10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 001-33217
GLG PARTNERS, INC.
(Exact name of registrant as specified in its charter)
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|
Delaware
(State or other jurisdiction of
incorporation or organization)
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20-5009693
(I.R.S. Employer Identification No.) |
399 Park Avenue, 38th Floor
New York, New York 10022
(Address of principal executive offices) (Zip code)
(212) 224-7200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant 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 þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 10, 2008, there were 245,347,716 shares of the registrants common stock outstanding.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains statements
relating to our future results (including certain projections and business trends) that are
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act) and are subject to the safe harbor created by such
sections. Our actual results may differ materially from those projected as a result of certain
risks and uncertainties. Our forward-looking statements include, but are not limited to, statements
regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. In
addition, any statements that refer to projections, forecasts or other characterizations of future
events or circumstances, including any underlying assumptions, are forward-looking statements. The
words anticipates believe, continue, could, estimate, expect, intend, may, might,
plan, possible, potential, predict, project, should, would and similar expressions
may identify forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our
current expectations and beliefs concerning future developments and their potential effects on us
and speak only as of the date of such statement. There can be no assurance that future developments
affecting us will be those that we have anticipated. These forward-looking statements involve a
number of risks, uncertainties (some of which are beyond our control) or other assumptions that may
cause actual results or performance to be materially different from those expressed or implied by
these forward-looking statements. These risks and uncertainties include, but are not limited to,
those factors described under Item 1A, Risk Factors in our Annual Report on Form 10-K/A for the
year ended December 31, 2007 and the following:
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§ |
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the volatility in the financial markets; |
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§ |
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our financial performance; |
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§ |
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market conditions for the funds we manage, which we refer to as the GLG Funds; |
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§ |
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performance of GLG Funds, the related performance fees and the associated impacts on
revenues, net income, cash flows and fund inflows and outflows; |
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§ |
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the cost of retaining our key investment and other personnel or the loss of such key
personnel; |
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§ |
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risks associated with the expansion of our business in size and geographically; |
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§ |
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operational risk, including counterparty risk; |
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§ |
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litigation and regulatory enforcement risks, including the diversion of management
time and attention and the additional costs and demands on our resources; and |
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§ |
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risks associated with the use of leverage, investment in derivatives, availability
of credit, interest rates and currency fluctuations, |
as well as other risks and uncertainties, including those set forth herein and those detailed from
time to time in our other Securities and Exchange Commission filings. These forward-looking
statements are made only as of the date hereof, and we undertake no obligation to update or revise
the forward-looking statements, whether as a result of new information, future events or otherwise,
except as otherwise required by law.
GLG PARTNERS, INC.
INDEX
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLG PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(US dollars in thousands, except share and per share amounts)
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As of |
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As of |
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September 30, |
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December 31, |
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2008 |
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2007 |
|
ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
387,687 |
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$ |
429,422 |
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Restricted cash |
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24,363 |
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24,066 |
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Fees receivable |
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41,429 |
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389,777 |
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Prepaid expenses and other assets |
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41,005 |
|
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35,685 |
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Total Current Assets |
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494,484 |
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878,950 |
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Non-Current Assets |
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Investments at fair value |
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82,558 |
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96,108 |
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Goodwill |
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587 |
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Property and equipment |
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14,151 |
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9,079 |
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Total Non-Current Assets |
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97,296 |
|
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|
105,187 |
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Total Assets |
|
$ |
591,780 |
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$ |
984,137 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Rebates and sub-administration fees payable |
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$ |
25,408 |
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$ |
25,543 |
|
Accrued compensation, benefits and profit share |
|
|
185,244 |
|
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|
467,887 |
|
Income taxes payable |
|
|
20,829 |
|
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|
37,464 |
|
Distributions payable |
|
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60,017 |
|
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|
78,093 |
|
Accounts payable and other accruals |
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43,778 |
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33,288 |
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Other liabilities |
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30,580 |
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|
16,092 |
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Total Current Liabilities |
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365,856 |
|
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658,367 |
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Non-Current Liabilities |
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Loan payable |
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570,000 |
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|
570,000 |
|
Minority interest |
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|
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|
1,911 |
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|
|
|
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Total Non-Current Liabilities |
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570,000 |
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|
571,911 |
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Total Liabilities |
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$ |
935,856 |
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$ |
1,230,278 |
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Stockholders Deficit |
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Stockholders Deficit |
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Common stock, $.0001 par value; 1,000,000,000
authorized, 245,794,397 issued and
outstanding (Dec. 31, 2007: 244,730,988 issued
and outstanding), including 25,382,500 (Dec.
31, 2007: 25,382,500) shares of Treasury stock
held by a subsidiary |
|
$ |
25 |
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|
$ |
24 |
|
Series A voting preferred stock, $.0001 par
value; 150,000,000 authorized, 58,904,993
issued and outstanding (Dec. 31, 2007: 58,904,993
issued and outstanding) |
|
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6 |
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6 |
|
Additional paid in capital |
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1,111,159 |
|
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|
575,589 |
|
Treasury stock |
|
|
(347,740 |
) |
|
|
(347,740 |
) |
Accumulated other comprehensive income |
|
|
(8,559 |
) |
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|
3,477 |
|
Accumulated deficit |
|
|
(1,098,967 |
) |
|
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(477,497 |
) |
|
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Total Stockholders Deficit |
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|
(344,076 |
) |
|
|
(246,141 |
) |
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Total Liabilities and Stockholders Deficit |
|
$ |
591,780 |
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$ |
984,137 |
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|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GLG PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS
(US dollars in thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
|
Net revenues and other income |
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Management fees, net |
|
$ |
80,307 |
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|
$ |
78,558 |
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|
$ |
269,663 |
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$ |
198,892 |
|
Performance fees, net |
|
|
6,833 |
|
|
|
803 |
|
|
|
89,762 |
|
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|
343,835 |
|
Administration fees, net |
|
|
17,751 |
|
|
|
16,306 |
|
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|
60,448 |
|
|
|
42,986 |
|
Other (loss)/income |
|
|
(2,796 |
) |
|
|
6,905 |
|
|
|
2,412 |
|
|
|
7,875 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total net revenues and other income |
|
|
102,095 |
|
|
|
102,572 |
|
|
|
422,285 |
|
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|
593,588 |
|
|
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Expenses |
|
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|
|
|
|
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|
|
|
|
|
|
|
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|
Employee compensation and benefits |
|
|
(206,433 |
) |
|
|
(28,959 |
) |
|
|
(674,945 |
) |
|
|
(110,526 |
) |
Limited partner profit share |
|
|
(20,954 |
) |
|
|
(17,000 |
) |
|
|
(102,185 |
) |
|
|
(207,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share |
|
|
(227,387 |
) |
|
|
(45,959 |
) |
|
|
(777,130 |
) |
|
|
(318,026 |
) |
General, administrative and other |
|
|
(30,283 |
) |
|
|
(25,891 |
) |
|
|
(90,816 |
) |
|
|
(79,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
(257,670 |
) |
|
|
(71,850 |
) |
|
|
(867,946 |
) |
|
|
(397,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations |
|
|
(155,575 |
) |
|
|
30,722 |
|
|
|
(445,661 |
) |
|
|
195,928 |
|
Interest income |
|
|
2,043 |
|
|
|
3,252 |
|
|
|
6,685 |
|
|
|
5,302 |
|
Interest expense |
|
|
(6,028 |
) |
|
|
(204 |
) |
|
|
(18,795 |
) |
|
|
(608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes |
|
|
(159,560 |
) |
|
|
33,770 |
|
|
|
(457,771 |
) |
|
|
200,622 |
|
Income taxes |
|
|
(3,160 |
) |
|
|
(4,735 |
) |
|
|
(12,656 |
) |
|
|
(33,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before minority interests |
|
|
(162,720 |
) |
|
|
29,035 |
|
|
|
(470,427 |
) |
|
|
167,602 |
|
Minority interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of income |
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
(479 |
) |
Exchangeable Shares dividend (note 8) |
|
|
(1,472 |
) |
|
|
|
|
|
|
(4,418 |
) |
|
|
|
|
Cumulative dividends |
|
|
(2,896 |
) |
|
|
|
|
|
|
(12,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to common stockholders |
|
$ |
(167,088 |
) |
|
$ |
28,962 |
|
|
$ |
(487,039 |
) |
|
$ |
167,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share basic |
|
$ |
(0.79 |
) |
|
$ |
0.21 |
|
|
$ |
(2.30 |
) |
|
$ |
1.23 |
|
Weighted average common stock outstanding basic
(in thousands) |
|
|
211,417 |
|
|
|
135,712 |
|
|
|
211,357 |
|
|
|
135,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share diluted |
|
$ |
(0.79 |
) |
|
$ |
0.15 |
|
|
$ |
(2.30 |
) |
|
$ |
0.86 |
|
Weighted average common stock outstanding diluted
(in thousands) |
|
|
211,417 |
|
|
|
194,617 |
|
|
|
211,357 |
|
|
|
194,617 |
|
Dividends per share |
|
$ |
0.025 |
|
|
|
|
|
|
$ |
0.075 |
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.
3
GLG PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIT
(US dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Treasury |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Income/(Loss) |
|
|
Deficit |
|
|
Deficit |
|
Balance as of January 1, 2008 |
|
$ |
6 |
|
|
$ |
24 |
|
|
$ |
(347,740 |
) |
|
$ |
575,589 |
|
|
$ |
3,477 |
|
|
$ |
(477,497 |
) |
|
$ |
(246,141 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(487,039 |
) |
|
|
(487,039 |
) |
Unrealized losses on available
for sale equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,472 |
) |
|
|
|
|
|
|
(13,472 |
) |
Fair value movements on cash
flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,695 |
|
|
|
|
|
|
|
1,695 |
|
Foreign currency translation
(zero tax applicable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(499,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
(308 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574,355 |
|
|
|
|
|
|
|
|
|
|
|
574,355 |
|
Warrant exercises |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
2,567 |
|
|
|
|
|
|
|
|
|
|
|
2,568 |
|
Warrants repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,582 |
) |
|
|
|
|
|
|
|
|
|
|
(37,582 |
) |
Capital contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
525 |
|
Shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,987 |
) |
|
|
|
|
|
|
|
|
|
|
(3,987 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,077 |
) |
|
|
(16,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to former GLG owners |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,354 |
) |
|
|
(118,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
6 |
|
|
$ |
25 |
|
|
$ |
(347,740 |
) |
|
$ |
1,111,159 |
|
|
$ |
(8,559 |
) |
|
$ |
(1,098,967 |
) |
|
$ |
(344,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GLG PARTNERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
STATEMENTS OF CASH FLOWS
(US dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net (loss)/income attributable to common stockholders |
|
$ |
(487,039 |
) |
|
$ |
167,123 |
|
Adjustments to reconcile net (loss)/income attributable to common
stockholders to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
479 |
|
Depreciation |
|
|
2,019 |
|
|
|
1,522 |
|
Foreign exchange gains on investments |
|
|
78 |
|
|
|
39 |
|
Share based compensation |
|
|
574,355 |
|
|
|
|
|
Cash flows due to change in: |
|
|
|
|
|
|
|
|
Fees receivable |
|
|
348,348 |
|
|
|
211,276 |
|
Prepaid expenses and other assets |
|
|
(3,625 |
) |
|
|
(6,703 |
) |
Rebates and sub-administration fees payable |
|
|
(135 |
) |
|
|
327 |
|
Accrued compensation, benefits and profit share |
|
|
(282,643 |
) |
|
|
(47,551 |
) |
Income taxes payable |
|
|
(16,635 |
) |
|
|
(6,056 |
) |
Distributions payable |
|
|
(23,501 |
) |
|
|
62,001 |
|
Accounts payable and other accruals |
|
|
10,492 |
|
|
|
(4,963 |
) |
Other liabilities |
|
|
14,488 |
|
|
|
(1,446 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
136,202 |
|
|
|
376,046 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
|
(2,500 |
) |
|
|
|
|
Transfer to restricted cash |
|
|
(297 |
) |
|
|
|
|
Purchase of property and equipment |
|
|
(7,091 |
) |
|
|
(4,367 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,888 |
) |
|
|
(4,367 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Warrant exercises |
|
|
2,568 |
|
|
|
|
|
Warrant repurchases |
|
|
(37,582 |
) |
|
|
|
|
Share repurchases |
|
|
(3,987 |
) |
|
|
|
|
Capital contributions |
|
|
525 |
|
|
|
487 |
|
Dividends paid |
|
|
(10,652 |
) |
|
|
|
|
Acquisition related transaction costs |
|
|
(308 |
) |
|
|
|
|
Distributions to former GLG owners |
|
|
(118,354 |
) |
|
|
(254,331 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(167,790 |
) |
|
|
(253,844 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(41,476 |
) |
|
|
(117,835 |
) |
Effect of foreign currency translation on cash |
|
|
(259 |
) |
|
|
749 |
|
Cash and cash equivalents at beginning of period |
|
|
429,422 |
|
|
|
273,148 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
387,687 |
|
|
$ |
391,732 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.
5
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(US Dollars in thousands, except share and per share amounts)
1.
ORGANIZATION AND BASIS OF PRESENTATION
GLG Partners, Inc. (the Company) was incorporated in the state of Delaware on June 8, 2006 under
the name Freedom Acquisition Holdings, Inc (Freedom). The Company was formed to acquire an
operating business through a merger, capital stock exchange, asset acquisition, stock purchase or
other similar business combination. On November 2, 2007 the Company completed the acquisition (the
Acquisition) of GLG Partners LP and its affiliated entities (collectively, GLG).
The Company is a leading alternative asset manager based in London which offers its clients a broad
range of investment products and account management services. Its primary business is to provide
investment management advisory services for various investment funds and companies (the GLG
Funds). The Company derives revenue primarily from management fees and administration fees charged
to the GLG Funds and accounts it manages based on the value of assets in these funds and accounts,
and performance fees charged to the GLG Funds and accounts it manages based on the performance of
these funds and accounts.
As the Acquisition is considered a reverse acquisition and recapitalization for accounting
purposes, the combined historical financial statements of GLG became the Companys historical
financial statements. Accordingly, the Acquisition has been treated as the equivalent of GLG
issuing stock for the net assets of the Company, accompanied by a recapitalization of GLG. The net
assets of the Company, primarily cash, have been stated at their carrying value, and accordingly no
goodwill or other intangible assets were recorded.
The unaudited condensed consolidated and combined financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with US generally accepted accounting principles (US GAAP) have been condensed or
omitted pursuant to the SECs rules and regulations.
These unaudited condensed consolidated and combined financial statements should be read in
conjunction with the consolidated and combined financial statements and the notes thereto included
in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2007.
The unaudited condensed consolidated and combined financial statements are presented in US Dollars
($) and prepared under US GAAP. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company have been included. The condensed consolidated
and combined financial statements include the accounts of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated.
The Company operates in one business segment, the management of global funds and accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combination and consolidation
Upon consummation of the Acquisition, the GLG entities became subsidiaries of the Company and from
that date the financial statements have been prepared on a consolidated basis and consolidate those
entities over which the legal parent, the Company, has control over significant operating,
financial or investing decisions. Prior to the Acquisition and for all comparative periods, the
combined financial statements presented are those of the accounting acquirer, GLG. The combined
financial statements of GLG combine those entities in which the principals of GLG, Noam Gottesman,
Pierre Lagrange and Emmanuel Roman (the Principals), and the trustees of their respective trusts
(the Trustees) had control over significant operating, financial or investing decisions. Equity
balances have been retroactively restated to conform to the capital structure of the legal
acquirer, the Company.
The Company consolidates certain entities it controls through a majority voting interest or
otherwise in which the Company is presumed to have control pursuant to Financial Accounting
Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 04-5, Determining Whether a
General Partner, or the General Partners as a
6
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights (EITF 04-5). All intercompany transactions and balances have been eliminated.
Minority Interests in Consolidated Subsidiaries
Minority interests are recorded in respect of the following interests in the following GLG
entities:
GLG Holdings Inc. and GLG Inc.
On January 24, 2008 GLG Holdings Inc. was acquired by the Company for $2,500 in cash and GLG
Holdings Inc. and GLG Inc. became wholly owned subsidiaries of the Company. Prior to January 24,
2008, GLG Holdings Inc. was independently owned.
Prior to this acquisition, the Company consolidated GLG Holdings Inc. and GLG Inc. pursuant to the
requirements of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, since they
were variable interest entities and the Company was the Primary Beneficiary. GLG Holdings Inc. is
the holding company (and acts solely as a holding company) for GLG Inc., a dedicated research and
administrative services provider based in New York. GLG Inc. provides dedicated research and
administrative services to GLG Partners LP with respect to GLGs U.S. focused investment
strategies. The consolidated and combined assets of GLG Holdings Inc. and GLG Inc. were $11,774 as
at December 31, 2007.
GLG Holdings Inc. funded the acquisition of GLG Inc. with promissory notes now held by GLG Partners
Services LP. GLG Inc. issued additional promissory notes now held by GLG Partners Services LP to
fund its operations. The promissory notes issued by GLG Holdings Inc. are secured by the pledge of
100% of the issued and outstanding share capital of GLG Inc. in favor of GLG Partner Services LP
pursuant to a pledge agreement. Creditors of GLG Holdings Inc. and GLG Inc. do not have any
recourse against other GLG entities.
Minority interest in respect of these entities at December 31, 2007 relates to their entire equity
and retained earnings, in which GLG does not hold any economic interest.
