price of the
Companys common stock). The compensation committee
determined that restricted stock units would be an appropriate
way to both motivate these individuals and deliver value to them
through a competitive compensation package, regardless of future
market conditions.
The compensation committee uses long-term equity incentives to
motivate our executives to promote the success of the
Companys business, even if the market remains flat or
continues to deteriorate in the future. The restricted stock
unit awards will vest based on continued service to the Company
over four years in equal annual 25% increments. The compensation
committee believes that these vesting requirements help to
create and maintain an environment that motivates retention and
longevity of our executives and other key employees.
2009
Long-Term Incentive Awards
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
Glenn H. Stevens
|
|
|
43,130
|
|
|
$
|
882,440
|
|
Henry C. Lyons
|
|
|
10,000
|
|
|
$
|
204,600
|
|
Timothy OSullivan
|
|
|
7,500
|
|
|
$
|
153,450
|
|
Samantha Roady
|
|
|
8,000
|
|
|
$
|
163,680
|
|
Christopher W. Calhoun
|
|
|
|
|
|
|
|
|
Equity
Award Grant Practices
Restricted stock units, stock options and other equity awards
are granted under the GAIN Capital Holdings, Inc. 2006 Equity
Compensation Plan, as amended. Generally, restricted stock units
are granted to newly hired employees on the later of either the
first day of employment with the Company or the date the award
is approved by the compensation committee. Restricted stock
units and other equity awards are granted to continuing
executives, our other employees and directors on an annual
basis. In the case of directors, stock options and other equity
awards are granted when a new director joins our board of
directors and then automatically thereafter on an annual basis
on the first business day of each calendar year as part of the
directors total compensation for the year. The
compensation committee has engaged Frederic Cook to provide
compensation consulting services to ensure the actions and
recommendations are benchmarked to our industry. Our philosophy
on long-term
incentive compensation is based on an analysis of the market
comparable compensation data, including proprietary survey
sources containing functional position matches of comparable
scope to the NEOs and compensation data from the Peer Group. The
long-term
incentive awards for the named executive officers we target to
be ranked between the
50th and
75th
percentile.
Recommendations for grants and awards to executives, including
the named executive officers, and directors are made to our
compensation committee. Our compensation committee must approve
all stock option grants and other equity awards to executives
and directors. Our compensation committee retains the discretion
to make additional awards to executives at other times in
connection with the initial hiring of a new executive, for
retention purposes or otherwise.
127
Each stock option grant and other equity award must specify all
of the material terms of the grant or award, including the date
of grant, exercise price, vesting schedule, term and any other
terms or conditions that the compensation committee or our board
of directors deems appropriate. Option grants made to our
executives, or any of our other employees or directors, are made
with an exercise price equal to the fair market value of a share
of the Companys common stock on the date of grant. Our
compensation committee can not delegate its authority or
responsibility with respect to stock option grants to any other
subcommittee of our board of directors or member of management.
The grant date fair value of the long-term incentive awards made
to the named executive officers in 2009 is reported in the
Summary Compensation Table and the Grants of Plan-Based Awards
Table on pages 130 and 131, respectively, of this
prospectus.
Retirement,
Nonqualified Deferred Compensation Plan and Other
Benefits
We provide a Section 401(k) Retirement Savings Plan, which
is a tax-qualified defined contribution plan, and a nonqualified
deferred compensation plan to our executives and employees,
including the named executive officers. Under the 401(k) plan,
each participant may contribute up to 100.0% of his or her
pretax compensation, up to a statutory limit, which for most
employees was $16,500 in 2009. 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 $16,500
for all employees who have been employed with us for less than
three years, and we match 50.0% of employee contributions up to
$16,500 for all employees who have been employed with us for
more than three years. The Companys matching contributions
to the accounts of the named executive officers are disclosed in
the Summary Compensation Table on page 130 of this
prospectus. None of our named executive officers participate in
or have account balances in nonqualified defined contribution
plans or other deferred compensation plans maintained by us.
Additional benefits received by our executives, including the
named executive officers, include health-care benefits, dental,
vision, disability and life insurance coverage. These benefits
are provided on the same basis as to all of our employees.
Employment,
Severance and Change in Control Arrangements
We have an employment agreement with Mr. Stevens. 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 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 such
provisions allow our executives to focus on the best interests
of the Company, including long-term goals and strategic
interests, to the benefit of the shareholders. 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
Mr. Calhoun, Ms. Roady and Mr. 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 Potential Payments Upon Termination or
Change of Control. The severance and change in control
arrangements in place for Messrs. Stevens and Lyons were
individually negotiated with each executive to whom it applies.
In general terms, a change in 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
128
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 Internal Revenue 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 units 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 Potential Payments Upon
Termination or Change of Control Employment
Agreements and Change of Control Arrangements 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 or, if earlier, until the plan is materially modified.
We will take these transition rules into account when awarding
compensation to our named executive officers. 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.
129
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 named
executive officers. All dollar amounts are in U.S. dollars.
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Name and
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Principal
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Salary
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Awards(1)
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Awards(1)
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Compensation
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Earnings
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Compensation
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Total
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Position(a)
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Year(b)
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($)(c)
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$(e)
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(f)
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($)(g)
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($)(h)
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($)(i)
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($)(j)
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Glenn H. Stevens
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2009
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$
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650,000
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882,440
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$
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694,000
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$
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26,174
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(2)
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$
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2,252,614
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President and Chief
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2008
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$
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650,000
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2,205,000
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$
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2,302,000
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$
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24,748
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(3)
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$
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5,181,748
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Executive Officer
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Christopher W.
Calhoun(4)
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2009
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$
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126,250
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$
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$
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8,280
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(5)
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$
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134,530
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Senior Advisor and Secretary
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2008
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$
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305,000
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735,000
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44,833
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$
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440,000
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$
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22,852
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(6)
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$
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1,547,685
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Henry C. Lyons
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2009
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$
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325,000
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204,600
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$
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91,000
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$
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10,727
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(7)
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$
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631,327
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Chief Financial Officer and Treasurer
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2008
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$
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325,000
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918,750
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$
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193,000
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$
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429
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(8)
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$
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1,437,179
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Timothy OSullivan
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2009
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$
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223,300
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153,450
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$
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478,000
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$
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22,972
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(9)
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$
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877,722
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Chief Dealer
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2008
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$
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200,000
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367,500
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$
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968,000
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$
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14,014
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(10)
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$
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1,549,514
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Samantha Roady
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2009
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$
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225,400
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163,680
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$
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159,000
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$
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14,548
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(11)
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$
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562,628
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Chief Marketing Officer
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2008
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$
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203,333
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367,500
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$
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316,000
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$
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13,930
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(12)
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$
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900,763
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(1)
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The amounts shown in this column
represent the aggregate grant date fair value of restricted
stock units granted during fiscal year 2009 under the 2006
Equity Compensation Plan calculated in accordance with FASB
ASC 718, Compensation Stock
Compensation. For information on assumptions used in
determining fair value of these stock awards, refer to
Notes 2 and 13 to our consolidated financial statements
included in the prospectus.
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(2)
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This amount includes:
(i) $8,250 in employer matching contribution to our 401(k)
plan; (ii) $8,640 in car allowance ($720 per month);
(iii) $8,426 in country club membership; and (iv) $858
for payment of term life insurance premiums.
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(3)
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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.
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(4)
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In April 2009, Mr. Calhoun
agreed to modify his position as our managing director and he
agreed to assume a part-time position as a 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 reduced to $50,000 per year. In October 2009,
Mr. Calhouns annual compensation was increased to
$100,000 annually to reflect increased responsibilities. In
October 2010, Mr. Calhoun was elected to our board of directors.
As a result, Mr. Calhoun is no longer a part-time employee.
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(5)
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This amount includes:
(i) $6,313 in employer matching contribution to our 401(k)
plan; (ii) $1,800 in car allowance; and (iii) $168 for
payment of term life insurance premiums.
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(6)
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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 country club membership; and (iv) $402
for payment of term life insurance premiums.
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(7)
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This amount includes:
(i) $1,872 in employer matching contribution to our 401(k)
plan; (ii) 8,426 in country club membership; and
(iii) $429 for payment of term life insurance premiums.
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(8)
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This amount includes $429 for
payment of term life insurance premiums.
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(9)
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This amount includes:
(i) $8,250 in employer matching contribution to our 401(k)
plan; (ii) $6,000 in car allowance ($500 per month);
(iii) $8,426 in country club membership; and (iv) $296
for payment of term life insurance premiums
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(10)
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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.
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(11)
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This amount includes:
(i) $8,250 in employer matching contribution to our 401(k)
plan; (ii) $6,000 in car allowance ($500 per month); and
(iii) $298 for payment of term life insurance premiums.
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(12)
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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
$180 for payment of term life insurance premium.
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130
Grants
of Plan-Based Awards
The following table sets forth information concerning grants of
plan-based awards to the named executive officers during the
year ended December 31, 2009. The estimated possible
payouts under non-equity incentive plan awards consist of the
incentive compensation plans that are described in
Actions Relative to 2009
Compensation Annual Incentive Awards. The
actual amounts realized in respect of the non-equity plan
incentive awards in respect of 2009 are reported in the Summary
Compensation Table under the Non-Equity Incentive Plan
Compensation column.
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All Other Stock
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Awards:
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Grant Date Fair
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Estimated Possible Payouts Under Non-equity Incentive Plan
Awards
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Number of
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Value of Stock and
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Threshold
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Target
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Maximum
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Shares of Stock
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Option Awards
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Name (a)
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Grant Date (b)
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($)(c)
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($)(d)
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($)(e)
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or Units (i)(#)
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(1)(2)
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Glenn H. Stevens
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12/15/09
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$
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1,462,500
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43,130
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$
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882,440
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Christopher W. Calhoun
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Henry C. Lyons
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12/15/09
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$
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201,000
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10,000
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$
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204,600
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Timothy OSullivan
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12/15/09
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$
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836,000
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7,500
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$
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153,450
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Samantha Roady
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12/15/09
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$
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260,000
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8,000
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$
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163,680
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(1)
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Includes only those columns
relating to plan-based award granted during 2009. All other
columns have been omitted.
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(2)
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The grant date fair value was
determined by multiplying the number of shares times $20.46, the
fair value per share on the grant date.
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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,
2009. For more information on equity awards made to the named
executive officers see Actions Relative to
2009 Compensation Summary Long-Term
Equity Incentive Awards.
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Option Awards
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Stock Awards
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Equity
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Equity
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Incentive
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Incentive Plan
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Equity
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Plan
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Awards:
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Incentive
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Awards:
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Market or
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Plan
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Number of
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Payout
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Awards:
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Unearned
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Value of
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Number of
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Number of
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Number of
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Number of
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Shares,
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Unearned
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Securities
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Securities
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Securities
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Shares
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Market Value of
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Units or
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Shares,
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Underlying
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Underlying
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Underlying
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or Units of
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Shares or
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Other
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Units or
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Unexercised
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Unexercised
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Unexercised
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Option
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Option
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Stock That
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Units of Stock
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Rights That
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Other Rights
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Options
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Options
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Unearned
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Exercise
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Expiration
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Have Not
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That Have Not
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Have Not
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That Have Not
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Name
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Exercisable
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Unexercisable
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Options
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Price
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Date
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Vested
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Vested
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Vested
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Vested
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Glenn H. Stevens
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53,813
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(1)
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$
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1.75
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6/10/2013
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20,000
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(2)
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$
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2.50
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1/30/2014
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50,000
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(2)
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$
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2.50
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1/30/2014
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10,000
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(2)
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|
|
|
|
|
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
(3)(4)
|
|
$
|
94,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,983
|
(3)(4)
|
|
$
|
37,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(3)(5)
|
|
$
|
945,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
(3)(6)
|
|
$
|
850,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,130
|
(3)(7)
|
|
$
|
815,157
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Payout
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Value of
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Shares,
|
|
|
Unearned
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Market Value of
|
|
|
Units or
|
|
|
Shares,
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
or Units of
|
|
|
Shares or
|
|
|
Other
|
|
|
Units or
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock That
|
|
|
Units of Stock
|
|
|
Rights That
|
|
|
Other Rights
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
That Have Not
|
|
|
Have Not
|
|
|
That Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Christopher W. Calhoun
|
|
|
10,833
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
6/15/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,833
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
5.50
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
6.50
|
|
|
|
1/31/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
(3)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
(3)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry C. Lyons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,750
|
(3)(6)
|
|
$
|
354,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(7)
|
|
$
|
189,000
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
(3)(4)
|
|
$
|
94,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,343
|
(3)(4)
|
|
$
|
25,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(5)
|
|
$
|
189,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
(3)(6)
|
|
$
|
141,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
(3)(7)
|
|
$
|
141,750
|
|
|
|
|
|
|
|
|
|
Samantha Roady
|
|
|
45,175
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
6/15/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(1)
|
|
|
|
|
|
|
|
|
|
$
|
5.50
|
|
|
|
12/30/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
(3)(4)
|
|
$
|
94,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)(5)
|
|
$
|
189,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
(3)(6)
|
|
$
|
141,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
(3)(7)
|
|
$
|
151,200
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Such 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 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.
|
(7)
|
|
Such restricted stock units were
granted on December 15, 2009.
|
132
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, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
Acquired on
|
|
|
Value Realized
|
|
Name
|
|
Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
on
Vesting(1)
|
|
|
Glenn H. Stevens
|
|
|
|
|
|
$
|
|
|
|
|
46,983
|
|
|
$
|
1,083,738
|
|
Christopher W. Calhoun
|
|
|
|
|
|
$
|
|
|
|
|
20,000
|
|
|
$
|
445,843
|
|
Henry C. Lyons
|
|
|
|
|
|
$
|
|
|
|
|
6,250
|
|
|
$
|
137,262
|
|
Timothy OSullivan
|
|
|
|
|
|
$
|
|
|
|
|
13,843
|
|
|
$
|
282,664
|
|
Samantha Roady
|
|
|
|
|
|
$
|
|
|
|
|
12,500
|
|
|
$
|
261,788
|
|
|
|
|
(1)
|
|
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, 2010,
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 our 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 our 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.
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 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, see GCAM Letter
Agreement.
133
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 which are currently vested. 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 $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 predetermined
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.
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
health-care 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 his annual base salary in the event he is terminated 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 automatically become
fully vested.
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,
noncompete and nonhire agreement. In the event of a change of
control, Mr. OSullivan may be entitled to accelerated
vesting of equity awards.
Samantha
Roady
Samantha Roady is currently employed by us as our chief
marketing officer pursuant to an offer letter, dated
October 1, 1999. Pursuant to her offer letter,
Ms. Roady was hired for an annual salary of $80,000, which
has been increased to $240,000 per year. Ms. Roady 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.
Ms. Roadys employment is at will and not
for any specified period of time. Ms. Roadys offer
letter required her execution of our standard confidentiality,
noncompete and nonhire agreement. In the event of a change of
control, Ms. Roady may be entitled to accelerated vesting
of equity awards.
134
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,
2009, and the fair market value of a share of our common stock
as of December 31, 2009 was $18.90. 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, 2009, 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, 2009. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
in
|
|
Change in
|
|
or
|
Name
|
|
Benefit
|
|
for Cause
|
|
Control
|
|
Control
|
|
Control
|
|
Retirement
|
|
Glenn H. Stevens
|
|
Cash
severance(1)
|
|
|
|
|
|
$
|
3,168,750
|
(2)
|
|
|
|
|
|
$
|
3,168,750
|
(2)
|
|
$
|
1,462,500
|
(3)
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
2,742,069
|
(4)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
$
|
18,000
|
(5)
|
|
|
|
|
|
$
|
18,000
|
(5)
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
$
|
3,186,750
|
|
|
$
|
2,742,069
|
|
|
$
|
3,186,750
|
|
|
$
|
1,462,500
|
|
Christopher W. Calhoun
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
756,000
|
(8)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
$
|
756,000
|
|
|
|
|
|
|
|
|
|
Henry C.
