DEF 14A 1 d847334ddef14a.htm DEF 14A DEF 14A
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

Filed by the Registrant x

Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material under §240.14a-12

GAIN CAPITAL HOLDINGS, INC.

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1) Title of each class of securities to which transaction applies:
                                                                                                                                                                             

 

  (2) Aggregate number of securities to which transaction applies:
                                                                                                                                                                             

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
                                                                                                                                                                             

 

  (4) Proposed maximum aggregate value of transaction:
                                                                                                                                                                             

 

  (5) Total fee paid:
                                                                                                                                                                             

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1) Amount Previously Paid:
                                                                                                                                                                             

 

  (2) Form, Schedule or Registration Statement No.:
                                                                                                                                                                             

 

  (3) Filing Party:
                                                                                                                                                                             

 

  (4) Date Filed:
                                                                                                                                                                             

 


Table of Contents

LOGO

GAIN CAPITAL HOLDINGS, INC.

Bedminster One

135 U.S. Highway 202/206

Bedminster, New Jersey 07921

(908) 731-0700

February 6, 2015

Dear Stockholder:

On October 31, 2014, GAIN Capital Holdings, Inc. (the “Company”), entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with City Index Group Limited, a company incorporated and registered in England and Wales (the “Seller”), INCAP Gaming B.V., a company incorporated and registered in The Netherlands (“INCAP”) and IPGL Limited, a company incorporated and registered in England and Wales (“IPGL”).

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, the Company has agreed to purchase the entire issued and outstanding share capital (the “Shares”) of City Index (Holdings) Limited, a company incorporated and registered in England and Wales (“City”) from the Seller (the “Acquisition”). The Shares will be sold for an aggregate purchase price consisting of (i) $20,000,000 in cash, including $1,000,000 in cash to be held in escrow; (ii) 5,319,149 shares of the Company’s common stock (the “Consideration Shares”), including 4,787,234 Consideration Shares to be held in escrow; and (iii) 4.125% unsecured convertible senior notes of the Company (the “Convertible Notes”) with an aggregate principal amount of $60,000,000, including Convertible Notes with an aggregate principal amount of $54,000,000 to be held in escrow.

On November 27, 2013, the Company issued $80 million in aggregate principal amount of its 4.125% Convertible Senior Notes due 2018 (the “Existing Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Existing Convertible Notes were issued pursuant to an indenture, dated as of November 27, 2013 (the “Existing Indenture”), between the Company and the Bank of New York Mellon, as trustee. The Existing Convertible Notes bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on June 1 and December 1 of each year, and will mature on December 1, 2018, unless earlier converted, redeemed or repurchased. The Existing Convertible Notes are convertible into cash, shares of the Company’s common stock (the “Common Stock”), or a combination thereof, at the Company’s election; provided that, prior to obtaining stockholder approval to issue shares of Common Stock in excess of the Aggregate Share Cap (as defined in the Existing Indenture), (i) the Company must settle conversions of the Existing Convertible Notes by paying and delivering, as the case may be, a combination of cash and shares of Common Stock with a Specified Dollar Amount (as defined in the Existing Indenture) of at least $1,000 per $1,000 principal amount of Existing Convertible Notes, (ii) the number of shares of Common Stock deliverable upon conversion of all Existing Convertible Notes in the aggregate may not exceed the Aggregate Share Cap and (iii) the number of shares of Common Stock deliverable upon conversion of each $1,000 principal amount of Existing Convertible Notes may not exceed the Conversion Share Cap (as defined in the Existing Indenture).

On behalf of the Board of Directors (the “Board”) of the Company, I cordially invite you to attend the Special Meeting of Stockholders (the “Meeting”) of the Company, which will be held on March 12, 2015, at 2:30 p.m. Eastern Time. You will be able to attend the Meeting, vote and submit your questions during the Meeting via live webcast by visiting www.virtualshareholdermeeting.com/gcap2015. The matters to be considered by our stockholders at the Meeting are described in detail in the accompanying materials. Among the matters that you will be considering are the approval of: (1) the issuance of the Consideration Shares and the Convertible Notes in connection with the Acquisition (the “Issuance”); (2) the amendment of our Certificate of Incorporation to


Table of Contents

increase the number of authorized shares of our common stock; (3) the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and (4) the adjournment of the Meeting, if necessary to solicit additional proxies if there are not sufficient votes to approve the foregoing proposals at the time of the Meeting. This proxy is solicited on behalf of the Board.

We are seeking stockholder approval of the Issuance in connection with the proposed Acquisition to satisfy the rules of the New York Stock Exchange, which require stockholder approval prior to the issuance of securities in connection with the acquisition of the stock or assets of another company if the issuance would constitute more than 20% of the total number of shares of common stock outstanding before the issuance. As a result, approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Stockholder approval of the Issuance in connection with the Acquisition is required to complete the Acquisition. We are also seeking approval of other matters, summarized above and described in further detail in this Proxy Statement.

Stockholders of record at the close of business on February 5, 2015 (the “Record Date”) are entitled to receive notice of and vote at the Meeting and any adjournment or postponement thereof.

After careful consideration, the Board recommends that you vote “FOR” the proposal to authorize the Issuance, “FOR” the proposal to approve the amendment to our Certificate of Incorporation, “FOR” the proposal to remove the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture, and “FOR” the proposal for the adjournment of the Meeting if necessary to solicit additional proxies if there are not sufficient votes to approve the other proposals at the time of the Meeting.

It is very important that you be represented at the Meeting regardless of the number of shares you own. Even if you plan to attend the Meeting, I urge you to submit your vote promptly. You may vote your shares via a toll-free telephone number, over the Internet, or by marking, signing and dating your proxy card and returning it in the envelope provided, as described in further detail herein. Voting by phone, over the Internet or by proxy card will not prevent you from voting in person, but will ensure that your vote is counted if, for whatever reason, you are unable to attend the Meeting. If your shares are held in the name of a bank, brokerage firm, fiduciary or custodian, as record holder of your shares, follow the voting instructions on the form you receive from your record holder. The method of submitting a voting proxy through any such record holder will depend on their voting procedures.

In addition, we urge you to read carefully the accompanying Proxy Statement (and the documents incorporated by reference into it) which includes important information about the proposed Acquisition, the Company, City, IPGL INCAP and the Meeting. Please pay particular attention to the section titled “Risk Factors” beginning on page 18 of the accompanying Proxy Statement.

Your continued support and interest in the Company are sincerely appreciated.

 

Sincerely,
LOGO
Peter Quick
Chairman of the Board

These proxy materials are being mailed to stockholders of record on or about February 6, 2015.


Table of Contents

GAIN CAPITAL HOLDINGS, INC.

Bedminster One

135 U.S. Highway 202/206

Bedminster, New Jersey 07921

(908)  731-0700

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on March 12, 2015

Dear Stockholder:

You are cordially invited to attend the Special Meeting of Stockholders (the “Meeting”) of GAIN Capital Holdings, Inc. (the “Company”), to be held on March 12, 2015, at 2:30 p.m. Eastern Time via live webcast at www.virtualshareholdermeeting.com/gcap2015.