FA Sub 2 Limited Exchangeable Shares
Upon consummation of the Acquisition, Noam Gottesman and the trustee of the Gottesman GLG Trust
received, in exchange for their interests in GLG entities, in total 58,904,993 exchangeable Class B
ordinary shares of FA Sub 2 Limited (the Exchangeable Shares) and 58,904,993 shares of our Series
A voting preferred stock (the Series A preferred stock), in addition to their proportionate share
of the cash consideration.
The Exchangeable Shares are exchangeable at the holders option for an equal number of shares of
the Companys common stock at any time for zero consideration. Upon exchange of the Exchangeable
Shares, an equivalent number of shares of the Companys Series A preferred stock will be
concurrently redeemed. The shares of Series A preferred stock are entitled to one vote per share
and to vote with the common stockholders as a single class but have no economic rights. The
Exchangeable Shares carry dividend but no voting rights except with respect to certain limited
matters which will require the majority vote or written consent of the holders. The combined
ownership of the Exchangeable Shares and the Series A preferred stock provides the holders with
voting rights equivalent to those of the Companys common stockholders.
The dividend rights of the Exchangeable Shares are such that the holders will receive an equivalent
dividend to dividends paid to the common stockholders (Exchangeable Shares dividend). The
Exchangeable Shares dividend is presented as an expense within minority interest in the condensed
consolidated and combined statements of operations. In addition, the holders of the Exchangeable
Shares will receive a cumulative dividend based on the Companys estimate of the net taxable income
of FA Sub 2 Limited allocable to such holders multiplied by an assumed tax rate of 43.783%. The
cumulative dividend rights of the holders of the Exchangeable Shares are in excess of those of the
Companys common stockholders, and these rights are presented as an expense within minority
interest in the condensed consolidated and combined statements of operations.
7
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
At the FA Sub 2 Limited level, the Exchangeable Shares have the same liquidation and income rights
as other ordinary shareholders of FA Sub 2 Limited, and consequently the minority interest is
calculated as the Exchangeable Shareholders proportionate share of net assets.
Revenue Recognition
Management fees are calculated as a percentage of net assets under management based upon the
contractual terms of investment advisory and related agreements and recognized as earned as the
related services are performed. These fees are generally payable monthly in arrears.
Performance fees are calculated as a percentage of investment gains (which includes both realized
and unrealized gains) less management and administration fees, subject in certain cases to
performance hurdles, over a measurement period, generally six months. The Company has elected to
adopt the preferred method of recording performance fee income, Method 1 of EITF Topic D-96,
Accounting for Management Fees Based on a Formula (Method 1). Under Method 1, the Company does
not recognize performance fee revenues until the end of the measurement period when the amounts are
crystallized.
The majority of the investment funds and accounts managed by the Company have contractual
measurement periods that end on each of June 30 and December 31. As a result, the performance fee
revenues for the first and third fiscal quarters do not reflect revenues from uncrystallized
performance fees during these three-month periods and will be reflected instead at the end of the
fiscal quarter in which such fees crystallize.
In certain cases, the Company may rebate a portion of its gross management and performance fees in
order to compensate third-party institutional distributors for marketing its products and, in a
limited number of cases, in order to incentivize clients to invest in funds managed by the Company.
Such arrangements are generally priced at a portion of the Companys management and performance
fees paid by the fund. The Company accounts for rebates in accordance with EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent (EITF 99-19), and has recorded its
revenues net of rebates. In addition, most funds managed by the Company have share classes with
distribution fees that are paid to third party institutional distributors.
Administration fees are calculated on a similar basis as management fees and are recognized as the
related services are performed. From its gross administration fees, the Company pays
sub-administration fees to third-party administrators and custodians. In accordance with EITF
99-19, administration fees are recognized net of sub-administration fees.
Rebates and sub-administration fees on the balance sheet represent amounts payable under the rebate
and sub-administration fee arrangements described above.
Where a single-manager alternative strategy fund or internal Fund of Hedge Funds (FoHF) managed
by the Company invests in an underlying single-manager alternative strategy fund managed by the
Company, the investing fund is the top-level GLG Fund into which a client invests and the
investee fund is the underlying GLG Fund into which the investing fund allocates funds for
investment. When one of the single-manager alternative strategy funds or internal FoHFs managed by
the Company invests in an underlying single-manager alternative strategy fund managed by the
Company:
|
|
|
management fees are charged at the investee fund level, except in the case of (1) an
investment by the GLG Emerging Markets Fund in the GLG Emerging Markets (Special Assets)
Fund where management fees are charged only at the investing fund level and (2) the GLG
Multi Strategy Fund where fees are charged at both the investee and investing fund levels; |
|
|
|
|
performance fees are charged at the investee fund level, except in the case of (1) an
investment by the GLG Emerging Markets Fund in the GLG Emerging Markets (Special Assets)
Fund where performance fees are charged only at the investing fund level and (2) the GLG
Global Aggressive Fund where fees are charged at |
8
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
|
|
|
both the investee and investing fund levels, to the extent, if any, that the performance fee
charged at the investing fund is greater than the performance fee charged at the investee
fund level; and |
|
|
|
|
administration fees are charged at both the investing and investee fund levels. |
Due to the impact of foreign currency exposures on management and performance fees, the Company has
elected to utilize cash flow hedge accounting to hedge a portion of its anticipated foreign
currency denominated revenue. The effective portion of the hedge is recorded as a component of
other comprehensive income and is released into management or performance fee income, respectively,
when the hedged revenues impact the income statement. The ineffective portion of the hedge is
recorded each period as derivative gain or loss in other income or other expense, respectively.
See Derivatives and Hedging for a further discussion of the Companys foreign exchange hedging
activities.
Employee Compensation and Benefits
The components of employee compensation and benefits are:
|
|
|
Base compensation contractual compensation paid to employees in the form of base
salary, which is expensed as incurred. |
|
|
|
|
Variable compensation payments that arise from the contractual entitlements of
personnel to a fixed percentage of certain variable fee revenues attributable to such
personnel with respect to GLG Funds and managed accounts. Variable compensation expense is
recognized at the same time as the underlying fee revenue is crystallized, which may be
monthly or semi-annually (on June 30 and December 31), depending on the fee revenue source. |
|
|
|
|
Discretionary compensation payments that are determined by the Companys management in
its sole discretion and are generally linked to performance. In determining such payments,
the Companys management considers, among other factors, the ratio of total discretionary
compensation to total revenues; however, this ratio may vary between periods and, in
particular, significant discretionary bonuses may still be paid in a period of low
performance for retention and incentivization purposes. This discretionary compensation is
paid to employees in the form of a discretionary cash bonus. Discretionary compensation is
generally declared and paid following the end of each calendar year. However, the notional
discretionary compensation charge is adjusted monthly based on the year-to-date
profitability and revenues recognized on a year-to-date basis. As the majority of funds
crystallize their performance fees at June 30 and December 31, the majority of
discretionary compensation expense crystallizes at year end and is typically paid in
January following the year end. |
Limited Partner Profit Share
The key personnel who are participants in the limited partner profit share arrangement provide
services to the Company through two limited liability partnerships, Laurel Heights LLP and Lavender
Heights LLP (the LLPs), which are limited partners in GLG Partners LP and GLG Partners Services
LP, respectively. The amount of profits (or limited partner profit share) attributable to each of
the LLPs is determined at the Companys discretion based upon the profitability of the Companys
business and the Companys view of the contribution to revenues and profitability from the services
provided by each limited partnership during that period. These profit shares are recorded as
operating expense matching the period in which the related revenues are recognized and associated
services are provided. A portion of the partnership distribution is advanced monthly as a draw
against final determination of profit share. Once the final profit allocation is determined,
typically in January following each year end, it will be paid to the LLPs, as limited partners,
less any amounts paid as advance drawings during the year. In addition, as shares of restricted
stock awarded under the Companys 2007 Restricted Stock Plan (the Restricted Stock Plan) or 2007
Long-Term Incentive Plan (the LTIP) to members of the LLPs vest or as the Company pays cash
dividends on the unvested shares of restricted stock awarded under these plans to members of the
LLPs, the limited partnerships allocate additional profits to the LLPs sufficient for the LLP to
acquire from the Company the shares that are vesting or to pay the relevant dividend. These
additional profit shares are recorded as operating
9
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment (SFAS No. 123(R)). Other limited partners of GLG Partners Services LP who
receive profit allocations include two investment professionals, who are not members of Lavender
Heights LLP, but whose profit distributions from GLG Partners Services LP are determined in the
same manner as the allocation of profit shares to individual members of the LLP and included in the
limited partner profit share measure, as described below.
Profit allocations made to the LLPs by GLG Partners LP and GLG Partners Services LP make up
substantially all of the LLPs net profits for each period. Members are entitled to a base limited
partner profit share priority drawing, which is a fixed amount and paid as a partnership draw.
Certain members are also entitled to a variable limited partner profit share priority drawing based
on a fixed percentage of certain variable fee revenues attributable to such personnel with respect
to GLG Funds and managed accounts, which are paid as a partnership draw. After year end, the
managing members of the LLPs will declare discretionary allocations to the key personnel who
participate in the limited partner profit share arrangement and who are LLP members from the
remaining balance of the LLPs net profits, after taking into account the base and variable limited
partnership profit share priority drawings, based on their view of those individuals contribution
to the generation of these profits. These three components make up the limited partner profit
share. This process will typically take into account the nature of the services provided to the
Company by each key personnel, his or her seniority and the performance of the individual during
the period. Profit allocations, net of any amounts paid during the year as priority partnership
drawings, will typically be paid to the members in January following each year end.
Derivatives and Hedging
The Company is exposed to foreign exchange risks relating to performance and management fees
denominated in foreign currencies. Forward foreign exchange contracts on various foreign currencies
are entered into to manage those risks. These contracts are designated as cash flow hedges under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, with changes in fair
value attributable to changes in the relevant spot rates recorded in other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged forecasted
transaction affects earnings. Changes in the fair value of the hedge attributable to the
spot-forward differential are recorded directly in the income statement.
For those derivatives that are designated as hedges and for which hedge accounting is desired, the
hedging relationship is formally designated and documented at its inception. The document
identifies the risk management objective and strategy for undertaking the hedge, the hedging
instrument, the hedged item or transaction, the nature of risk being hedged and how effectiveness
will be measured throughout its duration. Such hedges are expected at inception to be highly
effective in offsetting changes in cash flows and are assessed on an ongoing basis to determine
that they actually have been highly effective throughout the reporting period for which they were
designated.
The Company has hedged 35,000,000 of monthly management fee receivables from June to November
2008 with a final settlement date of December 10, 2008.
Recent Accounting Pronouncements
On March 19, 2008 the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 changes
the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. The Company has
elected to adopt SFAS No. 161 early effective as of January 1, 2008. Adoption of SFAS No. 161 has
not had a material impact on the Companys results of operations and financial condition.
SFAS No. 157, Fair Value Measurements (SFAS No. 157), which became effective for the Company on
January 1, 2008, established a framework for measuring fair value, while expanding fair value
measurement disclosures.
10
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
SFAS No. 157 established a fair value hierarchy that distinguishes between independent observable
inputs and unobservable inputs based on the best information available. SFAS No. 157 expands
disclosures about the use of fair value to measure assets and liabilities, the effect of these
measurements on earnings for the period, and the inputs used to measure fair value. In February
2008, the FASB issued FASB Staff Position (FSP) FAS 157-1 to exclude SFAS No. 13, Accounting for
Leases, and its related interpretive accounting pronouncements that address leasing transactions,
from the scope of SFAS No. 157. In February 2008, the FASB also issued FSP FAS 157-2 to allow
entities the option to defer the effective date of SFAS No. 157 for non-financial assets and
liabilities, except for those items recognized or disclosed at fair value on an annual or more
frequently recurring basis, until January 1, 2009. The Company will apply the fair value
measurement provisions of SFAS No. 157 to its non-financial assets and liabilities effective
January 1, 2009. The January 1, 2008 adoption of the other provisions of SFAS No. 157 had no impact
on retained earnings and is not expected to have a material impact on the Companys results of
operations and financial condition. On October 10, 2008, the FASB issued FSP FAS 157-3,
Determining Fair Value in a Market That Is Not Active (FSP FAS 157-3), which is effective upon
issuance, to help constituents measure fair value in markets that are not active. The adoption of
FSP FAS 157-3 did not have a material impact on the Companys results of operations or financial
condition.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 states that the accounting
and reporting for minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS No. 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective prospectively, except for certain retrospective disclosure
requirements, for fiscal years beginning after December 15, 2008. This statement will be effective
for the Company beginning in fiscal 2009. As described above, the primary impact of the statement
will be the reclassification of minority interests from liabilities to stockholders equity and
their re-labeling as noncontrolling interests. In addition, presently under ARB No. 51,
noncontrolling interests only share in losses to the extent that they have available equity to
absorb losses. Under SFAS No. 160, the noncontrolling interests will fully share in losses as well
as profits.
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN
45-4). FSP FAS 133-1 and FIN 45-4 is intended to improve disclosures about credit derivatives by
requiring more information about the potential adverse effects of changes in credit risk on the
financial position, financial performance, and cash flows of the sellers of credit derivatives. The
Company is currently evaluating the impact of adopting FSP FAS 133-1 and FIN 45-4 but the adoption
is not expected to have a material impact on the Companys results of operations or financial
condition.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per
Share. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. All prior-period earnings per share data
presented shall be adjusted retrospectively. Early application is not permitted. The adoption of
FSP EITF 03-6-1 is not expected to have a material impact on the Companys results of operations or
financial condition.
11
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
Net Income per share of Common Stock
The Company calculates net income per share of common stock in accordance with SFAS No. 128,
Earnings Per Share. Basic and diluted net income per common stock was determined by dividing net
income applicable to common stockholders by the weighted-average number of shares of common stock
outstanding during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net (loss)/income applicable to common stockholders |
|
$ |
(167,088 |
) |
|
$ |
28,962 |
|
|
$ |
(487,039 |
) |
|
$ |
167,123 |
|
Weighted-average common stock outstanding (in thousands) basic |
|
|
211,417 |
|
|
|
135,712 |
|
|
|
211,357 |
|
|
|
135,712 |
|
Net (loss)/income per share applicable to common stockholders basic |
|
$ |
(0.79 |
) |
|
$ |
0.21 |
|
|
$ |
(2.30 |
) |
|
$ |
1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding (in thousands) diluted |
|
|
211,417 |
|
|
|
194,617 |
|
|
|
211,357 |
|
|
|
194,617 |
|
Net (loss)/income per share applicable to common stockholders diluted |
|
$ |
(0.79 |
) |
|
$ |
0.15 |
|
|
$ |
(2.30 |
) |
|
$ |
0.86 |
|
Reconciliation of weighted-average common stock outstanding basic to
weighted-average common stock outstanding diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding basic (in thousands) |
|
|
211,417 |
|
|
|
135,712 |
|
|
|
211,357 |
|
|
|
135,712 |
|
FA Sub 2 Limited Exchangeable Shares |
|
|
|
|
|
|
58,905 |
|
|
|
|
|
|
|
58,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding diluted (in thousands) |
|
|
211,417 |
|
|
|
194,617 |
|
|
|
211,357 |
|
|
|
194,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following common stock equivalents have been excluded from the computation of weighted-average
stock outstanding as of September 30, 2008 and 2007 as they would have been anti-dilutive (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Common stock held in Treasury |
|
|
25,382 |
|
|
|
25,382 |
|
|
|
25,382 |
|
|
|
25,382 |
|
FA Sub 2 Limited Exchangeable Shares |
|
|
58,905 |
|
|
|
|
|
|
|
58,905 |
|
|
|
|
|
Common stock awarded in connection
with share-based compensation
arrangements |
|
|
8,882 |
|
|
|
6,397 |
|
|
|
8,882 |
|
|
|
6,397 |
|
Public stockholders warrants |
|
|
32,985 |
|
|
|
|
|
|
|
32,985 |
|
|
|
|
|
Co-investment warrants |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Sponsors warrants |
|
|
4,500 |
|
|
|
|
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,654 |
|
|
|
31,779 |
|
|
|
135,654 |
|
|
|
31,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, 12,000 founders warrants have not been included in the computation of
weighted-average stock outstanding as of September 30, 2008 and 2007, because they are only
exercisable in the event that the last sale price of the Companys common stock equals or exceeds
$14.25 per share for any 20 trading days within a 30-trading day period, and to do so would have
been anti-dilutive.
3. COMMITMENTS AND CONTINGENCIES
Regulatory Proceedings
The Company, in the ordinary course of business, responds to a variety of regulatory inquiries. The
Company and its subsidiaries are involved in the following regulatory investigations among others:
On January 25, 2008, the Autorité des Marchés Financiers (AMF) notified the Company of
proceedings relating to GLGs trading in the shares of Infogrames Entertainment (Infogrames) on
February 8 and 9, 2006, prior to the issuance by Infogrames on February 9, 2006 of a press release
announcing poor financial results. The AMFs decision to initiate an investigation into GLGs
trades in Infogrames was based on a November 19, 2007 report prepared by the AMFs Department of
Market Investigation and Supervision (the Infogrames Report). According to the Infogrames Report,
the trades challenged by the AMF generated an unrealized capital gain for GLG as of the
12
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
opening on February 10, 2006 of 179,000. The AMF investigation relates solely to the conduct of
a former employee; however, the Company was named as the respondent. If sustained, the charge
against the Company could give rise to an administrative fine under French securities laws. The
Company filed its response to the Infogrames Report on May 23, 2008.
The Company has provided for the above within accounts payable and other accruals within Current
Liabilities.
Indemnifications
In the normal course of business, the Company enters into operating contracts that contain a
variety of representations and warranties and that provide general indemnifications. The Companys
maximum exposure under these arrangements is unknown as this would involve future claims that may
be made against the Company that have not yet occurred. However, based on experience, the Company
expects the risk of material loss to be remote.
