Investment Agreement
On March 7, 2018, BGC, including through its subsidiary BGC Partners, L.P., purchased 16,606,726 newly issued exchangeable limited partnership units (the
Units) of Newmark Holdings for approximately $242.0 million (the Investment). The price per Unit was based on the $14.57 closing price of Newmarks Class A common stock, par value $0.01 per share (the
Class A common stock) on March 6, 2018 as reported on the NASDAQ Global Select Market. These newly-issued Units are exchangeable, at BGCs discretion, into either shares of Class A common stock or shares of
Class B common stock, par value $0.01 per share, of Newmark (the Newmark Class B common stock).
BGC made the Investment pursuant to
an Investment Agreement dated as of March 6, 2018 by and among BGC, BGC Holdings, BGC Partners, L.P., BGC Global Holdings, L.P., Newmark, Newmark Holdings and Newmark Partners, L.P. The Investment and related transactions were approved by the
Audit Committees (the Audit Committees) of the Boards of Directors of BGC and Newmark (the Boards) and by the full Boards upon the recommendation of the Audit Committees.
BGC and its subsidiaries funded the Investment using the proceeds of its Controlled Equity Offering Class A common stock sales program pursuant to the
Sales Agreement dated April 1, 2017 between BGC Partners, Inc. and Cantor Fitzgerald & Co. (CF&Co) with respect to 20,000,000 shares of Class A common stock (the 2017 Sales Agreement). Since
December 19, 2017, BGC has sold an aggregate of 19.4 million newly-issued Class A common shares under the 2017 Sales Agreement for net proceeds of $270.9 million. Approximately $242.0 million of gross proceeds were used to
make the Investment. The remaining funds were used to repurchase shares of BGCs Class A common stock and to purchase or redeem limited partnership interests of BGC Holdings, L.P. (BGC Holdings) and exchangeable limited
partnership interests of Newmark Holdings. All of the shares under the 2017 Sales Agreement have been sold as of the date hereof.
The foregoing description of the Investment Agreement does not purport to be complete and is qualified in its
entirety by reference to the full text of the Investment Agreement, which is attached hereto as Exhibit 10.1 and incorporated herein by reference.
Repayment of Term Loan
As previously disclosed,
on November 22, 2017, BGC and Newmark entered into an amendment (the Term Loan Amendment) to the unsecured senior term loan credit agreement (the Term Loan Credit Agreement), dated as of September 8, 2017, with Bank
of America, N.A., as administrative agent (the Administrative Agent), and a syndicate of lenders. The Term Loan Credit Agreement provided for a term loan in the aggregate principal amount of $575.0 million (the Term
Loan). In connection with Newmarks separation from BGC, Newmark assumed the obligations of BGC as borrower under the Term Loan. Newmark repaid a portion of the Term Loan from the proceeds of its initial public offering in December 2017
and made two additional payments of $14.4 million each subsequent to December 31, 2017. Newmark will use the proceeds from the Investment to repay the balance of the outstanding principal amount under the Term Loan in the amount of
approximately $242.0 million.
The information under the heading Update to Outlooks set forth in Exhibit 99.1 attached to this Current
Report on Form
8-K
is being furnished under Item 7.01of Form
8-K.
Such information shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the
Securities Act), or the Exchange Act, except as expressly set forth by specific reference in such filing and as set forth below. The remaining information set forth in Exhibit 99.1 is being filed under the items set forth above and shall
be deemed incorporated by reference in any filing under the Securities Act, except as expressly set forth by specific reference in such filing.
Discussion of Forward-Looking Statements about Newmark and BGC Partners, Inc.
Statements in this document and the attached press release regarding Newmark and BGC that are not historical facts are forward-looking statements
that involve risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements. Except as required by law, Newmark and BGC undertake no obligation to update any forward-looking statements. For
a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Newmarks and BGCs Securities and Exchange Commission filings, including, but not
limited to, any updates to such risk factors contained in subsequent Forms
10-K,
10-Q,
or Forms
8-K.
Information Regarding
Non-GAAP
Financial Measures
In the Press Release, BGC uses
non-GAAP
financial measures including, but not limited to,
pre-tax
Adjusted Earnings and
post-tax
Adjusted Earnings, which are supplemental measures of operating results that are used by management to evaluate
the financial performance of the Company and its consolidated subsidiaries. BGC believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers when
managing its business.