At the Meeting, you will be asked to consider and vote upon proposals to:

 

1. Approve the issuance (the “Issuance”) of 5,319,149 shares of common stock, par value $0.00001 per share (the “Common Stock”) of the Company (the “Consideration Shares”) and 4.125% unsecured convertible senior notes of the Company (the “Convertible Notes”) with an aggregate principal amount of $60,000,000 in connection with the Company’s proposed acquisition (the “Acquisition”) of the entire issued and outstanding share capital (the “Shares”) of City Index (Holdings) Limited, a company incorporated and registered in England and Wales (“City”) from City Index Group Limited, a company incorporated and registered in England and Wales (the “Seller”) pursuant to a Share Purchase Agreement (the “Share Purchase Agreement”), dated as of October 31, 2014, by and among the Company, the Seller, INCAP Gaming B.V., a company incorporated and registered in The Netherlands (“INCAP”) and IPGL Limited, a company incorporated and registered in England and Wales (“IPGL”);

 

2. Approve an amendment of the Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock from 60,000,000 to 120,000,000, which we refer to as the “charter amendment proposal”;

 

3. Approve the removal of the Aggregate Share Cap and the Conversion Share Cap (as defined in the Existing Indenture) from the terms of the Company’s 4.125% Convertible Senior Notes due 2018 (the “Existing Convertible Notes”) issued pursuant to the indenture dated as of November 27, 2013 (the “Existing Indenture”), between the Company and the Bank of New York Mellon, as trustee, in order to provide the Company with additional flexibility in determining how to settle the Existing Convertible Notes; and

 

4. Approve the adjournment of the Meeting, if necessary to solicit additional proxies if there are not sufficient votes to approve the foregoing proposals at the time of the Meeting, which we refer to as the “adjournment proposal”.

These items of business are described in detail in the accompanying Proxy Statement.

After careful consideration, the Board of Directors of the Company recommends that you vote “FOR” Proposal Nos. 1, 2, 3 and 4.

YOUR VOTE IS IMPORTANT!

We cannot complete the Acquisition unless our stockholders approve the Issuance. Closing of the Acquisition is subject to the approval by our stockholders of the Issuance (the “Company Stockholder Approval”) at the closing and the satisfaction of other closing conditions, including certain regulatory approvals. We are obligated to pay to Seller a fee of $1,000,000 if the Company Stockholder Approval is not obtained. The Share Purchase Agreement will be terminated immediately 180 days after the date of the Share Purchase Agreement if the transaction is not closed by such time, unless otherwise agreed by the parties.


Table of Contents

You should read the attached Proxy Statement and the information incorporated by reference into the Proxy Statement carefully. Whether or not you plan to attend the Meeting, you are urged to vote your shares promptly either by telephone, by Internet or by mail by signing, dating and mailing the proxy card in the envelope provided. You may revoke your proxy at any time before it is exercised at the Meeting as described in the accompanying proxy materials. If your shares are held in the name of a bank, brokerage firm, fiduciary or custodian as record holder of our shares, follow the voting instructions on the form you receive from your record holder. The method of submitting a voting proxy through any such record holder will depend on their voting procedures.

Thank you very much for your continued support.

 

By order of the Board:
LOGO
Diego Rotsztain
Executive Vice President, General Counsel and Secretary

Bedminster, New Jersey

February 6, 2015


Table of Contents

GAIN CAPITAL HOLDINGS, INC.

Bedminster One

135 U.S. Highway 202/206

Bedminster, New Jersey 07921

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of GAIN Capital Holdings, Inc. (the “Board”) of proxies to be voted at our Special Meeting of Stockholders (the “Meeting”) to be held on March 12, 2015 at 2:30 p.m. Eastern Time via live webcast at www.virtualshareholdermeeting.com/gcap2015, and at any adjournment or adjournments thereof. Holders of record of shares of our common stock, $0.00001 par value (the “Common Stock”), as of the close of business on February 5, 2015, will be entitled to notice of and to vote at the Meeting and any adjournment or adjournments thereof. As of the Record Date, there were 43,088,234 shares of Common Stock issued and outstanding (not including shares held by the Company as treasury stock). Each share of Common Stock is entitled to one vote on any matter presented to stockholders at the Meeting.

In this Proxy Statement, “GAIN”, “Company”, “we”, “us”, and “our” refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, include GAIN’s subsidiaries.

PROPOSALS

If proxies are properly submitted by telephone, via the Internet or by signing, dating and returning the proxy card by mail in the envelope provided, the shares of Common Stock represented thereby will be voted in the manner specified therein. If not otherwise specified, and the proxy card is signed, the shares of Common Stock represented by the proxies will be voted:

 

  (1) FOR the approval of the issuance (the “Issuance”) of 5,319,149 shares of Common Stock and 4.125% unsecured convertible senior notes of the Company with an aggregate principal amount of $60,000,000 in connection with the Company’s proposed acquisition of the entire issued and outstanding share capital of City Index (Holdings) Limited, a company incorporated and registered in England and Wales from City Index Group Limited, a company incorporated and registered in England and Wales pursuant to a Share Purchase Agreement, dated as of October 31, 2014, by and among the Company, the Seller, INCAP Gaming B.V., a company incorporated and registered in The Netherlands, and IPGL Limited, a company incorporated and registered in England and Wales;

 

  (2) FOR the approval of an amendment of the Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock from 60,000,000 to 120,000,000, which we refer to as the “charter amendment proposal”;

 

  (3) FOR the approval of the removal of the Aggregate Share Cap and Conversion Share Cap from the terms of the Company’s 4.125% Convertible Senior Notes due 2018 (the “Existing Convertible Notes”) issued pursuant to the indenture dated as of November 27, 2013 (the “Existing Indenture”), between the Company and the Bank of New York Mellon, as trustee; and

 

  (4) FOR the approval of the adjournment of the Meeting, if necessary to solicit additional proxies if there are not sufficient votes to approve the foregoing proposals at the time of the Meeting, which we refer to as the “adjournment proposal”.

The Board does not know of any matters other than proposals (1), (2), (3) and (4) listed above to be brought before the Meeting. If any other matters properly come before the Meeting, the persons named in the enclosed form of proxy or their substitutes will vote in accordance with their best judgment on such matters. Any stockholder who has submitted a proxy may revoke it at any time before it is voted, by (i) written notice addressed to and received by our Secretary, (ii) by submitting a duly executed proxy bearing a later date,

 

i


Table of Contents

(iii) granting a subsequent proxy through the Internet or telephone, or (iv) by electing to vote at the Meeting. Your most recent proxy card or telephone or Internet proxy is the one that is counted.

REQUIRED VOTE

The affirmative vote by the holders of a majority in voting power of the shares of Common Stock present or represented and voting on the proposal is required for the approval of the Issuance, provided a quorum is present in person or by proxy.

The affirmative vote by the holders of a majority in voting power of the shares of Common Stock entitled to vote on the proposal is required for the approval of the charter amendment proposal, provided a quorum is present in person or by proxy.

The affirmative vote by the holders of a majority in voting power of the shares of Common Stock present or represented and voting on the proposal is required for the approval of the removal of the Aggregate Share Cap and Conversion Share Cap from the terms of the Existing Convertible Notes issued pursuant to the Existing Indenture, provided a quorum is present in person or by proxy.