4. INCOME TAXES
The Company calculates its effective tax rate on profit before tax and certain non-tax deductible
compensation expense. For the first nine months of 2008, $588,500 of the Companys compensation
expense related to acquisition-related share based compensation, $541,400 of which is not tax
deductible, compared to $0 for the first nine months of 2007. The Companys profit before tax and
before this expense was $83,600 and $200,600 for the first nine months of 2008 and 2007,
respectively. The Companys effective tax rate based on this measure was 15.1% and 16.5% for the
first nine months of 2008 and 2007, respectively. This is lower than the U.S. Federal rate of tax
of 35.0% as the Companys profits are predominantly earned in the United Kingdom and the Cayman
Islands which apply lower rates of tax.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the use of inputs used in
valuation methodologies into the following three levels:
|
|
|
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for
identical assets or liabilities in active markets. A quoted price in an active market
provides the most reliable evidence of fair value and shall be used to measure fair value
whenever available. |
|
|
|
|
Level 2: Inputs to the valuation methodology include quoted prices for similar assets
or liabilities in active markets; inputs to the valuation methodology include quoted prices
for identical or similar assets or liabilities in markets that are not active; or inputs to
the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means. |
|
|
|
|
Level 3: Inputs to the valuation methodology are unobservable and significant to the
fair value measurement. Level 3 assets and liabilities include financial instruments whose
value is determined using discounted cash flow methodologies, as well as instruments for
which the determination of fair value requires significant management judgment or
estimation. |
Investments at fair value include available for sale investments in listed GLG Funds. These
investments are valued at the final Net Asset Value (NAV) as published by the relevant exchange.
Other assets include the fair value of foreign exchange derivatives, which are valued at quoted
forward prices from foreign exchange counterparties and discounted to present value using
prevailing risk free rates for the Companys functional currency.
In accordance with the fair value hierarchy described above, the following table shows the fair
value of our financial assets and liabilities that are required to be measured at fair value as of
September 30, 2008, which are classified as Non-current assets:
13
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Balance |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale investments |
|
$ |
82,558 |
|
|
|
|
|
|
$ |
82,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (financial derivatives) |
|
$ |
4,401 |
|
|
|
|
|
|
$ |
4,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. SHARE BASED COMPENSATION
The Company has assumed from April 1, 2008 a forfeiture rate of 10% per annum for restricted stock
awards under the Restricted Stock Plan and the LTIP and share awards under the equity participation
plan and from July 1, 2008 a forfeiture rate of 10% per annum for cash awards under the equity
participation plan. Shares subject to the agreement among the principals and trustees continue to
carry a zero forfeiture rate estimate. The impact of the change in forfeiture assumptions was not
material for the nine months ended September 30, 2008.
During the quarter ended September 30, 2008, 406,908 shares were forfeited, of which 314,908 shares
remain as treasury stock held by two subsidiary limited partnerships (and are included in the
Companys total common share count as issued and outstanding) and 92,000 shares were returned to
the Company and cancelled.
7. DERIVATIVE FINANCIAL INSTRUMENTS
For the quarter ended September 30, 2008, the fair value of financial instruments has been recorded
as follows:
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, 2008 |
|
Balance Sheet |
|
|
|
|
Fair Value of Derivative Financial Instruments designated in a cash
flow hedge relationship at end of period (included in Other Assets) |
|
$ |
4,401 |
|
Fair Value of Derivative Financial Instruments designated in a cash
flow hedge relationship at beginning of period (included in Other
Liabilities) |
|
|
(1,210 |
) |
|
|
|
|
Change in Fair Value of Derivative Financial Instruments |
|
$ |
5,611 |
|
|
|
|
|
|
|
|
|
|
Fair values are allocated as follows: |
|
|
|
|
|
|
|
|
|
Statement of Changes in Equity: |
|
|
|
|
Gain recorded in other comprehensive income in period cash flow hedges |
|
$ |
3,732 |
|
Loss reclassified from other comprehensive income to income |
|
|
(1,293 |
) |
|
|
|
|
Total gain carried forward in Other Comprehensive Income |
|
|
2,439 |
|
|
|
|
|
|
Statement of Operations: |
|
|
|
|
Increase in Management Fees |
|
|
1,241 |
|
Increase in Other income (ineffective portion of hedge and excluded
from effectiveness assessment) |
|
|
1,931 |
|
|
|
|
|
Total impact on Statement of Operations |
|
|
3,172 |
|
|
|
|
|
|
|
|
|
|
Total impact on Comprehensive Income |
|
$ |
5,611 |
|
|
|
|
|
14
GLG PARTNERS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS (Continued)
(US Dollars in thousands, except share and per share amounts)
8. SHAREHOLDERS EQUITY
The following transactions occurred in the common stock of the Company:
|
|
|
|
|
|
|
Number of shares |
Common stock outstanding at December 31, 2007 |
|
|
244,730,988 |
|
|
|
|
|
|
Warrants exercised |
|
|
2,147,939 |
|
Shares repurchased |
|
|
(344,355 |
) |
Stock awarded under LTIP arrangements |
|
|
1,164,325 |
|
Stock forfeited and cancelled under share-based compensation arrangements |
|
|
(359,000 |
) |
Cancellation and replacement of stock previously issued under
share-based compensation arrangements with equivalent restricted stock
obligations |
|
|
(1,545,500 |
) |
|
|
|
|
|
Common stock outstanding at September 30, 2008 |
|
|
245,794,397 |
|
|
|
|
|
|
On February 25, 2008 a dividend of $0.025 per share of common stock was declared payable on April
21, 2008 to holders of record on April 10, 2008. Total dividends of $6,244 were recognized for the
three months ended March 31, 2008.
On June 16, 2008 a dividend of $0.025 per share of common stock was declared payable on July 21,
2008 to holders of record on July 10, 2008. Dividends of $5,568 have been provided for the three
months ended June 30, 2008 (totaling $11,812 for the six months ended June 30, 2008) after charging
dividends on shares expected to be forfeited to operating expense.
On September 26, 2008 a dividend of $0.025 per share of common stock was declared payable on
October 21, 2008 to holders of record on October 10, 2008. Total dividends of $4,265 were
recognized for the three months ended September 30, 2008 after transfer of $1,494 to compensation
for dividends paid on shares forfeited, anticipated to forfeit or awarded to non-employees.
Exchangeable Shares dividends of $0.025 per share in the aggregate amount of $1,472.7 were also
declared, payable on each of April 21, 2008, July 21, 2008 and October 21, 2008, to holders of the
FA Sub 2 Limited Exchangeable Shares, who are entitled to dividends based on the number of shares
of common stock of the Company into which the Exchangeable Shares are exchangeable (58,904,993).
These Exchangeable Shares dividends are recorded as an expense within minority interest in the
statements of operations.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated and
combined financial statements and the related notes (referred to as the consolidated and combined
financial statements) included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our
audited consolidated and combined financial statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K/A for the year ended December 31, 2007. The information in this section
contains forward-looking statements. Our actual results may differ significantly from the results
suggested by these forward-looking statements and our historical results as a result of certain
risks and uncertainties which are described in Risk Factors included in Part II, Item 1A of this
Quarterly Report on Form 10-Q.
General
Our Business
We are a leading alternative asset manager offering our clients a diverse range of investment
products. Our primary business is to provide investment management advisory services for various
investment funds and companies (the GLG Funds). We currently derive our revenues from management
fees and administration fees based on the value of the assets in the GLG Funds and accounts we
manage, and performance fees based on the performance of the GLG Funds and accounts managed by us.
Substantially all of our assets under management, or AUM, are attributable to third-party
investors, and the funds and accounts managed by us are not consolidated into our financial
statements. As of September 30, 2008, our net AUM (net of assets invested in other funds managed by
us) was approximately $17.3 billion, down from approximately $23.7 billion as of June 30, 2008. As
of September 30, 2008 our gross AUM (including assets invested in other funds managed by us) was
approximately $21.2 billion, down from approximately $27.9 billion as of June 30, 2008.
On November 2, 2007, we completed the acquisition (the Acquisition) of GLG Partners Limited,
GLG Holdings Limited, Mount Granite Limited, Albacrest Corporation, Liberty Peak Ltd., GLG Partners
Services Limited, Mount Garnet Limited, Betapoint Corporation, Knox Pines Ltd., GLG Partners Asset
Management Limited and GLG Partners (Cayman) Limited (each, an Acquired Company and collectively,
the Acquired Companies) pursuant to a Purchase Agreement dated as of June 22, 2007 (the Purchase
Agreement) among us, our wholly owned subsidiaries, FA Sub 1 Limited, FA Sub 2 Limited and FA Sub
3 Limited, Jared Bluestein, as the buyers representative, Noam Gottesman, as the sellers
representative, and the equity holders of the Acquired Companies (the GLG Shareowners).
Effective upon the consummation of the Acquisition, (1) each Acquired Company became a
subsidiary of ours, (2) the business and assets of the Acquired Companies and certain affiliated
entities became our only operations and (3) we changed our name to GLG Partners, Inc.
In exchange for their equity interests in the Acquired Companies, the GLG Shareowners
received:
|
|
|
$976,107,300 in cash; |
|
|
|
|
$23,892,700 in promissory notes in lieu of all of the cash consideration payable to
electing GLG Shareowners; |
|
|
|
|
230,000,000 shares of our common stock, par value $0.0001 per share which consists
of: |
|
|
|
138,095,007 shares of our common stock, including 10,000,000 shares of our
common stock issued for the benefit of our employees, service providers and
certain key personnel under our 2007 Restricted Stock Plan (the Restricted Stock
Plan); |
|
|
|
33,000,000 shares of our common stock payable by us upon exercise of certain
put or call rights with respect to 33,000,000 ordinary shares issued by FA Sub
1 Limited to certain |
16
|
|
|
GLG Shareowners. Each of the ordinary shares issued by FA Sub 1 Limited to
these GLG Shareowners has been put by the holder to us in exchange for one
share of our common stock; and |
|
|
|
58,904,993 shares of our common stock to be issued upon the exchange of
58,904,993 Exchangeable Shares (the Exchangeable Shares) issued by FA Sub 2
Limited to certain GLG Shareowners. Each Exchangeable Share is exchangeable at
any time at the election of the holder for one share of our common stock; and |
|
|
|
58,904,993 shares of our Series A preferred stock, par value $0.0001 per share
issued with the corresponding Exchangeable Shares which carry only voting rights
and nominal economic rights and which will automatically be redeemed on a
share-for-share basis as Exchangeable Shares are exchanged for shares of our
Common Stock. |
The aggregate of $1.0 billion in cash and promissory notes necessary to pay the cash portion
of the purchase price to the GLG Shareowners was financed through a combination of (1)
approximately $571.1 million of proceeds raised in our initial public offering and the
co-investment by our sponsors, Berggruen Holdings North America Ltd. and Marlin Equities II, LLC,
immediately prior to the consummation of the Acquisition and (2) bank debt financing of $530.0
million of the $570.0 million available under the new credit facilities. The remaining capacity
under the credit facilities has been drawn down for working capital and general corporate purposes.
The Acquisition is accounted for as a reverse acquisition. The combined group composed of the
Acquired Companies has been treated as the acquiring entity and the continuing reporting entity for
accounting purposes. Upon completion of the Acquisition, our assets and liabilities were recorded
at historical cost and added to those of the Acquired Companies. Because we had no active business
operations prior to consummation of the Acquisition, the Acquisition was accounted for as a
recapitalization of the Acquired Companies.
In this Managements Discussion and Analysis of Financial Condition and Results of Operations,
references to GLG are to the combined business of the Acquired Companies and certain affiliated
entities prior to November 2, 2007, and references to we, us, our and the Company are to the
business of GLG Partners, Inc. and its subsidiaries from and after November 2, 2007.
Factors Affecting Our Business
Our business and results of operations are impacted by the following factors:
|
|
|
Assets under management. Our revenues from management and administration fees are
directly linked to AUM. As a result, our future performance will depend on, among other
things, our ability both to retain AUM and to grow AUM from existing and new products. |
|
|
|
|
Fund performance. Our revenues from performance fees are linked to the performance
of the GLG Funds and accounts we manage. Performance also affects AUM because it
influences investors decisions to invest assets in, or withdraw assets from, the GLG
Funds and accounts managed by us. |
|
|
|
|
Currency exchange rates. The GLG Funds typically offer share classes denominated in
foreign currencies and as a result, earn fees in those currencies based on AUM
denominated in those currencies. Consequently, our fee revenues are affected by
exchange rate movements. |
|
|
|
|
Personnel, systems, controls and infrastructure. We depend on our ability to
attract, retain and motivate leading investment and other professionals. Our business
requires significant investment in our fund management platform, including
infrastructure and back-office personnel. We have in the past paid, and expect to
continue in the future to pay, these professionals significant compensation and a share
of our profits. |
|
|
|
|
Fee rates. Our management and administration fee revenues are linked to the fee
rates we charge the GLG Funds and accounts we manage as a percentage of their AUM. Our
performance fees are linked to |
17
|
|
|
the rates we charge the GLG Funds and accounts we manage as a percentage of their
performance-driven asset growth, subject to high water marks, whereby performance fees
are earned by us only to the extent that the net asset value of a GLG Fund at the end of
a measurement period exceeds the highest net asset value on a preceding measurement
period end for which we earned performance fees, and further subject, in some cases, to
performance hurdles. |
In addition, our business and results of operations may be affected by a number of external
market factors. These include global asset allocation trends, regulatory developments and overall
macroeconomic activity. Due to these and other factors, our operating results may reflect
significant volatility from period to period.
We operate in only one business segment, the management of global investment funds and
accounts.
Critical Accounting Policies
For the period prior to November 2, 2007, our accounts are presented based upon the combined
financial statements of the GLG entities, which have been prepared in accordance with generally
accepted accounting principles in the United States, or GAAP, and in accordance with the criteria
presented below.
For the period from and after November 2, 2007, our accounts are presented based on the
consolidated financial statements of GLG Partners, Inc. and its consolidated subsidiaries prepared
in accordance with GAAP.
The preparation of financial statements in accordance with GAAP requires the use of estimates
and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues, expenses and other income.
Actual results could differ materially from these estimates. The following is a summary of our
critical accounting policies that are most affected by judgments, estimates and assumptions.
Combination and Consolidation Criteria
For the period prior to November 2, 2007, we have prepared combined financial statements of
the accounting acquirer, GLG. The combined financial statements of GLG combine those entities in
which Noam Gottesman, Pierre Lagrange and Emmanuel Roman (the Principals) and the trustees of
their respective trusts (the Trustees) had control over significant operating, financial or
investing decisions. Upon consummation of the Acquisition, the GLG entities became wholly owned
subsidiaries of the Company and from that date the financial statements have been prepared on a
consolidated basis and consolidate those entities over which the legal parent, the Company, has
control over significant operating, financial or investing decisions.
The analysis as to whether to combine or consolidate an entity is subject to a significant
amount of judgment. Some of the criteria considered are the determination as to the degree of
control over an entity by its various equity holders, the design of the entity, how closely related
the entity is to each of its equity holders and the relationship of the equity holders to each
other.
We have determined that we do not own a substantive, controlling interest in any of the
investment funds we manage and that they are not variable interest entities in which we are the
primary beneficiary. As a result, none of the GLG Funds are required to be consolidated into our
financial statements. For all GLG Funds, a simple majority of the investors has the ability to
remove us from our position as fund manager. The majority of the directors of the boards of the GLG
Funds are independent directors.
Revenue Recognition
Performance Fees
Performance fee rates are calculated as a percentage of investment gains less management and
administration fees, subject to high water marks and, in the case of most long-only funds, four
external funds of funds, or FoHF, and three single-manager alternative strategy funds, to
performance hurdles, over a measurement period, generally six months. We have elected to adopt the
preferred method of recording performance fee income,
18
Method 1 of Emerging Issues Task Force (EITF) Topic D-96, Accounting for Management Fees
Based on a Formula (Method 1). Under Method 1, we do not recognize performance fee revenues
until the end of the measurement period when the amounts are contractually payable, or
crystallized.
The majority of the GLG Funds and accounts managed by us have contractual measurement periods
that end on each of June 30 and December 31. As a result, the performance fee revenues for our
first fiscal quarter and third fiscal quarter results do not reflect revenues from uncrystallized
performance fees during these three-month periods. These revenues will be reflected instead at the
end of the fiscal quarter in which such fees crystallize.
Compensation and Limited Partner Profit Share
Compensation expense related to performance fees is accrued during the period for which the
related performance fee revenue is recognized and is adjusted monthly based on year-to-date
profitability and revenues recognized on a year-to-date basis.
We also have a limited partner profit share arrangement which remunerates certain individuals
through distributions of profits from two of our subsidiaries, GLG Partners LP and GLG Partners
Services LP, paid either to two limited liability partnerships in which those individuals are
members or directly to a limited number of individuals who are limited partners of the GLG Partners
Services LP. Through these partnership interests and under the terms of services agreements between
the subsidiaries and the limited liability partnerships, these individuals are entitled to priority
draws and an additional discretionary share of the profits earned by the subsidiaries. These
partnership draws and profit share distributions are referred to as limited partner profit share
and are discussed further under Expenses Compensation, Benefits and Limited Partner Profit
Share below. Charges related to the limited partner profit share arrangement are recognized as
operating expenses as the related revenues are recognized and associated services provided.