As compared with income (loss) from operations before income taxes, and net income (loss) per fully diluted
share, all prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain
non-cash
items and other expenses that generally do not involve the receipt or outlay of cash by the
Company and/or which do not dilute existing stockholders, as described below. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary results of BGC.
Adjustments Made to Calculate
Pre-Tax
Adjusted Earnings
BGC defines
pre-tax
Adjusted Earnings as GAAP income (loss) from operations before income taxes and noncontrolling
interest in subsidiaries excluding items, such as:
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Non-cash
asset impairment charges, if any;
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Allocations of net income to limited partnership units;
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Non-cash
charges related to the amortization of intangibles with respect to acquisitions; and
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Non-cash
charges relating to grants of exchangeability to limited partnership units that reflect the value of the shares of common stock into which the unit is exchangeable when
the unit holder is granted exchangeability not previously expensed in accordance with GAAP.
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Virtually all of BGCs key executives and
producers have partnership or equity stakes in the Company and receive deferred equity or limited partnership units as part of their compensation. A significant percentage of the Companys fully diluted shares are owned by its executives,
partners and employees. The Company issues limited partnership units and grant exchangeability to unit holders to provide liquidity to its employees, to align the interests of its employees and management with those of common stockholders, to help
motivate and retain key employees, and to encourage a collaborative culture that drives cross-selling and revenue growth.
When the Company issues limited
partnership units, the shares of common stock into which the units can be ultimately exchanged are included in BGCs fully diluted share count for Adjusted Earnings at the beginning of the subsequent quarter after the date of grant. BGC
includes such shares in the Companys fully diluted share count when the unit is granted because the unit holder is expected to be paid a
pro-rata
distribution based on BGCs calculation of Adjusted
Earnings per fully diluted share and because the holder could be granted the ability to exchange their units into shares of common stock in the future.
Non-cash
charges with respect to grants of
exchangeability reflect the value of the shares of common stock into which the unit is exchangeable when the unit holder is granted exchangeability not previously expensed in accordance with GAAP. The amount of
non-cash
charges relating to grants of exchangeability the Company uses to calculate
pre-tax
Adjusted Earnings on a quarterly basis is based upon the Companys
estimate of expected grants of exchangeability to limited partnership units during the annual period, as described further below under Adjustments Made to Calculate
Post-Tax
Adjusted Earnings.
Adjusted Earnings also excludes
non-cash
GAAP gains attributable to originated mortgage servicing rights (which
Newmark refer to as OMSRs) and
non-cash
GAAP amortization of mortgage servicing rights (which the Company refers to as MSRs). Under GAAP, the Company recognizes OMSRs gains equal to the
fair value of servicing rights retained on mortgage loans originated and sold. Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and amortized in proportion to the net servicing
revenue expected to be earned. However, it is expected that any cash received with respect to these servicing rights, net of associated expenses, will increase Adjusted Earnings (and Adjusted EBITDA) in future periods.
Additionally, Adjusted Earnings calculations exclude certain unusual,
one-time,
non-ordinary
or
non-recurring
items, if any. These items are excluded from Adjusted Earnings because the Company views excluding such items as a better reflection of the
ongoing operations of BGC. BGCs definition of Adjusted Earnings also excludes certain gains and charges with respect to acquisitions, dispositions, or resolutions of litigation. Management believes that excluding such gains and charges also
best reflects the ongoing performance of BGC.
Recognition of Nasdaq
Earn-out
Payments
Consistent with Newmarks methodology of recognizing income related to the receipt of Nasdaq
earn-out
payments in
the third quarter under GAAP, beginning with the first quarter of 2018, BGC will recognize the receipt of Nasdaq
earn-out
payments when earned in the third quarter for Adjusted Earnings instead of
pro-rating
over four quarters. This GAAP methodology will lead to earlier recognition of the Nasdaq income under Adjusted Earnings.
Adjustments Made to Calculate
Post-Tax
Adjusted Earnings
Because Adjusted Earnings are calculated on a
pre-tax
basis, BGC also intends to report
post-tax
Adjusted Earnings on a consolidated basis. The Company defines
post-tax
Adjusted Earnings as
pre-tax
Adjusted Earnings
reduced by the
non-GAAP
tax provision described below and Adjusted Earnings attributable to noncontrolling interest in subsidiaries.