The affirmative vote by the holders of a majority in voting power of the shares of Common Stock present or represented and voting on the proposal is required for the approval of the adjournment proposal, provided a quorum is present in person or by proxy.

The presence at the Meeting, in person or by proxy, of the holders of a majority of the shares of Common Stock issued and outstanding on the record date will constitute a quorum. Abstentions and “broker non-votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when a bank, broker or other holder of record holding shares for a beneficial owner does not vote on a particular proposal because that holder does not have discretionary voting power for that particular item and has not received instructions from the beneficial owner. Shares not present at the Meeting, shares voting “abstain” and broker non-votes have no effect on the approval of the Issuance, the removal of the Aggregate Share Cap and Conversion Share Cap from the terms of the Existing Convertible Notes issued pursuant to the Existing Indenture and the adjournment proposal because they are not considered “votes cast” under Delaware law. Abstentions, failures to vote and broker non-votes will have the effect of a vote “AGAINST” the charter amendment proposal.

Information About These Proxy Materials

Why you received these proxy materials. You have received these proxy materials because our Board is soliciting your proxy to vote your shares at the Meeting. This proxy statement includes information that we are required to provide to you under the rules of the U.S. Securities and Exchange Commission (the “SEC”) and that is designed to assist you in voting your shares. If you own our Common Stock in more than one account, such as individually and also jointly with your spouse, you may receive more than one notice relating to these proxy materials. To assist us in saving money and to serve you more efficiently, we encourage you to have all your accounts registered in the same name and address by contacting our transfer agent:

Broadridge Corporate Issuer Solutions, Inc.

1717 Arch Street, Suite 1300

Philadelphia, PA 19103

Telephone: (800) 830-4936

Householding. The SEC’s rules permit us to deliver a single set of Meeting materials to one address shared by two or more of our stockholders. This delivery method is referred to as “householding” and can result in significant cost savings. To take advantage of this opportunity, we have delivered only one set of Meeting materials to multiple stockholders who share an address, unless we received contrary instructions from the affected stockholders prior to the mailing date. We agree to deliver promptly, upon written or oral request, a

 

ii


Table of Contents

separate copy of the Meeting materials to any stockholder at the shared address to which a single copy of those documents was delivered. If you prefer to receive separate copies of the Meeting materials, contact:

Broadridge Corporate Issuer Solutions, Inc.

Householding Department

51 Mercedes Way

Edgewood, New York 11717

Telephone: (800) 542-1061

If you are currently a stockholder sharing an address with another stockholder and wish to receive only one copy of future Meeting materials and other communications for your household, please contact Broadridge at the above phone number or address.

 

iii


Table of Contents

TABLE OF CONTENTS

 

    Page  

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

PROXY STATEMENT

    i   

PROPOSALS

    i   

REQUIRED VOTE

    ii   

Information About These Proxy Materials

    ii   

SUMMARY TERM SHEET

    1   

The Companies

    1   

Summary of the Acquisition

    2   

Principal Reasons for the Acquisition

    2   

Principal Terms of the Acquisition

    2   

Opinion of the Company’s Financial Advisor

    6   

Selected Unaudited Pro Forma Condensed Consolidated Financial Data

    6   

Regulatory Approvals and Regulatory Notifications

    7   

Interests of Certain of our Directors and Executive Officers in the Acquisition

    7   

Impact of the Issuance on Existing Stockholders

    8   

Dissenters’ or Appraisal Rights of Existing Stockholders

    8   

Vote Required and Recommendation of the Board

    8   

QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING

    9   

IMPORTANT NOTE

    15   

FORWARD-LOOKING STATEMENTS

    16   

Relating to the Acquisition and the Issuance:

    16   

Relating to our Business Generally:

    16   

RISK FACTORS

    18   

PROPOSAL NO. 1 APPROVAL OF THE ISSUANCE

    21   

The Companies

    21   

Principal Reasons for the Acquisition

    22   

Principal Terms of the Acquisition

    22   

Background of the Acquisition

    22   

Opinion of the Company’s Financial Advisor

    25   

Share Purchase Agreement

    30   

Stockholders’ Agreement

    35   

Convertible Notes Indenture

    36   

Registration Rights Agreement

    38   

Side Letter with the Other Investors

    39   

Regulatory Approvals and Regulatory Notifications To Be Obtained in Connection with the Acquisition

    40   

Interests of Certain of our Directors and Executive Officers in the Acquisition

    40   

Impact of the Issuance on Existing Stockholders

    41   

Dissenters’ or Appraisal Rights of Existing Stockholders

    41   

Vote Required and Recommendation of the Board

    41   

PROPOSAL NO. 2 APPROVAL OF THE CHARTER AMENDMENT PROPOSAL

    44   

Vote Required and Board Recommendation

    44   

 

iv


Table of Contents
    Page  
PROPOSAL NO. 3 APPROVAL OF REMOVAL OF THE AGGREGATE SHARE CAP AND THE CONVERSION SHARE CAP FROM THE TERMS OF THE EXISTING CONVERTIBLE NOTES AND THE EXISTING INDENTURE     45   

The Company’s Existing 4.125% Convertible Senior Notes due 2018

    45   

Removal of Share Cap

    45   

Vote Required and Board Recommendation

    45   
PROPOSAL NO. 4 APPROVAL OF THE ADJOURNMENT OR POSTPONEMENT OF THE MEETING     46   

Adjournment or Postponement

    46   

Vote Required and Board Recommendation

    46   

DESCRIPTION OF CAPITAL STOCK

    47   

General

    47   

Common Stock

    47   

Preferred Stock

    47   

Restricted Stock Units

    47   

Registration Rights

    48   

Anti-Takeover Effects of Our Certificate of Incorporation and By-laws and Delaware Law

    48   

Transfer Agent

    49   

Listing

    50   

SELECTED FINANCIAL DATA OF THE COMPANY

    50   

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    51   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    70   

Persons That Beneficially Own More Than 5% of Our Voting Securities

    70   

Ownership of Our Common Stock By Directors and Executive Officers

    71   

TRANSACTIONS WITH RELATED PERSONS AND CERTAIN CONTROL PERSONS

    72   

Transactions With Related Persons

    72   

Review of Related Person Transactions

    72   

STOCKHOLDER PROPOSALS FOR THE 2015 ANNUAL MEETING

    72   

COMMUNICATIONS WITH THE BOARD

    72   

SOLICITATION OF PROXIES

    73   

OTHER MATTERS

    73   

WHERE YOU CAN FIND MORE INFORMATION

    73   

INCORPORATION BY REFERENCE

    74   

CITY INDEX (HOLDINGS) LIMITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED 31 MARCH 2014

    F-1   

CITY INDEX (HOLDINGS) LIMITED UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED 30 SEPTEMBER 2014 AND 2013

    F-43   

ANNEX A: OPINION OF JEFFRIES LLC

    A-1   

ANNEX B: PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION

    B-1   

 

v


Table of Contents

SUMMARY TERM SHEET

This summary highlights selected information from this Proxy Statement and the documents referred to or incorporated by reference herein, and may not contain all of the information that is important to you. Below is a summary of the principal terms of the transactions and the proposals we are asking you to consider at the Meeting. To better understand the transactions and the proposals we are asking you to consider, you should read this entire Proxy Statement carefully, as well as those additional documents to which we refer. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference into this Proxy Statement by following the instructions set forth in the section entitled “Where You Can Find More Information”. Unless otherwise noted or the context otherwise requires, throughout this Proxy Statement we refer to GAIN Capital Holdings, Inc. as the “Company,” “we,” “us,” “our” or “our Company.”