Equity-Based Compensation
Prior to December 31, 2006, GLG had not granted any equity-based awards. In March 2007, GLG
established the equity participation plan to provide key individuals limited partnership interests
in two limited partnerships, Sage Summit LP and Lavender Heights Capital LP, with the right to
receive a percentage of the proceeds derived from an initial public offering relating to the
Acquired Companies or a third-party sale of the Acquired Companies. Upon consummation of the
Acquisition, Sage Summit LP and Lavender Heights Capital LP received collectively 15% of the total
consideration of cash and our capital stock payable to the GLG Shareowners in the Acquisition. In
accordance with GAAP, the issued and outstanding shares of our capital stock paid to Sage Summit LP
and Lavender Heights Capital LP in the Acquisition are considered as treasury shares for accounting
purposes and are included in our total common share count as issued and outstanding. The equity
participation plan was initially subdivided into an A Sub-Plan and a B Sub-Plan. These limited
partnerships distributed to A Sub-Plan limited partners an aggregate of 25% of such amounts upon
consummation of the Acquisition, and the remaining 75% will be distributed to the A Sub-Plan
limited partners in three equal installments upon vesting over a three-year period on the first,
second and third anniversaries of the consummation of the Acquisition, subject to the ability of
the general partners of the limited partnerships, whose respective boards of directors consist of
the Trustees, to accelerate vesting. B Sub-Plan member entitlements vest in equal installments on
the first, second, third and fourth anniversaries of the consummation of the Acquisition subject to
the ability of the general partners of the limited partnerships, whose respective boards of
directors consist of the Trustees, to accelerate vesting. The unvested portion of such amounts will
be subject to forfeiture back to Sage Summit LP and Lavender Heights Capital LP (and not GLG), in
the event of termination of the individual as a limited partner prior to each vesting date, unless
such termination is without cause after there has been a change in control of our company or due to
death or disability. To the extent awards granted under the equity participation plan are
forfeited, these amounts may be reallocated by Sage Summit LP and Lavender Heights Capital LP to
their then existing or future limited partners (i.e., participants in the plan). Because forfeited
awards are returned to the limited partnerships, and not GLG, the forfeited shares remain issued
and outstanding and the cash and shares held by the limited partnerships may be reallocated without
further dilution to our shareholders. The equity portion of this plan is being accounted for in
accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment (SFAS 123(R)), and EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, which require that
19
such equity instruments are recorded at their fair value on the measurement date, which date
is typically upon the inception of the services that will be performed, remeasured at subsequent
dates to the extent the awards are unvested, and amortized into expense over the vesting period
utilizing the accelerated method.
Ten
million shares of our common stock, which were part of the purchase price in respect of the
Acquisition, were reserved for allocation under the Restricted Stock
Plan. Of these shares, 9,877,000 shares
were allocated to our employees, service providers and certain key personnel. 911,000 shares of
this reserve were unallocated as of September 30, 2008 following forfeitures (net of new
allocations) of 788,000 since the Acquisition. These awards are subject to vesting, typically over
four years, which may be accelerated. We also adopted the 2007 Long-Term Incentive Plan, or LTIP,
which provides for the grants of incentive and non-qualified stock options, stock appreciation
rights, common stock, restricted stock, restricted stock units, performance units and performance
shares to employees, service providers, non-employee directors and certain key personnel who hold
direct or indirect limited partnership interests in certain GLG entities. The Company is authorized
to issue up to 40 million shares under the LTIP. Shares of restricted stock awarded under the
Restricted Stock Plan and the LTIP are issued and outstanding shares, except in the case of awards
under these plans to personnel who are members of the limited partner profit share arrangement in
which case shares are issued and become outstanding only as the awards vest. Unvested awards under
the LTIP and Restricted Stock Plan which are forfeited, to the extent shares are issued, are
returned to us and cancelled.
In addition, the Principals and the Trustees have entered into an agreement among principals
and trustees which will provide that, in the event a Principal voluntarily terminates his
employment with us for any reason prior to the fifth anniversary of the closing of the Acquisition,
a portion of the equity interests held by that Principal and his related Trustee as of the closing
of the Acquisition will be forfeited to the Principals who are still employed by us and their
related Trustees.
All of these arrangements are accounted for in accordance with SFAS 123(R) (or EITF 96-18 in
respect of awards to non-employees under the Restricted Stock Plan and LTIP) and will be amortized
into expense over the applicable vesting period using the accelerated method. As a result,
following the completion of the Acquisition, compensation and benefits reflect the amortization of
significant non-cash equity-based compensation expenses associated with the vesting of these
equity-based awards, which under GAAP acts to reduce our net income and may result in net losses.
The agreement provides for vesting of 17.5% on the consummation of the Acquisition, and 16.5% on
each of the first through fifth anniversaries of the Acquisition.
SFAS 123(R) requires a company to estimate the cost of share-based payment awards based on
estimated fair values. The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service period. For awards with performance conditions, we
will make an evaluation at the grant date and future periods as to the likelihood of the
performance targets being met. Compensation expense is adjusted in future periods for subsequent
changes in the expected outcome of the performance conditions until the vesting date. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
At the initial grant date of our equity awards on November 2, 2007, management made the
following assumptions with respect to forfeiture rates:
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The size of the awards to employees, service providers and key personnel under
the equity participation plan and LTIP was considered to be a substantial retention
incentive; |
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Incentives for the awards to employees, service providers and key personnel
under the equity participation plan and LTIP were considered sufficiently large
that a zero percent forfeiture rate was estimated, subject to review as actual
forfeitures occur; |
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Disincentives for forfeiture related to the agreement among principals and
trustees were considered to be so punitive that the probability of forfeiture was
estimated as zero; and |
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For awards under the Restricted Stock Plan, we used different forfeiture rates
for individual employees, service providers and key personnel. |
During the second quarter of 2008, we reviewed these assumptions and found that retention
rates (based on the limited post-Acquisition experience) were similar across various groupings of
employees, service providers and key personnel, other than for the Principals and Trustees. Our
expectation is that the equity awards will continue to have a significant impact on retention.
Historical turnover by shares awarded is consistent with the turnover statistics by headcount,
excluding the impact of one individual with a significant share award which we consider not to be
representative of our population.
Consequently in the second quarter of 2008 we revised our forfeiture assumptions with
respect to forfeitures among our stock awards under the Restricted Stock Plan, equity participation
plan and LTIP to an assumed rate of 10% per annum. The forfeiture assumption for the agreement
among the principals and trustees remains at zero. In the third quarter of 2008 we also changed our
forfeiture assumption with respect to forfeitures of the cash component of the equity participation
plan to align with the equity component to an assumed rate of 10% per annum.
Income Tax
Historically, the only GLG entity earning significant profits subject to company-level income
taxes was GLG Holdings Limited, which was subject to U.K. corporate income tax. Most of the balance
of the profit was earned by pass-through or other entities that did not incur significant
company-level income taxes.
Following the Acquisition, profits repatriated back to the United States (e.g., in the form of
dividends) are subject to U.S. taxation. As it is our intention to continue to pay dividends on our
shares of common stock, we expect to repatriate some of our profits in this manner and we expect to
experience U.S. taxation on those repatriated profits. In connection with the Acquisition, we
recognized for U.S. income tax purposes the value of goodwill and certain other intangibles which
we are amortizing and deducting for U.S. income tax purposes over a 15-year period. Depending on
the amount of profits repatriated, this tax amortization deduction will effectively reduce U.S. tax
expense on repatriated profits. Allocation of income among business activities and entities is
subject to detailed and complex rules applied to facts and circumstances that generally are not
readily determinable at the date financial statements are prepared. Accordingly, estimates are made
of income allocations in computing financial statement effective tax rates that may differ from
actual allocations determined when tax returns are prepared or after examination by tax
authorities.
We account for taxes using the asset and liability method in accordance with SFAS No. 109,
Accounting for Income Taxes, under which deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is
established when we believe it is more likely than not that a deferred tax asset will not be
realized.
Net Revenues
All fee revenues are presented in this Quarterly Report on Form 10-Q net of any applicable
rebates or sub-administration fees.
Where a single-manager alternative strategy fund or internal FoHF managed by us invests in an
underlying single-manager alternative strategy fund managed by us, the investing fund is the
top-level GLG Fund into which a client invests and the investee fund is the underlying GLG Fund
into which the investing fund invests. For example, the GLG European Long-Short Fund invests in the
GLG Utilities Fund. In that case, the GLG European Long-Short Fund is the investing fund and the
GLG Utilities Fund is the investee fund.
21
Management Fees
Our gross management fee rates are set as a percentage of fund AUM. Management fee rates vary
depending on the product, as set forth in the table below (subject to fee treatment of fund-in-fund
reinvestments as described below):
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Product |
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General range of gross fee rates (% of AUM) |
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Single-manager alternative strategy funds
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1.50% 2.50%* |
Long-only funds
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0.75% 2.25% |
Internal FoHF
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0.25% 1.00% (at the investing fund level) |
External FoHF
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1.50% 1.95% |
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* |
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When one of the single-manager alternative strategy funds or internal FoHFs managed by us
invests in an underlying single-manager alternative strategy fund managed by us, management
fees are charged at the investee fund level, except in the case of (1) an investment by the
GLG Emerging Markets Fund in the GLG Emerging Markets (Special Assets) Fund where fees are
charged only at the investing fund level and (2) the GLG Multi Strategy Fund where fees are
charged at both the investee and investing fund levels. |
Management fees are generally paid monthly, one month in arrears.
Most GLG Funds managed by us have share classes with distribution fees that are paid to
third-party institutional distributors with no net economic impact to us. In certain cases, we may
rebate a portion of our gross management fees in order to compensate third-party institutional
distributors for marketing our products and, in a limited number of historical cases, in order to
incentivize clients to invest in funds managed by us.
Due to the changing mix of our AUM related to the impact of redemptions from higher yielding
alternative strategy funds during the quarter ended September 30, 2008 and continuing in the
subsequent quarter, the inflow in October 2008 of a material institutional managed account which
earns a wholesale level management fee, and the side pocketing of certain private placement
investments in some of the funds that we manage into special asset vehicles, we expect that our
combined management fee yield will decline to lower levels in future quarters.
Performance Fees
Our gross performance fee rates are set as a percentage of fund performance, calculated as
investment gains (both realized and unrealized), less management and administration fees, subject
to high water marks and, in the case of most long-only funds, four external FoHFs and three
single manager alternative strategy funds, to performance hurdles. As a result, even when a GLG
Fund has positive performance, we may not earn a performance fee due to negative fund performance
in prior measurement periods and in some cases due to a failure to reach a hurdle rate. High water
marks and performance hurdles, however, are determined on a fund-by-fund basis and performance fees
are not netted across funds, other than in the case of the GLG Emerging Markets (Special Assets) Fund.
The GLG Emerging Markets (Special Assets) Fund does
not earn a performance fee until an investors high water mark across both the GLG Emerging Markets (Special Assets) Fund and its parent fund (the GLG Emerging Markets Fund) is exceeded. Accordingly,
any funds above high water marks and applicable performance hurdles at the end of the relevant
measurement period will contribute to performance fee revenue. As of September 30, 2008, all of our
long-only funds and a vast majority of our single-manager alternative strategy funds subject to
high water marks were below their respective high water marks. Accordingly, even if our funds that
are below high water marks have positive performance during the last quarter of 2008 or in
subsequent performance periods, our ability to earn performance fees during those periods will be
adversely impacted due to the number of funds subject to high water marks and the amounts to be
recovered.
22
Performance fee rates vary depending on the product, as set forth in the table below (subject
to fee treatment of fund-in-fund investments as described below):
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Product |
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General range of gross fee rates (% of investment gains) |
Single-manager alternative strategy funds
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20% 30%* |
Long-only funds
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20% (may be subject to performance hurdle) |
Internal FoHF
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0% 20% (at the investing fund level) |
External FoHF
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5% 10% (may be subject to performance hurdle) |
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* |
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When one of the single-manager alternative strategy funds or internal FoHFs
managed by us invests in an underlying single-manager alternative strategy fund
managed by us, performance fees are charged at the investee fund level, except in
the case of an investment by the GLG Emerging Markets Fund in the GLG Emerging
Markets (Special Assets) Fund where performance fees are charged only at the
investing fund level. In addition, performance fees are charged at both the
investee and investing fund levels on the GLG Global Aggressive Fund, to the
extent, if any, that the performance fee charged at the investing fund level is
greater than the performance fee charged at the investee fund level. |
We have adopted Method 1 for recognizing performance fee revenues and under Method 1 do not
recognize performance fee revenues until the end of the measurement period when the amounts are
crystallized, which for the majority of the investment funds and accounts managed by us is on June
30 and December 31.
Due to the impact of foreign currency exposures on management and performance fees, we have
elected to utilize cash flow hedge accounting to hedge a portion of our anticipated foreign
currency denominated revenue. The effective portion of the hedge is recorded as a component of
other comprehensive income and is released into management or performance fee income, respectively,
when the hedged revenues impact the income statement. The ineffective portion of the hedge is
recorded each period as derivative gain or loss in other income or other expense, respectively.
See Quantitative and Qualitative Disclosures About Market Risk Exchange Rate Risk in Part I,
Item 3 of this Quarterly Report for a further discussion of our foreign exchange exposure and
hedging activities.
Administration Fees
Our gross administration fee rates are set as a percentage of fund AUM. Administration fee
rates vary depending on the product. From our gross administration fees, we pay sub-administration
fees to third-party administrators and custodians, with the residual fees recognized as our net
administration fee. Administration fees are generally paid monthly, one month in arrears.
When one of the single-manager alternative strategy funds or internal FoHFs managed by us
invests in an underlying single-manager alternative strategy fund managed by us, administration
fees are charged at both the investing and investee fund levels.
Fees on Managed Accounts
Managed account fee structures are negotiated on an account-by-account basis and may be more
complex than for the GLG Funds. Across the managed account portfolio, fee rates vary according to
the underlying mandate and, excluding one material managed account, in the aggregate are generally
within the performance and management fee ranges charged with respect to comparable fund products.
In October 2008, a new material managed account funded which provides for a management fee at
institutional rates and a performance fee based on exceeding certain benchmarks even in a scenario
with negative performance.
Expenses
Compensation, Benefits and Limited Partner Profit Share
To attract, retain and motivate the highest quality investment and other professionals, we
provide significant remuneration through salary, discretionary bonuses, profit sharing and other
benefits.
23
The largest component of expenses is limited partner profit share and employee compensation
and other benefits payable to our investment and other professionals. This includes significant
fixed annual salary, limited partner profit share and other compensation based on individual, team
and company performance and profitability.
Beginning in mid-2006, GLG entered into partnership with a number of our key personnel in
recognition of their importance in creating and maintaining the long-term value of our business.
These individuals ceased to be employees and either became holders of direct or indirect limited
partnership interests in one of two of our subsidiaries GLG Partners LP and GLG Partners Services
LP, or formed two limited liability partnerships, Laurel Heights LLP and Lavender Heights Capital
LLP, through which they provided services to the GLG entities. Through these partnership interests,
these key individuals are entitled to partnership draws as priority distributions, which are
recognized in the period in which they are payable. There is an additional limited partner profit
share distribution, which is recognized in the period in which the related revenues are recognized
and associated services provided. This additional distribution represents a substantial majority
of the limited partner profit share for the year and is typically paid at the beginning of the
following year. Key personnel that are participants in the limited partner profit share arrangement
do not receive any salaries or discretionary bonuses from us, except for the salary paid by GLG
Partners, Inc. to our Chief Operating Officer.
Under GAAP, limited partner profit share is treated as an operating expense in the period the
limited partner provides services.
Following the Acquisition, and as required by SFAS 123(R), our GAAP employee compensation
expense reflects share-based and other compensation recognized in respect of (a) the equity
participation plan, the 10,000,000 shares allocated for the benefit of employees, service providers
and certain key personnel under the Restricted Stock Plan, and the agreement among the principals
and trustees (collectively, the Acquisition-related compensation expense) and (b) dividends paid
on unvested shares that are ultimately not expected to vest.
Under GAAP, there is a charge to compensation expense for Acquisition-related compensation
expense based on certain service conditions. However, management believes that this charge does not
reflect our ongoing core business operations and compensation expense and excludes such amounts for
purposes of assessing our ongoing core business performance. As a result of our view in respect of
Acquisition-related compensation expense, we present the measure non-GAAP compensation, benefits
and profit share, or non-GAAP CBP (which we had, prior to the first fiscal quarter of 2008,
referred to as non-GAAP limited partner profit share, compensation and benefits, or non-GAAP PSCB),
which is a non-GAAP financial measure which reflects GAAP compensation, benefits and profit share
adjusted to exclude Acquisition-related compensation expense described below under
Acquisition-Related Compensation Expense, to show the total ongoing cost of the services provided
to us by both participants in the limited partner profit share arrangement and employees in
relation to services rendered during the periods under consideration.
The components of compensation, benefits and profit share are:
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Base compensation contractual compensation paid to employees in the form of base
salary, which is expensed as incurred. |
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Variable compensation payments that arise from the contractual entitlements of
personnel to a fixed percentage of certain variable fee revenues attributable to such
personnel with respect to GLG Funds and managed accounts. Variable compensation expense
is recognized at the same time as the underlying fee revenue is crystallized, which may
be monthly or semi-annually (on June 30 and December 31), depending on the fee revenue
source. |
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Discretionary compensation payments that are determined by the Companys
management in its sole discretion and are generally linked to performance. In
determining such payments, the Companys management considers, among other factors, the
ratio of total discretionary compensation to total revenues; however, this ratio may
vary between periods and, in particular, significant discretionary bonuses may still be
paid in a period of low performance for retention and incentivization purposes. This
discretionary compensation is paid to employees in the form of a discretionary cash
bonus. Discretionary compensation is generally declared and paid following the end of
each calendar year.