Lyons(9)
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,000
|
(10)
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
543,375
|
(11)
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
868,375
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
in
|
|
Change in
|
|
or
|
Name
|
|
Benefit
|
|
for Cause
|
|
Control
|
|
Control
|
|
Control
|
|
Retirement
|
|
Timothy OSullivan
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
592,572
|
(12)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
$
|
592,572
|
|
|
|
|
|
|
|
|
|
Samantha Roady
|
|
Cash severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration
|
|
|
|
|
|
|
|
|
|
$
|
576,450
|
(7)
|
|
|
|
|
|
|
|
|
|
|
Health Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value
|
|
|
|
|
|
|
|
|
|
$
|
576,450
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2009,
Mr. Stevens would be entitled to the full amount of the
unpaid 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 2009. The amount set forth in the table is
equal to 1.5 times Mr. Stevens 2009 base salary,
$975,000, plus the full amount of Mr. Stevens 2009
bonuses, $2,193,750.
|
(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 because of death or disability. The amount in the
table is equal to one (1) times Mr. Stevens
annual bonus for 2009.
|
(4)
|
|
This amount represents the value of
the accelerated vesting and payment of 145,083 restricted stock
units based on a price per share as of December 31, 2009 of
$18.90. 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)
|
|
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. 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. In October 2010, Mr. Calhoun was elected
to our board of directors. As a result, Mr. Calhoun is no
longer a part-time employee.
|
|
|
|
(7)
|
|
This amount represents the value of
accelerated vesting and payment of 30,500 restricted stock units
based on a price per share as of December 31, 2009 of
$18.90 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.
|
(8)
|
|
This amount represents the value of
accelerated vesting and payment of 40,000 restricted stock units
based on a price per share as of December 31, 2009 of
$18.90. 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 $543,375.
|
(11)
|
|
This amount represents the value of
accelerated vesting and payment of 28,750 restricted stock units
based on a price per share as of December 31, 2009 of
$18.90 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 31,343 restricted stock units
based on a price per share as of December 31, 2009 of
$18.90, 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.
|
136
Benefit
Plans
2010
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, or 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 nonemployee
members of our board of directors.
Recently our board of directors adopted the GAIN Capital
Holdings, Inc. 2010 Omnibus Incentive Compensation Plan, or the
2010 Plan, effective as
of ,
2010, 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 nonemployee members of our
board of directors. The 2010 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 2010 Plan, the 2006 Plan will be
merged with and into the 2010 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 2010 Plan merger, and the shares
with respect to outstanding grants under the 2006 Plan will be
issued or transferred under the 2010 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 2010
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.
2010
Omnibus Incentive Compensation Plan
Introduction. Our board of directors has
adopted the 2010 Plan. It is expected that the 2010 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 2010 Plan is to attract and retain employees,
nonemployee directors and consultants and advisors. The 2010
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 2010 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 2010 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 2010 Plan. The 2010 Plan
will be administered by our compensation committee, and the
committee will determine all of the terms and conditions
applicable to grants under the 2010 Plan. Our compensation
committee will also determine who will receive grants under the
2010 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 of directors.
Awards. The 2010 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
137
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 2010 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 2010 Plan also contain annual individual grant 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 2010 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 2010 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 2010 Plan. In addition, our nonemployee directors and
consultants and advisors who perform services for us and our
subsidiaries may receive grants under the 2010 Plan.
Vesting. Our committee determines the vesting
of awards granted under the 2010 Plan.
Options. Under the 2010 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 2010 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.
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Stock Awards. Under the 2010 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 2010 Plan, the
committee may grant stock units to anyone eligible to
participate in the 2010 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. The 2010 Plan
authorizes the committee to grant stock appreciation rights, or
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 2010 Plan,
the committee may grant other types of awards that are based on,
measured by or payable to anyone eligible to participate in the
2010 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.
Dividend Equivalents. Under the 2010 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
2010 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.
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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.
Annual Bonus Awards. The 2010 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 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 (provided 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 2010 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.
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
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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:
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if a person, entity or affiliated group (with certain
exceptions) acquires more than 50.0% of our then outstanding
voting securities;
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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;
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if we sell or dispose of all or substantially all of our assets;
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if we are liquidated or dissolved; or
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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.
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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. 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 our chief executive officer and our three highest
compensated executive officers other than our chief executive
officer and chief financial officer. There is an exemption from
the $1,000,000 deduction limitation for performance-based
compensation that meets certain requirements. Transition rules
apply to exempt from this deduction limitation compensation that
is paid by a newly public company under a plan or agreement that
was in effect while the company was privately held. These
transition rules should apply to compensation received by our
executive officers pursuant to awards granted under our 2010
Plan provided that such awards are granted before the transition
period expires. The transition period will expire upon the
earliest to occur of: (i) the expiration of the 2010 Plan,
(ii) a material modification of the 2010 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 2010 Plan, or (iv) the
first meeting of our stockholders (during 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 (in other words, the 2014 annual stockholders
meeting if our initial public offering occurs before
December 31, 2010). Once the transition period expires, the
$1,000,000 deduction limitation of Section 162(m) of the
Internal Revenue Code will apply to compensation paid in
connection with awards granted under our 2010 Plan unless our
2010 Plan is approved by our stockholders after our initial
public offering. If this approval is obtained, then certain
awards subsequently granted under our 2010 Plan could continue
to be exempt from the deduction limitation as qualified
performance-based compensation.
Our board of directors may amend or terminate the 2010 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 of
directors or extended with stockholder approval, the 2010 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 2010 Plan is subject to taxation in
countries other than the United States, the 2010 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.
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2010
Employee Stock Purchase Plan
Introduction. The 2010 Employee Stock Purchase
Plan, or the ESPP, was adopted by our board of directors
on ,
2010, subject to approval by our stockholders. It is expected
that the ESPP will be approved by our stockholders and will
become effective after 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 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.
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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:
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if a person, entity or affiliated group acquires more than 50.0%
of our then outstanding voting securities;
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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;
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if we merge with another entity and the members of our board of
directors prior to the merger would not constitute a majority of
our board of directors in the merged entity or its parent;
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if we sell or dispose of all or substantially all of our assets;
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if we are liquidated or dissolved; or
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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.
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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:
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,
2020;
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the date all shares available for issuance under the plan have
been issued; or
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the date all options are exercised in connection with a change
of control.
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Retirement
Plans
We provide a Section 401(k) Retirement Savings Plan, which
is a tax-qualified defined contribution plan, and a nonqualified
deferred compensation plan to our executives and employees,
including the named executive officers. Under the 401(k) plan,
each participant may contribute up to 100.0% of his or her
pretax compensation, up to a
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statutory limit, which for most employees was $16,500 in 2009.
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 $16,500 for all employees who have
been employed with us for less than three years, and we match
50.0% of employee contributions up to $16,500 for all employees
who have been employed with us for more than three years. The
Companys matching contributions to the accounts of the
named executive officers are disclosed in the Summary
Compensation Table on page 130 of this prospectus.
We maintain a nonqualified deferred compensation 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 Company and to promote its continued growth. This
nonqualified deferred compensation plan provides that each
eligible employee may defer up to either $25,000 (for
tier 2 eligible employees) or $50,000 (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
compensation. Employee deferrals are held and invested at the
employees direction by the plans trustee. We do not
match employee deferrals into this plan. For the year-ended
December 31, 2009, none of the named executive officers
participated in the nonqualified deferred compensation 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:
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for any breach of their duty of loyalty to us or our
stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for voting or assenting to unlawful payments of dividends or
other distributions; or
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for any transaction from which the director derived an improper
personal benefit.
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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 that 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
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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.
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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 $4,708,650.10. 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
146
5.0% 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.
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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
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$
|
4,773,272
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|
|
|
|
|
|
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|
Total
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$
|
79,119,915
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|
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|
|
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
147
each employee that participated in the employee repurchase. The
names of the officers, directors and 5.0% 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.
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|
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|
|
|
Aggregate
|
|
|
|
Number and Type of Securities
|
|
Purchase
|
|
Name
|
|
Repurchased by the
Company
|
|
Price
|
|
|
Glenn H. Stevens
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|
55,803 shares of common stock and options to purchase
160,524 shares of common stock
|
|
$
|
9,676,307
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|
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),
148
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
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 predetermined
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 Potential
Payments Upon Termination or Change of Control
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
149
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 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 1.375 times the annual compensation received by
independent members of our board of directors, as determined by
the compensation committee of our 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. Per its terms, the agreement
automatically renewed for an additional one year and is set to
expire on December 31, 2010. Two of our board of directors
members, Messrs. Calhoun 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.
150
Employment
Agreements
We have entered into an employment agreement with Glenn H.
Stevens, our president and chief executive officer, Christopher
W. Calhoun, our senior advisor and secretary (which has been
terminated as of October 2010) and have entered into employment
arrangement pursuant to executed offer letter with Henry C.
Lyons, our chief financial officer and treasurer, as described
in Management Potential Payments Upon
Termination or Change of Control Employment
Agreements and Change of Control Arrangements.
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.
151
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table provides information concerning beneficial
ownership of our capital stock as of October 20, 2010, and
as adjusted to reflect the sale of shares of common stock in
this offering, by:
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each stockholder, or group of affiliated stockholders, that we
know owns more than 5.0% of our outstanding capital stock;
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|
each other selling stockholder in this offering;
|
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|
each of our named executive officers;
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|
each of our directors; and
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|
all of our directors and named executive officers as a group.
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The following table lists the number of shares and percentage of
shares beneficially owned based on shares of common stock
outstanding as of October 20, 2010
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 and Warrantholders 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 October 20, 2010 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.
152
Unless otherwise indicated in the footnotes, the principal
address of each of the stockholders identified below is
c/o GAIN
Capital Holdings, Inc., Bedminster One, 135 Route 202/206,
Bedminster, New Jersey 07921.
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Shares Beneficially Owned
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Shares Being Sold in Offering
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Immediately Following Offering
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Assuming
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Assuming
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Assuming
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Assuming
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Underwriters
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Underwriters
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Underwriters Over-
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Underwriters Over-
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Shares Beneficially
|
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Over-Allotment
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Over-Allotment
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Allotment
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Allotment
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Owned Prior to
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Option is
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Option is
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Option is
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Option is
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Offering
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Not
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Exercised
|
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Not Exercised
|
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Exercised in Full
|
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Beneficial Owner
|
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Number
|
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|
Percentage
|
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Exercised
|
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in Full
|
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|
Number
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Percentage
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|
Number
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Percentage
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5.0% Beneficial Owners
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3i U.S. Growth Partners
L.P.(1)
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2,165,178
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18.5
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%
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3i Technology Partners III
L.P.(1)
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2,165,178
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18.5
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%
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VantagePoint Venture Partners IV(Q),
L.P.(2)
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3,701,106
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31.6
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%
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VantagePoint Venture Partners IV,
L.P.(2)
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3,701,106
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31.6
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%
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VantagePoint Venture Partners IV Principals Fund,
L.P.(2)
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|
|
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
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher W.
Calhoun(12)
|
|
|
110,666
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry C. Lyons
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
OSullivan(13)
|
|
|
106,733
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samantha Roady
(14)
|
|
|
107,175
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crevan
OGrady(15)
|
|
|
2,165,178
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerry
McCrory(16)
|
|
|
1,527,402
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James C.
Mills(17)
|
|
|
3,701,106
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Quick
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Schenk
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher S.
Sugden(18)
|
|
|
2,853,963
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger Tarika
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susanne D. Lyons
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and named executive officers as a
group(19)
|
|
|
12,638,507
|
|
|
|
88.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
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 board of directors 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 board of directors of 3i US Growth Corporation are Ken
Hanau, Robert Stefanowski, Richard Relyea and Jim Rutherfurd.
Each of the members disclaims beneficial ownership of the shares
except to the extent of their pecuniary interest, if any. 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 board
of directors 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 board of
directors of 3i Technology Corporation are Ken Hanau, Robert
Stefanowski, Ian Lobley, Sundip Murthy, Richard Relyea and Jim
Rutherfurd. Each of the members disclaims beneficial ownership
of the shares except to the extent of their pecuniary interest,
if any. 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 of preferred stock upon completion
of this offering held by VantagePoint Venture Partners IV, L.P.,
(iii) 8,592 shares of common stock
|
(footnotes continued on next
page)
153
|
|
|
|
|
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. 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.
|
|
|
|
(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.
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(13)
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Consists of options to purchase
106,733 shares of common stock.
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(14)
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Consists of
(i) 12,000 shares of common stock and
(ii) options to purchase 125,175 shares of common
stock.
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(footnotes continued on next
page)
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(15)
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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.
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(16)
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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.
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(17)
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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.
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(18)
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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.
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(19)
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See footnotes 9 through 18.
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155
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, 2010, there were 1,353,584 shares
of common stock outstanding held of record by approximately 70
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 ,
2010 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 ,
2010 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
156
preferred stock, as adjusted for stock splits, combinations and
similar changes), referred to herein as the Target 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 and Warrantholders 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, 2010, 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 Management
Potential Payments Upon Termination or Change of
Control Employment Agreements and Change of Control
Arrangements. We have also granted restricted stock units
that vest upon attainment of performance criteria from time to
time. Once vested, delivery of the vested 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, 2010,
849,531 restricted stock units were outstanding, of which
303,447 restricted stock units were non-vested and 546,084
were vested. For more details regarding the terms of the
outstanding restricted stock units grants, see
Management Executive Compensation and
Management Potential Payments Upon Termination
or Change of Control Employment Agreements and
Change of Control Arrangements 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
157
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.
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
30% 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.
158
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:
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acquisition of our company by means of a tender offer, a proxy
contest or otherwise; and
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removal of our incumbent officers and directors.
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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 our 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 two-thirds (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 our board of directors, the chairman
of our board of directors, 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.
159
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 New York Stock
Exchange under the symbol GCAP.
160
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 New York Stock Exchange, 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, 2010. 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:
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Days After Date of
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this Prospectus
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Shares Eligible for Sale
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Comment
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Date of Prospectus
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Shares sold in this offering
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90 Days
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Shares saleable under Rules 144 and 701 that are not subject to
a lock-up
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180 Days
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Lock-up released; shares saleable under Rules 144 and 701
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In addition, of
the shares
of our common stock that were subject to stock options
outstanding as of September 30, 2010, options to
purchase shares
of common stock were exercisable as of September 30, 2010,
and all of the warrants to
purchase shares
of our common stock outstanding as of September 30, 2010
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 of 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:
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with the prior written consent of Morgan Stanley & Co.
Incorporated and Deutsche Bank Securities Inc.;
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of shares of common stock or other securities acquired in open
market transactions after the completion of this offering;
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as a distribution to limited partners or stockholders of a
holder of our common stock;
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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
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as a bona fide gift.
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161
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 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 nonaffiliate.
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:
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1.0% of the number of shares of common stock then outstanding,
which will equal shares immediately after this offering; and
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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.
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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 nonaffiliate
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
nonaffiliate 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.
162
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United
States 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, partnerships or other
entities classified as partnerships for United States federal
income tax purposes or United States holders (as defined below)
of shares of our common stock whose functional
currency is not the United States dollar. Holders of our
common stock who are described in the preceding sentence should
consult their own tax advisors regarding the United States
federal income tax consequences relating to the ownership and
disposition of our common stock, as the United States
federal income tax consequences for persons in the above
categories relating to the ownership and disposition of our
common stock may be significantly different than as described
below.
This discussion is based upon the provisions of the United
States 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 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 (or any other entity treated as a partnership
for United States federal income tax purposes) holds our common
stock, the tax treatment of a partner or member in such
partnership or other pass-through entity will generally depend
on the status of the partner or the member and the activities of
the partnership or other entity. Such a partner or member should
consult its own tax advisors as to the United States tax
consequences of being a partner or member in a partnership or
other entity that acquires, holds or disposes of our common
stock.
Distributions. Distributions of cash or
property that we pay in respect of our common stock will
constitute dividends for United States federal income tax
purposes to the extent paid from our current or accumulated
earnings and profits (as determined under United States 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, 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
163
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, if any, between the amount
realized on the sale, exchange or other taxable disposition and
the United States holders adjusted tax basis in the shares
of our common stock. Such capital gain or loss will be long-term
capital gain or loss if the United States 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 noncorporate
United States holders (including individuals) are currently
subject to United States federal income tax rates. There are
presently no preferential tax rates for long-term capital gains
of a United States holder that is a corporation. 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 the then effective rate (currently a
maximum rate of 28%) 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).
Surtax on Certain Net Investment
Income. Recent legislation requires certain
United States holders who are individuals, estates or trusts to
pay an additional 3.8% tax on, among other things, dividends and
capital gains from the sale or other disposition of our common
stock for taxable years beginning after December 31, 2012.
United States holders should consult their tax advisors
regarding the effect, if any, of this legislation on their
ownership and disposition of our common stock.
Non-United
States Holders
The following is a summary of certain United States federal
income considerations for a holder of our common stock that is a
non-United
States holder. 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.
Distributions. A distribution with respect to
our common stock of cash or property generally will constitute a
dividend to the extent of our current or accumulated earnings
and profits (as determined under United States federal income
tax principles). To the extent that a distribution exceeds our
current and accumulated earnings and profits, such distribution
will be a tax-free return of capital to the extent of a
holders tax basis in our common stock and thereafter as
gain from the sale or exchange of common stock. In general,
dividends paid to a
non-United
States holder will be subject to withholding of United States
federal income tax at a 30% 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 the
non-United
States holders conduct of a trade or business within the
United States are generally exempt from the withholding tax
(assuming, if required by an applicable tax treaty, that the
dividends are attributable to a permanent establishment
maintained by such
non-United
States holder within the United States), provided certain
certification and disclosure requirements are satisfied.