The Companies (Page 21)

GAIN Capital Holdings, Inc.

We are a Delaware corporation that provides trading technology and execution services to retail and institutional investors. We specialize in over-the-counter and exchange-traded markets, and we service customers in more than 180 countries worldwide. Our customers have access to a diverse range of over 12,500 financial products, including foreign exchange, precious metals, “contracts for difference”, indices, individual equities, bonds and interest rate products, OTC options on forex, as well as futures and options on futures on more than 30 global exchanges and binaries. In the United Kingdom, we also offer spread bets, which are investment products similar to “contracts for difference”, but that offer more favorable tax treatment to residents of that country.

Our headquarters are in Bedminster, New Jersey, and we have a global presence across North America, Europe and the Asia Pacific regions. Our registered office is at 135 US Highway 202/206, Suite 11, Bedminster, NJ 07921, United States of America and our phone number is: +1 908-731-0700.

City Index (Holdings) Limited

City is a privately held company incorporated and registered in England and Wales. Established in 1983, City is a global provider of retail trading services including spread betting (United Kingdom only), “contracts for difference” and margin forex. City is majority owned by IPGL Limited, the private holding company for the interests of Michael Spencer, Founder and Chief Executive of ICAP plc, the global markets operator. City trades primarily under the City Index, Finspreads, FX Solutions and IFX Markets brands with core markets in the UK, Middle East and Asia Pacific. City’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and City’s phone number is: +44 207-550-8500.

City Index Group Limited

The Seller is a company incorporated and registered in England and Wales. The Seller is the legal and beneficial owner of the entire issued share capital of City. The Seller’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and the Seller’s phone number is: +44 207-550-8500.

INCAP Gaming B.V.

INCAP is a company incorporated and registered in The Netherlands, whose registered office is at Luna Arena, Herikerbergweg 238, 1101 CM Amsterdam Zuidoost, the Netherlands. INCAP’s phone number is: +31 20-57-55-600.

 

 

1


Table of Contents

IPGL Limited

IPGL is a company incorporated and registered in England and Wales. IPGL is the private holding company for the interests of Michael Spencer, Founder and Chief Executive of ICAP plc, the global markets operator. IPGL’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and IPGL’s phone number is: +44 207-107-7311.

Summary of the Acquisition

The Company has entered into a series of agreements which provide for (i) the acquisition of the Shares of City from the Seller, (ii) the issuance of 5,319,149 shares of Common Stock and (iii) the issuance of the Convertible Notes. The material terms of these transactions are described in the section entitled “Principal Terms of the Acquisition” below.

Principal Reasons for the Acquisition (Page 22)

The Board of Directors (the “Board”) of the Company and the Company’s management believe that the Acquisition, of which the Issuance is a part, is extremely compelling as it offers the best opportunity to meet the multiple objectives of the Company’s operating strategies and should increase stockholder value. The Acquisition is expected to provide the Company with a number of strategic and financial benefits, including increased scale, a diversified global footprint, further diversification of the Company’s retail business, fixed operating expense synergies, a positive impact on the Company’s earnings, positive tax attributes and increased liquidity. The Acquisition will result in the combination of the Company’s strong presence in the global retail forex industry under the Forex.com brand with City’s significant market presence in the UK “contracts-for-difference” and spread bet markets under the well-known City Index brand. Both the Company and City have strong businesses in China and elsewhere in Asia and the Acquisition will allow the companies to become even stronger competitors in these markets.

Principal Terms of the Acquisition (Page 22)

The Acquisition and Issuance

On October 31, 2014, the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL. Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, the Company agreed to purchase the Shares of City from the Seller. The Shares will be sold for an aggregate purchase price consisting of (i) $20,000,000 in cash; (ii) the Consideration Shares; and (iii) the Convertible Notes. The purchase price is subject to upwards or downwards adjustments based on City’s working capital, regulatory capital and cash and debt as of the date of the closing of the Acquisition (the “Closing Date”).

The Company and the Seller have each made customary warranties. Subject to certain limitations, the Seller has agreed to indemnify the Company for losses suffered by the Company in respect of certain known pre-existing liabilities. The Company may not make a claim against the Seller unless the Company provides notice of such claim to the Seller before certain dates. Subject to certain exceptions, the Seller’s liability under the Share Purchase Agreement is also subject to certain caps and thresholds. In addition, the Seller, City, and City’s subsidiaries are subject to customary covenants between the date of the Share Purchase Agreement and the Closing Date, including an agreement by the Seller to procure that the business of City and its subsidiaries is conducted in the normal course consistent with past practices, and not to take certain actions specified in the Share Purchase Agreement. The Seller and INCAP have each also agreed, subject to certain exceptions, for a period of two years from the Closing Date, to not engage in certain competitive and hiring actions in regards to City and its subsidiaries.

 

 

2


Table of Contents

Closing of the Acquisition is subject to the approval by the stockholders of the Company of the Issuance (the “Company Stockholder Approval”) at the closing and the satisfaction of other closing conditions, including certain regulatory approvals. The Company is obligated to pay to Seller a fee of $1,000,000 if the Company Stockholder Approval is not obtained at a meeting of the Company’s stockholders. The Share Purchase Agreement will be terminated immediately 180 days after the date of the Share Purchase Agreement (the “Long Stop Date”) if the transaction is not closed by such time, unless otherwise agreed by the parties. The Share Purchase Agreement may also be terminated by the Company upon a material breach by the Seller of its obligations in connection with closing, its warranties or its pre-closing covenants.

INCAP has guaranteed the payment obligations of the Seller under the Share Purchase Agreement for a period of seven years following the Closing Date, unless IPGL elects to guarantee the payment obligations of the Seller under the Share Purchase Agreement prior to such time but on or after 18 months following the Closing Date.

The Stockholders’ Agreement

In connection with the Share Purchase Agreement, the Company entered into the Stockholders’ Agreement (the “Stockholders’ Agreement”) with the Seller, INCAP, Francisco Partners II, L.P., Sun Luxco I, Sarl and Sun Luxco II, Sarl dated as of October 31, 2014. Under the terms and subject to the conditions of the Stockholders’ Agreement, including the satisfaction of the eligibility standards established by the Company’s Nominating and Corporate Governance Committee, INCAP will have the right to nominate one director to the Company’s Board and the Company will increase the size of the Board by one member upon INCAP’s request to nominate its director designee to the Board. INCAP’s director designee shall be entitled to remain a director, subject to certain conditions, until the earlier of such time as (i) INCAP ceases to beneficially own at least 5% of the aggregate number of outstanding shares of Common Stock and other securities of the Company convertible into or exchangeable for Common Stock (calculated on an as-converted-to-Common Stock basis) (the “Ownership Threshold”) and (ii) INCAP’s right to nominate a director is terminated by the Company following such time as INCAP ceases to be controlled by the direct or indirect equity holders of INCAP as of the date of the Stockholders’ Agreement. At any time INCAP’s director designee is not serving on the Board and INCAP has the right to nominate a director under the Stockholders’ Agreement, INCAP has the right to designate one individual as a non-voting observer to the Board.