The Company calculates its tax provision for
post-tax
Adjusted Earnings using an annual estimate similar to how it
accounts for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, BGC estimates its full fiscal year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the
expected inclusions and deductions for income tax purposes, including expected grants of exchangeability to limited partnership units during the annual period. The resulting annualized tax rate is applied to BGCs quarterly GAAP income (loss)
from operations before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period.
To determine the
non-GAAP
tax provision, BGC first adjusts
pre-tax
Adjusted
Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include
non-cash
charges with respect to grants of exchangeability; certain charges related to
employee loan forgiveness; certain net operating loss carryforwards when taken for statutory purposes; certain charges related to tax goodwill amortization; and deductions with respect to charitable contributions. These adjustments may also reflect
timing and measurement differences, including treatment of employee loans, changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange, variations in the value of certain deferred tax assets and
liabilities and the different timing of permitted deductions for tax under GAAP and statutory tax requirements.
After application of these previously
described adjustments, the result is the Companys taxable income for its
pre-tax
Adjusted Earnings, to which BGC then applies the statutory tax rates. This amount is the Companys
non-GAAP
tax provision. BGC views the effective tax rate on
pre-tax
Adjusted Earnings as equal to the amount of its
non-GAAP
tax
provision divided by the amount of
pre-tax
Adjusted Earnings.
Generally, the most significant factor affecting
this
non-GAAP
tax provision is the amount of
non-cash
charges relating to the grants of exchangeability to limited partnership units. Because the
non-cash
charges relating to the grants of exchangeability are deductible in accordance with applicable tax laws, increases in exchangeability have the effect of lowering the Companys
non-GAAP
effective tax rate and thereby increasing its
post-tax
Adjusted Earnings.
Management uses
post-tax
Adjusted Earnings in part to help it evaluate, among other things, the overall performance of
the business, to make decisions with respect to the Companys operations, and to determine the amount of dividends payable to common stockholders and distributions payable to holders of limited partnership units.
BGC incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of
each of its subsidiaries. Certain of the Companys entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (UBT) in New York City. Any U.S. federal and state income tax liability or benefit related
to the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity. The Companys consolidated financial statements include U.S. federal, state and local income taxes on the
Companys allocable share of the U.S. results of operations. Outside of the U.S., BGC operates principally through subsidiary corporations subject to local income taxes. For these reasons, taxes for Adjusted Earnings are expected to be
presented to show the tax provision the consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate rates.
Adjusted Earnings Attributable to Noncontrolling Interest in Subsidiaries
Adjusted Earnings attributable to noncontrolling interest in subsidiaries is calculated based on the relevant noncontrolling interest existing on the balance
sheet date. Following the Newmark IPO, noncontrolling interests exist for Newmark Group, Inc., and on the issuance of additional standalone units for BGC Holdings L.P. and Newmark Holdings L.P., because relevant units/shares may have different
economic entitlements to common stock of BGC Partners, Inc.
Calculations of
Pre-Tax
and
Post-Tax
Adjusted Earnings per Common Share
BGCs Adjusted Earnings per common share calculations assume either
that:
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The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated expense, net of tax, when the impact would be dilutive; or
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The fully diluted share count excludes the shares related to these instruments, but includes the associated expense, net of tax.
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The share count for Adjusted Earnings excludes certain shares expected to be issued in future periods but not yet eligible to receive dividends and/or
distributions. Each quarter, the dividend payable to BGCs common stockholders, if any, is expected to be determined by the Companys Board of Directors with reference to a number of factors, including
post-tax
Adjusted Earnings per common share. BGC may also pay a
pro-rata
distribution of net income to limited partnership units, as well as to Cantor for its
noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be determined using the above definition of
post-tax
Adjusted Earnings per common share.
The declaration, payment, timing and amount of any future dividends payable by the Company will be at the discretion of its board of directors.
Other Matters with Respect to Adjusted Earnings
The term
Adjusted Earnings should not be considered in isolation or as an alternative to GAAP net income (loss). The Company views Adjusted Earnings as a metric that is not indicative of liquidity or the cash available to fund its operations, but
rather as a performance measure.
Pre-
and
post-tax
Adjusted Earnings are not intended to replace the Companys presentation of its GAAP financial results. However,
management believes that these measures help provide investors with a clearer understanding of BGCs financial performance and offer useful information to both management and investors regarding certain financial and business trends related to
the Companys financial condition and results of operations. Management believes that Adjusted Earnings measures and the GAAP measures of financial performance should be considered together.