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.
Any such effectively connected dividends received by a foreign
corporation may also be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be
provided for in an applicable income tax treaty.
We plan to withhold United States income tax at the rate of 30%
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 completes and provides to us IRS
Form W-8BEN
(or successor form) properly certifying qualifications for the
reduced rate or (2) the
non-United
States holder completes and provides to us an IRS
Form W-8ECI
(or successor form) claiming that the distribution is
effectively connected income. Special rules apply to claims for
164
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. A
non-United
States holder 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:
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the gain is effectively connected with a trade or business of
the
non-United
States Holder in the United States, and, where a tax treaty
applies, is attributable to a permanent establishment in the
United States;
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the
non-United
States holders is 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
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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.
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A non-United
States holder described in the first bullet immediately above
will, generally, be subject to United States federal income
tax on net gain that is effectively connected with the conduct
of a trade or business within the United States and 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.
An individual
non-United
States Holder described in the second bullet point immediately
above will, generally, be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by United States
source capital losses provided that the
non-United
States holder has timely filed United States federal income tax
returns with respect to such losses.
Information Reporting and Backup
Withholding. We will be required to report
annually to the IRS and to each
non-United
States holder the amount of dividends paid to such holder and
any tax withheld on such dividends. 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 the
non-United
States holder resides.
Backup withholding at the then effective rate will apply to
dividends paid to a
non-United
States holder unless such holder satisfies 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
non-United
States holders 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) such
non-United
States holder certifies under penalties of perjury in accordance
with specified procedures that such holder is a
non-United
States holder and (b) the payor does not have actual
knowledge that such holder is a United States person or
(2) an exemption is otherwise established.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against such
non-United
States holders United States federal income tax liability
provided the required information is timely furnished to the IRS.
Payments to Foreign Financial Institutions and other
non-United
States Entities. Newly enacted legislation may
impose withholding taxes on certain types of payments made to
foreign financial institutions and certain other
non-United
States entities. Under this legislation, the failure to comply
with additional certification, information reporting and other
specified requirements could result in withholding tax being
imposed on payments
165
of dividends and sales proceeds to foreign intermediaries and
certain
non-United
States holders. The legislation imposes a 30% withholding tax on
dividends and gross proceeds from the sale or other disposition
of our common stock, paid to a foreign financial institution or
to a foreign non-financial entity, unless (i) the foreign
financial institution undertakes certain diligence and reporting
obligations or (ii) the foreign non-financial entity either
certifies it does not have any substantial United States owners
or furnishes identifying information regarding each substantial
United States owner. If the payee is a foreign financial
institution, it must enter into an agreement with the United
States Treasury requiring, among other things, that it
undertakes to identify accounts held by certain United States
persons or United States-owned foreign entities, annually report
certain information about such accounts and withhold 30% on
payments to account holders whose actions prevent it from
complying with these reporting and other requirements. The
legislation applies to payments made after December 31,
2012. Prospective investors should consult their tax advisors
regarding this legislation.
166
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 we and
the selling stockholders have agreed to sell to them, severally,
the number of shares indicated below:
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Number of
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Name
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Shares
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Morgan Stanley & Co. Incorporated
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Deutsche Bank Securities Inc.
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Total
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The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and 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.
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Per Share
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Total
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Without
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With
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Without
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With
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Over-
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Over-
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Over-
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Over-
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Allotment
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Allotment
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Allotment
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Allotment
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Public offering price
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$
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$
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$
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$
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Underwriting discounts and commissions paid by:
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Us
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$
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$
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$
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$
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The selling stockholders
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$
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$
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$
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$
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Proceeds, before expenses, to:
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Us
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$
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$
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$
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$
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The selling stockholders
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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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.
167
Application has been made to have the common stock approved for
quotation on the New York Stock Exchange 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:
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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
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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;
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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:
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the sale of shares to the underwriters;
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transactions relating to shares of common stock or other
securities acquired in open-market transactions after completion
of our initial public offering;
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transfers of shares of common stock or any security convertible
into common stock as a bona fide gift;
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distributions of shares of common stock or any security
convertible into common stock to limited partners or
stockholders;
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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;
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transfers of shares of Common Stock to any affiliated entities
of the transferor; or
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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.
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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.
168
GAIN Capital Group, LLC, one of our subsidiaries, has formed a
liquidity relationship with Deutsche Bank AG, London Branch, an
affiliate of Deutsche Bank Securities Inc., by entering into an
ISDA agreement with Deutsche Bank AG, London Branch. For more
details regarding ISDA agreements and liquidity relationships,
see Business Our Forex Trading
Business Relationships with Wholesale Forex Trading
Partners above.
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.
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 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 DLA
Piper LLP (U.S.), Florham Park, New Jersey 07932. Davis
Polk & Wardwell LLP, New York, New York 10017, 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, 2008 and 2009, and for each of
the three years in the period ended December 31, 2009,
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
169
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.
170
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,
2008 and 2009, 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, 2009. 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,
2008 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
September 27, 2010
F-2
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except share and per share data)
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
176,431
|
|
|
$
|
222,524
|
|
Short term investments
|
|
|
|
|
|
|
4,276
|
|
Trading securities
|
|
|
25,001
|
|
|
|
25,040
|
|
Receivables from brokers
|
|
|
50,816
|
|
|
|
76,391
|
|
Property and equipment (net of accumulated
depreciation and amortization of $5,278 and $7,054 at
December 31, 2008 and 2009, respectively)
|
|
|
3,937
|
|
|
|
6,843
|
|
Prepaid assets
|
|
|
1,632
|
|
|
|
2,044
|
|
Deferred financing costs
|
|
|
313
|
|
|
|
226
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
1,732
|
|
Goodwill
|
|
|
3,092
|
|
|
|
3,092
|
|
Intangible assets (net of accumulated amortization
of $609 at December 31, 2008 and 2009)
|
|
|
320
|
|
|
|
320
|
|
Other assets (net of allowance for doubtful accounts
of $2,213 and $332 at December 31, 2008 and 2009,
respectively)
|
|
|
3,274
|
|
|
|
9,452
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,816
|
|
|
$
|
351,940
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
Liabilities
|
|
|
|
|
|
|
|
|
Payables to brokers, dealers, FCMs and other regulated entities
|
|
$
|
1,679
|
|
|
$
|
2,769
|
|
Payables to customers
|
|
|
122,293
|
|
|
|
196,985
|
|
Accrued compensation and benefits
|
|
|
5,282
|
|
|
|
4,040
|
|
Accrued expenses and other liabilities
|
|
|
5,627
|
|
|
|
8,673
|
|
Income tax payable
|
|
|
10,539
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
82,785
|
|
|
|
81,098
|
|
Notes payable
|
|
|
39,375
|
|
|
|
28,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
267,580
|
|
|
|
322,440
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 15)
|
|
|
|
|
|
|
|
|
Convertible, Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
Series A Convertible, Redeemable Preferred Stock;
($0.00001 par value; 4,545,455 shares authorized;
865,154 shares issued and outstanding as of
December 31, 2008 and 2009)
|
|
|
2,009
|
|
|
|
2,009
|
|
Series B Convertible, Redeemable Preferred Stock;
($0.00001 par value; 7,000,000 shares authorized;
2,610,210 shares issued and outstanding as of
December 31, 2008 and 2009)
|
|
|
5,412
|
|
|
|
5,412
|
|
Series C Convertible, Redeemable Preferred Stock;
($0.00001 par value; 2,496,879 shares authorized;
1,055,739 shares issued and outstanding as of
December 31, 2008 and 2009)
|
|
|
5,319
|
|
|
|
5,319
|
|
Series D Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,254,678 shares authorized,
issued and outstanding as of December 31, 2008 and 2009)
|
|
|
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 and 2009)
|
|
|
116,810
|
|
|
|
116,810
|
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
169,390
|
|
|
|
169,390
|
|
|
|
|
|
|
|
|
|
|
GAIN Capital Holdings, Inc. Shareholders Deficit
|
|
|
|
|
|
|
|
|
Common Stock; ($0.00001 par value; 27 million shares
authorized; 1,304,029 and 1,311,649 shares issued and
outstanding as of December 31, 2008 and 2009, respectively)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
21
|
|
|
|
348
|
|
Additional paid-in capital
|
|
|
(182,891
|
)
|
|
|
(178,409
|
)
|
Retained earnings
|
|
|
10,201
|
|
|
|
38,195
|
|
|
|
|
|
|
|
|
|
|
Total GAIN Capital Holdings, Inc. shareholders
deficit
|
|
|
(172,669
|
)
|
|
|
(139,866
|
)
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
515
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(172,154
|
)
|
|
|
(139,890
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,816
|
|
|
$
|
351,940
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except share and
|
|
|
|
per share data)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
118,176
|
|
|
$
|
186,004
|
|
|
$
|
153,375
|
|
Other revenue
|
|
|
437
|
|
|
|
2,366
|
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
118,613
|
|
|
|
188,370
|
|
|
|
155,483
|
|
Interest revenue
|
|
|
5,024
|
|
|
|
3,635
|
|
|
|
292
|
|
Interest expense
|
|
|
(4,299
|
)
|
|
|
(3,905
|
)
|
|
|
(2,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest revenue (expense)
|
|
|
725
|
|
|
|
(270
|
)
|
|
|
(2,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
119,338
|
|
|
|
188,100
|
|
|
|
153,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
25,093
|
|
|
|
37,024
|
|
|
|
41,503
|
|
Selling and marketing
|
|
|
21,836
|
|
|
|
29,312
|
|
|
|
36,875
|
|
Trading expenses and commissions
|
|
|
10,436
|
|
|
|
16,310
|
|
|
|
14,955
|
|
Bank fees
|
|
|
2,316
|
|
|
|
3,754
|
|
|
|
4,466
|
|
Depreciation and amortization
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
2,689
|
|
Communications and data processing
|
|
|
1,659
|
|
|
|
2,467
|
|
|
|
2,676
|
|
Occupancy and equipment
|
|
|
1,616
|
|
|
|
2,419
|
|
|
|
3,548
|
|
Bad debt provision
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
760
|
|
Professional fees
|
|
|
1,380
|
|
|
|
3,104
|
|
|
|
3,729
|
|
Software expense
|
|
|
123
|
|
|
|
888
|
|
|
|
1,132
|
|
Professional dues and memberships
|
|
|
187
|
|
|
|
773
|
|
|
|
698
|
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
Other
|
|
|
(627
|
)
|
|
|
1,424
|
|
|
|
1,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
232,374
|
|
|
|
(78,496
|
)
|
|
|
113,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN
EARNINGS OF EQUITY METHOD INVESTMENT
|
|
|
(113,036
|
)
|
|
|
266,596
|
|
|
|
40,229
|
|
Income tax expense
|
|
|
21,615
|
|
|
|
34,977
|
|
|
|
12,556
|
|
Equity in earnings of equity method investment
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
(134,651
|
)
|
|
|
231,405
|
|
|
|
27,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to noncontrolling interest
|
|
|
|
|
|
|
(21
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS,
INC.
|
|
|
(134,651
|
)
|
|
|
231,426
|
|
|
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
28
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS)
|
|
|
(134,651
|
)
|
|
|
231,454
|
|
|
|
28,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income applicable to noncontrolling interest, net
of tax
|
|
|
|
|
|
|
7
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL
HOLDINGS, INC.
|
|
$
|
(134,651
|
)
|
|
$
|
231,447
|
|
|
$
|
28,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
$
|
(63,913
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
21.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,307,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
14,909,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
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 and per share data)
|
|
|
BALANCE January 1, 2007
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
3,508
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Conversion restricted stock units into common stock
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from employee exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,609
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
(39
|
)
|
|
|
288
|
|
Increase in noncontrolling interest related to acquisition of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
(1,314
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,994
|
|
|
|
|
|
|
|
(321
|
)
|
|
|
27,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
|
1,311,649
|
|
|
$
|
|
|
|
$
|
(178,409
|
)
|
|
$
|
38,195
|
|
|
$
|
348
|
|
|
$
|
(24
|
)
|
|
$
|
(139,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(134,651
|
)
|
|
$
|
231,405
|
|
|
$
|
27,673
|
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange transactions liquidity
providers and customers
|
|
|
2,740
|
|
|
|
1,776
|
|
|
|
(7,706
|
)
|
Loss on foreign currency exchange rates
|
|
|
|
|
|
|
191
|
|
|
|
28
|
|
Depreciation and amortization
|
|
|
1,911
|
|
|
|
2,496
|
|
|
|
2,689
|
|
Litigation settlement
|
|
|
(1,479
|
)
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
(1,538
|
)
|
|
|
(932
|
)
|
|
|
(1,787
|
)
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
89
|
|
|
|
89
|
|
|
|
87
|
|
Interest income
|
|
|
|
|
|
|
(183
|
)
|
|
|
(77
|
)
|
Bad debt provision
|
|
|
1,164
|
|
|
|
1,418
|
|
|
|
1,101
|
|
Loss in earnings of equity method investment
|
|
|
|
|
|
|
214
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
23
|
|
|
|
91
|
|
|
|
353
|
|
Stock compensation expense
|
|
|
1,657
|
|
|
|
4,492
|
|
|
|
5,609
|
|
Tax benefit from employee stock option exercises
|
|
|
|
|
|
|
(10,709
|
)
|
|
|
|
|
Change in fair value of preferred stock embedded derivative
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
(4,276
|
)
|
Trading securities
|
|
|
|
|
|
|
(24,817
|
)
|
|
|
37
|
|
Receivables from brokers
|
|
|
(4,983
|
)
|
|
|
22,620
|
|
|
|
(26,068
|
)
|
Prepaid assets
|
|
|
(152
|
)
|
|
|
(849
|
)
|
|
|
(412
|
)
|
Other assets
|
|
|
(615
|
)
|
|
|
(3,043
|
)
|
|
|
(2,426
|
)
|
Current tax receivable
|
|
|
4,874
|
|
|
|
|
|
|
|
(3,646
|
)
|
Deferred initial public offering costs
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
Payables to customers
|
|
|
35,473
|
|
|
|
13,528
|
|
|
|
81,312
|
|
Accrued compensation and benefits
|
|
|
1,453
|
|
|
|
354
|
|
|
|
(1,242
|
)
|
Payables to brokers, dealers, FCMs and other regulated entities
|
|
|
(3,085
|
)
|
|
|
(483
|
)
|
|
|
1,090
|
|
Accrued expenses and other liabilities
|
|
|
871
|
|
|
|
939
|
|
|
|
2,013
|
|
Income tax payable
|
|
|
8,742
|
|
|
|
12,505
|
|
|
|
(10,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
77,774
|
|
|
|
69,320
|
|
|
|
62,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,719
|
)
|
|
|
(2,679
|
)
|
|
|
(4,059
|
)
|
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
|
)
|
|
|
|
|
Purchase of subsidiary shares from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(2,528
|
)
|
|
|
(3,792
|
)
|
|
|
(5,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,296
|
)
|
Payment on notes payable
|
|
|
(7,625
|
)
|
|
|
(10,500
|
)
|
|
|
(10,500
|
)
|
Proceeds from exercise of stock options
|
|
|
70
|
|
|
|
1,686
|
|
|
|
8
|
|
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
|
|
|
|
|
|
|
10,709
|
|
|
|
|
|
Repurchase of warrants
|
|
|
|
|
|
|
(3,945
|
)
|
|
|
|
|
Repurchase of common shares
|
|
|
(30,000
|
)
|
|
|
(40,752
|
)
|
|
|
|
|
Repurchase of preferred shares
|
|
|
|
|
|
|
(62,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
(7,828
|
)
|
|
|
12,062
|
|
|
|
(11,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
(53
|
)
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
67,418
|
|
|
|
77,537
|
|
|
|
46,093
|
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
31,476
|
|
|
|
98,894
|
|
|
|
176,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
98,894
|
|
|
$
|
176,431
|
|
|
$
|
222,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,093
|
|
|
$
|
3,959
|
|
|
$
|
2,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
9,524
|
|
|
$
|
20,731
|
|
|
$
|
28,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease of property and equipment
|
|
|
|
|
|
$
|
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in S.L. Bruce Financial Corporation in accrued
expenses and other liabilities
|
|
|
|
|
|
$
|
325
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual to acquire additional shares of GAIN Capital Japan Co
Ltd.
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
$
|
42
|
|
|
|
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of call option liability
|
|
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-7
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
1.
|
Nature of
Operations and Significant Accounting Policies
|
Nature
of Operations
GAIN Capital Holdings, Inc. and subsidiaries (the
Company) 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.
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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.
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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 strategically
expanded its operations from 2007 to 2009:
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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 20 for additional information.
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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.