The Seller is subject to customary standstill provisions that prevent the Seller from, among other things, engaging in any solicitation of proxies with respect to the voting of the voting securities of the Company, entering into or proposing certain fundamental transactions involving the Company or calling a meeting of shareholders or taking any action or making any public statement to seek to control or influence the management, the Board or policies of the Company. The standstill provisions will cease to apply upon the earliest to occur of (i) the time at which the Seller and its affiliates beneficially own less than the Ownership Threshold, (ii) five years from the Closing Date and (iii) the public announcement by the Company that it has entered into a definitive agreement with respect to a fundamental transaction with a third party. The Seller has agreed to vote all voting securities it holds or over which it has voting power for all of the nominees on the slate of directors recommended for election by the Board at the 2015 annual meeting of the stockholders of the Company. The Seller is also subject to certain restrictions on transfer of Company securities it holds. Among other restrictions, the Seller may not transfer Company securities it holds until six months after the Closing Date, after which time the Seller may transfer up to 16.67% of such securities (calculated on an as-converted-to-Common Stock basis) every three months, subject to compliance with Rule 144 in a manner that avoids directed block sales.

The Convertible Notes Indenture

Pursuant to the Share Purchase Agreement, the Company will issue the Convertible Notes as part of the consideration for the Shares. The Convertible Notes will bear interest at a fixed rate of 4.125% per year, payable semiannually, and will mature on a date (the “Maturity Date”) that will be approximately five years following the Closing Date. The Convertible Notes will be issued pursuant to an indenture to be dated on or about the Closing Date (the “Indenture”).

 

 

3


Table of Contents

Prior to the date that is six months immediately preceding the Maturity Date, the Convertible Notes will be convertible only upon the occurrence of specified events set forth in the Indenture. Thereafter, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. The Company will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of Common Stock or a combination thereof, at its election. The conversion rate for the Convertible Notes will be equal to $1,000, divided by the initial conversion price, rounded to the nearest 1/10,000th share of Common Stock. The initial conversion price will be equal to 125% of the arithmetic average of the daily volume-weighted average price for the Common Stock over the 20 consecutive trading day period ending on, and including, the trading day immediately preceding the Closing Date; provided that the initial conversion price (x) shall not exceed the greater of (i) $9.25 and (ii) the last reported sale price of the Common Stock on the Closing Date and (y) shall not be less than $7.20. The conversion rate and the corresponding conversion price will be subject to customary anti-dilution adjustments, as described in the Indenture.

If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or part of their Convertible Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date of repurchase. In addition, in certain circumstances, the Company may be required to increase the conversion rate for any Convertible Notes converted in connection with a make-whole fundamental change (as defined in the Indenture).

Prior to the date that is two years immediately preceding the Maturity Date, the Company will not have the right to redeem the Convertible Notes. During the two year period immediately preceding the Maturity Date, the Company may redeem for cash all, but not less than all, of the Convertible Notes if the last reported sale price of the Common Stock equals or exceeds 130% of the conversion price for the Convertible Notes for at least 20 trading days, whether or not consecutive, during the 30 consecutive trading day period ending on the trading day immediately preceding the date the Company delivers notice of redemption.

The Indenture will contain customary covenants for convertible debt securities, including negative covenants that restrict the Company’s ability to effect a consolidation or merger, or sell, convey, transfer or lease all or substantially all of its properties and assets.

The Indenture will contain events of default customary for convertible debt securities (with customary grace periods, as applicable) and will provide that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company, all outstanding Convertible Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the holders of at least 25% in aggregate principal amount of the then outstanding Convertible Notes or the trustee may declare all of the outstanding Convertible Notes to be due and payable immediately.

The Registration Rights Agreement

On the Closing Date, the Company will enter into a Registration Rights Agreement (the “RRA”) with VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint Venture Partners Principals Fund, L.P., VP New York Venture Partners, L.P. (collectively, the “Other Investors”), the Seller and INCAP. At the time the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL, it was contemplated that Edison Venture Fund IV SBIC, L.P. and Edison Partners IV SBIC, LLC (together, the “Edison Entities”) would be parties to the RRA. However, the Edison Entities have since divested their holdings in the Company and will therefore not be parties to the RRA. Pursuant to the terms of the RRA, upon the request of the Seller, any Other Investor or other parties to the RRA holding at least 30% of the Common Stock and the Convertible Notes (calculated on an as-converted-to-Common-Stock basis) subject to the RRA (the “Registrable Securities”), the Company must use its reasonable best efforts to prepare and file a registration statement registering the offer and sale of the number of shares of Registrable Securities requested to

 

 

4


Table of Contents

be registered in such request. The Company must also use reasonable best efforts to file and cause to become effective a shelf registration statement registering all Registrable Securities within six months of the Closing Date. The Company shall use its reasonable best efforts to keep such shelf registration statement continuously effective under the Securities Act of 1933, as amended (the “Securities Act”) in order to permit the prospectus forming a part thereof to be usable by holders of Registrable Securities until the earlier of (i) three years following the effectiveness under the Securities Act of the shelf registration statement and (ii) the date on which each of the holders of Registrable Securities is permitted to sell all of its Registrable Securities without registration pursuant to Rule 144 promulgated under the Securities Act (“Rule 144”) without limitation or restriction under any of the requirements of Rule 144. The Seller and the Other Investors also have customary piggy-back registration rights under the RRA.

Neither the Other Investors (taken together) nor the Seller may request a registration of Registrable Securities more than twice and Seller may not request a registration of Registrable Securities prior to the second anniversary of the Closing Date. The Seller’s and the Other Investors’ registration rights are also subject to additional limitations, including a limitation that no registration is required by the Company unless the anticipated aggregate price to the public (after deduction for underwriter’s discounts and expenses related to the issuance) of the Registrable Securities requested to be registered is equal to or greater than $20,000,000. Except as specifically provided in the RRA, all expenses of registration will be borne by the Company.

Concurrently with the entry into the RRA by the Company, the Other Investors, the Seller and INCAP, the Amended and Restated Investor Rights Agreement dated January 11, 2008 among the Company, the Other Investors, the Edison Entities, Mark Galant, The Mark E. Galant 2007 GRAT, Cross Atlantic Technology Fund, L.P., Blue Rock Capital, L.P., Tudor Ventures II, L.P., The Raptor Global Portfolio, Ltd., ALTAR Rock Fund L.P., 3i U.S. Growth Partners L.P. and 3i Technology Partners III L.P, as amended by the Amendment to the Investor Rights Agreement dated November 18, 2013 among the Company, the Other Investors and, Edison Venture Fund IV SBIC L.P. and Mark E. Galant (the “IRA”), pursuant to which the Other Investors had certain registration and other rights, will be automatically terminated.