BGC anticipates providing forward-looking guidance for GAAP revenues and for certain Adjusted Earnings measures from time to time. However, the Company does
not anticipate providing an outlook for other GAAP results. This is because certain GAAP items, which are excluded from Adjusted Earnings, are difficult to forecast with precision before the end of each period. The Company therefore
believes that it is not possible to forecast GAAP results or to quantitatively reconcile GAAP results to
non-GAAP
results with sufficient precision unless
BGC makes unreasonable efforts. The items that are difficult to predict on a quarterly basis with precision and which can have a material impact on the Companys GAAP results include, but are not limited, to the following:
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Allocations of net income and grants of exchangeability to limited partnership units, which are determined at the discretion of management throughout and up to the
period-end;
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The impact of certain marketable securities, as well as any gains or losses related to associated
mark-to-
market movements and/or hedging.
These items are calculated using
period-end
closing prices;
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Non-cash
asset impairment charges, which are calculated and analyzed based on the
period-end
values of the underlying assets. These amounts
may not be known until after
period-end;
and
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Acquisitions, dispositions and/or resolutions of litigation which are fluid and unpredictable in nature.
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Adjusted EBITDA and Adjusted EBITDA Before Allocations to Units Defined
BGC also provides an additional
non-GAAP
financial performance measure, Adjusted EBITDA, which it defines
as GAAP Net income (loss) available to common stockholders, adjusted to add back the following items:
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Fixed asset depreciation and intangible asset amortization;
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Employee loan amortization and reserves on employee loans;
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Provision (benefit) for income taxes;
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Net income (loss) attributable to noncontrolling interest in subsidiaries;
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Non-cash
charges relating to grants of exchangeability to limited partnership interests;
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Non-cash
charges related to issuance of restricted shares;
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Non-cash
earnings or losses related to BGCs equity investments; and
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Net
non-cash
GAAP gains related to OMSR gains and MSR amortization.
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The Company also discloses Adjusted EBITDA before allocations to units, which is Adjusted EBITDA excluding GAAP charges with respect to
allocations of net income to limited partnership units. Such allocations represent the
pro-rata
portion of
pre-tax
earnings available to such unit holders. These units
are in the fully diluted share count, and are exchangeable on a
one-to-one
basis into common stock. As these units are exchanged into common shares, unit holders become
entitled to cash dividends rather than cash distributions. The Company views such allocations as intellectually similar to dividends on common shares. Because dividends paid to common shares are not an expense under GAAP, management believes similar
allocations of income to unit holders should also be excluded by investors when analyzing BGCs results on a fully diluted share basis with respect to Adjusted EBITDA.
The Companys management believes that these Adjusted EBITDA measures are useful in evaluating BGCs operating performance, because the calculation
of this measure generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions. Such items
may vary for different companies for reasons unrelated to overall operating performance. As a result, the Companys management uses these measures to evaluate operating performance and for other discretionary purposes. BGC believes that
Adjusted EBITDA is useful to investors to assist them in getting a more complete picture of the Companys financial results and operations.
Since these Adjusted EBITDA measures are not recognized measurements under GAAP, investors should use these
measures in addition to GAAP measures of net income when analyzing BGCs operating performance. Because not all companies use identical EBITDA calculations, the Companys presentation of these Adjusted EBITDA measures are may not be
comparable to similarly titled measures of other companies. Furthermore, these Adjusted EBITDA measures are not intended to be a measure of free cash flow or GAAP cash flow from operations, because these Adjusted EBITDA measures do not consider
certain cash requirements, such as tax and debt service payments.
For a reconciliation of these
non-GAAP
measures
to GAAP Net income (loss) available to common stockholders, the most comparable financial measure calculated and presented in accordance with GAAP, see the section of BGCs most recent quarterly financial results press release
titled Reconciliation of GAAP Income (Loss) to Adjusted EBITDA.
Liquidity Defined
BGC also uses a
non-GAAP
measure called liquidity. The Company considers liquidity to be comprised of the
sum of cash and cash equivalents plus marketable securities that have not been financed, reverse repurchase agreements, and securities owned, less securities loaned and repurchase agreements. BGC considers this an important metric for determining
the amount of cash that is available or that could be readily available to the Company on short notice.