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F-8
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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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.
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Group, LLC entered into a joint venture with Rosenthal Collins
Group (RCG), a leading independent futures clearing
firm, that was approved by the U.K. Financial Services Authority
(U.K. FSA) effective January 2008 in which Group,
LLC and RCG each owned a 50% interest in RCG GAIN Limited
(RCGGL). On December 22, 2008, Group, LLC
acquired RCGs 50% interest in RCGGL. 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).
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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 name
of State Discount Brokers, Inc. to GAIN Capital Securities, Inc.
(GCSI).
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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. On October 1, 2009, the Company
purchased an additional 196 shares of FORTUNE, increasing
the ownership interest from 51% to 70% of the outstanding
shares. 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 (Japan
FSA). FORTUNE was subsequently renamed GAIN Capital
Forex.com Japan (GC Japan).
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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.
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The Company incorporated GAIN Capital Forex.com
Singapore Pte Ltd. in January 2009.
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The Company incorporated GAIN Capital Forex.com
Australia Pty Ltd. in October 2009.
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2.
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Summary
of Significant Accounting Policies
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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).
Reclassification
Certain balances have been reclassified to conform with the
current year presentation. These include the reclassification of
$3.7 million, $2.7 million, and $1.7 million for
the year ended December 31, 2007, 2008 and 2009,
respectively, from interest expense on notes payable to interest
expense in the net interest revenue (expense) category on the
Consolidated Statements of Operations and Comprehensive Income
(Loss).
We have reclassified $25.0 million from Receivables from
Brokers to Trading Securities on our Consolidated
Statements of Financial Condition at December 31, 2008.
This reclassification was made to reflect an immaterial
misstatement in trading securities previously classified within
Receivables from Brokers. This change has no effect
F-9
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on our previously reported Consolidated Statements of Operations
and Comprehensive Income/(Loss), Consolidated Statements of Cash
Flows, or GAIN Capital Group, LLCs net capital calculation.
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 FASB
ASC 810-10,
Consolidation (FASB Interpretation No. 46R
(FIN 46R), Consolidation of Variable
Interest Entities, and Accounting Research Bulletin
(ARB 51), Consolidated Financial
Statements), 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.
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 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:
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Valuation of assets and liabilities requiring fair value
estimates;
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The allowance for doubtful accounts;
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The realization of deferred taxes;
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The carrying amount of goodwill and other intangible assets;
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The amortization period of intangible assets with definite lives;
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Incentive based compensation accruals and valuation of
share-based payment arrangements; and
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Other matters that affect the reported amounts and disclosure of
contingencies in the consolidated financial statements.
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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 Companys revenue is derived from our activities as a
market maker to our retail customers, where we act as the
counterparty to our customers trades. Revenue is
recognized in accordance with
ASC 605-10-S99,
Revenue Recognition (Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition). The
Company generates revenue from forex trading. SAB 104
requires that four basic criteria must be met before revenue can
be
F-10
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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) collectability 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 (expense)
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 and interest expense on
notes payable.
Advertising
Advertising costs are incurred for the production and
communication of advertising, as well as other marketing
activities. The Company expenses the cost of advertising as
incurred, except for costs related to the production of
broadcast advertising, which are expensed when the first
broadcast occurs. The Company did not capitalize any production
costs associated with broadcast advertising for 2007, 2008, or
2009.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of 90 days or less at the time of
acquisition 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. At December 31, 2008 and
2009, the Companys cash equivalents consisted of money
market accounts and U.S. Government short-term securities.
All cash and cash equivalents and are carried at amounts that
approximate fair value.
Short
Term Investments
The Company considers all investments with an original maturity
of less than one year short term investments. Short term
investments consist of short-term certificates of deposit and
approximate fair value. All income from the certificates of
deposit is recorded as interest income when earned.
Trading
Securities
Trading securities consist of U.S. Treasury Bills and
equity securities and are reported at fair value, with
unrealized gains or losses resulting from changes in fair value
recognized as other income, net in the Consolidated Statements
of Operations and Comprehensive Income/(Loss).
F-11
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value
The carrying amounts of assets, excluding goodwill, and
liabilities approximate their fair values due to the short term
maturities. Some of the Companys financial instruments are
not measured at fair value on a recurring basis but nevertheless
are recorded at amounts that approximate fair value. Such
financial assets and liabilities include: cash, receivables from
broker, other assets, payables to customers, and accrued
expenses and other liabilities. The carrying amount of
borrowings under the revolving credit agreement approximates
fair value since the long-term debt bears interest at variable
rates. The fair value of the Convertible Notes and term loan is
based on transaction prices. The fair value of interest rate
protection agreements and foreign currency forward contracts are
determined based the estimated amounts that such contracts could
be settled with the counterparty at the balance sheet date.
Concentrations
of Credit Risk
Financial instruments that subject the Company to credit risk
primarily consist of cash equivalents. The Companys credit
risk is managed by investing cash and cash equivalents primarily
in high-quality money market and U.S. Government
instruments. The majority of the Companys cash and cash
equivalents are held at ten financial institutions.
Prepaid
Assets
The Company records goods and services paid for but not to be
received until a future date as prepaid assets. 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 recorded 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:
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Purchased software
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3 years
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Furniture and fixtures
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3 years
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Leasehold improvements
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Shorter of lease term or estimated useful life
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Telephone equipment
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3 years
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Office equipment
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3 years
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Vehicles
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5 years
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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.
F-12
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 FASB
ASC 830-10,
Foreign Currency Matters
(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 gain of $0.2 million for the year
ended December 31, 2007 and a loss of $0.2 million and
$0.03 million for the years ended December 31, 2008
and 2009, respectively.
Intangible
Assets
FASB ASC 350, Intangibles Goodwill and Other
(SFAS No. 142, Goodwill and Other
Intangible Assets) 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 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 indicate that an impairment
may have occurred. See Note 6 for additional information.
Goodwill
In accordance with FASB
ASC 350-10
(SFAS No. 142 Goodwill and Other
Intangible Assets), 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, GC Japan, and GCUK. No amount of goodwill is
expected to be deductible for tax purposes. See Note 7 for
additional information.
Other
Assets
The Company recorded receivables from affiliates, vendors, a
credit card processing service and lead deposits in Other
assets on the Consolidated Statements of Financial
Condition. See Note 8 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.
F-13
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The allowance for doubtful accounts consisted of the following
(amounts in thousands):
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Balance as of January 1, 2007
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$
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(348
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)
|
Addition to provision
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(1,209
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)
|
Amounts written off
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428
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|
Balance as of December 31, 2007
|
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|
(1,129
|
)
|
Addition to provision
|
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|
(1,418
|
)
|
Amounts written off
|
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|
334
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
(2,213
|
)
|
Addition to provision
|
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|
(1,101
|
)
|
Amounts written off
|
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|
2,641
|
|
Recoveries
|
|
|
341
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|
|
|
|
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Balance as of December 31, 2009
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|
$
|
(332
|
)
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Long-Lived
Assets
In accordance with FASB
ASC 360-10,
Property, Plant and Equipment
(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.
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.
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.
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 GAIN
Capital Forex.com Japan as of December 31, 2009.
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.
F-14
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
(SFAS No. 133 Accounting for
Derivatives and Hedging Activities), 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.
Share
Based Payment
In accordance with FASB ASC 718, Stock Compensation,
the Company recognizes all share-based payments to
employees, including grants of employee stock options, in the
Statements of Operations and Comprehensive Income based on their
fair values.
FASB
ASC 718-10
requires measurement of share based payment arrangements at fair
value and recognition of compensation cost over the service
period, net of estimated forfeitures. The fair value of
restricted 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 13 for additional share based payment 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 17 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 37 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 relative 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
F-15
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 forex liquidity
pool.
Litigation
The Company contests liability
and/or the
amount of damages as appropriate in each pending matter. Where
available information indicates that it is probable a liability
had been incurred at the date of the condensed consolidated
financial statements and the Company can reasonably estimate the
amount of that loss, the Company accrues the estimated loss by a
charge to income. In many proceedings, however, it is inherently
difficult to determine whether any loss is probable or even
possible or to estimate the amount of any loss. In addition,
even where loss is possible or an exposure to loss exists in
excess of the liability already accrued with respect to a
previously recognized loss contingency, it is not possible to
reasonably estimate the size of the possible loss or range of
loss.
For certain legal proceedings, the Company can estimate possible
losses, additional losses, ranges of loss or ranges of
additional loss in excess of amounts accrued, but does not
believe, based on current knowledge and after consultation with
counsel, such losses will have a material adverse effect on the
Companys results of operations, cash flows or financial
condition. For certain other legal proceedings, the Company
cannot reasonably estimate such losses, if any, since the
Company cannot predict if, how or when such proceedings will be
resolved or what the eventual settlement, fine, penalty or other
relief, if any, may be, particularly for proceedings that are in
their early stages of development or where plaintiffs seek
substantial or indeterminate damages. Numerous issues must be
developed, including the need to discover and determine
important factual matters and the need to address novel or
unsettled legal questions relevant to the proceedings in
question, before a loss or additional loss or range of loss or
additional loss can be reasonably estimated for any proceeding.
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 $0.1 million
as well as costs incurred during the year ended
December 31, 2008 of $1.9 million.
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)
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 reporting period ending after
September 15, 2009. The Company adopted
SFAS No. 168 in the third quarter of 2009 and
references to both GAAP and the Codification are included in
this filing.
In June 2009, the FASB issued 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 is
effective January 1, 2010. The adoption of
SFAS No. 167 by the Company in January 1, 2010
did not have a material impact on the Companys
consolidated financial statements.
F-16
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 and
has included the required disclosures in the 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
during the second quarter of 2009 did not have a material impact
on the Companys consolidated financial statements.
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
during the third quarter of 2008 did not have a material effect
on the Companys consolidated financial statements.
In April 2008, the FASB issued FASB
ASC 350-30
(FSP
SFAS 142-3,
Determination of the Useful Life of Intangible Assets).
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 adoption of FSP
SFAS No. 142-3
during 2008 did not have a material effect on the Companys
consolidated financial statements.
In March 2008, the FASB issued FASB
ASC 815-10-65,
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 and
has included the required disclosures in the 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
F-17
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and has included the noncontrolling interest in GAIN Capital
Forex.com Japan, Co. Ltd. as equity in the consolidated
financial statements.
In December 2007, the FASB issued SFAS 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.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after
December 15, 2008. The Company adopted
SFAS No. 141R during 2009 and will apply the guidance
to future acquisitions
|
|
3.
|
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, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Netting(1)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43
|
|
U.S. treasury securities
|
|
$
|
24,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,997
|
|
Futures contracts
|
|
$
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
$
|
182
|
|
|
$
|
39
|
|
Investment in gold
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
|
|
|
|
|
|
|
$
|
81,098
|
|
|
|
|
|
|
$
|
81,098
|
|
|
|
|
(1)
|
|
Represents cash collateral netting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
|
as of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Netting(1)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5
|
|
U.S. treasury securities
|
|
$
|
24,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,996
|
|
Futures contracts
|
|
$
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
$
|
190
|
|
|
$
|
26
|
|
Investment in gold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
|
as of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Netting(1)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
|
|
|
|
|
|
|
$
|
82,785
|
|
|
|
|
|
|
$
|
82,785
|
|
Level 1
Financial Assets
The Company has equity securities, U.S. treasury
securities, futures contracts and an investment in gold that are
Level 1 financial instruments that are recorded based upon
listed or quoted market rates. The equity securities and
U.S. treasury securities are classified as trading
securities and are recorded in Trading securities and the
futures contracts and investment in gold are recorded in
Receivables from brokers.
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 10 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, 2009 (amounts in thousands):
|
|
|
|
|
Beginning January 1, 2009
|
|
$
|
82,785
|
|
Unrealized gain included in change in fair value of convertible,
redeemable preferred stock embedded derivative
|
|
|
(1,687
|
)
|
Purchases, issuances and settlements
|
|
|
|
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
81,098
|
|
|
|
|
|
|
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 2009.
|
|
4.
|
Receivables
From Brokers
|
Amounts receivable from brokers consisted of the following at
December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Required collateral
|
|
$
|
1,687
|
|
|
$
|
15,080
|
|
Cash in excess of required collateral
|
|
|
48,598
|
|
|
|
60,724
|
|
Open foreign exchange positions
|
|
|
531
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,816
|
|
|
$
|
76,391
|
|
|
|
|
|
|
|
|
|
|
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 of $0.04 million recorded based upon listed or
quoted market rates that approximate fair value at
December 31, 2009. 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
F-19
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated financial statements. These amounts are reflected
as Receivables from brokers in the Consolidated
Statements of Financial Condition.
|
|
5.
|
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):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Software
|
|
$
|
5,419
|
|
|
$
|
7,846
|
|
Computer equipment
|
|
|
3,048
|
|
|
|
3,801
|
|
Leasehold improvements
|
|
|
243
|
|
|
|
1,235
|
|
Telephone equipment
|
|
|
146
|
|
|
|
609
|
|
Office equipment
|
|
|
159
|
|
|
|
226
|
|
Furniture and fixtures
|
|
|
145
|
|
|
|
93
|
|
Web site development costs
|
|
|
43
|
|
|
|
87
|
|
Vehicles
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,215
|
|
|
|
13,897
|
|
Less: Accumulated depreciation and amortization
|
|
|
(5,278
|
)
|
|
|
(7,054
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,937
|
|
|
$
|
6,843
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.5 million, $2.3 million,
and $2.7 million for the years ended December 31,
2007, 2008 and 2009, respectively.
In 2003, the Company acquired the Forex.com domain name for
$0.2 million, and in 2004, the foreignexchange.com domain
name was purchased for $0.1 million. 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 FASB
ASC 350-10
(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
$0.8 million that is being amortized over its useful life,
with an amortization period no longer than 18 months.
Amortization of $0.4 million and $0.2 million 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.
As of December 31, 2008 and 2009, the accumulated
amortization related to intangibles was $0.6 million.
Intangible assets consisted of the following (amounts in
thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
929
|
|
Amortization of marketing list
|
|
|
(406
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
523
|
|
Amortization of marketing list
|
|
|
(203
|
)
|
|
|
|
|
|
Balance at December 31, 2008 and 2009
|
|
$
|
320
|
|
|
|
|
|
|
F-20
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008 and 2009 (amounts in thousands):
|
|
|
|
|
GC Japan (formerly FORTUNE)
|
|
$
|
1,278
|
|
GCAM, LLC
|
|
|
1,078
|
|
GAIN Capital Securities, Inc. (formerly State Discount Brokers,
Inc.)
|
|
|
533
|
|
GAIN Capital Forex.com U.K., Ltd (formerly RCGGL)
|
|
|
203
|
|
|
|
|
|
|
|
|
$
|
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, 2008 and 2009, the goodwill associated with
the acquisition was $1.1 million.
The joint venture, entered into on December 20, 2007 and
known as RCGGL, received regulatory approval from the U.K.
Financial Services Authority (U.K. 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
$0.2 million. RCG owned 50% 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 U.K., Ltd.
The Company acquired GAIN Capital Securities, Inc. on
October 3, 2008, generating $0.5 million in goodwill
from the transaction.
Goodwill associated with the acquisition of 51% of the
outstanding shares of GC Japan in December 2008 amounted to
$1.3 million. In October 2009, the Company acquired an
additional 19% of GC Japan per the purchase agreement for
$1.3 million. The Company may acquire up to 95% of the
outstanding shares of GC Japan after the second tranche has been
executed, but no later than December 31, 2011.
The following schedule summarizes the effects of changes in the
Companys ownership interest in GC Japan on the
Companys equity (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Net income attributable to GAIN Capital Holdings, Inc.
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
Transfers to the noncontrolling interest
|
|
|
|
|
|
|
|
|
Decrease in GAIN Capital Holdings, Inc.s paid-in capital
for purchase of 196 GC Japan common shares
|
|
|
|
|
|
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to GAIN Capital Holdings
Inc. and transfers to noncontrolling interest
|
|
$
|
231,426
|
|
|
$
|
26,858
|
|
|
|
|
|
|
|
|
|
|
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. 141R, 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,
2007, 2008 and 2009.
F-21
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other assets consisted of the following at December 31 (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Vendor and security deposits
|
|
$
|
2,807
|
|
|
$
|
3,371
|
|
Customer receivable balances, net of allowance for doubtful
accounts
|
|
|
82
|
|
|
|
|
|
Current tax receivable
|
|
|
|
|
|
|
3,646
|
|
Deferred tax receivable
|
|
|
90
|
|
|
|
1,893
|
|
Miscellaneous receivables
|
|
|
295
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,274
|
|
|
$
|
9,452
|
|
|
|
|
|
|
|
|
|
|
The Company entered into a Loan and Security Agreement with
Silicon Valley Bank and JPMorgan Chase (the Loan)
for $30 million 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, 2009 was 4.75%.