Side Letter with the Other Investors

On October 31, 2014, in connection with the RRA to be entered at the closing of the Acquisition by the Company, the Seller, INCAP and each Other Investor, the Company, the Other Investors and the Edison Entities entered into a side letter (the “Side Letter”). Since entering into the Side Letter, the Edison Entities have divested their share ownership in the Company in a manner resulting in the termination of their rights under the Side Letter and the IRA. Pursuant to the Side Letter, the Company and the Other Investors agreed, among other things, that concurrently with the closing of the Acquisition, each Other Investor will enter into the RRA and the IRA will be automatically terminated. In addition, in order to preserve certain rights of the Other Investors under the IRA following its termination, the Side Letter also provides that, effective as of the entry into the RRA by the parties thereto, among other things, (i) the Company will reimburse each member of the Board for reasonable out of pocket expenses incurred in connection with the performance of such member’s duties as a member of the Board and other reasonable expenses incurred that are pre-approved by the Company; (ii) the Company’s Certificate of Incorporation will contain provisions providing for elimination of the liability of directors and indemnification of directors for acts on behalf of the Company, in each case to the maximum extent permitted by law; (iii) the Company will enter into and use its best efforts to maintain indemnification contracts with each of the Company’s directors under which it will indemnify such directors to the maximum extent permissible under Delaware law; (iv) the Company will maintain directors and officers liability insurance covering its directors and officers in an amount of at least $10,000,000; and (v) if any Other Investor’s representatives are on the Board, such representatives will be treated no less favorably than any other member of the Board in his or her capacity as a member of the Board with respect to all matters, except in respect of equity compensation received by independent directors.

 

 

5


Table of Contents

The obligations of the Company under the Side Letter will terminate with respect to each Other Investor on the earliest to occur of (i) the termination of the Share Purchase Agreement without closing thereunder, (ii) the date on which such Other Investor does not have any representatives on the Board and (iii) mutual agreement between such Other Investor and the Company to terminate such obligations.

Opinion of the Company’s Financial Advisor (Page 25)

On October 28, 2014, at a meeting of the Company’s Board held to evaluate the Acquisition, Jefferies LLC (“Jefferies”) delivered to the Company’s Board an oral opinion, confirmed by delivery of a written opinion dated October 28, 2014, to the effect that, as of that date and based on and subject to various assumptions, matters considered and limitations described in Jefferies’ opinion, the consideration to be paid by the Company pursuant to the Share Purchase Agreement was fair, from a financial point of view, to the Company.

The full text of Jefferies’ opinion describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Jefferies. Jefferies’ opinion is attached as Annex A and is incorporated by reference into this document. Jefferies’ opinion was provided for the use and benefit of the Company’s Board in its consideration of the Acquisition, and did not address the relative merits of the transactions contemplated by the Share Purchase Agreement as compared to any alternative transaction or opportunity that might be available to the Company, nor did it address the underlying business decision by the Company to engage in the Acquisition or the terms of the Share Purchase Agreement or the documents referred to therein. Jefferies’ opinion does not constitute a recommendation as to how any holder of the Company common stock should vote in connection with the Acquisition or any matter related thereto. The summary of Jefferies’ opinion provided in this Proxy Statement is qualified in its entirety by reference to the full text of Jefferies’ opinion. See “Proposal No. 1 Approval of the Issuance—Opinion of the Company’s Financial Advisor.”

Selected Unaudited Pro Forma Condensed Consolidated Financial Data (Page 51)

The following selected unaudited pro forma condensed consolidated financial data was prepared using the purchase method of accounting, with the Company treated as the acquirer. The selected unaudited pro forma condensed consolidated statements of operation for the year ended December 31, 2013 and the nine months ended September 30, 2014 give effect to the Acquisition and the Issuance as if they had occurred on January 1, 2013. The unaudited pro forma condensed consolidated balance sheet data at September 30, 2014 gives effect to the Acquisition and the Issuance as if they had occurred on September 30, 2014.

The unaudited pro forma condensed consolidated financial data is provided for illustration purposes only and does not purport to represent what the actual consolidated results of operations or financial position of the Company would have been had the Acquisition and the Issuance occurred at the beginning of the period presented or on the date indicated, nor is it necessarily indicative of future operating results or financial position. The selected unaudited pro forma condensed consolidated financial data is derived from the unaudited pro forma condensed consolidated financial statements included elsewhere in this Proxy Statement and should be read in conjunction therewith.

Selected Unaudited Pro Forma Condensed Consolidated Statements of Operation Data:

 

     (in thousands, except per share data)  
     Nine months ended
September 30, 2014
     Year ended
December 31, 2013
 

Total net revenue

     348,502         492,988   

Total operating expense

     331,665         467,725   

Operating profit

     16,837         25,263   
  

 

 

    

 

 

 

Net income

   $ 3,244       $ 4,703   
  

 

 

    

 

 

 

Earnings per share, diluted

   $ 0.05       $ 0.10   
  

 

 

    

 

 

 

 

 

6


Table of Contents

Selected Unaudited Pro Forma Condensed Consolidated Balance Sheet Data:

 

     (in thousands)  
     As of
September 30, 2014
 

Cash and cash equivalents

   $ 86,698   

Total assets

     1,732,895   

Total liabilities

     1,419,000   

Total shareholders’ equity

     303,447   

 

Regulatory Approvals and Regulatory Notifications (Page 40)

Closing of the transactions described herein is subject to the following regulatory approvals and regulatory notifications:

 

    The U.K. Financial Conduct Authority having approved the acquisition of control of City Index Limited (a City subsidiary) by the Company (which approval was obtained on December 29, 2014);

 

    The Monetary Authority of Singapore having provided written approval in satisfaction of the requirements in relevant local laws and any other conditions in the capital markets services license of City Index Asia Pte Limited (a City subsidiary);

 

    The Company having received all approvals required by section 11.10 of National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) and Dealer Member Rule 5.4. of the Investment Industry Regulatory Organization of Canada;

 

    No communication from the Australian Securities and Investments Commission (“ASIC”) having been received by the Company or City Index Australia Pty Limited (a City subsidiary) to the effect that ASIC has any material objection or concern in connection with the transaction contemplated by the Share Purchase Agreement, or which suggests that ASIC may do, or refrain from doing, anything which may have a material adverse impact on the licenses or authorizations of the Company or City Index Australia Pty Limited in Australia; and

 

    The Company complying with applicable United States federal and state securities laws and the New York Stock Exchange (“NYSE”) Listing Rules in connection with the Issuance. The rules of the NYSE require stockholder approval prior to the issuance of securities in connection with the acquisition of the stock or assets of another company if the issuance would constitute more than 20% of the total number of shares of common stock outstanding before the issuance. We are seeking stockholder approval of the Issuance to satisfy such rules of the NYSE.