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However, the notional discretionary compensation charge is adjusted monthly based on the
year-to-date profitability and revenues recognized on a year-to-date basis. As the
majority of the GLG Funds crystallize their performance fees at June 30 and December 31,
the majority of discretionary compensation expense crystallizes at year end and is
typically paid in January following the year end. |
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Limited partner profit share distributions of limited partner profit share under
the limited partner profit share arrangement described below. |
The key personnel who are participants in the limited partner profit share arrangement provide
services to us through two limited liability partnerships, Laurel Heights LLP and Lavender Heights
LLP (the LLPs), which are limited partners in GLG Partners LP and GLG Partners Services LP,
respectively. The amount of profits (or limited partner profit share) attributable to each of the
LLPs is determined at our discretion based upon the profitability of our business and our view of
the contribution to revenues and profitability from the services provided by each limited
partnership during that period. These profit shares are recorded as operating expense matching the
period in which the related revenues are recognized and associated services provided. A portion of
the partnership distribution is advanced monthly as a draw against final determination of profit
share. Once the final profit allocation is determined, typically in January following each year
end, it will be paid to the LLPs, as limited partners, less any amounts paid as advance drawings
during the year. See Allocation of Profit Shares to Individual Members of LLPs below for a
further discussion of the allocations. In addition, as shares of restricted stock awarded under our
Restricted Stock Plan or LTIP to members of the LLPs vest or as we pay cash dividends on the
unvested shares of restricted stock awarded under these plans to members of the LLPs, we allocate
additional profits to the LLPs sufficient for the LLP to acquire from us the shares that are
vesting or to pay the relevant dividend. These additional profit shares are recorded as operating
expense in accordance with SFAS 123(R). Other limited partners of GLG Partners Services LP who
receive profit allocations include two investment professionals who are not members of Lavender
Heights LLP, but whose profit distributions from GLG Partners Services LP are determined in the
same manner as the allocation of profit shares to individual members of the LLP described below and
included in the limited partner profit measure, as described below.
Allocation of Profit Shares to Individual Members of LLPs
Profit allocations made to the LLPs by GLG Partners LP and GLG Partners Services LP make up
substantially all of the LLPs net profits for each period. Members are entitled to a base limited
partner profit share priority drawing, which is a fixed amount and paid as a priority partnership
draw. Certain members are also entitled to a variable limited partner profit share priority drawing
based on a fixed percentage of certain variable fee revenues attributable to such personnel with
respect to GLG Funds and managed accounts, which are paid as a partnership draw. After year end,
the managing members of the LLPs will declare discretionary allocations to the key personnel who
participate in the limited partner profit share arrangement and who are LLP members from the
remaining balance of the LLPs net profits, after taking into account the base and variable limited
partnership profit share priority drawings, based on their view of those individuals contribution
to the generation of these profits. This process will typically take into account the nature of the
services provided to us by each key personnel, his or her seniority and the performance of the
individual during the period. These profit shares are recorded as operating expenses matching the
period in which the related revenues are recognized and associated services provided. Profit
allocations, net of any amounts paid during the year as priority partnership drawings, will
typically be paid to the members in January following each year end.
As our investment performance improves, our compensation costs and performance-related limited
partner profit share distributions are expected generally to rise correspondingly. In addition,
equity-based compensation costs may vary significantly from period to period depending on the
market price of our common stock, among other things. In order to retain our investment
professionals during periods of poor performance, we may have to pay our investment professionals
significant amounts, even if we earn low or no performance fees. In these circumstances these
payments may represent a larger proportion of our revenues than historically.
Acquisition-Related Compensation Expense
Following the Acquisition, and as required by SFAS 123(R), our GAAP compensation, benefits and
profit share expense reflects share-based and other compensation recognized with respect to (a) the
15% of the total
25
consideration of cash and capital stock received collectively by Sage Summit LP and Lavender
Heights Capital LP in association with the Acquisition (including with respect to the cash portion
of the awards under the equity participation plan in the aggregate amounts of $72 million, $36
million and $5 million for the three 12-month periods beginning with the consummation of the
Acquisition), the 10,000,000 shares allocated for the benefit of employees, service providers and
certain key personnel under the Restricted Stock Plan, and the agreement among the principals and
trustees and (b) dividends paid on unvested shares that are ultimately not expected to vest.
Under GAAP, there is a charge to compensation expense for Acquisition-related compensation
expense based on certain service conditions. However, management believes that this charge does not
reflect our ongoing core business operations and compensation expense and excludes such amounts for
purposes of assessing our ongoing core business performance. In the case of the Acquisition-related
compensation expense associated with Sage Summit LP and Lavender Heights Capital LP, because awards
forfeited by participants in the equity participation plan who are no longer limited partners are
returned to Sage Summit LP and Lavender Heights Capital LP, and not GLG, and the cash and stock
held by the limited partnerships may be reallocated to then existing or future participants in the
plan without further dilution to our shareholders and because the amount of consideration received
by the entities in the Acquisition was awarded based on the contributions of the participants in
the equity participation plan prior to the Acquisition and the amount reduced the number of shares
which would otherwise have been paid to the GLG Shareowners in the Acquisition, management measures
ongoing business performance by excluding these amounts. In the case of the Acquisition-related
compensation expense associated with the Restricted Stock Plan, because the amount allocated to the
Restricted Stock Plan was designed to recognize employees, service providers and key personnel for
their contribution to GLG prior to the Acquisition and because the shares allocated to the
Restricted Stock Plan reduced the number of shares which would otherwise have been paid to GLGs
shareholders in the Acquisition, management measures ongoing business performance by excluding
these amounts. In the case of the Acquisition-related compensation expense associated with the
agreement among principals and trustees, because, notwithstanding the service requirement in SFAS
123(R), neither the vesting nor forfeiture provisions of that agreement would be accretive or
dilutive to our present or future shareholders, management measures ongoing business performance by
excluding these amounts.
As a result of our view on the Acquisition-related compensation expense, we present the
measure non-GAAP CBP, which is a non-GAAP financial measure used to calculate adjusted net income,
as described below under Assessing Business Performance, and which deducts Acquisition-related
compensation expense from GAAP compensation, benefits and profit share expense, to show the total
ongoing cost of the services provided to us by both participants in the limited partner profit
share arrangement and employees in relation to services rendered during the periods under
consideration.
General and Administrative
Our non-personnel cost base represents the expenditure required to provide an effective
investment infrastructure and marketing operation. Key elements of the cost base are, among other
things, professional services fees, temporary and contract employees, travel, information
technology and communications, business development, marketing, occupancy, facilities and
insurance.
Assessing Business Performance
As discussed above under Expenses Compensation, Benefits and Limited Partner Profit
Share, we assess our personnel-related expenses based on the measure non-GAAP CBP. Non-GAAP CBP
reflects GAAP compensation, benefits and profit share expense, adjusted to exclude the
Acquisition-related compensation expense described above under Expenses Compensation, Benefits
and Limited Partner Profit Share and Expenses Acquisition-Related Compensation Expense.
In addition, we assess the underlying performance of our business based on the measure
adjusted net income, which adjusts GAAP net (loss)/income before minority interest for
Acquisition-related compensation expense and deducts the tax effect of Acquisition-related
compensation expense and cumulative dividends accrued for the holders of FA Sub 2 Limited
Exchangeable Shares. See Results of Operations Adjusted Net Income for this reconciliation
for the periods presented.
26
Non-GAAP CBP is not a measure of financial performance under GAAP and should not be considered
as an alternative to GAAP compensation, benefits and profit share expense. Further, adjusted net
income is not a measure of financial performance under GAAP and should not be considered as an
alternative to GAAP net income as an indicator of our operating performance or any other measures
of performance derived in accordance with GAAP. The non-GAAP financial measures we present may be
different from non-GAAP financial measures used by other companies.
We are providing these non-GAAP financial measures to enable investors, securities analysts
and other interested parties to perform additional financial analysis of our personnel-related
costs and our earnings from operations and because we believe that they will be helpful to
investors in understanding all components of the personnel-related costs of our business. We
believe that the non-GAAP financial measures also enhance comparisons of our core results of
operations with historical periods. In particular, we believe that the non-GAAP adjusted net income
measure better represents profits available for distribution to stockholders than does GAAP net
income primarily because of the adjustment described above. In addition, we use these non-GAAP
financial measures in our evaluation of our core results of operations and trends between fiscal
periods and believe these measures are an important component of our internal performance
measurement process. We also prepare forecasts for future periods on a basis consistent with these
non-GAAP financial measures.
Under our revolving credit and term loan facilities, we are required to maintain compliance
with certain financial covenants based on adjusted earnings before interest expense, provision for
income taxes, depreciation and amortization, or adjusted EBITDA, which is calculated based on the
non-GAAP adjusted net income measure, further adjusted to add back interest expense, provision for
income taxes, depreciation and amortization. Non-GAAP adjusted net income has certain limitations
in that it may overcompensate for certain costs and expenditures related to our business.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 states that accounting
and reporting for minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS 160 is effective prospectively, except for certain retrospective disclosure
requirements, for fiscal years beginning after December 15, 2008. This statement will be effective
for the Company beginning in fiscal 2009. As described above, the primary impact of the statement
will be the reclassification of minority interests from liabilities to stockholders equity and
their re-labeling as non-controlling interests. In addition, presently under ARB No. 51,
non-controlling interests only share in losses to the extent that they have available equity to
absorb losses. Under SFAS 160, the non-controlling interests will fully share in losses as well as
profits.
27
Assets Under Management
September 30, 2008 Compared to June 30, 2008, December 31, 2007 and September 30, 2007
Change in AUM between September 30, 2008, June 30, 2008, December 31, 2007 and September 30, 2007
(U.S. Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Sept |
|
|
As of June |
|
|
3-Month |
|
|
As of Dec |
|
|
9-Month |
|
|
As of Sept |
|
|
12-Month |
|
|
|
30, 2008 |
|
|
30, 2008 |
|
|
Change |
|
|
31, 2007 |
|
|
Change |
|
|
30, 2007 |
|
|
Change |
|
Alternative strategy |
|
$ |
13,692 |
|
|
$ |
17,772 |
|
|
|
(4,080 |
) |
|
$ |
18,833 |
|
|
|
(5,140 |
) |
|
$ |
14,713 |
|
|
|
(1,020 |
) |
Long-only |
|
|
3,079 |
|
|
|
4,684 |
|
|
|
(1,605 |
) |
|
|
4,774 |
|
|
|
(1,695 |
) |
|
|
4,561 |
|
|
|
(1,482 |
) |
Internal FoHF |
|
|
1,690 |
|
|
|
2,191 |
|
|
|
(501 |
) |
|
|
2,318 |
|
|
|
(628 |
) |
|
|
1,651 |
|
|
|
39 |
|
External FoHF |
|
|
587 |
|
|
|
691 |
|
|
|
(104 |
) |
|
|
598 |
|
|
|
(12 |
) |
|
|
598 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fund-based AUM |
|
|
19,048 |
|
|
|
25,337 |
|
|
|
(6,289 |
) |
|
|
26,523 |
|
|
|
(7,475 |
) |
|
|
21,524 |
|
|
|
(2,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed accounts |
|
|
1,843 |
|
|
|
2,110 |
|
|
|
(267 |
) |
|
|
2,357 |
|
|
|
(514 |
) |
|
|
1,905 |
|
|
|
(62 |
) |
Cash and other holdings |
|
|
261 |
|
|
|
448 |
|
|
|
(187 |
) |
|
|
206 |
|
|
|
55 |
|
|
|
164 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross AUM |
|
|
21,152 |
|
|
|
27,895 |
|
|
|
(6,743 |
) |
|
|
29,086 |
|
|
|
(7,933 |
) |
|
|
23,593 |
|
|
|
(2,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: alternative strategy
investments in GLG Funds |
|
|
(2,161 |
) |
|
|
(2,125 |
) |
|
|
(35 |
) |
|
|
(2,090 |
) |
|
|
(71 |
) |
|
|
(1,419 |
) |
|
|
(742 |
) |
Less: long-only
investments in GLG Funds
(1) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Less: internal FoHF
investments in GLG Funds |
|
|
(1,674 |
) |
|
|
(2,047 |
) |
|
|
373 |
|
|
|
(2,331 |
) |
|
|
657 |
|
|
|
(1,653 |
) |
|
|
(21 |
) |
Less: external FoHF
investments in GLG Funds |
|
|
(32 |
) |
|
|
(50 |
) |
|
|
18 |
|
|
|
(53 |
) |
|
|
21 |
|
|
|
(55 |
) |
|
|
23 |
|
Net AUM |
|
$ |
17,280 |
|
|
$ |
23,668 |
|
|
|
(6,388 |
) |
|
$ |
24,612 |
|
|
|
(7,331 |
) |
|
$ |
20,466 |
|
|
|
(3,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average gross AUM |
|
$ |
24,524 |
|
|
$ |
28,516 |
|
|
|
|
|
|
$ |
26,339 |
|
|
|
|
|
|
$ |
22,557 |
|
|
|
|
|
Quarterly average net AUM |
|
|
20,474 |
|
|
|
24,157 |
|
|
|
|
|
|
|
22,539 |
|
|
|
|
|
|
|
19,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening net AUM |
|
$ |
23,668 |
|
|
$ |
24,646 |
|
|
|
|
|
|
$ |
20,466 |
|
|
|
|
|
|
$ |
18,585 |
|
|
|
|
|
Inflows (net of redemptions) |
|
|
(2,182 |
) |
|
|
(629 |
) |
|
|
|
|
|
|
2,927 |
|
|
|
|
|
|
|
1,633 |
|
|
|
|
|
Performance (gains net of
losses and fees) |
|
|
(3,139 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
(297 |
) |
|
|
|
|
Currency translation impact
(non USD AUM expressed in
USD) |
|
|
(1,068 |
) |
|
|
(80 |
) |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing net AUM |
|
$ |
17,280 |
|
|
$ |
23,668 |
|
|
|
|
|
|
$ |
24,612 |
|
|
|
|
|
|
$ |
20,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Previously included in alternative strategy investments in GLG Funds. |
During the three months ended September 30, 2008, our gross AUM decreased by $6.7 billion to
$21.2 billion and net AUM decreased by $6.4 billion to $17.3 billion. The decline in net AUM was
attributable to the following factors:
|
|
|
Negative performance during the three months ended September 30, 2008, resulting in
performance losses (net of gains) of $3.1 billion (which included an estimated $95.0
million in aggregate direct exposure of certain GLG Funds to the appointment of
administrators for Lehman Brothers International (Europe)); |
|
|
|
|
Strengthening of the U.S. dollar against other currencies in which our funds and
managed accounts are denominated, resulting in a negative foreign exchange impact of
$1.1 billion during the three months ended September 30, 2008; |
|
|
|
|
Net outflows of $2.2 billion (which included $1.3 billion of redemptions from the
GLG Emerging Markets Fund and other emerging markets funds previously anticipated due
to the announced departure of the portfolio manager of those funds); and |
|
|
|
|
Overall pause in the industry given the current market conditions. |
28
The ratio between net and gross AUM declined slightly between June 30, 2008 and September 30,
2008, reflecting generally stable and consistent relative levels of fund-in-fund investments, with
respect to both investments by our FoHF products in certain funds managed by us and investments by
certain single-manager alternative strategy funds managed by us in other single-manager alternative
strategy funds managed by us.
On April 22, 2008, we announced the departure of the portfolio manager of the GLG Emerging
Markets Fund and three other emerging markets funds effective October 2008. As a result of this
departure, approximately $4.0 billion (including approximately $2.4 billion after September 30,
2008) has been redeemed from these GLG Funds as of November 7, 2008.
On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman Brothers) filed for Chapter 11
bankruptcy in the United States and administrators were appointed for Lehman Brothers International
(Europe) (LBIE), Lehman Brothers prime brokerage unit in the United Kingdom. We currently
estimate that the combined direct exposure of the GLG Funds to the administration proceedings of
LBIE and the insolvency proceedings of other entities in the Lehman Brothers group amounts to
approximately $95.0 million, or less than 1% of our total net AUM. Our assessment of this exposure
is based upon a number of assumptions, including that:
|
|
|
amounts which LBIE was required to treat as client money and not use in the course
of its business were and are, in fact, so held and will be released upon repayment of
all the affected GLG Funds debt to LBIE (and are therefore excluded from the
estimated exposure amounts); |
|
|
|
|
the information we have received to date from the administrators of LBIE in
relation to rehypothecation of assets is accurate; |
|
|
|
|
unsettled transactions at the time LBIE entered into administration proceedings
will be determined on the basis of a cash settlement of those trades, in accordance
with contractual agreements between the affected GLG Fund and LBIE, or cancelled; |
|
|
|
|
the cash settlement amounts for terminated over-the-counter derivatives and other
transactions will be as determined by us; and |
|
|
|
|
there are no other factors, which if known to us, would lead us to conclude that
the business of LBIE was conducted otherwise than in accordance with the contractual
documentation. |
Based on legal and professional advice recently obtained, we believe these assumptions are
reasonable. However, until we are able to fully reconcile our information and assumptions with the
administrators of LBIE, these estimates could change or the assumptions may prove to be incorrect.