On October 16, 2006, a loan modification was made to add a
revolving credit line of $5 million. 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 million to
$10 million. The Company had a zero balance due under the
advance line of credit for the years ended December 31,
2007, 2008, and 2009.
On June 6, 2007, a third loan modification increased the
loan amount to $52.5 million. 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 million from
$10 million, 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 ratio. The Company
was in compliance with all financial covenants at
December 31, 2008 and 2009. The carrying amount of notes
payable approximates fair value. The
F-22
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company had a balance of $39.4 million and
$28.9 million outstanding on the Loan as of
December 31, 2008 and 2009, respectively, with future
maturities of the notes payable as follows (amounts in
thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
2010
|
|
$
|
10,500
|
|
2011
|
|
|
10,500
|
|
2012
|
|
|
7,875
|
|
|
|
|
|
|
|
|
$
|
28,875
|
|
|
|
|
|
|
Loan fees were capitalized to deferred finance costs and are
being amortized over the life of the loan. The Company
capitalized loan costs of $0.3 million in 2007 and $0 in
2008 and 2009. Deferred loan costs amortized to interest expense
were $0.1 million for the years ended December 31,
2007, 2008 and 2009, respectively. The Company had Deferred
financing costs on the Consolidated Statements of Financial
Condition of $0.3 million and $0.2 million at
December 31, 2008 and 2009, respectively.
|
|
10.
|
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.
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. 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.
F-23
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants totaling 1,458,335 to purchase Series B remain
outstanding as of December 31, 2008 and 2009, 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 has authorized and issued
3,254,678 shares of convertible, redeemable Series D
Preferred Stock for $40 million.
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.
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 $117 million, incurring
$0.2 million 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.
F-24
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 of
directors determines that the fully diluted equity value of the
Company exceeds $400 million. 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, 2009, 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.
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.
F-25
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
$
|
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 shareholders 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,
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
F-26
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 loss on
the preferred stock embedded derivative amounted to
$165.3 million December 31, 2007 and the gains on the
embedded derivative amounted to $181.8 million and
$1.7 million at December 31, 2008 and 2009,
respectively.
The following summarizes the preferred stock conversion value by
preferred stock share class as of December 31 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Preferred stock series A
|
|
$
|
13,317
|
|
|
$
|
14,308
|
|
Preferred stock series B
|
|
|
38,634
|
|
|
|
41,490
|
|
Preferred stock series C
|
|
|
13,562
|
|
|
|
14,471
|
|
Preferred stock series D
|
|
|
14,902
|
|
|
|
10,462
|
|
Preferred stock series E
|
|
|
2,370
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,785
|
|
|
$
|
81,098
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Shareholders
Deficit
|
Common Stock At December 31, 2008 and
2009, the Company had authorized 27,000,000 shares of
Common Stock (Common Stock), of which 1,304,029 and
1,311,649 shares were issued and outstanding at
December 31, 2008 and 2009, respectively.
The net proceeds from the issuance of Series E Preferred
Stock during 2008 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.
|
|
12.
|
Related
Party Transactions
|
In 2005, the Group, LLC purchased a 20.36% interest in GCAM,
LLC. 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 of
directors, and Glenn Stevens, the Companys CEO.
The Company recorded $0.9 million 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 $0.8 million
allocated toward the purchase price with the remainder
recognized in expense as the restricted stock units vest.
Restricted units were immediately unrestricted as
F-27
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
per the term of the purchase agreement, or they continue to
unrestrict over 27 months. The Company recorded
$0.1 million and $0.1 million 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 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 $0.1 million 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 $1.2 million 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 $1.2 million account balance and
$0.05 million 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 (now known as GAIN
Capital Forex.com Japan). The Company had a receivable of
$0.1 million 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 $0.3 million is included in Accrued
expenses and other liabilities on the Consolidated
Statements of Financial Condition at December 31, 2008.
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
$1.2 million, and $2.9 million at December 31,
2008, and 2009, respectively, with $31,680, $13,327 and $1,772
of interest paid for the years ended December 31, 2007,
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
$14,475 per month. Per its terms, the agreement automatically
renewed for an additional one year and is set to expire on
December 31, 2010. 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 of directors members, Messrs. Galant and Sugden, are
members of the board of directors of Scivantage.
On March 27, 2006, the Companys shareholders approved
the GAIN Capital Holdings, Inc. 2006 Equity Incentive Plan (the
Plan), under which 4.93 million shares are
available for awards to employees, consultants and directors.
The Plan provides for the issuance of share based award which
include restricted stock units (RSUs), Incentive
Stock Options (ISOs), and nonqualified stock options
(NQSQs). ISOs are granted at fair market value and
are subject to the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended. All share based
awards are granted at a price or conversion price determined by
the Companys board of directors. Grants of ISOs and NQSQs
usually vest over a three years with one-third vesting upon
anniversary date. RSUs usually vest over four years with
one-fourth vesting upon the grant anniversary. All options
granted under these plans expire ten years from the date of
grant.
F-28
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following table summarizes the stock option activity under
all plans from January 1, 2009 through December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding, January 1, 2009
|
|
|
1,554,099
|
|
|
$
|
3.90
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,508
|
)
|
|
|
2.26
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(516
|
)
|
|
|
5.86
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
1,550,075
|
|
|
$
|
3.90
|
|
|
|
5.03
|
|
|
$
|
23,251,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest options
|
|
|
1,550,075
|
|
|
$
|
3.90
|
|
|
|
5.03
|
|
|
$
|
23,251,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
1,550,075
|
|
|
$
|
3.90
|
|
|
|
5.03
|
|
|
$
|
23,251,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value of common stock at exercise date
|
|
$
|
85,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost to exercise
|
|
|
7,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net value of Stock Options exercised
|
|
$
|
77,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning
outstanding and exercisable stock options as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Contractual
|
|
|
Options
|
|
|
Average
|
|
Exercise Price
|
|
As of 12/31/09
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$0.85
|
|
|
18,275
|
|
|
$
|
0.02
|
|
|
|
0.02
|
|
|
|
18,275
|
|
|
$
|
0.01
|
|
$1.75
|
|
|
208,813
|
|
|
$
|
0.24
|
|
|
|
0.47
|
|
|
|
208,813
|
|
|
$
|
0.24
|
|
$2.50
|
|
|
213,170
|
|
|
$
|
0.34
|
|
|
|
0.58
|
|
|
|
213,170
|
|
|
$
|
0.34
|
|
$3.50
|
|
|
187,356
|
|
|
$
|
0.42
|
|
|
|
0.62
|
|
|
|
187,356
|
|
|
$
|
0.42
|
|
$4.50
|
|
|
627,323
|
|
|
$
|
1.82
|
|
|
|
2.21
|
|
|
|
627,323
|
|
|
$
|
1.83
|
|
$5.50
|
|
|
267,405
|
|
|
$
|
0.95
|
|
|
|
1.03
|
|
|
|
267,405
|
|
|
$
|
0.95
|
|
$6.50
|
|
|
26,700
|
|
|
$
|
0.11
|
|
|
|
0.10
|
|
|
|
26,700
|
|
|
$
|
0.11
|
|
$7.50
|
|
|
683
|
|
|
$
|
0.00
|
|
|
|
0.00
|
|
|
|
683
|
|
|
$
|
0.00
|
|
$8.50
|
|
|
350
|
|
|
$
|
0.00
|
|
|
|
0.00
|
|
|
|
350
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550,075
|
|
|
$
|
3.90
|
|
|
|
5.03
|
|
|
|
1,550,075
|
|
|
$
|
3.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life for the
1,550,075 outstanding options as of December 31, 2009, is
approximately 5.03 years. There are 1,550,075 stock options
exercisable as of December 31, 2009.
F-29
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total intrinsic value of stock options exercised during
2007, 2008 and 2009 respectively were $0.3 million,
$25.4 million, and $0.1 million. During 2009, the
Company had 9,829 shares of stock options vest. The value
of these vested stock options at date of grant was
$0.1 million and at vesting date was $0.2 million. The
Company received $0.1 million, $1.7 million, and
$0.01 million from stock option exercises in 2007, 2008 and
2009, respectively.
No stock options were granted in 2007, 2008 or 2009.
The Company recorded stock-based compensation expense in
accordance with FASB
ASC 718-10
of $0.02 million and $0.05 million for the years ended
December 31, 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 211,850 and 158,380 restricted units to employees in 2008
and 2009, respectively, with an additional 13,301 and 18,485
issued to board of directors members that unrestricted
immediately in 2008 and 2009, respectively.
The Company recorded $1.6 million, $4.4 million, and
$5.6 million in stock-based compensation expense related to
RSUs as of December 31, 2007, 2008 and 2009, respectively.
GAIN Capital Holdings, Inc. recorded $0.1 million 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.
A summary of the status of the Companys nonvested shares
of as of December 31, 2009 and changes during the year
ended December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
Non-Vested Shares
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested at January 1, 2009
|
|
|
491,672
|
|
|
$
|
29.23
|
|
Granted
|
|
|
176,865
|
|
|
$
|
20.46
|
|
Vested
|
|
|
(207,441
|
)
|
|
$
|
25.05
|
|
Forfeited
|
|
|
(7,265
|
)
|
|
$
|
35.43
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009
|
|
|
453,831
|
|
|
$
|
27.62
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 there was $10.4 million 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 two years. Based The fair market value
of RSUs vested during the years ended December 31, 2007,
2008 and 2009 was $2.2 million, $3.1 million and
$5.2 million, respectively.
RSUs that were unrestricted as of December 31, 2009 had a
value at grant date of $8.6 million. The total value of
these RSUs was $8.9 million at the date they became
unrestricted.
F-30
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair market value of RSUs at the date of grant during the
years ended December 31, 2007, 2008 and 2009 was
$7.1 million, $8.7 million, and $3.6 million,
respectively.
The provision for income tax expense consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(amounts in thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
17,827
|
|
|
$
|
27,775
|
|
|
$
|
12,144
|
|
State
|
|
|
5,326
|
|
|
|
8,059
|
|
|
|
1,207
|
|
Non U.S.
|
|
|
|
|
|
|
75
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,153
|
|
|
|
35,909
|
|
|
|
14,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,203
|
)
|
|
|
(723
|
)
|
|
|
(1,482
|
)
|
State
|
|
|
(335
|
)
|
|
|
(209
|
)
|
|
|
(305
|
)
|
Non U.S.
|
|
|
|
|
|
|
284
|
|
|
|
(377
|
)
|
Valuation allowance
|
|
|
|
|
|
|
(284
|
)
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,538
|
)
|
|
|
(932
|
)
|
|
|
(1,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
21,615
|
|
|
$
|
34,977
|
|
|
$
|
12,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The Companys deferred tax assets are
included in Other assets on the
F-31
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Statements of Financial Condition. Significant
components of the Companys deferred tax assets and
liabilities at December 31, 2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(amounts in thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,009
|
|
|
$
|
138
|
|
Deferred rent
|
|
|
43
|
|
|
|
88
|
|
Accrued expenses
|
|
|
62
|
|
|
|
405
|
|
Net foreign operating losses
|
|
|
284
|
|
|
|
661
|
|
Stock-based compensation expense
|
|
|
2,526
|
|
|
|
4,957
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,924
|
|
|
|
6,249
|
|
Valuation allowance
|
|
|
(284
|
)
|
|
|
(661
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets after valuation allowance
|
|
$
|
3,640
|
|
|
$
|
5,588
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Unrealized trading differences
|
|
$
|
(3,466
|
)
|
|
$
|
(3,301
|
)
|
Basis difference in property and equipment
|
|
|
(84
|
)
|
|
|
(200
|
)
|
State taxes
|
|
|
|
|
|
|
(141
|
)
|
Other
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(3,550
|
)
|
|
$
|
(3,696
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
90
|
|
|
$
|
1,892
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the provision to the
U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Federal income tax at statutory rate
|
|
|
(35.00
|
)%
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Increase/(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax
|
|
|
2.87
|
%
|
|
|
1.91
|
%
|
|
|
0.08
|
%
|
Embedded derivative
|
|
|
51.24
|
%
|
|
|
(23.92
|
)%
|
|
|
(1.47
|
)%
|
Stock options
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
Foreign rate differential
|
|
|
|
|
|
|
0.16
|
%
|
|
|
(0.61
|
)%
|
Meals & entertainment
|
|
|
0.10
|
%
|
|
|
0.03
|
%
|
|
|
0.17
|
%
|
R&D credit
|
|
|
|
|
|
|
|
|
|
|
(1.09
|
)%
|
Other permanent differences
|
|
|
(0.54
|
)%
|
|
|
(0.07
|
)%
|
|
|
(0.87
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
19.12
|
%
|
|
|
13.11
|
%
|
|
|
31.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has $2.6 million in foreign net operating loss
(NOL) carryforwards as of December 31, 2009,
for which a full valuation allowance has been established
against the deferred tax asset. 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, 2009, 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.
F-32
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has recorded a liability of $0.1 million
related to uncertain tax positions at December 31, 2009 in
accordance with FASB
ASC 740-10,
Income Taxes. The Companys open tax years for its
federal returns range from 2007 through 2009 and from 2006
through 2009 for its major state jurisdictions.
|
|
15.
|
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 (amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2010
|
|
$
|
1,127
|
|
2011
|
|
|
1,166
|
|
2012
|
|
|
990
|
|
2013
|
|
|
990
|
|
2014
|
|
|
990
|
|
2015 and beyond
|
|
|
12,053
|
|
|
|
|
|
|
|
|
$
|
17,316
|
|
|
|
|
|
|
Rent expense was $1.2 million, $1.4 million, and
$1.8 million for the years ended December 31, 2007,
2008 and 2009, respectively.
On December 31, 2009, the Company entered into capital
leases for computer equipment that expire on various dates
through 2011. Assets recorded under capital leases amounted to
$0.6 million. In accordance with
ASC 840-30,
Capital leases, the Company measured the present value of
the minimum lease payments and the capital lease obligation of
$0.7 million is recorded in Accrued expenses and other
current liabilities as of December 31, 2009. Future
annual minimum lease payments for capital leases are as follows
(amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2010
|
|
$
|
335
|
|
2011
|
|
|
335
|
|
|
|
|
|
|
|
|
$
|
670
|
|
|
|
|
|
|
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
$2.3 million and contested the petition. The Company fully
reserved for the $2.3 million 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 $0.8 million. The
difference between the settlement amount of $0.8 million
and the reserve of $2.3 million as of December 31,
2006 resulted in income of $1.5 million for the year ended
December 31, 2007.
The Company has no material litigation pending as of
December 31, 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
F-33
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, 2008 and 2009 was $0.2 million,
$0.6 million, and $0.5 million, respectively.
|
|
17.
|
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, 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 2008 and 2009.
F-34
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(amounts in thousands,
|
|
|
|
except share and per share data)
|
|
|
Net income/(loss)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
(63,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
1,899,386
|
|
|
|
1,287,360
|
|
|
|
1,307,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series A
|
|
|
|
|
|
|
899,666
|
|
|
|
865,154
|
|
Preferred stock series B
|
|
|
|
|
|
|
2,610,254
|
|
|
|
2,610,210
|
|
Preferred stock series C
|
|
|
|
|
|
|
1,361,768
|
|
|
|
1,355,669
|
|
Preferred stock series D
|
|
|
|
|
|
|
3,254,678
|
|
|
|
3,254,678
|
|
Preferred stock series E
|
|
|
|
|
|
|
2,540,251
|
|
|
|
2,611,606
|
|
Warrants
|
|
|
|
|
|
|
1,408,725
|
|
|
|
1,382,921
|
|
Stock options
|
|
|
|
|
|
|
1,380,283
|
|
|
|
1,264,707
|
|
RSUs
|
|
|
|
|
|
|
259,292
|
|
|
|
256,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
1,899,386
|
|
|
|
15,002,277
|
|
|
|
14,909,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(70.89
|
)
|
|
$
|
130.12
|
|
|
$
|
21.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(70.89
|
)
|
|
$
|
11.17
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Number of potential shares that are anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
9,467,741
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,484,670
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,892,604
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
169,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,014,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Regulatory
Requirements
|
GAIN Capital Group, LLC a registered futures commission merchant
and forex dealer member, 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, is $20.0 million plus 5%
of the amount of customer liabilities over $10.0 million.
The Company was compliant with the regulations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(amounts in thousands)
|
|
|
GAIN Capital Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital
|
|
$
|
53,954
|
|
|
$
|
114,978
|
|
|
$
|
102,577
|
|
Adjusted net capital
|
|
$
|
49,604
|
|
|
$
|
107,726
|
|
|
$
|
90,425
|
|
Excess adjusted net capital
|
|
$
|
44,148
|
|
|
$
|
97,726
|
|
|
$
|
64,424
|
|
GAIN Global Markets, Inc. (GGMI), the Companys
Cayman Island subsidiary, is a registered securities arranger
with the Cayman Islands Monetary Authority. GGMI is required to
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, 2009.