Interests of Certain of our Directors and Executive Officers in the Acquisition (Page 40)

On the Closing Date, the Company will enter into the RRA with the Other Investors, the Seller and INCAP. In connection with the RRA, the Company, the Other Investors and the Edison Entities entered into the Side Letter. At the time the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL and the Side Letter with the Other Investors and the Edison Entities, it was contemplated that the Edison Entities would be parties to the RRA. However, the Edison Entities have since divested their holdings in the Company and will therefore not be parties to the RRA. Although the Edison Entities are parties to the Side Letter, they no longer hold shares in the Company. Certain affiliates of the Other Investors are members of the Board. One purpose of

 

 

7


Table of Contents

the RRA and Side Letter is to preserve certain rights of the Other Investors. For a description of the RRA and Side Letter, please refer to “Proposal No. 1 Approval of the Issuance—Side Letter with the Other Investors” and “Proposal No. 1 Approval of the Issuance—Registration Rights Agreement.”

Impact of the Issuance on Existing Stockholders (Page 41)

The Issuance will significantly dilute the Common Stock ownership percentages of our existing stockholders. When the Acquisition is completed, there will be an additional 5,319,149 shares of Common Stock outstanding. In addition, although it is not possible to determine the exact maximum number of shares of Common Stock that will be issuable upon conversion of the Convertible Notes until the Convertible Notes are issued on or around the Closing Date, to the extent that the Company elects to settle any conversions of the Convertible Notes by issuing shares of its Common Stock or a combination of cash and shares of its Common Stock, the Convertible Notes will have a dilutive effect on the Company’s Common Stock, and such dilutive effect may be substantial. When the Acquisition is completed, the Common Stock owned by the Seller, including the maximum number of shares of Common Stock issuable upon conversion of the Convertible Notes, will likely represent more than 20% of the issued and outstanding shares of the Company’s Common Stock as of the Record Date on a fully diluted basis.

As a result of the Issuance, the Seller will become a significant stockholder of the Company with substantial influence over matters submitted to a vote of our stockholders, including the election of directors, amendment of our organizational documents, acquisitions or other business combinations involving the Company and potentially the ability to prevent extraordinary transactions such as a takeover attempt. In addition, as a result of the Acquisition, INCAP will have representation on the Board. Under the terms and subject to the conditions of the Stockholders’ Agreement, INCAP will have the right to nominate one director to the Board and the Company will increase the size of the Board by one member upon INCAP’s request to nominate its director designee to the Board.

Dissenters’ or Appraisal Rights of Existing Stockholders (Page 41)

Under applicable Delaware law, the Company’s stockholders do not have dissenters’ or appraisal rights in connection with the issuance of the Consideration Shares and the Convertible Notes, and we do not plan to independently provide stockholders with any such rights.

Vote Required and Recommendation of the Board (Page 41)

With respect to the proposal for the approval of the Issuance, the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and the adjournment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. The proposal for the approval of the Issuance, the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and the adjournment proposal require the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on these proposals. The Board recommends a vote “for” the approval of the Issuance, “for” the approval of the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and “for” the approval of the adjournment proposal.

With respect to the charter amendment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the charter amendment proposal requires the affirmative vote of the holders of a majority of the stock entitled to vote on the proposal. Abstentions, failures to vote and broker non-votes, if any, will have the effect of a vote “AGAINST” the proposal. The Board recommends a vote “for” the charter amendment proposal.

 

 

8


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING

The following are some of the questions, and answers to those questions, that you as a stockholder of the Company may have regarding the Acquisition, the Issuance and the other matters being considered at the Meeting to which this Proxy Statement relates. The information in this section does not provide all of the information that may be important to you with respect to the matters being considered at the Meeting. Therefore, you should read this Proxy Statement carefully, as well as the full contents of the other documents to which this Proxy Statement refers or incorporates by reference. These documents contain information that may be important to you in determining how you will vote on the matters to be considered at the Meeting. See “Where You Can Find More Information” beginning on page 73.

 

Q: When is the Meeting and where will it be held?

 

A: The Meeting will be held on March 12, 2015, at 2:30 p.m. Eastern Time, via live webcast at www.virtualshareholdermeeting.com/gcap2015. The date, time and place of any adjournment or postponement of the Meeting will be established in accordance with our governing documents and applicable law.

 

Q: Why am I receiving these proxy materials?

 

A: Our Board is sending this Proxy Statement to provide stockholders with information about the Acquisition and the proposals so that they may determine how to vote their shares in connection with the Meeting.

 

Q: What am I being asked to vote on?

 

A: You are being asked to consider and vote on the following matters:

 

  1. Approval of the Issuance;

 

  2. Approval of the charter amendment proposal;

 

  3. Approval of the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture; and

 

  4. Approval of the adjournment proposal.

 

Q: How does the Board recommend that I vote on the proposals?

 

A: The Board recommends that you vote:

 

  1. “FOR” the proposal to authorize the Issuance;

 

  2. “FOR” the charter amendment proposal;

 

  3. “FOR” the proposal to remove the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture; and

 

  4. “FOR” the adjournment proposal.

 

Q: Why is stockholder approval of the Issuance described in Proposal No. 1 required?

 

A:

Under Section 312.03 of the NYSE Listed Company Manual, stockholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock, or (2) the number of shares of common

 

9


Table of Contents
  stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

Pursuant to the Share Purchase Agreement, we have agreed to issue 5,319,149 shares of our Common Stock in addition to the Convertible Notes (which would be convertible into an aggregate maximum of at least 6,486,486 shares of our Common Stock if February 3, 2015 were the Closing Date) in connection with our acquisition of City. As of the Record Date, we had 43,088,234 shares of Common Stock outstanding (not including 2,596,175 shares held by the Company as treasury stock). Although it is not possible to calculate the exact maximum number of shares of Common Stock that will be issuable upon conversion of the Convertible Notes before the Closing Date, unless the last reported sale price of our Common Stock on the Closing Date exceeds $18.29, the aggregate number of shares of Common Stock, including the maximum number of shares of Common Stock issuable upon conversion of the Convertible Notes issued in connection with the Acquisition will exceed 20 percent of the number of shares of our Common Stock issued and outstanding on the Record Date.

 

Q: Why is stockholder approval of the removal of the Aggregate Share Cap and the Conversion Share Cap with respect to the Company’s Existing Convertible Notes described in Proposal No. 3 required?

 

A: Under Section 312.03 of the NYSE Listed Company Manual, stockholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock, or (2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

Pursuant to the terms of the Existing Indenture, the Company may settle conversions of its Existing Convertible Notes in cash, shares of its Common Stock, or a combination thereof, at the Company’s election; provided that, prior to obtaining stockholder approval to issue shares of Common Stock in excess of the Aggregate Share Cap (as defined in the Existing Indenture) (i) the Company must settle conversions of the Existing Convertible Notes by paying and delivering, as the case may be, a combination of cash and shares of Common Stock with a Specified Dollar Amount (as defined in the Existing Indenture) of at least $1,000 per $1,000 principal amount of Existing Convertible Notes, (ii) the number of shares of Common Stock deliverable upon conversion of all Existing Convertible Notes in the aggregate may not exceed the Aggregate Share Cap, which equaled 19.99 percent of the Common Stock outstanding at the time the Existing Convertible Notes were initially issued, and (iii) the number of shares of Common Stock deliverable upon conversion of each $1,000 principal amount of Existing Convertible Notes may not exceed the Conversion Share Cap (as defined in the Existing Indenture), in each case, subject to adjustment at the same time and in the same manner as the conversion rate under the Existing Indenture.