During the nine months ended September 30, 2008, our gross AUM decreased by $7.9 billion to
$21.2 billion and net AUM decreased by $7.3 billion to $17.3 billion. The decline in net AUM was
attributable to the following factors:
|
|
|
Negative performance during the nine months ended September 30, 2008, resulting in
performance losses (net of gains) of $5.0 billion (which included an estimated $95.0
million in aggregate direct exposure of certain GLG Funds to the appointment of
administrators for LBIE); |
|
|
|
|
Strengthening of the U.S. dollar against other currencies in which our funds and
managed accounts are denominated, resulting in a negative foreign exchange impact of
$0.3 billion during the nine months ended September 30, 2008; |
|
|
|
|
Net outflows of $2.0 billion (which included $1.6 billion of redemptions from the
GLG Emerging Markets Fund and other emerging markets funds previously anticipated due
to the announced departure of the portfolio manager of those funds); and |
|
|
|
|
Overall pause in the industry given the current market conditions. |
29
The ratio between net and gross AUM decreased slightly between December 31, 2007 and September
30, 2008, reflecting generally stable and consistent relative levels of fund-in-fund investments,
with respect to both investments by our FoHF products in certain funds managed by us and
investments by certain single-manager alternative strategy funds managed by us in other
single-manager alternative strategy funds managed by us.
During the twelve months ended September 30, 2008, our gross AUM decreased by $2.4 billion to
$21.2 billion and net AUM decreased by $3.2 billion to $17.3 billion. The decline in net AUM was
attributable to the following factors:
|
|
|
Negative performance during the twelve months ended September 30, 2008, resulting in
performance losses (net of gains) of $4.0 billion (which included an estimated $95.0
million in aggregate direct exposure of certain GLG Funds to the appointment of
administrators for LBIE); |
|
|
|
|
Strengthening of the U.S. dollar against other currencies in which our funds and
managed accounts are denominated, resulting in a negative foreign exchange impact of
$0.1 billion during the twelve months ended September 30, 2008; |
|
|
|
|
Net inflows of $0.1 billion (which included $1.6 billion of redemptions from the GLG
Emerging Markets Fund and other emerging markets funds previously anticipated due to
the announced departure of the portfolio manager of those funds); and |
|
|
|
|
Overall pause in the industry given the current market conditions. |
The ratio between net and gross AUM decreased 6% between September 30, 2007 and September 30,
2008, reflecting relatively slightly higher levels of fund-in-fund investments, with respect to
both investments by our FoHF products in certain funds managed by us and investments by certain
single-manager alternative strategy funds managed by us in other single-manager alternative
strategy funds managed by us.
During October 2008, the boards of directors of five of the GLG Funds managed by us have taken
actions including restructuring redemptions, suspending redemptions and/or side pocketing certain
investments in special asset vehicles. The estimated impact of these actions is that
approximately $1.3 billion of gross AUM that may have been redeemed during the quarter ending
December 31, 2008 will be redeemed in later periods.
30
Results of Operations
Condensed Combined and Consolidated GAAP Statement of Operations Information
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net revenues and other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees, net |
|
$ |
80,307 |
|
|
$ |
78,558 |
|
|
$ |
269,663 |
|
|
$ |
198,892 |
|
Performance fees, net |
|
|
6,833 |
|
|
|
803 |
|
|
|
89,762 |
|
|
|
343,835 |
|
Administration fees, net |
|
|
17,751 |
|
|
|
16,306 |
|
|
|
60,448 |
|
|
|
42,986 |
|
Other income |
|
|
(2,796 |
) |
|
|
6,905 |
|
|
|
2,412 |
|
|
|
7,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and other income |
|
|
102,095 |
|
|
|
102,572 |
|
|
|
422,285 |
|
|
|
593,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
(206,433 |
) |
|
|
(28,959 |
) |
|
|
(674,945 |
) |
|
|
(110,526 |
) |
Limited partner profit share |
|
|
(20,954 |
) |
|
|
(17,000 |
) |
|
|
(102,185 |
) |
|
|
(207,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share |
|
|
(227,387 |
) |
|
|
(45,959 |
) |
|
|
(777,130 |
) |
|
|
(318,026 |
) |
General, administrative and other |
|
|
(30,283 |
) |
|
|
(25,891 |
) |
|
|
(90,816 |
) |
|
|
(79,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
(257,670 |
) |
|
|
(71,850 |
) |
|
|
(867,946 |
) |
|
|
(397,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / income from operations |
|
|
(155,575 |
) |
|
|
30,722 |
|
|
|
(445,661 |
) |
|
|
195,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (expense) / income |
|
|
(3,985 |
) |
|
|
3,048 |
|
|
|
(12,110 |
) |
|
|
4,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / income before income taxes |
|
|
(159,560 |
) |
|
|
33,770 |
|
|
|
(457,771 |
) |
|
|
200,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(3,160 |
) |
|
|
(4,735 |
) |
|
|
(12,656 |
) |
|
|
(33,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / income before minority interests |
|
|
(162,720 |
) |
|
|
29,035 |
|
|
|
(470,427 |
) |
|
|
167,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of income |
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
(479 |
) |
Exchangeable Shares dividends |
|
|
(1,472 |
) |
|
|
|
|
|
|
(4,418 |
) |
|
|
|
|
Cumulative dividends on Exchangeable
Shares |
|
|
(2,896 |
) |
|
|
|
|
|
|
(12,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) / income attributable to common
stockholders |
|
$ |
(167,088 |
) |
|
$ |
28,962 |
|
|
$ |
(487,039 |
) |
|
$ |
167,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Net Revenues and Other Income
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Change in GAAP Net Revenues and Other Income between
Three Months Ended September 30, 2008 and Three Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net revenues and other income |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees, net |
|
$ |
80,307 |
|
|
$ |
78,558 |
|
|
$ |
1,749 |
|
Performance fees, net |
|
|
6,833 |
|
|
|
803 |
|
|
|
6,030 |
|
Administration fees, net |
|
|
17,751 |
|
|
|
16,306 |
|
|
|
1,445 |
|
Other income |
|
|
(2,796 |
) |
|
|
6,905 |
|
|
|
(9,701 |
) |
|
|
|
|
|
|
|
|
|
|
Total net revenues and other income |
|
$ |
102,095 |
|
|
$ |
102,572 |
|
|
$ |
(477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios* |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees / average net AUM, annualized |
|
|
1.57 |
% |
|
|
1.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration fees / average net AUM, annualized |
|
|
0.35 |
% |
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The ratio of total revenues and other income to average net AUM for the three month
periods on an annualized basis are not meaningful because the majority of our performance
fees crystallize in the second and fourth quarter. |
Total net revenues and other income decreased by $0.5 million, or 0.5%, to $102.1 million.
This decrease was driven by a net loss of other income related to the negative impact of the
strengthening of the U.S. dollar versus the Euro and British Pound, offset by growth in all
categories of fee revenue.
For management and administration fee revenues, we use annualized net fee yield as a measure
of our fees generated for every dollar of our net AUM. The net management and administration fee
yield is equal to the annualized management fees and administration fees, respectively, divided by
quarterly average net AUM for the applicable period.
Net management fees increased by $1.7 million, or 2.2%, to $80.3 million. This growth was a
result of the following factors:
|
|
|
a 4.9% higher quarterly average net AUM balance between the periods which, at
constant net management fee yield, resulted in an increase in management fees of $3.8
million; and |
|
|
|
|
a decrease in the annualized net management fee yield from 1.61% to 1.57%,
reflecting lower management fees per unit of AUM, which, when applied to the
increased net AUM base, resulted in a decrease in management fees of $2.1 million. |
Net performance fees increased by $6.0 million, or 750.9%, to $6.8 million primarily due to
the crystallization of performance fees in the third quarter on certain managed accounts. The
majority of GLG Funds and accounts managed by GLG did not crystallize performance fees during the
three-month periods presented and as a result, management believes performance fee revenue amounts
are not indicative of the performance of GLGs business during the periods presented.
Net administration fees increased by $1.4 million, or 8.9%, to $17.8 million. This growth was
driven by two main factors:
|
|
|
a 4.9% higher quarterly average net AUM balance between the periods which, at
constant administration fee yield, resulted in an increase in administration fees of
$0.8 million, or 54.8% of the total increase in administration fees; and |
32
|
|
|
an increase in the annualized net administration fee yield from 0.33% to 0.35%
which, when applied to the increased net AUM base, resulted in an increase in
administration fees of $0.7 million, or 45.2% of the total increase in administration
fees. |
Other income decreased by $9.7 million, or 140.5%, resulting in a loss of $2.8 million. This
decrease was primarily due to our holding non-U.S. dollar cash balances which depreciated in value
as a result of the strengthening U.S. dollar and giving rise to certain foreign exchange losses
reflected in Other income.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Change in GAAP Net Revenues and Other Income between
Nine Months Ended September 30, 2008 and Nine Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net revenues and other income |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees, net |
|
$ |
269,663 |
|
|
$ |
198,892 |
|
|
$ |
70,771 |
|
Performance fees, net |
|
|
89,762 |
|
|
|
343,835 |
|
|
|
(254,073 |
) |
Administration fees, net |
|
|
60,448 |
|
|
|
42,986 |
|
|
|
17,462 |
|
Other income |
|
|
2,412 |
|
|
|
7,875 |
|
|
|
(5,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and other income |
|
$ |
422,285 |
|
|
$ |
593,588 |
|
|
$ |
(171,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and other income / average
net AUM,
annualized |
|
|
2.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees / average net AUM, annualized |
|
|
1.59 |
% |
|
|
1.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration fees / average net AUM, annualized |
|
|
0.36 |
% |
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and other income decreased by $171.3 million, or 28.9%, to $422.3 million.
This decrease was primarily driven by a decline in performance fees partially offset by growth in
the remaining categories of fee revenue management fees and administration fees.
For management and administration fee revenues, we use net fee yield as a measure of our fees
generated for every dollar of our net AUM. The annualized net management and administration fee
yield is equal to the annualized management fees and administration fees, respectively, divided by
quarterly average net AUM for the applicable period.
Net management fees increased by $70.8 million, or 35.6%, to $269.7 million. This growth was
driven by two main factors:
|
|
|
a 28.3% higher quarterly average net AUM balance between the periods which, at
constant net management fee yield, resulted in an increase in management fees of $56.4
million, or 79.6% of the total increase in management fees; and |
|
|
|
|
an increase in the annualized net management fee yield from 1.51% to 1.59%,
reflecting higher management fees per unit of AUM, which, when applied to the
increased net AUM base, resulted in an increase in management fees of $14.4 million,
or 20.4% of the total increase in management fees. |
The higher annualized net management fee yield was attributable primarily to investors
participating in GLG Funds and managed accounts with higher management fee rates.
33
Net performance fees decreased by $254.1 million, or 73.9%, to $89.8 million. This decline
was driven by:
|
|
|
a lower percentage of the GLG Funds generating significant positive performance;
and |
|
|
|
|
a higher percentage of the GLG Funds unable to meet their respective high water
marks since performance fees last crystallized, even if they generated positive
performance during the nine month period. |
Net administration fees increased by $17.5 million, or 40.6%, to $60.4 million. This growth
was driven by two main factors:
|
|
|
a 28.3% higher quarterly average net AUM balance between the periods which, at
constant administration fee yield, resulted in an increase in administration fees of
$12.2 million, or 69.8% of the total increase in administration fees; and |
|
|
|
|
an increase in the annualized net administration fee yield from 0.33% to 0.36%
which, when applied to the increased net AUM base, resulted in an increase in
administration fees of $5.3 million, or 30.2% of the total increase in administration
fees. The higher annualized net administration fee yield was attributable primarily to
investors participating in GLG Funds and managed accounts with higher net
administration fee rates. |
Other income decreased by $5.5 million, or 69.4%, to $2.4 million. This decrease was primarily
due to our holding non-U.S. dollar cash balances which depreciated in value against the U.S. dollar
giving rise to certain foreign exchange losses reflected in Other income.
Expenses
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Change in GAAP Expenses between Three Months Ended September 30, 2008 and
Three Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
$ |
(206,433 |
) |
|
$ |
(28,959 |
) |
|
$ |
(177,474 |
) |
Limited partner profit share |
|
|
(20,954 |
) |
|
|
(17,000 |
) |
|
|
(3,954 |
) |
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share |
|
|
(227,387 |
) |
|
|
(45,959 |
) |
|
|
(181,428 |
) |
General, administrative and other |
|
|
(30,283 |
) |
|
|
(25,891 |
) |
|
|
(4,392 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
(257,670 |
) |
|
$ |
(71,850 |
) |
|
$ |
(185,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share / total
GAAP net revenues and other income |
|
|
222.7 |
% |
|
|
44.8 |
% |
|
|
177.9 |
% |
General, administrative and other / total GAAP net
revenue and other income |
|
|
29.7 |
% |
|
|
25.2 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total expenses / total GAAP net revenue and other income |
|
|
252.4 |
% |
|
|
70.0 |
% |
|
|
182.4 |
% |
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share increased by $181.4 million, or 394.7%, to $227.4
million. This increase was driven primarily by Acquisition-related compensation expense of $188.0
million for which there was no charge in the corresponding period in 2007, offset slightly by lower
discretionary bonus accruals and limited
34
partner profit share (see -Non-GAAP Expense Measures discussed below) due to the
decreased performance of certain GLG Funds during the period.
General, administrative and other expenses increased by $4.4 million, or 17.0%, to $30.3
million. This increase was mainly attributable to additional public company costs and the continued
growth in the scale of our operations, which led to an increase in operational costs.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Change in GAAP Expenses between Nine Months Ended September 30, 2008 and
Nine Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
$ |
(674,945 |
) |
|
$ |
(110,526 |
) |
|
$ |
(564,419 |
) |
Limited partner profit share |
|
|
(102,185 |
) |
|
|
(207,500 |
) |
|
|
105,315 |
|
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share |
|
|
(777,130 |
) |
|
|
(318,026 |
) |
|
|
(459,104 |
) |
General, administrative and other |
|
|
(90,816 |
) |
|
|
(79,634 |
) |
|
|
(11,182 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
(867,946 |
) |
|
$ |
(397,660 |
) |
|
$ |
(470,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share / total
GAAP net revenues and other income |
|
|
184.0 |
% |
|
|
53.6 |
% |
|
|
130.5 |
% |
General, administrative and other / total GAAP net
revenue and other income |
|
|
21.5 |
% |
|
|
13.4 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total expenses / total GAAP net revenue and other income |
|
|
205.5 |
% |
|
|
67.0 |
% |
|
|
138.5 |
% |
|
|
|
|
|
|
|
|
|
|
Compensation, benefits and profit share increased by $459.1 million, or 144.4%, to $777.1
million. This increase was driven primarily by Acquisition-related compensation expense of $588.5
million for which there was no charge in the corresponding period in 2007, offset by lower
discretionary bonus accruals and limited partner profit share (see -Non-GAAP Expense
Measures discussed below) due to the decreased performance of certain GLG Funds during the period.
General, administrative and other expenses increased by $11.2 million, or 14.0%, to $90.8
million. This increase was mainly attributable to additional public company costs and the continued
growth in the scale of our operations, which led to an increase in operational costs.
35
Non-GAAP Expense Measures
As discussed above under Assessing Business Performance, we present a non-GAAP
compensation, benefits, and profit share measure. The table below reconciles GAAP compensation,
benefits and profit share to non-GAAP CBP for the periods presented.
Change in Non-GAAP Expenses between Three Months Ended September 30, 2008 and September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Non-GAAP expenses |
|
|
|
|
|
|
|
|
|
|
|
|
GAAP compensation, benefits and profit share |
|
$ |
(227,387 |
) |
|
$ |
(45,959 |
) |
|
$ |
(181,428 |
) |
Add back: Acquisition-related compensation expense |
|
|
188,005 |
|
|
|
|
|
|
|
188,005 |
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP |
|
|
(39,382 |
) |
|
|
(45,959 |
) |
|
|
6,577 |
|
GAAP general, administrative and other |
|
|
(30,283 |
) |
|
|
(25,891 |
) |
|
|
(4,392 |
) |
|
|
|
|
|
|
|
|
|
|
Non-GAAP total expenses |
|
$ |
(69,665 |
) |
|
$ |
(71,850 |
) |
|
$ |
2,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios (based on non-GAAP measures) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP / total GAAP net revenues and other income |
|
|
38.6 |
% |
|
|
44.8 |
% |
|
|
(6.2 |
)% |
General, administrative and other / total GAAP net
revenues and other income |
|
|
29.7 |
% |
|
|
25.2 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
Non-GAAP total expenses / total GAAP net revenues and
other income |
|
|
68.3 |
% |
|
|
70.0 |
% |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP decreased by $6.6 million, or 14.3%, to $39.4 million. The decrease was
attributable to lower discretionary bonus accruals and limited partner profit share due to the
decreased performance of certain GLG Funds during the period.
Change in Non-GAAP Expenses between Nine Months Ended September 30, 2008 and September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Non-GAAP expenses |
|
|
|
|
|
|
|
|
|
|
|
|
GAAP compensation, benefits and profit share |
|
$ |
(777,130 |
) |
|
$ |
(318,026 |
) |
|
$ |
(459,104 |
) |
Add back: Acquisition-related compensation expense |
|
|
588,508 |
|
|
|
|
|
|
|
588,508 |
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP |
|
|
(188,622 |
) |
|
|
(318,026 |
) |
|
|
129,404 |
|
GAAP general, administrative and other |
|
|
(90,816 |
) |
|
|
(79,634 |
) |
|
|
(11,182 |
) |
|
|
|
|
|
|
|
|
|
|
Non-GAAP total expenses |
|
$ |
(279,438 |
) |
|
$ |
(397,660 |
) |
|
$ |
118,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios (based on non-GAAP measures) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP / total GAAP net revenues and other income |
|
|
44.7 |
% |
|
|
53.6 |
% |
|
|
(8.9 |
)% |
General, administrative and other / total GAAP net
revenues and other income |
|
|
21.5 |
% |
|
|
13.4 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
Non-GAAP total expenses / total GAAP net revenues and
other income |
|
|
66.2 |
% |
|
|
67.0 |
% |
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
Non-GAAP CBP decreased by $129.4 million, or 40.7%, to $188.6 million. The decrease was
attributable to lower discretionary bonus accruals and limited partner profit share due to the
decreased performance of certain GLG Funds during the period.