GCSI is a registered broker-dealer 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 $0.05 million,
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 the regulations and required capital levels at
December 31, 2009.
GAIN Capital Forex.com UK Limited (GCUK), is a
registered full scope BIPRU 730K investment firm, regulated by
the Financial Services Authority (U.K. FSA). It is
required to maintain the greater of $1.0 million (730k
Euros) or the Financial Resources Requirement which is the sum
of the firms operational, credit, counterparty, and forex
risk. GCUK was compliant with U.K. FSA regulations at
December 31, 2009 and required capital levels at
December 31, 2009.
GAIN Capital Forex.com Japan Co., Ltd, (GC Japan), a
registered Financial & Futures firm regulated by 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%. This
calculation is derived by dividing Net Capital by the sum of GC
Japans market, counterparty credit risk, and operational
risk. GCJP was compliant with regulations and required capital
levels at December 31, 2009.
GAIN Capital Forex.com Hong Kong Limited (GCHK) is a
registered Type 3 leveraged foreign exchange trading firm with
the Securities and Futures Commission (SFC)
operating as an approved introducing agent. GCHK is subject to
the requirements of section 145 of the Securities and
Futures Ordinance (Cap.571). Under this rule, GCHK is required
to maintain a minimum liquid capital requirement of
$0.4 million. GCHK was compliant with SFC regulations and
required capital levels at December 31, 2009.
FASB ASC 280 (FASB 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
F-36
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, 2008 and 2009, 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.
|
|
20.
|
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 $0.8 million.
Between 2006 and 2008, a significant portion of the
Companys trading volume, trading revenue, net income and
cash flow were generated from residents of China. When the
Company 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 during 2008, in May 2008 the Company 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.
The Company does not have such a permit and to its 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 our trading support operations
located in that country. As of December 31, 2008, the
Company no longer accepted new customers.
However, pursuant to the Companys most recent review of
the relevant regulatory requirements in China, the Company now
believes that it can accept customers from China if the
customers come to the Companys website without being
solicited by the Company to do so. As a result, the Company
began accepting customers from China in this manner in June
2010. The Company cannot provide any assurance that it will not
be subject to fines or penalties, and if so in what amounts,
relating to its forex trading services through the Internet to
Chinese residents.
Jia Shen reduced its work force in 2008 and is in the process of
formally filing for closure with Chinese authorities. The
Company expects Jia Shen to be closed by 2011. The Shanghai
lease expires in September 2010 and there were no vendor
contract termination costs.
In February 2010, the Company made the final payment of
$0.4 million related to the second tranche of the GC Japan
agreement. This amount was accrued for as of December 31,
2009 and relates to the attainment of customer trading volume
greater than or equal to a specified amount in the fourth
quarter of 2009. In April 2010, the Company acquired the
remaining 30.0% interest in GC Japan.
On June 30, 2010, the National Futures Association, for
NFA, filed a complaint against GAIN Capital Group, LLC, the
Companys wholly-owned operating subsidiary, and Glenn H.
Stevens, the president and chief executive officer, alleging,
among other things, that certain aspects of the Companys
liquidation, trade execution and records maintenance, along with
the Companys supervisory management of introducing brokers
were not compliant with certain NFA rules and standards. The
Company may be subject to fines, censure or other disciplinary
action by the NFA as a result of the complaint. The Company is
actively working with the NFA to remediate these purported
issues and settle the complaint without a hearing and expect to
have this matter resolved in the near term. The settlement
process can be time consuming and costly and there are no
assurances that the Company will reach a settlement with the NFA
on acceptable terms, if at all. Any disciplinary action taken
against the Company or fines or
F-37
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
restrictions imposed on the Company could have a material
adverse effect on the Company, its reputation, damage the
Companys brand name or adversely affect the Companys
business and financial condition.
On July 14, 2010, the Company entered into an Exclusive
Marketing Agreement with Forexster Limited, or Forexster,
pursuant to which the Company receives, subject to certain
excluded customers and geographic regions, exclusive rights to
use Forexster Trading Services (as defined in the agreement) in
the field of forex trading and non-exclusive rights to use
Forexster Trading Services in the field of precious metals
trading. Pursuant to the terms of the Exclusive Marketing
Agreement, the Company paid Forexster an up-front,
non-refundable $7.5 million prepayment for use of the
Forexster Trading Services. During the term of the agreement,
the Company will also pay Forexster a monthly Revenue Share
equal to a percentage of all Gross Revenues (as defined in the
agreement) earned by the Company from use of the Forexster
Trading Services, provided certain Minimum Net Income (as
defined in the agreement) thresholds of the Company are met. The
Companys aggregate Revenue Share payment obligations under
the Exclusive Marketing Agreement are capped at
$60.0 million if paid in-full on or before July 31,
2013, the Cap, or $65.0 million if paid in-full on or
before July 31, 2015, the Additional Cap. The Company is
under no duty to pay the Cap or Additional Cap if not earned,
but the Company may choose to prepay all or part of the Cap or
Additional Cap without penalty. In the event the Additional Cap
is not paid in-full on or before July 31, 2015, then all
payment provisions of the Exclusive Marketing Agreement shall
cease and the payment provisions of the existing agreements
among the parties shall apply. In the event the Company pays the
Cap in-full on or before July 31, 2013 or the Additional
Cap in-full on or before July 31, 2015, as applicable, then
the Company shall owe no further fees, costs or expenses to
Forexster for use of the Forexster Trading Services and the
Companys rights to the Forexster Trading Services under
the Exclusive Marketing Agreement shall continue for
100 years. The term of the Exclusive Marketing Agreement
began on July 14, 2010 and continues through July 31,
2015. Thereafter, the Exclusive Marketing Agreement shall
automatically renew for additional twelve (12) month
periods unless otherwise terminated by the parties.
The Company and Forexster also entered into that certain
Forexster Limited Software License, dated as of July 14,
2010, as amended and supplemented by that certain Amendment and
Variance to Forexster Limited Software License Agreement, dated
as of July 14, 2010, or the License Agreement, pursuant to
which Forexster will grant the Company certain non-exclusive
license rights to software.
The Company has evaluated subsequent events through
September 27, 2010, which is the date in which the
consolidated financial statements were available for issuance.
******
F-38
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2010 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010
(UNAUDITED)
F-39
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2010
|
|
|
|
(in thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
258,012
|
|
Short term investments
|
|
|
4,282
|
|
Trading securities
|
|
|
20,055
|
|
Receivables from brokers
|
|
|
89,569
|
|
Property and equipment (net of accumulated
depreciation and amortization of $9,554)
|
|
|
7,599
|
|
Prepaid assets
|
|
|
10,065
|
|
Deferred financing costs
|
|
|
160
|
|
Deferred initial public offering costs
|
|
|
2,130
|
|
Goodwill
|
|
|
3,092
|
|
Intangible assets
|
|
|
762
|
|
Other assets (net of allowance for doubtful accounts
of $377)
|
|
|
9,635
|
|
|
|
|
|
|
Total
|
|
$
|
405,361
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
Liabilities
|
|
|
|
|
Payables to brokers, dealers, FCMs and other regulated entities
|
|
$
|
5,857
|
|
Payables to customers
|
|
|
216,587
|
|
Accrued compensation and benefits
|
|
|
4,339
|
|
Accrued expenses and other liabilities
|
|
|
9,831
|
|
Income taxes payable
|
|
|
3,306
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
130,034
|
|
Notes payable
|
|
|
21,000
|
|
|
|
|
|
|
Total liabilities
|
|
|
390,954
|
|
|
|
|
|
|
Commitments and Contingencies (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
|
|
|
|
|
|
|
GAIN Capital Holdings, Inc. Shareholders Deficit
|
|
|
|
|
Common Stock; ($0.00001 par value; 27,000,000 shares
authorized and 1,353,584 issued and outstanding)
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
548
|
|
Additional paid-in capital
|
|
|
(174,795
|
)
|
Retained Earnings
|
|
|
19,264
|
|
|
|
|
|
|
Total deficit
|
|
|
(154,983
|
)
|
|
|
|
|
|
Total
|
|
$
|
405,361
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-40
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
COMPREHENSIVE
INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands,
|
|
|
|
except per share data)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
Trading revenue
|
|
$
|
114,332
|
|
|
$
|
147,667
|
|
Other revenue
|
|
|
1,119
|
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue
|
|
|
115,451
|
|
|
|
149,581
|
|
Interest revenue
|
|
|
228
|
|
|
|
243
|
|
Interest expense
|
|
|
(1,848
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
Total net interest revenue/(expense)
|
|
|
(1,620
|
)
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
113,831
|
|
|
|
148,148
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
29,621
|
|
|
|
34,031
|
|
Selling and marketing
|
|
|
26,791
|
|
|
|
28,192
|
|
Trading expenses and commissions
|
|
|
10,431
|
|
|
|
18,601
|
|
Bank fees
|
|
|
3,415
|
|
|
|
3,170
|
|
Depreciation and amortization
|
|
|
2,013
|
|
|
|
2,568
|
|
Communications and data processing
|
|
|
1,950
|
|
|
|
2,209
|
|
Occupancy and equipment
|
|
|
2,391
|
|
|
|
2,963
|
|
Bad debt provision/(recovery)
|
|
|
593
|
|
|
|
514
|
|
Professional fees
|
|
|
2,549
|
|
|
|
2,623
|
|
Software expense
|
|
|
712
|
|
|
|
1,431
|
|
Professional dues and memberships
|
|
|
565
|
|
|
|
205
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
40,820
|
|
|
|
48,936
|
|
Other
|
|
|
1,091
|
|
|
|
3,846
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
122,942
|
|
|
|
149,289
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE
|
|
|
(9,111
|
)
|
|
|
(1,141
|
)
|
Income tax expense
|
|
|
11,423
|
|
|
|
18,192
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
(20,534
|
)
|
|
|
(19,333
|
)
|
Net income/(loss) applicable to noncontrolling interest
|
|
|
(15
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL HOLDINGS,
INC.
|
|
|
(20,519
|
)
|
|
|
(18,931
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
482
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME/(LOSS)
|
|
|
(20,037
|
)
|
|
|
(18,699
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss applicable to noncontrolling interest, net of
tax
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME/(LOSS) APPLICABLE TO GAIN CAPITAL
HOLDINGS, INC.
|
|
$
|
(20,048
|
)
|
|
$
|
(18,699
|
)
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(20,519
|
)
|
|
$
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing
earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-41
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
|
|
(in thousands, except per share data)
|
|
|
BALANCE December 31, 2009
|
|
|
1,311,649
|
|
|
$
|
0.00
|
|
|
$
|
(178,409
|
)
|
|
$
|
38,195
|
|
|
$
|
348
|
|
|
$
|
(24
|
)
|
|
$
|
(139,890
|
)
|
Exercise of options
|
|
|
16,832
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Conversion of restricted stock units into common stock
|
|
|
25,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,181
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
32
|
|
|
|
232
|
|
Increase in noncontrolling interest related to acquisition of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
(614
|
)
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
(220
|
)
|
Net income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,931
|
)
|
|
|
|
|
|
|
(402
|
)
|
|
|
(19,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE September 30, 2010
|
|
|
1,353,584
|
|
|
$
|
|
|
|
$
|
(174,795
|
)
|
|
$
|
19,264
|
|
|
$
|
548
|
|
|
$
|
|
|
|
$
|
(154,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-42
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(20,534
|
)
|
|
$
|
(19,333
|
)
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange transactions liquidity
providers and customers
|
|
|
(11,522
|
)
|
|
|
(35,048
|
)
|
Gain/(loss) on foreign currency exchange rates
|
|
|
(49
|
)
|
|
|
272
|
|
Depreciation and amortization
|
|
|
2,013
|
|
|
|
2,568
|
|
Deferred taxes
|
|
|
838
|
|
|
|
(188
|
)
|
Amortization of deferred financing costs
|
|
|
65
|
|
|
|
66
|
|
Interest income
|
|
|
(61
|
)
|
|
|
(34
|
)
|
Bad debt provision
|
|
|
593
|
|
|
|
514
|
|
Loss on disposal of fixed assets
|
|
|
258
|
|
|
|
37
|
|
Stock compensation expense
|
|
|
3,372
|
|
|
|
4,181
|
|
Change in fair value of preferred stock embedded derivative
|
|
|
40,820
|
|
|
|
48,936
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
30
|
|
|
|
5,013
|
|
Receivables from brokers
|
|
|
(20,783
|
)
|
|
|
(13,325
|
)
|
Prepaid assets
|
|
|
(299
|
)
|
|
|
(8,021
|
)
|
Other assets
|
|
|
(2,426
|
)
|
|
|
(453
|
)
|
Current tax receivable
|
|
|
(3,019
|
)
|
|
|
791
|
|
Payables to customers
|
|
|
53,612
|
|
|
|
60,593
|
|
Accrued compensation and benefits
|
|
|
(2,091
|
)
|
|
|
298
|
|
Payables to brokers, dealers, FCMs and other regulated
entities
|
|
|
53
|
|
|
|
3,087
|
|
Accrued expenses and other liabilities
|
|
|
2,017
|
|
|
|
1,828
|
|
Income tax payable
|
|
|
(10,538
|
)
|
|
|
3,306
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
32,349
|
|
|
|
55,088
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,748
|
)
|
|
|
(3,319
|
)
|
Purchase of MG Financial, LLC, net of cash
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(2,748
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Initial public offering related costs
|
|
|
(701
|
)
|
|
|
(78
|
)
|
Payment on notes payable
|
|
|
(7,875
|
)
|
|
|
(7,875
|
)
|
Proceeds from exercise of stock options
|
|
|
3
|
|
|
|
48
|
|
Purchase of subsidiary shares from noncontrolling interest
|
|
|
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(8,573
|
)
|
|
|
(8,332
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
479
|
|
|
|
(7,481
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
21,507
|
|
|
|
35,488
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
176,431
|
|
|
|
222,524
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
197,938
|
|
|
$
|
258,012
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,824
|
|
|
$
|
1,524
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
23,950
|
|
|
$
|
13,263
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets in accrued expenses and other
liabilities
|
|
$
|
7
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
$
|
407
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
F-43
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010
(UNAUDITED)
|
|
1.
|
Significant
Accounting Policies
|
The Companys significant accounting policies as of
September 30, 2010 are similar to those at
December 31, 2009, which are included elsewhere in the
prospectus.
Unaudited Interim Financial Statements The
accompanying interim condensed consolidated statement of
financial condition as of September 30, 2010, the condensed
consolidated statements of operations and comprehensive
income/(loss) for the nine months ended September 30, 2009
and 2010, the condensed consolidated statement of
shareholders deficit for the nine months ended
September 30, 2009 and 2010, and the condensed consolidated
statements of cash flows for the nine months ended
September 30, 2009 and 2010 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, 2010 and results of its
operations for the nine months ended September 30, 2009 and
2010, and cash flows for the nine months ended
September 30, 2009 and 2010. The results of operations for
the nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2010. 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,
2007, 2008 and 2009 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/(Loss) 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
Statements 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/(Loss).
In accordance with FASB
ASC 830-10,
Foreign Currency Matters
(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 gain of
$0.05 million and a loss of $0.3 million for the nine
months ended September 30, 2009 and 2010, respectively.
Prepaid Assets The Company records goods and
services paid for but not to be received until a future date as
prepaid assets. These include payments for advertising and
insurance.
On July 14, 2010, the Company entered into an Exclusive
Marketing Agreement with Forexster Limited, or Forexster,
pursuant to which the Company receives, subject to certain
excluded customers and geographic regions, exclusive rights to
use Forexster Trading Services (as defined in the agreement) in
the field of forex trading and non-exclusive rights to use
Forexster Trading Services in the field of precious metals
trading. The Company will pay Forexster a monthly revenue share
equal to a percentage of all Gross Revenues (as defined in the
agreement) earned by the Company from use of the Forexster
Trading Services, provided certain Minimum Net Income (as
defined in the agreement) thresholds of the Company are met.
Pursuant to the terms of the Exclusive Marketing Agreement, the
Company paid Forexster an up-front, non-refundable
$7.5 million prepayment for use of the Forexster Trading
Services which will be amortized as revenue associated with
Forexster Trading Services is recognized.
F-44
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Statements of Financial Condition.
The allowance for doubtful accounts consisted of the following
(amounts in thousands):
|
|
|
|
|
Balance as of January 1, 2010
|
|
$
|
(332
|
)
|
Addition to provision
|
|
|
(514
|
)
|
Amounts written off
|
|
|
469
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
$
|
(377
|
)
|
|
|
|
|
|
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 GAIN Capital Forex.com Japan,
Co Ltd through April 2010. In April 2010 the Company acquired
the remaining 30% interest in GAIN Capital Forex.com Japan, Co
Ltd. for $0.4 million.
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, 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 2010.
Acquisition On August 26, 2010, the
Company entered into an asset purchase agreement with MG
Financial, LLC, or (MG), whereby the Company
acquired the account balances and effective customer agreements
for all transferring MG customers, MG customer list, and MG
marketing list. Upon closing in September 2010, the Company
assumed all MG liabilities associated with the account balances
of the transferring customers. The Company received
approximately $3.0 million in cash and recorded
$3.0 million in customer liabilities. In consideration for
the assets purchased and liabilities assumed, the Company paid
MG $0.5 million, which represents 15% of the account
balances transferred. The Company allocated the purchase price
to customer and marketing lists which are classified as
Intangible assets on the Condensed Consolidated Statement
of Financial Condition. The customer and marketing lists are
being amortized over their useful lives of one year.
Recent Accounting Pronouncements In January
2010, the FASB issued Accounting Standards Update
(ASU)
2010-06,
Improving Disclosures about Fair Value Measurements
(ASU
2010-06).
ASU 2010-06
amends ASC 820, Fair Value Measurements and Disclosures
(ASC 820), by requiring additional
disclosures regarding fair value measurements. Specifically, the
amendment requires additional disclosures of i) the input
and valuation techniques used to measure fair value for both
recurring and nonrecurring fair value measurements of
Level 2 and Level 3 positions, ii) the transfers
between all levels (including Level 1 and
Level 2) will be required to be disclosed on a gross
basis as well as the reasons for the transfers and
iii) separate disclosures are required for each class of
F-45
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets and liabilities rather than each major category of assets
and liabilities. ASU
2010-06 is
effective for fiscal years beginning after December 15,
2009. Therefore, ASU
2010-06 was
effective for the Companys fiscal year beginning
January 1, 2010. The adoption of ASU
2010-06 did
not have a material impact on the Companys condensed
consolidated financial statements.
Effective February 24, 2010, the FASB issued ASU
2010-09,
Subsequent Events (ASU
2010-09).
ASU 2010-09
amends ASC 855, Subsequent Events, by requiring less
disclosure regarding subsequent events. ASU
2010-09
changes the criteria for determining whether an entity would
evaluate subsequent events through the date that financial
statements are issued or when they are available to be issued.
The Company is still required to evaluate subsequent events
through the date that the financial statements are issued. ASU
2010-09 was
effective for the Companys interim period ended
June 30, 2010. The adoption of ASU
2010-09 did
not have a material impact on the Companys condensed
consolidated financial statements.
|
|
2.
|
Fair
Value Disclosures
|
The following table presents the Companys assets and
liabilities that are measured at fair value and the related
hierarchy levels (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of September 30, 2010
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting(1)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56
|
|
U.S. treasury securities
|
|
$
|
19,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,999
|
|
Futures contracts
|
|
$
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
$
|
128
|
|
|
$
|
53
|
|
Investment in gold
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
|
|
|
|
|
|
|
$
|
130,034
|
|
|
|
|
|
|
$
|
130,034
|
|
|
|
|
(1)
|
|
Represents cash collateral netting.
|
Level 1
Financial Assets
The Company has equity securities, U.S. treasury
securities, futures contracts and an investment in gold that are
Level 1 financial instruments that are recorded based upon
listed or quoted market rates. The equity securities and
U.S. treasury securities are classified as trading
securities and are recorded in Trading securities and the
futures contracts and investment in gold are recorded in
Receivables from brokers.
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.
F-46
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2010:
|
|
|
|
|
Beginning January 1, 2010
|
|
$
|
81,098
|
|
Unrealized loss included in change in fair value of convertible,
redeemable preferred stock embedded derivative
|
|
|
48,936
|
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
130,034
|
|
|
|
|
|
|
|
|
3.
|
Receivables
from Brokers
|
Amounts receivable from brokers consisted of the following as of
(amounts in thousands):
|
|
|
|
|
|
|
September 30,
2010
|
|
|
Required collateral
|
|
$
|
18,243
|
|
Cash in excess of required collateral
|
|
|
70,790
|
|
Open foreign exchange positions
|
|
|
536
|
|
|
|
|
|
|
|
|
$
|
89,569
|
|
|
|
|
|
|
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 of $0.1 million recorded based upon listed or
quoted market rates that approximate fair value at
September 30, 2010. 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 Condensed Consolidated
Statements of Financial Condition.
F-47
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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,
2010
|
|
|
Software
|
|
$
|
9,656
|
|
Computer equipment
|
|
|
4,466
|
|
Leasehold improvements
|
|
|
1,359
|
|
Office equipment
|
|
|
219
|
|
Telephone equipment
|
|
|
617
|
|
Furniture and fixtures
|
|
|
198
|
|
Web site development costs
|
|
|
638
|
|
|
|
|
|
|
|
|
|
17,153
|
|
Less: Accumulated depreciation and amortization
|
|
|
(9,554
|
)
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,599
|
|
|
|
|
|
|
Depreciation expense was $2.0 million and $2.5 million
for the nine months ended September 30, 2009 and 2010,
respectively.
The Companys intangible assets consist of two domain
names, customer and marketing lists. The foreignexchange.com
domain name was acquired in January 2004 for $100,000 and
Forex.com domain name was acquired in December 2002 for
$0.2 million. The Company has determined that the domain
names have indefinite useful lives. On August 26, 2010, the
Company acquired the account balances and effective customer
agreements, customer and marketing lists of MG Financial, LLC
for $0.5 million. The customer and marketing lists are
intangible assets and are being amortized over their useful
lives of one year. In accordance with FASB ASC 350,
Intangibles-Goodwill and Other, 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 Forex.com Japan Co.,
Ltd (GC Japan) on July 1, 2009. Goodwill
consists of the following as of (amounts in thousands):
|
|
|
|
|
|
|
September 30,
2010
|
|
|
GC Japan (formerly FORTUNE)
|
|
$
|
1,278
|
|
GCAM, LLC
|
|
|
1,078
|
|
GAIN Capital Securities, Inc. (formerly State Discount Brokers,
Inc.)
|
|
|
533
|
|
GAIN Capital Forex.com U.K., Ltd (formerly RCGGL)
|
|
|
203
|
|
|
|
|
|
|
|
|
$
|
3,092
|
|
|
|
|
|
|
F-48
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No goodwill impairment was recorded for the nine months ended
September 30, 2009 and 2010. In accordance with FASB
ASC 350, Intangibles-Goodwill and Other, 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.
Other assets consisted of the following (amounts in
thousands):
|
|
|
|
|
|
|
September 30,
2010
|
|
|
Vendor and security deposits
|
|
$
|
3,467
|
|
Current tax receivable
|
|
|
2,856
|
|
Deferred tax asset
|
|
|
2,081
|
|
Miscellaneous receivables
|
|
|
1,231
|
|
|
|
|
|
|
|
|
$
|
9,635
|
|
|
|
|
|
|
The Company entered into a Loan and Security Agreement with
Silicon Valley Bank and JPMorgan Chase (the Loan)
for $30 million 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 (0.5)%. 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, 2010 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 $52.5 million from
$22.5 million. 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
$10.0 million to $20.0 million. On June 16, 2010
the Company entered into a sixth loan modification agreement
related to the term loan. The loan modification reduced the
Prime Rate Margin on the Term loan from 0.75% to 0.5% and
reduced the Prime Rate Margin on the revolving credit line from
0.75% to 0% and amends the revolving line maturity date from
June 17, 2010 to June 16, 2011. There was no amount
due on the revolving credit line at September 30, 2010.
The Company has a balance of $21.0 million outstanding on
the Loan as of September 30, 2010 with scheduled repayments
as follows (amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2010
|
|
$
|
2,625
|
|
2011
|
|
|
10,500
|
|
2012
|
|
|
7,875
|
|
|
|
|
|
|
|
|
$
|
21,000
|
|
|
|
|
|
|
Loan fees were capitalized to deferred finance and are being
amortized over the life of the loan. Deferred loan costs
amortized to interest expense were $0.1 million nine months
ended September 30, 2009 and 2010.
F-49
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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, 2010
|
|
$
|
2,009
|
|
|
$
|
5,412
|
|
|
$
|
5,319
|
|
|
$
|
39,840
|
|
|
$
|
116,810
|
|
|
$
|
169,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE September 30, 2010
|
|
$
|
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 FASB ASC 815,
Derivatives and Hedging.
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.
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 Statements of Financial Condition with change in
fair value recorded in the Companys Condensed Consolidated
Statements of Operations and Comprehensive Income/(Loss). The
Company recorded a loss on the preferred stock embedded
derivative of $40.8 million and $48.9 million at
September 30, 2009 and 2010, respectively.
F-50
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the preferred stock conversion value by
preferred stock share class as of September 30 (amounts in
thousands):
|
|
|
|
|
|
|
2010
|
|
|
Preferred stock series A
|
|
$
|
21,505
|
|
Preferred stock series B
|
|
|
63,064
|
|
Preferred stock series C
|
|
|
25,075
|
|
Preferred stock series D
|
|
|
20,387
|
|
Preferred stock series E
|
|
|
3
|
|
|
|
|
|
|
|
|
$
|
130,034
|
|
|
|
|
|
|
Warrants Warrants totaling 1,458,335 to
purchase Series B remain outstanding as of
September 30, 2010.
|
|
10.
|
Related
Party Transactions
|
Management has funds on deposit in Group, LLC customer accounts
with balances of $3.0 million on deposit at
September 30, 2010. Management received interest of
approximately $1,500 for the nine months ended
September 30, 2009 and 2010, 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. Per its terms, the agreement automatically
renewed for an additional one year and is set to expire on
December 31, 2010. 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 of directors 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. 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).
Total share-based compensation for the nine months ended
September 30, 2009 and 2010 are summarized in the following
table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2009
|
|
|
September 30,
2010
|
|
|
Share based compensation:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
|
|
|
$
|
138
|
|
Restricted stock units
|
|
|
3,372
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,372
|
|
|
$
|
4,181
|
|
|
|
|
|
|
|
|
|
|
There were no restricted stock unit grants awarded during the
nine month period ended September 30, 2010.
F-51
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FASB
ASC 740-10-65,
Income Taxes, 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 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 2009 and from 2006 through 2009
for its major state jurisdictions.
The Company has $2.3 million in foreign net operating loss
(NOL) carryforwards as of September 30, 2010,
for which full valuation allowance has been established. These
NOLs begin to expire in 2013.
The decrease in our effective tax rate is due to the impact on
the income tax expense from the change in fair value of the
Companys redeemable convertible preferred stock embedded
derivative, which is off-set by 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,
2009
|
|
|
September 30,
2010
|
|
|
Federal income tax at statutory rate
|
|
|
(35.00
|
)%
|
|
|
(35.00
|
)%
|
Increase/(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income tax
|
|
|
(0.81
|
)%
|
|
|
153.09
|
%
|
Embedded derivative
|
|
|
156.81
|
%
|
|
|
1,501.65
|
%
|
Foreign rate differentials
|
|
|
9.42
|
%
|
|
|
(54.45
|
)%
|
Research and development tax credit
|
|
|
(3.61
|
)%
|
|
|
|
|
Meals & entertainment
|
|
|
0.49
|
%
|
|
|
4.84
|
%
|
Valuation allowance
|
|
|
|
|
|
|
31.16
|
%
|
Other permanent differences
|
|
|
(1.92
|
)%
|
|
|
(6.32
|
)%
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
125.38
|
%
|
|
|
1,594.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
(amounts in thousands):
|
|
|
|
|
Years Ended December
31:
|
|
|
|
|
2010
|
|
$
|
631
|
|
2011
|
|
|
1,770
|
|
2012
|
|
|
1,112
|
|
2013
|
|
|
1,009
|
|
2014
|
|
|
990
|
|
Thereafter
|
|
|
12,053
|
|
|
|
|
|
|
|
|
$
|
17,565
|
|
|
|
|
|
|
F-52
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rent expense was $1.6 million and $2.3 million for the
nine months ended September 30, 2009 and 2010, respectively.
Litigation
The Company contests liability
and/or the
amount of damages as appropriate in each pending matter. Where
available information indicates that it is probable a liability
had been incurred at the date of the condensed consolidated
financial statements and the Company can reasonably estimate the
amount of that loss, the Company accrues the estimated loss by a
charge to income. In many proceedings, however, it is inherently
difficult to determine whether any loss is probable or even
possible or to estimate the amount of any loss. In addition,
even where loss is possible or an exposure to loss exists in
excess of the liability already accrued with respect to a
previously recognized loss contingency, it is not possible to
reasonably estimate the size of the possible loss or range of
loss.
For certain legal proceedings, the Company can estimate possible
losses, additional losses, ranges of loss or ranges of
additional loss in excess of amounts accrued, but does not
believe, based on current knowledge and after consultation with
counsel, such losses will have a material adverse effect on the
Companys results of operations, cash flows or financial
condition. For certain other legal proceedings, the Company
cannot reasonably estimate such losses, if any, since the
Company cannot predict if, how or when such proceedings will be
resolved or what the eventual settlement, fine, penalty or other
relief, if any, may be, particularly for proceedings that are in
their early stages of development or where plaintiffs seek
substantial or indeterminate damages. Numerous issues must be
developed, including the need to discover and determine
important factual matters and the need to address novel or
unsettled legal questions relevant to the proceedings in
question, before a loss or additional loss or range of loss or
additional loss can be reasonably estimated for any proceeding.
Other
On June 30, 2010, the National Futures Association, or NFA,
filed a complaint against GAIN Capital Group, LLC, our
wholly-owned operating subsidiary, and Glenn H. Stevens, our
president and chief executive officer, alleging, among other
things, that certain aspects of our liquidation, trade execution
and records maintenance, along with our supervisory management
of introducing brokers were not compliant with certain NFA rules
and standards. On October 27, 2010 we settled the matter
with the NFA. Pursuant to the settlement, the NFA made no
findings with respect to allegations that GAIN Capital Group,
LLCs and Mr. Stevens supervisory management
were not compliant with certain NFA rules and standards. As part
of the settlement that resulted in the NFA action being
terminated, we and Mr. Stevens neither admitted nor denied
the allegations in the complaint and we will pay a fine of
approximately $0.5 million. We have agreed to no longer use
certain liquidation and trade execution processes. For those
customers that were impacted by these liquidation and trade
executions processes, we have also agreed to reimburse them
within 30 days of the settlement. We have fully accrued
these amounts as of September 30, 2010.
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/(Loss) by the
Company for its employees participation in the plan for
the nine months ended September 30, 2009 and 2010 was
$0.4 million.
F-53
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(amounts in thousands, except share and per share data)
|
|
|
Net income/(loss)
|
|
$
|
(20,519
|
)
|
|
$
|
(18,931
|
)
|
Effect of redemption of preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
|
|
$
|
(20,519
|
)
|
|
$
|
(18,931
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Preferred stock series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
1,306,265
|
|
|
|
1,327,124
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(15.71
|
)
|
|
$
|
(14.26
|
)
|
|
|
|
|
|
|
|
|
|
F-54
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2009
|
|
|
2010
|
|
|
Number of potential shares that are anti-dilutive:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
10,697,317
|
|
|
|
10,697,317
|
|
Warrants
|
|
|
1,385,810
|
|
|
|
1,350,202
|
|
Stock options
|
|
|
1,275,545
|
|
|
|
1,023,609
|
|
RSUs
|
|
|
267,464
|
|
|
|
552,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,626,136
|
|
|
|
13,623,450
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$20.0 million or 5% of the total payables over
$10.0 million to customers, brokers, dealers, FCMs and
other regulated entities. The Company was compliant with the
regulations for the nine month period ended September 30,
2010.
|
|
|
|
|
|
|
September 30,
2010
|
|
|
(amounts in thousands)
|
|
GAIN Capital Group, LLC
|
|
|
|
|
Net capital
|
|
$
|
96,144
|
|
Adjusted net capital
|
|
$
|
63,123
|
|
Excess adjusted net capital
|
|
$
|
37,284
|
|
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, 2010.
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, 2010.
GAIN Capital Forex.com UK Limited (GCUK) is a
registered full scope BIPRU 730K investment firm, regulated by
the Financial Services Authority (FSA). It is
required to maintain the greater of $1.0 million
($0.7 million Euro) or the Financial Resources Requirement
which is the sum of the firms operational, credit,
counterparty and forex risk. At September 30, 2010, the
Financial Resources Requirement was $2.0 million. GCUK was
compliant with FSA regulations at September 30, 2010 and
required capital levels at September 30, 2010.
F-55
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2010.