36
Net Interest Income
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Change in Net Interest Income / (Expense) between
Three Months Ended September 30, 2008 and Three Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Interest income |
|
$ |
2,043 |
|
|
$ |
3,252 |
|
|
$ |
(1,209 |
) |
Interest expense |
|
|
(6,028 |
) |
|
|
(204 |
) |
|
|
(5,824 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income / (expense) |
|
$ |
(3,985 |
) |
|
$ |
3,048 |
|
|
$ |
(7,033 |
) |
|
|
|
|
|
|
|
|
|
|
Gross interest income decreased by $1.2 million to $2.0 million, attributable primarily to
lower cash balances held during the three months ended September 30, 2008 compared to the three
months ended September 30, 2007. The lower cash balances are attributable to lower performance fees
earned and collected during 2008. Gross interest expense increased by $5.8 million to $6.0 million,
driven by increased interest costs and a larger loan balance from our debt financing of $570
million in connection with the Acquisition.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Change in Net Interest Income / (Expense) between
Nine Months Ended September 30, 2008 and Nine Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Interest income |
|
$ |
6,685 |
|
|
$ |
5,302 |
|
|
$ |
1,383 |
|
Interest expense |
|
|
(18,795 |
) |
|
|
(608 |
) |
|
|
(18,187 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income / (expense) |
|
$ |
(12,110 |
) |
|
$ |
4,694 |
|
|
$ |
(16,804 |
) |
|
|
|
|
|
|
|
|
|
|
Gross interest income increased by $1.4 million to $6.7 million, attributable primarily to
higher cash balances held during the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007. Gross interest expense increased by $18.2 million to $18.8
million, driven by increased interest costs and a larger loan balance from our debt financing of
$570 million in connection with the Acquisition.
Income Tax
We calculate our effective tax rate on profit before tax and certain non-tax deductible
compensation expense. For the three months ended September 30, 2008, $188.0 million of our
compensation expense related to acquisition-related share based compensation, $180.8 million of
which is not tax deductible, compared to $0 for the three months ended September 30, 2007. Our
profit before tax and before this expense was $21.3 million and $33.8 million for the three months
ended September 30, 2008 and 2007, respectively. Our effective tax rate based on this measure was
14.9% and 14.0% for the three months ended September 30, 2008 and 2007, respectively. This is
lower than the U.S. Federal rate of tax of 35.0% as our profits are predominantly earned in the
United Kingdom and the Cayman Islands which apply lower rates of tax. Income tax expense for the
three months ended September 30, 2008 of $3.2 million includes a deferred tax benefit of $0.6
million related to the tax effect of certain acquisition-related compensation expense.
37
For the first nine months of 2008, $588.5 million of our compensation expense related to
Acquisition-related share based compensation, $541.4 million of which relates to awards that do not
give rise to a tax deduction, compared to $0 for the first nine months of 2007. Our profit before
tax and before this expense was $83.6 million and $200.6 million for the first nine months of 2008
and 2007, respectively. Our effective tax rate based on this measure was 15.1% and 16.5% for the
first nine months of 2008 and 2007, respectively. This is lower than the U.S. Federal rate of tax
of 35.0% as our profits are predominantly earned in the United Kingdom and the Cayman Islands which
apply lower rates of tax.
Minority Interests
Minority interests increased by $4.3 million and $16.1 million for the three months and nine
months ended September 30, 2008, respectively, due to:
|
|
|
cumulative dividends to holders of Exchangeable Shares reflecting our estimate of
the net taxable income of FA Sub 2 Limited allocable to such holders multiplied by an
assumed tax rate; and |
|
|
|
|
dividends to holders of the Exchangeable Shares reflecting a dividend equivalent to
dividends paid to common stockholders. |
For periods prior to the Acquisition, the minority interest only related to GLG Holdings Inc.
and GLG Inc.
Adjusted Net Income
As discussed above under Assessing Business Performance, we present a non-GAAP adjusted
net income measure. The table below reconciles GAAP net (loss)/income to adjusted net income for
the periods presented.
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Change in Non-GAAP Adjusted Net Income between Three Months Ended September 30, 2008 and
Three Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Derivation of non-GAAP adjusted net income |
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net (loss)/income before minority interest |
|
$ |
(162,720 |
) |
|
$ |
29,035 |
|
|
$ |
(191,755 |
) |
Add: Acquisition-related compensation expense |
|
|
188,005 |
|
|
|
|
|
|
|
188,005 |
|
Deduct: tax effect of Acquisition-related
compensation expense |
|
|
(553 |
) |
|
|
|
|
|
|
(553 |
) |
Deduct: cumulative dividends |
|
|
(2,896 |
) |
|
|
|
|
|
|
(2,896 |
) |
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income |
|
$ |
21,836 |
|
|
$ |
29,035 |
|
|
$ |
(7,199 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted net income decreased by $7.2 million, or 24.8%, to $21.8 million. This decrease was
driven primarily by increased general, administrative and other expenses as well as higher debt
financing costs associated with the Acquisition during the three months ended September 30, 2008.
38
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Change in Non-GAAP Adjusted Net Income between Nine Months Ended September 30, 2008 and
Nine Months Ended September 30, 2007
(U.S. Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Derivation of non-GAAP adjusted net income |
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net (loss)/income before minority interest |
|
$ |
(470,427 |
) |
|
$ |
167,602 |
|
|
$ |
(638,029 |
) |
Add: Acquisition-related compensation expense |
|
|
588,508 |
|
|
|
|
|
|
|
588,508 |
|
Deduct: tax effect of Acquisition-related
compensation expense |
|
|
(6,010 |
) |
|
|
|
|
|
|
(6,010 |
) |
Deduct: cumulative dividends |
|
|
(12,194 |
) |
|
|
|
|
|
|
(12,194 |
) |
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted net income |
|
$ |
99,877 |
|
|
$ |
167,602 |
|
|
$ |
(67,725 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted net income decreased by $67.7 million, or 40.4%, to $99.9 million. This decrease was
driven primarily by decreased net revenues due to lower performance fees offset by higher
management and administration fees, increased general, administrative and other expenses and higher
debt financing costs associated with the Acquisition during the nine months ended September 30,
2008.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, pay compensation, and satisfy other general business
needs. Our primary sources of funds for liquidity consist of cash flows provided by operating
activities, primarily the management fees and performance fees paid from the funds and accounts we
manage.
We expect that our cash on hand and cash flows from operating activities and issuance of debt
and equity securities will satisfy our liquidity needs with respect to debt obligations over the
next twelve months. We expect to meet our long-term liquidity requirements, including the repayment
of our debt obligations, with net income, if any, and through the issuance of debt and equity
securities and loans.
We currently have $530 million dollars outstanding under a 5-year amortizing term loan
facility, of which the first principal payment is due in the second half of 2011. We also have a
$40 million 5-year amortizing revolving credit facility which is fully drawn with the same
syndicate of banks as the term loan facility. We are current on all required payments related to
these two loan facilities and are in compliance with all financial and other covenants as of
September 30, 2008.
The financial covenants require that we have fee paying AUM (approximately equal to our
disclosed gross AUM) on December 31, 2008 of $15 billion (which is tested annually and increases
$500 million per year until 2012) and that we maintain at the end of each fiscal quarter a leverage
ratio of not more than 4.5:1 calculated on the basis of adjusted earnings before interest, taxes,
depreciation and amortization (as defined in our credit agreement for the loan facilities) on a
last twelve months basis. We believe we will be in compliance with these financial covenants as of
December 31, 2008, although there can be no assurance in this regard. Factors affecting our ability
to comply with these covenants include: the performance of the GLG Funds prior to the end of each
relevant measurement period, future net redemptions, currency movements principally Euro versus
the U.S. dollar and the level of our compensation and general and administration expenses. In
addition, we believe that there are a number of options available to us to maintain compliance with
the above covenants, should the risk of compliance increase, including obtaining a waiver,
strategic acquisitions that would increase AUM and/or earnings and reducing debt levels through the
use of free cash or from the proceeds of the issuance of additional equity. Our credit agreement
also includes restrictive covenants which, among other things, restricts our ability to incur
additional indebtedness.
39
Due to decreases in AUM and changes in the management fee mix, we expect that management and
administration fees will trend lower in future quarters when compared to prior periods until AUM
begins to increase. We believe that we will be able to scale down our cost infrastructure in order
to maintain positive operating cash flow.
In September 2008, our Board of Directors approved the payment of a regular dividend of $0.025
per share with respect to the quarter ended September 30, 2008, which was paid in October 2008.
After the end of the fiscal year, the Board will consider paying a special dividend based on annual
profitability. Holders of FA Sub 2 Limited Exchangeable Shares are also entitled to dividends based
on the number of shares of common stock into which the Exchangeable Shares are exchangeable. In
addition, pursuant to the terms of awards of restricted stock under our equity participation plan,
Restricted Stock Plan and LTIP, grantees are generally entitled to receive cash dividends on
unvested shares. We have paid the regular quarterly dividends with cash generated from operations
and expect that future regular quarterly dividends, if declared, will be paid with cash generated
from operations.
Our ability to execute our business strategy, particularly our ability to form new funds and
increase our AUM, depends on our ability to raise additional investor capital within such funds.
Decisions by investors to commit capital to the funds and accounts managed by us will depend upon a
number of factors including, but not limited to, the financial performance of such funds and
accounts, industry and market trends and performance and the relative attractiveness of alternative
investment opportunities.
Excess cash we hold on our balance sheet is either kept in interest bearing accounts or
invested in AA or better rated money market funds. Currency hedging is undertaken to maintain
currency net assets at pre-determined ratios.
Operating Activities
Our net cash provided by operating activities was $136.2 million during the first nine months
of 2008 and $376.0 million for the first nine months of 2007. The decrease in net cash provided by
operating activities in the first nine months of 2008 compared to the first nine months in 2007 was
mainly attributable to a reduction in net income (primarily as a result of significantly reduced
performance fees) and payments of increased discretionary compensation and taxes, partly offset by
higher performance fees crystallized in December 2007 compared to December 2006 which were
collected in the nine months ended September 30, 2008 and 2007, respectively.
Investing Activities
Our net cash used in investing activities was $9.9 million and $4.4 million during the first
nine months of 2008 and 2007, respectively.
The increase in net cash used in investing activities during the first nine months of 2008
compared to the first nine months of 2007 relates primarily to the purchase price of $2.5 million
paid in January 2008 for the acquisition of GLG Holdings, Inc. and its subsidiary, GLG Inc. Other
than this amount, these amounts primarily reflect the cash purchase of fixed assets to support our
expanding headcount and infrastructure. We do not undertake material investing activities for our
own account, and as a result, net cash used in investing activities is generally not significant in
the context of our business. Additionally, the amount of net cash used in investing activities on a
period-to-period basis may be strongly affected by the purchase of a particular fixed asset,
thereby giving rise to a potentially volatile period-to-period net cash usage.
Financing Activities
Our net cash used in financing activities was $167.8 million during the first nine months of
2008 compared to the net cash used in financing activities of $253.8 million during the first nine
months of 2007. For the nine months ended September 30, 2007, net cash used in financing activities
reflects distributions made to the former GLG Shareowners in connection with the Acquisition. For
the nine months ended September 30, 2008, net cash used in financing activities primarily reflects
warrant and share repurchases and purchase price adjustments relating
40
to the Acquisition, regular dividend payments and repayment of $35.0 million of the principal
amount under our credit facilities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
41
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our predominant exposure to market risk is related to our role as investment manager for the
GLG Funds and accounts we manage for clients and the impact of movements in the fair value of their
underlying investments. Changes in value of assets managed will impact the level of management and
performance fee revenues.
The broad range of investment strategies that are employed across the over 40 GLG Funds and
the managed accounts mean that they are subject to varying degrees and types of market risk. In
addition, as the GLG Funds and managed accounts are managed independently of each other and risk is
managed at a strategy and fund level, it is unlikely that any market event would impact all GLG
Funds and managed accounts in the same manner or to the same extent. Moreover, there is no netting
of performance fees across funds as these fees are calculated at the fund level.
The management of market risk on behalf of clients, and through the impact on fees to us, is a
significant focus for us and we use a variety of risk measurement techniques to identify and manage
market risk. Such techniques include Monte Carlo Value at Risk, stress testing, exposure management
and sensitivities, and limits are set on these measures to ensure the market risk taken is
commensurate with the publicized risk profile of each GLG Fund and in compliance with risk limits.
In order to provide a quantitative indication of the possible impact of market risk factors on
our future performance, the following sets forth the potential financial impact of scenarios
involving a 10% increase or decrease in the fair value of all investments in the GLG Funds and
managed accounts. While these scenarios are for illustrative purposes only and do not reflect our
managements expectations regarding future performance of the GLG Funds and managed accounts, they
represent hypothetical changes that illustrate the potential impact of such events.
Impact on Management Fees
Our management fees are based on the AUM of the various GLG Funds and accounts that we manage,
and, as a result, are impacted by changes in market risk factors. These management fees will be
increased or reduced in direct proportion to the impact of changes in market risk factors on AUM in
the related GLG Funds and accounts managed by us. A 10% change in the fair values of all of the
investments held by the GLG Funds and managed accounts as of September 30, 2008 would impact future
net management fees in the following four fiscal quarters by an aggregate of $28.5 million,
assuming that there is no subsequent change to the investments held by the GLG Funds and managed
accounts in those four following fiscal quarters.
Impact on Performance Fees
Our performance fees are generally based on a percentage of profits of the various GLG Funds
and accounts that we manage, and, as a result, are impacted by changes in market risk factors. Our
performance fees will therefore generally increase given an increase in the market value of the
investments in the relevant GLG Funds and managed accounts and decrease given a decrease in the
market value of the investments in the relevant GLG Funds and managed accounts. However, it should
be noted that we are not required to refund historically crystallized performance fees to the GLG
Funds and managed accounts. The calculation of the performance fee includes in certain cases
performance hurdles and high-water marks, and as a result, the impact on performance fees of a
10% change in the fair values of the investments in the GLG Funds and managed accounts cannot be
readily predicted or estimated.
Impact on Administration Fees
Our administration fees are generally based on the AUM of the GLG Funds and managed accounts
to which they relate and, as a result, are impacted by changes in market risk factors. Our
administration fees will generally increase given an increase in the market value of the
investments in the relevant GLG Funds and managed accounts and decrease given a decrease in the
market value of the investments in the relevant GLG Funds and managed accounts. In certain cases,
the calculation of the administration fees includes minimum payments and fixed
42
payments and, as a result, the impact on administration fees of a 10% change in the fair
values of the investments in the GLG Funds and managed accounts cannot be readily predicted or
estimated.
Market Risk
The GLG Funds and accounts managed by us hold investments that are reported at fair value as
of the reporting date. Our AUM is a measure of the estimated fair values of the investments in the
GLG Funds and managed accounts. Our AUM will therefore increase (or decrease) in direct proportion
to changes in the market value of the total investments across all of the GLG Funds and managed
accounts. A 10% change in the fair values of all of the investments held by the GLG Funds and
managed accounts as of September 30, 2008 would impact our gross AUM by $2.1 billion and net AUM by
$1.7 billion as of such date. This change will consequently affect our management fees, performance
fees and administration fees as described above.
Exchange Rate Risk
The GLG Funds and the accounts managed by us hold investments that are denominated in foreign
currencies. The GLG Funds and the managed accounts may employ currency hedging to help mitigate the
risks of currency fluctuations.
Furthermore, share classes may be issued in the GLG Funds denominated in foreign currencies,
whose value against the currency of the underlying investments, or against our reporting currency,
may fluctuate. As a result, the calculation of our U.S. dollar AUM based on AUM denominated in
foreign currencies is affected by exchange rate movements. In addition, foreign currency movements
may impact the U.S. dollar value of our management fees, performance fees and administration fees.
For example, management fee revenues derived from AUM denominated in a foreign currency will accrue
in that currency and their value may increase or decline in U.S. dollar terms if the value of the
U.S. dollar changes against that foreign currency.
We utilize derivative instruments in an effort to manage our foreign currency exposures.
Management and performance fees that are calculated on share classes denominated in currencies
other than U.S. dollars are exposed to changes in the value of the U.S. dollar versus those
currencies as they are translated back into U.S. dollars. The majority of our foreign currency
exposure related to management and performance fees is to the Euro, with smaller exposures to the
British Pound and Japanese Yen. We have elected to utilize cash flow hedge accounting to hedge a
portion of our anticipated foreign currency revenue. The effective portion of the hedge is recorded
as a component of other comprehensive income and is released into management and performance fee
income, respectively, when the hedged revenues impact the income statement. The ineffective portion
of the hedge is recorded each period as derivative gain or loss in other income or other expense.
We carefully analyze our hedging counterparties and only utilize those with credit ratings of AA or
better.
Interest Rate Risk
The GLG Funds and accounts managed by us hold positions in debt obligations and derivatives
thereof, some of which accrue interest at variable rates and whose value is impacted by reference
to changes in interest rates. Interest rate changes may therefore directly impact the AUM valuation
of these GLG Funds and managed accounts, which may affect our management fees and performance fees
as described above. Our long-term debt consists of our outstanding revolving and term loan credit
facilities. Interest on the outstanding principal amounts is currently based on 1-month LIBOR plus
the applicable margin, which is reset periodically and was 4.255% at September 30, 2008. A 10%
change in the 1-month LIBOR would impact our interest expense by approximately $0.2 million for the
1-month period.