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 $0.4 million. GCHK
was compliant with regulations and required capital levels at
September 30, 2010 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, 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,
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, 2009 and
2010, 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.
The Company has updated its subsequent events disclosures
through November 3, the filing date of this Amendment
No. 6 to the
Form S-1.
On October 5, 2010, the Company entered into an asset
purchase agreement with Capital Market Services, LLC, or
(CMS), whereby the Company will acquire a list of
the retail foreign exchange accounts maintained (Customer
List) by CMS with account balances and open positions and
a potential retail customer list (Marketing List).
The Company will assume all CMS liabilities associated with the
account balances and open positions of the transferring
customers as of and following the closing. The Company
anticipates the closing will occur during the fourth quarter of
2010.
In the event that the transferring customer account balances and
open positions equal or exceed $22.5 million at closing,
the Company will pay CMS $7.0 million. In addition to the
amounts payable, CMS shall also be entitled, during the
18 month period following the closing, to receive 15% of
the first $20.0 million of the Companys net revenue
which is directly attributable to the transferring customers and
any new customers introduced to the Company by CMS as an
introducing broker; and 50% of the Companys net revenue in
excess of $20.0 million recognized by the Company which is
directly attributable to the transferring customers.
In the event that the transferring customer account balances and
open positions are less than $22.5 million, the Company
will pay CMS fifteen (15%) of the aggregate transferring
customers account balances. In addition to the amounts
payable, CMS shall also be entitled, during the 18 month
period following the closing, to receive 35% of the first
$20.0 million of the Companys net revenue which is
directly attributable to the transferring customers and any new
customers introduced to the Company by CMS as an introducing
broker.
F-56
GAIN
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 30, 2010, the National Futures Association, or NFA,
filed a complaint against GAIN Capital Group, LLC, our
wholly-owned operating subsidiary, and Glenn H. Stevens, our
president and chief executive officer, alleging, among other
things, that certain aspects of our liquidation, trade execution
and records maintenance, along with our supervisory management
of introducing brokers were not compliant with certain NFA rules
and standards. On October 27, 2010 we settled the matter
with the NFA. Pursuant to the settlement, the NFA made no
findings with respect to allegations that GAIN Capital Group.
LLCs and Mr. Stevens supervisory management
were not compliant with certain NFA rules and standards. As part
of the settlement that resulted in the NFA action being
terminated, we and Mr. Stevens neither admitted nor denied the
allegations in the complaint and we will pay a fine of
approximately $0.5 million. We have agreed to no longer use
certain liquidation and trade execution processes. For those
customers that were impacted by these liquidation and trade
executions processes, we have also agreed to reimburse them
within 30 days of the settlement. We have fully accrued
these amounts as of September 30, 2010.
F-57
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 2009, and
for each of the three years in the period ended
December 31, 2009, and have issued our report thereon dated
September 27, 2010 such financial statements and report 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
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Deloitte &
Touche LLP
New York, New York
September 27, 2010
F-59
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except share and per share data)
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
905
|
|
|
$
|
83
|
|
Investments in subsidiaries, equity basis
|
|
|
127,902
|
|
|
|
129,568
|
|
Receivables from affiliates
|
|
|
1,422
|
|
|
|
3,012
|
|
Current tax receivable
|
|
|
|
|
|
|
4,618
|
|
Deferred IPO costs
|
|
|
|
|
|
|
1,732
|
|
Other assets
|
|
|
403
|
|
|
|
2,119
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,632
|
|
|
$
|
141,132
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT:
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
1,212
|
|
|
$
|
1,472
|
|
Income tax payable
|
|
|
10,539
|
|
|
|
|
|
Convertible, redeemable preferred stock embedded derivative
|
|
|
82,785
|
|
|
|
81,098
|
|
Notes payable
|
|
|
39,375
|
|
|
|
28,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
133,911
|
|
|
|
111,445
|
|
|
|
|
|
|
|
|
|
|
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
865,154 shares issued and outstanding as of
December 31, 2008 and 2009, respectively)
|
|
|
2,009
|
|
|
|
2,009
|
|
Series B Convertible, Redeemable Preferred Stock;
($0.00001 par value; 7,000,000 shares authorized;
2,610,210 shares issued and outstanding as of
December 31, 2008 and 2009, respectively)
|
|
|
5,412
|
|
|
|
5,412
|
|
Series C Convertible, Redeemable Preferred Stock;
($0.00001 par value; 2,496,879 shares authorized;
1,055,739 shares issued and outstanding as of
December 31, 2008 and 2009, respectively)
|
|
|
5,319
|
|
|
|
5,319
|
|
Series D Convertible, Redeemable Preferred Stock;
($0.00001 par value; 3,254,678 shares authorized,
issued and outstanding as of December 31, 2008 and 2009,
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 and 2009, respectively)
|
|
|
116,810
|
|
|
|
116,810
|
|
|
|
|
|
|
|
|
|
|
Total convertible, redeemable preferred stock
|
|
|
169,390
|
|
|
|
169,390
|
|
Deficit
|
|
|
|
|
|
|
|
|
Shareholders Deficit
|
|
|
|
|
|
|
|
|
Common Stock; ($0.00001 par value; 27 million shares
authorized and 1,304,029 and 1,311,649 shares issued and
outstanding as of December 31, 2008 and 2009, respectively)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
21
|
|
|
|
347
|
|
Additional paid-in capital
|
|
|
(182,891
|
)
|
|
|
(178,245
|
)
|
(Accumulated deficit)/retained earnings
|
|
|
10,201
|
|
|
|
38,195
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Deficit
|
|
|
(172,669
|
)
|
|
|
(139,703
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,632
|
|
|
$
|
141,132
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
F-60
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except share and per share data)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of subsidiaries
|
|
$
|
53,034
|
|
|
$
|
88,462
|
|
|
$
|
39,673
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
317
|
|
|
|
567
|
|
|
|
525
|
|
Bank fees
|
|
|
2
|
|
|
|
33
|
|
|
|
10
|
|
Professional fees
|
|
|
423
|
|
|
|
1,043
|
|
|
|
897
|
|
Write-off of initial public offering costs
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
Change in fair value of convertible, redeemable preferred stock
embedded derivative
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
Other
|
|
|
48
|
|
|
|
377
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
166,070
|
|
|
|
(177,865
|
)
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE
|
|
|
(113,036
|
)
|
|
|
266,327
|
|
|
|
39,547
|
|
Income tax expense
|
|
|
21,615
|
|
|
|
34,901
|
|
|
|
11,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS):
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
21
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET COMPREHENSIVE INCOME/(LOSS)
|
|
$
|
(134,651
|
)
|
|
$
|
231,447
|
|
|
$
|
28,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of redemption of preferred shares
|
|
$
|
|
|
|
$
|
(63,913
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to GAIN Capital Holdings, Inc.
common shareholders
|
|
$
|
(134,651
|
)
|
|
$
|
167,513
|
|
|
$
|
27,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
F-61
GAIN
CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(134,651
|
)
|
|
$
|
231,426
|
|
|
$
|
28,010
|
|
Adjustments to reconcile net income/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of subsidiaries
|
|
|
(56,722
|
)
|
|
|
(91,159
|
)
|
|
|
(41,340
|
)
|
Loss on foreign currency exchange rates
|
|
|
|
|
|
|
59
|
|
|
|
203
|
|
Deferred taxes
|
|
|
(1,538
|
)
|
|
|
(842
|
)
|
|
|
(1,787
|
)
|
Write-off of deferred initial public offering costs
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Amortization of deferred finance costs
|
|
|
89
|
|
|
|
89
|
|
|
|
87
|
|
Stock compensation expense
|
|
|
223
|
|
|
|
541
|
|
|
|
282
|
|
Tax benefit from employee stock option exercises
|
|
|
|
|
|
|
(10,709
|
)
|
|
|
|
|
Change in fair value of preferred stock embedded derivative
|
|
|
165,280
|
|
|
|
(181,782
|
)
|
|
|
(1,687
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from affiliates
|
|
|
1,520
|
|
|
|
2,637
|
|
|
|
3,737
|
|
Other assets
|
|
|
|
|
|
|
(191
|
)
|
|
|
(160
|
)
|
Current tax receivable
|
|
|
4,874
|
|
|
|
|
|
|
|
(4,618
|
)
|
Accrued expenses and other liabilities
|
|
|
221
|
|
|
|
1,102
|
|
|
|
(527
|
)
|
Income tax payable
|
|
|
8,742
|
|
|
|
12,505
|
|
|
|
(10,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for operating activities
|
|
|
(11,962
|
)
|
|
|
(36,282
|
)
|
|
|
(28,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and funding of subsidiaries
|
|
|
19,878
|
|
|
|
24,873
|
|
|
|
39,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
19,878
|
|
|
|
24,873
|
|
|
|
39,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,296
|
)
|
Payment on notes payable
|
|
|
(7,625
|
)
|
|
|
(10,500
|
)
|
|
|
(10,500
|
)
|
Proceeds from exercise of stock options
|
|
|
70
|
|
|
|
1,686
|
|
|
|
8
|
|
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
|
|
|
|
|
|
|
10,709
|
|
|
|
|
|
Repurchase of warrants
|
|
|
|
|
|
|
(3,945
|
)
|
|
|
|
|
Repurchase of common shares
|
|
|
(30,000
|
)
|
|
|
(40,752
|
)
|
|
|
|
|
Repurchase of preferred shares
|
|
|
|
|
|
|
(62,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
(7,828
|
)
|
|
|
12,062
|
|
|
|
(11,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
88
|
|
|
|
653
|
|
|
|
(822
|
)
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
164
|
|
|
|
252
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
252
|
|
|
$
|
905
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,469
|
|
|
$
|
2,795
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
9,524
|
|
|
$
|
20,731
|
|
|
$
|
28,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual to acquire additional shares of GAIN Capital Japan Co Ltd
|
|
$
|
|
|
|
$
|
|
|
|
$
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued initial public offering costs
|
|
$
|
42
|
|
|
$
|
|
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of call option liability
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements
F-62
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-8
to F-39.
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.
Certain balances have been reclassified to conform with the
current year presentation. These include the reclassification of
$3.7 million, $2.7 million, and $1.7 million for
the years ended December 31, 2007, 2008, and 2009,
respectively, from interest expense on notes payable to
undistributed earnings of subsidiaries in the revenue category
on the Condensed Statements of Operations and Comprehensive
Income/(Loss).
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 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 9 to the
Companys consolidated financial statements.
|
|
3.
|
Convertible,
Redeemable Preferred Stock
|
For a discussion of convertible, redeemable preferred stock, see
Note 10 to the Companys consolidated financial
statements.
For a discussion of the shareholders deficit, see
Note 11 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 $22.6 million, $31.5 million and
$54.6 million for the years ended December 31, 2007,
2008 and 2009, respectively.
The acquisition of GAIN Capital Forex.com Japan Co Ltd. included
purchase terms requiring an escrow balance for the last tranche
of the purchase payment. The balance due to the original owner
of GAIN Capital Forex.com Japan Co Ltd. of $0.4 million is
included in Accrued expenses and other liabilities as of
December 31,
I-1
SCHEDULE I
GAIN CAPITAL HOLDINGS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
2009 on the Parent Company Statements of Financial Condition.
The Company subsequently made the payment in February 2010.
FASB
ASC 740-10-65,
Income Taxes, 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 Parent Companys open tax years for its federal returns
range from 2007 through 2009 and from 2007 through 2009 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 15 to the Companys consolidated financial
statements.
I-2
Shares
(GAIN
CAPITAL HOLDINGS LOGO)
GAIN Capital Holdings,
Inc.
COMMON STOCK
PROSPECTUS
|
|
MORGAN
STANLEY |
DEUTSCHE BANK SECURITIES |
Dealer Prospectus Delivery Obligation
Through and
including ,
2010 (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.
,
2010
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
|
|
|
*
|
|
New York Stock Exchange 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
II-1
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 (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.
On June 30, 2007, the Registrant had granted and aggregate
of 221,250 restricted stock units under its Amended and Restated
2006 Equity Compensation Plan, as amended on January 11,
2008.
On September 30, 2007, the Registrant had granted and
aggregate of 6,250 restricted stock units under its Amended and
Restated 2006 Equity Compensation Plan, as amended on
January 11, 2008.
On February 15, 2008 the Registrant had granted and
aggregate of 76,850 restricted stock units under its Amended and
Restated 2006 Equity Compensation Plan, as amended on
January 11, 2008.
On April 15, 2008 the Registrant had granted and aggregate
of 135,000 restricted stock units under its Amended and Restated
2006 Equity Compensation Plan, as amended on January 11,
2008.
On December 11, 2008 the Registrant had granted and
aggregate of 13,301 restricted stock units under its Amended and
Restated 2006 Equity Compensation Plan, as amended on
January 11, 2008.
On December 15, 2009 the Registrant had granted and
aggregate of 176,865 restricted stock units under its Amended
and Restated 2006 Equity Compensation Plan, as amended on
January 11, 2008.
On July 28, 2010, 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
585,988 shares of common stock (net of exercises,
expirations and cancellations) at a weighted average exercise
price of $8.67 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.
II-3
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.
|
|
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 DLA Piper LLP (U.S.).
|
|
10
|
.1**
|
|
2006 Equity Compensation Plan (amended and restated).
|
|
10
|
.2*
|
|
2010 Omnibus Incentive Compensation Plan.
|
|
10
|
.3*
|
|
2010 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.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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.
|
|
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.
|
II-5
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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.
|
|
10
|
.49**
|
|
Form of ISDA Master Agreement, 2002 edition.
|
|
10
|
.50*
|
|
Sixth Loan Modification Agreement, dated June 16, 2010, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.51
|
|
Employment Letter, dated as of October 1, 1999, by and between
GAIN Capital Holdings, Inc. and Samantha Roady.
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
23
|
.2*
|
|
Consent of DLA Piper LLP (U.S.) (included in Exhibit 5.1).
|
|
23
|
.3
|
|
Consent of Aite Group, LLC, dated November 3, 2010.
|
|
23
|
.4
|
|
Consent of Forrester Research, dated November 3, 2010.
|
|
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.
II-6
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-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 6 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 3rd day of November,
2010.
GAIN CAPITAL HOLDINGS, INC.
Glenn H. Stevens
President and Chief Executive Officer
SIGNATURES
AND POWER OF ATTORNEY
Christopher W. Calhoun and Crevan OGrady, directors of
GAIN Capital Holdings, Inc. hereby severally constitute and
appoint Glenn H. Stevens and Henry C. Lyons, and each of them,
his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution for him/her and in
his/her
name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this
Registration Statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act of
1933, as amended and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as
he/she might
or could do in person, hereby ratifying and confirming all that
each of said attorney-in-fact or
his/her
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 6 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 3, 2010
|
|
|
|
|
|
/s/ Henry
C. Lyons
Henry
C. Lyons
|
|
Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
|
|
November 3, 2010
|
|
|
|
|
|
*
Mark
E. Galant
|
|
Chairman of the Board of Directors
|
|
November 3, 2010
|
|
|
|
|
|
/s/ Christopher
W. Calhoun
Christopher
W. Calhoun
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
*
Susanne
D. Lyons
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
*
Gerry
McCrory
|
|
Director
|
|
November 3, 2010
|
II-8
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
James
C. Mills
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
/s/ Crevan
OGrady
Crevan
OGrady
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
*
Peter
Quick
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
*
Joseph
Schenk
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
*
Christopher
S. Sugden
|
|
Director
|
|
November 3, 2010
|
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. 6 to
registration statement on behalf of the persons indicated.
|
|
* By: /s/ Glenn
H.
Stevens
|
November 3, 2010
|
Glenn H. Stevens
Attorney-in-Fact
II-9
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 DLA Piper LLP (U.S.).
|
|
10
|
.1**
|
|
2006 Equity Compensation Plan (amended and restated).
|
|
10
|
.2*
|
|
2010 Omnibus Incentive Compensation Plan.
|
|
10
|
.3*
|
|
2010 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.
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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.
|
|
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.
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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.
|
|
10
|
.49**
|
|
Form of ISDA Master Agreement, 2002 edition.
|
|
10
|
.50*
|
|
Sixth Loan Modification Agreement, dated June 16, 2010, by
and among GAIN Capital Holdings, Inc., Silicon Valley Bank and
JPMorgan Chase Bank, N.A.
|
|
10
|
.51
|
|
Employment Letter, dated as of October 1, 1999, by and between
GAIN Capital Holdings, Inc. and Samantha Roady.
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
23
|
.2*
|
|
Consent of DLA Piper LLP (U.S.) (included in Exhibit 5.1).
|
|
23
|
.3
|
|
Consent of Aite Group, LLC, dated November 3, 2010.
|
|
23
|
.4
|
|
Consent of Forrester Research, dated November 3, 2010.
|
|
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.
|