43
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our co-principal
executive officers and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended, as of the end of the period covered by this report. Based on this
evaluation, our co-principal executive officers and our principal financial officer concluded that
our disclosure controls and procedures were effective.
Subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2007 on
March 3, 2008, we identified misstatements in our 2006 and 2007 combined and consolidated financial
statements in relation to limited partner profit share distributions and have restated those
combined and consolidated financial statements in our Annual Report on Form 10-K/A for the year
ended December 31, 2007 filed on April 22, 2008. We previously recognized elements of the limited
partner profit share arrangement as distributions rather than as operating expenses. Our
management has concluded that these misstatements resulted from a control deficiency that
represented a material weakness in relation to our policies and procedures in respect of the
application of GAAP in this area. This material weakness has been remediated through the
establishment of applicable policies and procedures developed in relation to the restatement.
During the second quarter of 2008, we deployed a new multi-currency general ledger and
consolidation system. In doing so, we modified and enhanced our internal controls over financial
reporting (as such term is defined in Exchange Act Rule 13a-15(f)) as a result of the
implementation of new processes and functionality related to the general ledger system.
There have not been any changes in our internal control over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information about our legal proceedings is contained in Item 1, Legal Proceedings, in Part II
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. We believe that as of
September 30, 2008, there has been no material change to this information.
We are also subject to various claims and assessments and regulatory inquiries and
investigations in the normal course of our business. While it is not possible at this time to
predict the outcome of any legal and regulatory proceedings with certainty and while some
investigations, lawsuits, claims or proceedings may be disposed of unfavorably to us, based on our
evaluation of matters that are pending or asserted our management believes the disposition of such
matters will not have a material adverse effect on our business, financial condition or results of
operations. An unfavorable ruling could include money damages or injunctive relief.
Item 1A. Risk Factors
Information about our most significant risk factors is contained in Item 1A of our Annual
Report on Form 10-K/A for the fiscal year ended December 31, 2007. Except for the risk factors set
forth below, we believe that at September 30, 2008 there has been no material change to this
information.
Recent market disruptions and volatility have had and may continue to have a material adverse
effect on the GLG Funds and accounts we manage.
Recently, global credit and other financial markets have suffered substantial stress,
volatility, illiquidity and disruption. These forces reached unprecedented levels in September and
October 2008, resulting in the bankruptcy or acquisition of, or government assistance to, several
major domestic and international financial institutions. These events have significantly diminished
overall confidence in the financial markets and could further exacerbate the overall market
disruptions and risks to market participants, including the GLG Funds and managed accounts.
Further deterioration or a continuation of recent market conditions could lead to decreased
performance in the GLG Funds and managed accounts and a continued decline in the value of AUM,
which would reduce our management and performance fee revenues and adversely impact our business,
results of operations or financial condition.
As a result of the recent market developments and the potential for increased and continuing
disruptions and the resulting uncertainty, we have experienced an increase in the level of
withdrawals from the GLG Funds and managed accounts. If the level of withdrawal activity persists
at above normal levels, it could become more difficult to manage the liquidity requirements of the
GLG Funds and managed accounts, making it more difficult or more costly for the GLG Funds and
managed accounts to liquidate positions rapidly to meet margin calls, withdrawal requests or
otherwise. In addition to the impact on the market value of AUM, the illiquidity and volatility of
the global financial markets have negatively affected our ability to manage inflows and outflows
from the GLG Funds and managed accounts. The temporary closures of securities exchanges in certain
foreign markets, such as Brazil and Russia, could further negatively impact the liquidity of the
GLG Funds that invest in those markets. Under the terms of the prospectuses for the GLG Funds, the
respective boards of directors of the GLG Funds have the right to restrict withdrawals from the GLG
Funds for certain periods in the event of exceptional circumstances. Similarly, under the terms of
applicable agreements, we have the right to restrict withdrawals from managed accounts for certain
periods in the event of exceptional circumstances. Several other alternative asset managers have
recently exercised similar rights with respect to the funds they manage and we may and have
recommended that the boards of directors of certain of the GLG Funds exercise the rights available
to them. The exercise of these rights may have an adverse effect on the ability of the GLG Funds
to attract additional AUM.
Even if legislative or regulatory initiatives or other efforts successfully stabilize and add
liquidity to the financial markets, we may need to modify our strategies, businesses or operations,
face increased constraints or incur additional costs in order to satisfy new regulatory
requirements or to compete in a changed business environment. For example, temporary prohibitions
and restrictions on short sales of securities have impacted certain
45
of the investment strategies of the GLG Funds and managed accounts, and continued restrictions
on or further regulations of short sales likely could negatively impact the performance of the GLG
Funds and managed accounts.
The GLG Funds and accounts we manage are subject to risks in using prime brokers, custodians,
administrators and other agents.
All of the GLG Funds and managed accounts depend on the services of prime brokers, custodians,
administrators and other agents in connection with certain securities transactions. In the event of
the insolvency of a prime broker and/or custodian, the GLG Funds and managed accounts might not be
able to recover equivalent assets in full, as claims to some or all of these assets usually rank
among the prime brokers and custodians unsecured creditors in relation to assets that the prime
broker or custodian borrows, lends or otherwise uses. In addition, cash held by the GLG Funds and
managed accounts with a prime broker or custodian may not be segregated from the prime brokers or
custodians own cash, and the GLG Funds and managed accounts may therefore rank as unsecured
creditors in relation thereto.
On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman Brothers) filed for Chapter 11
bankruptcy in the United States and administrators were appointed for Lehman Brothers International
(Europe) (LBIE), Lehman Brothers prime brokerage unit in the United Kingdom. LBIE was a prime
broker and counterparty to over-the-counter securities transactions to all of the alternative
strategy GLG Funds and a number of the long-only GLG Funds. We currently estimate that the
combined direct exposure of the GLG Funds to the administration proceedings of LBIE and the
insolvency proceedings of other entities in the Lehman Brothers group amounts to approximately
$95.0 million, or less than 1% of our total net AUM. Our assessment of this exposure is based upon
a number of assumptions, including that:
|
|
|
amounts which LBIE was required to treat as client money and not use in the course
of its business were and are, in fact, so held and will be released upon repayment of
all the affected GLG Funds debt to LBIE (and are therefore excluded from the estimated
exposure amounts); |
|
|
|
|
the information we have received to date from the administrators of LBIE in relation
to rehypothecation of assets is accurate; |
|
|
|
|
unsettled transactions at the time LBIE entered into administration proceedings will
be determined on the basis of a cash settlement of those trades, in accordance with the
contractual agreements between the affected GLG Funds and LBIE, or cancelled; |
|
|
|
|
the cash settlement amounts for terminated over-the-counter derivatives and other
transactions will be as determined by us; and |
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there are no other factors, which if known to us, would lead us to conclude that the
business of LBIE was conducted otherwise than in accordance with the contractual
documentation. |
Based on legal and professional advice recently obtained, we believe these assumptions are
reasonable. However, until we are able to fully reconcile our information and assumptions with the
administrators of LBIE, these estimates could change or the assumptions may prove to be incorrect.
To the extent that these estimates or assumptions change or are incorrect and the exposure is
greater than estimated, we will be subject to additional risks, including:
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potential reputational risk in the competitive alternative asset management
industry; |
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investors in the GLG Funds may suffer additional losses, which could prompt further
withdrawals from the GLG Funds; and |
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the additional exposure may require us to restructure the affected GLG Funds. |
46
The GLG Funds and accounts we manage are subject to counterparty risk with regard to
over-the-counter instruments and other swap or hedging transactions. The actual or perceived
weakness of counterparties could increase the exposure of the GLG Funds and managed accounts to
these counterparty and credit risks, and concerns of counterparties about the financial strength of
the GLG Funds and managed accounts may impact their willingness to enter into transactions with the
GLG Funds and managed accounts.
The financial markets generally are characterized by extensive interconnections among
financial institutions. These interconnections present significant risks to the GLG Funds and
managed accounts as the failure or perceived weakness of any counterparties has the potential to
expose the GLG Funds and managed accounts to risk of loss. Financial institutions, including
banks, broker-dealers and insurance companies, have historically been the most significant
counterparties of the GLG Funds and managed accounts. Credit risk may arise through a default by
one of several large institutions that are dependent on one another to meet their liquidity or
operational needs, so that a default by one institution causes a series of defaults by the other
institutions. This systemic risk may adversely affect the financial intermediaries (such as
clearing agencies, clearing houses, banks, securities firms and exchanges) with which the GLG Funds
and managed accounts interact on a daily basis.
The GLG Funds and managed accounts also face the increased risk of potential bankruptcies or
credit deterioration of major financial institutions, some of with which have substantial
relationships with the GLG Funds and managed accounts. Furthermore, the combinations of financial
service firms announced in the third and fourth quarters of 2008 have increased the concentration
of counterparty risk for the GLG Funds and managed accounts. The current instability of the
financial markets has resulted in many financial institutions becoming significantly less
creditworthy, and the GLG Funds and managed accounts are exposed to the related counterparty risks.
The credit quality of these exposures may be affected by many factors, such as economic and
business conditions or deterioration in the financial condition of an individual counterparty,
group of counterparties or asset classes. Difficulties of this nature affecting counterparties
have the potential to result in significant exposures, whether counterparty, credit or otherwise,
for the GLG Funds and managed accounts and negatively impact our business and results of
operations.
In the event of the insolvency of any counterparty or any broker through which portfolio
managers trade for the account of the GLG Funds and managed accounts, such as prime brokerage and
custodian agreements to which the GLG Funds and managed accounts are party, the GLG Funds and
managed accounts may only rank as unsecured creditors in respect of sums due to them on the margin
accounts or otherwise and any losses will be borne by the GLG funds and managed accounts. The GLG
Funds and managed accounts may also enter into currency, interest rate, total return or other swaps
which may be surrogates for other instruments such as currency forwards and interest rate options.
The value of such instruments, which generally depends upon price movements in the underlying
assets as well as counterparty risk, will influence the performance of the GLG Funds and managed
accounts and, therefore, a decrease in the value of such instruments could have a material adverse
effect on our business, results of operations or financial condition. In particular, certain GLG
Funds frequently trade in debt securities and other obligations, either directly or on an
assignment basis. Consequently, those GLG Funds will be subject to risk of default by the debtor
or obligor in relation to their debt securities and other obligations, which could result in lower
investment performance by those GLG Funds and have a material adverse effect on our business,
results of operations or financial condition.
If the GLG Funds and managed accounts experience diminished financial strength or stability,
actual or perceived, including due to market or regulatory developments, business developments or
results of operations, counterparties may become less willing to enter into transactions with the
GLG Funds and managed accounts or our ability to enter into financial transactions on behalf of the
GLG Funds and managed accounts on terms acceptable to us may be materially compromised.
47
Our business has been affected by the recent unprecedented conditions in the U.S. and global
financial markets. Record volatility, lack of liquidity and the resultant flight to high quality,
low risk assets resulted in a substantial decline in value for virtually every asset class
globally. The unique combination of these factors adversely affects our ability to consistently
generate non-volatile investment performance, and to retain and attract new AUM, which negatively
impacts our business, results of operations and financial condition.
The U.S. and global financial markets have been impacted by an expanding credit market crisis,
initially triggered by rising mortgage default rates and a substantial decline in the value of
residential real estate in the U.S. Market turbulence reached unprecedented levels during the
third quarter of 2008, most dramatically in September 2008, as loss of investor confidence in the
financial system resulted in an historically unprecedented lack of liquidity and decline in asset
values. These factors, combined with volatile commodity prices and foreign exchange rates,
contributed to recessionary economic conditions globally and a deterioration in consumer and
corporate confidence. Global market conditions are inherently outside of our control and cannot be
predicted. If these conditions continue, they may impact our ability to consistently generate
non-volatile investment performance and attract new AUM, and may result in higher levels of
withdrawals from the GLG Funds and managed accounts than they have historically experienced. These
factors may reduce our revenue growth, income and the dividends we pay on our shares of common
stock and may slow or reduce the growth of our business. In particular, we may face the following
heightened risks:
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The investment performance of the GLG Funds and managed accounts may be negatively
impacted. Negative fund performance reduces AUM, which decreases the management fees
and performance fees we earn. Lower revenues may result in lower adjusted net income
and, therefore, reduced amounts available for dividends on our shares of common stock. |
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Performance fees, which historically have comprised a substantial portion of our
annual revenues, are largely contingent on the GLG Funds and managed accounts
generating positive annual investment performance. With one exception, to the extent
any of the GLG Funds and managed accounts generate negative investment performance and
fall below the applicable high water mark, we would not earn performance fees for that
GLG Funds or managed account the until the high water mark is reachieved. |
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Investors worldwide have reduced or eliminated their investments in many asset
classes as confidence in the global financial system has eroded. These actions have
resulted in increased withdrawals for the asset management industry worldwide,
including hedge funds. Withdrawal rates may stay elevated globally while market
conditions remain unsettled. The GLG Funds and managed accounts are not immune to this
trend and significant, additional withdrawals from the GLG Funds and managed accounts
that are not specifically related to investment performance may occur, which would
reduce our AUM. Additionally, our ability to attract new capital to existing GLG Funds
or developing investment platforms may be limited during this period. |
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Consolidation in the hedge fund industry may accelerate, as many hedge funds
experience substantial declines in investment performance, increased withdrawals, or
counterparty exposures which impair their businesses. Some of these funds have reduced
their fees in an attempt to avoid additional withdrawals. We may need to consider
similar actions to remain competitive, which could reduce our revenues. |
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Our industry has been and may continue to be subject to increased regulation and
public scrutiny. Such additional regulation could increase our compliance costs or
limit our ability to pursue investment opportunities. Recent rulemaking by the U.S.
Securities and Exchange Commission and other regulatory authorities outside the United
States has imposed trading and reporting requirements on short selling, which could
adversely affect trading opportunities, including hedging opportunities, for the GLG
Funds and managed accounts. |
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Defaults by, or even rumors or questions about, the solvency of counterparties with
which we execute transactions on behalf of the GLG Funds and managed accounts may
increase operational risks or transaction costs, which may result in lower investment
performance by the GLG Funds and managed accounts. |
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Our access to certain financial intermediaries, such as prime brokers or trading
counterparties, may be reduced or eliminated as a result of ongoing consolidation in
the financial services industry. This may reduce our ability to diversify the exposures
of the GLG Funds and managed accounts to these intermediaries which may increase
operational risks or transaction costs, which may result in lower investment
performance by the GLG Funds and managed accounts. |
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We pay a substantial portion of our compensation expense in the form of annual
bonuses and limited partner profit share, which are variable and discretionary.
Typically, the performance fees we earn fund a significant amount of the cash bonuses
and limited partner profit share that we pay. In periods where we earn little or no
performance fees, our ability to pay cash bonuses and limited partner profit share will
be reduced. This may affect our ability to retain and attract investment professionals
and other key personnel. |
Some of the other financial, economic and market related risks described in Item 1A, Risk
Factors, of our Annual Report on Form 10-K/A for the year ended December 31, 2007 have
materialized. In addition, the market prices of our shares of common stock, warrants and units
have experienced significant volatility and depreciation over the past year and may continue to be
subject to wide fluctuations or further declines. In the event of future deterioration in business
conditions, our Board of Directors may determine to take actions for the longer-term benefit of our
company, such as temporarily reducing dividends on our shares of common stock. As prevailing market
and business conditions or similar ones continue to exist or worsen, we could experience continuing
or increased adverse effects on our business, results of operation or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share and Warrant Repurchases
On November 2, 2007, we initiated a $100.0 million repurchase program for shares of our common
stock and warrants to purchase common stock approved by our Board of Directors effective through
May 2, 2008. On February 4, 2008, the Board of Directors approved an increase of our repurchase
program by an additional $100.0 million and extended the program through August 31, 2008. As of
August 4, 2008, we had repurchased an aggregate of 14,299,200 warrants and 64,900 shares of common
stock (as described below) for an aggregate purchase price of $83.4 million under the program. On
August 4, 2008, the Board of Directors extended the repurchase program through February 4, 2009.
Approximately $116.6 million remains available under the program for the repurchase of common
stock and warrants. Our repurchase program allows management to repurchase shares and warrants at
its discretion.
No shares were or warrants were repurchased by the Company during the third quarter of 2008.
49
Item 6. Exhibits
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Exhibit No. |
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Description |
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31.1
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Certification of Periodic Report by the Co-Chief
Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e)
of the Exchange Act. |
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31.2
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Certification of Periodic Report by the Co-Chief
Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e)
of the Exchange Act. |
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31.3
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Certification of Periodic Report by the Chief Financial
Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the
Exchange Act. |
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32.1
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Certification of Periodic Report by the Co-Chief
Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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32.2
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Certification of Periodic Report by the Co-Chief
Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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32.3
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Certification of Periodic Report by the Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350. |
50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GLG PARTNERS, INC.
(Registrant)
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Date: November 10, 2008 |
By |
/s/ Noam Gottesman
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Name: |
Noam Gottesman |
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Title: |
Chairman of the Board and Co-Chief
Executive Officer |
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51
EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1
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Certification of Periodic Report by the Co-Chief Executive
Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the
Exchange Act. |
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31.2
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Certification of Periodic Report by the Co-Chief Executive
Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the
Exchange Act. |
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31.3
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Certification of Periodic Report by the Chief Financial
Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the
Exchange Act. |
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32.1
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Certification of Periodic Report by the Co-Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
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32.2
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Certification of Periodic Report by the Co-Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
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32.3
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Certification of Periodic Report by the Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
52