Stockholders are being asked to approve the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture in order to provide the Company with additional flexibility in determining how to settle the Existing Convertible Notes. If Proposal No. 3 is approved (x) the number of shares of Common Stock delivered upon conversion of the Existing Convertible Notes shall not be subject to the Aggregate Share Cap or the Conversion Share Cap and (y) the Company will have the right to settle conversions of its Existing Convertible Notes by paying cash, delivering solely shares of its Common Stock, or paying and delivering, as the case may be, any combination of cash and shares of its Common Stock, with any Specified Dollar Amount, at the Company’s election.

 

10


Table of Contents
Q: Will the Issuance described in Proposal No. 1 dilute the existing stockholders’ percentage of ownership in the Company?

 

A: Yes. The Issuance will significantly dilute the Common Stock ownership percentages of our existing stockholders. When the Acquisition is completed, there will be an additional 5,319,149 shares of Common Stock outstanding. In addition, although it is not possible to determine the exact maximum number of shares of Common Stock that will be issuable upon conversion of the Convertible Notes until the Convertible Notes are issued on or around the Closing Date, to the extent that the Company elects to settle any conversions of the Convertible Notes by issuing shares of its Common Stock or a combination of cash and shares of its Common Stock, the Convertible Notes will have a dilutive effect on the Company’s Common Stock, and such dilutive effect may be substantial. When the Acquisition is completed, the Common Stock owned by the Seller, including the maximum number of shares of Common Stock issuable upon conversion of the Convertible Notes, will likely represent more than 20% of the issued and outstanding shares of the Company’s Common Stock as of the Record Date on a fully diluted basis.

 

Q: Why is the Company engaging in the Acquisition and the Issuance?

 

A: For several years, the Board and the Company’s management have been focused on executing strategies to increase stockholder value through organic growth and a disciplined mergers and acquisitions (“M&A”) strategy. The Company’s M&A strategy includes the exploration of strategic transactions that could improve the Company’s overall position in the online trading industry by increasing the Company’s scale, adding complementary products or services, expanding into new customer segments and geographies and providing the Company with opportunities to reduce overall cost and create increased operating leverage. The proposed Acquisition is a key component of the Company’s overall M&A strategy, and is expected to provide the Company with a number of benefits. The key strategic benefits of the proposed Acquisition include increased scale with respect to funded accounts, customer assets and retail trading volume, a diversified global footprint and a further diversification of the Company’s retail business, including with the addition of a leading “contracts-for-difference” brand and an increased presence in the UK “contracts-for-difference” and spread-bets market. The proposed Acquisition is also expected to provide a range of key financial benefits, including fixed operating expense synergies, a positive impact on the Company’s earnings, positive tax attributes and an increase in the Company’s liquidity.

 

Q: Why does the Board recommend I vote “FOR” Proposal No. 1?

 

A: In developing its recommendation to the stockholders to vote in favor of the Issuance, the Board considered many factors, including the positive and negative factors described in the section of this Proxy Statement entitled “Proposal No. 1—Approval of the Issuance—Vote Required and Recommendation of The Board” and concluded that the Issuance is advisable and in the best interests of the Company and our stockholders. The Board believes that the Company’s financial position, capital structure and business will be strengthened as a result of the Acquisition and the Issuance. After careful consideration, the Board recommends that the Company’s stockholders vote “FOR” Proposal No. 1.

 

Q: Who is entitled to vote at the Meeting?

 

A: Only those stockholders who owned Common Stock at the close of business on the Record Date, which is February 5, 2015, are entitled to vote at the Meeting. At the close of business on the Record Date, we had 43,088,234 shares of Common Stock outstanding entitled to cast a vote on the proposals presented in this Proxy Statement, which were held by 99 stockholders of record. Each outstanding share of our Common Stock entitles its holder to one vote.

 

Q: What happens if I sell my common stock after the record date but before the Meeting?

 

A: If you transfer your Common Stock after the Record Date but before the date of the Meeting, you will retain your right to vote at the Meeting.

 

11


Table of Contents
Q: How do I vote?

 

A: Stockholders of record can vote while attending the Meeting or by proxy. There are three ways to vote by proxy:

 

    By Telephone—you can vote by telephone by calling 1-800-690-6903 and following the instructions on the proxy card;

 

    By Internet—you can vote over the Internet at www.proxyvote.com by following the instructions on the proxy card; or

 

    By Mail—You can vote by mail by marking, signing, dating and mailing the proxy card in the envelope provided.

Telephone and Internet voting facilities for stockholders of record will be available 24 hours day, 7 days a week and will close at 11:59 p.m. Eastern Time, on March 11, 2015.

If you properly complete, sign and return a proxy card, your shares will be voted as you specify. However, if you sign and return a proxy card but do not specify a vote with respect to the proposal, your shares will be voted as the Board recommends with respect to the proposal and in the proxy’s discretion with respect to any other matter that may be properly considered at the Meeting.

If you are a beneficial owner (that is, your shares are held in “street name” by a bank, broker or other nominee or intermediary, which we collectively refer to as “brokers”), you will receive voting instructions or a voting information form from the holder of record. You must follow the instruction of the holder of record in order for your shares to be voted. If your shares are not registered in your own name and you plan to vote your shares in person at the Meeting, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the Meeting in order to vote.

 

Q: Can I change my vote after I submit my proxy?

You may revoke your proxy and change your vote:

 

    By submitting a duly executed proxy bearing a later date;

 

    Granting a subsequent proxy through the Internet or telephone;

 

    If you are a registered stockholder, by giving written notice of such revocation to the Secretary of GAIN prior to or at the Meeting, or electing to vote while attending the Meeting.

Your most recent proxy card or telephone or Internet proxy is the one that is counted. Your attendance at the Meeting itself will not revoke your proxy unless you give written notice of revocation to the Secretary before your proxy is voted or you vote while attending the Meeting.

If you hold your shares in “street name” (that is, through a broker), you may revoke a previous vote only by following the procedures established by the broker.

You may provide written notice to our Secretary at GAIN Capital Holdings, Inc., Attention: Secretary, Bedminster One, 135 U.S. Highway 202/206, Bedminster, New Jersey 07921.

 

Q: Who will count the votes?

 

A: Representatives of American Election Services, LLC, our inspectors of election, will tabulate and certify the votes. Alternatively, a representative of our transfer agent may serve as an inspector of election.

 

12


Table of Contents
Q: What is a “quorum”?

 

A: A “quorum” is a majority of the outstanding shares of Common Stock, which may be present in person at the Meeting or represented by proxy. The presence of a majority of the votes entitled to be cast, represented in person or by proxy, will constitute a quorum for the transaction of business at the Meeting. Your shares will be counted for purposes of determining a quorum if you attend the Meeting and vote in person or if you vote by telephone, by Internet or by submitting a properly executed proxy card by mail. Abstentions and broker non-votes will be counted for determining whether a quorum is present for the Meeting.

 

Q: What vote is required for approval of each proposal?

 

A: With respect to the proposal for the approval of the Issuance, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

With respect to the charter amendment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority of the stock entitled to vote on the proposal. Abstentions, failures to vote and broker non-votes, if any, will have the effect of a vote “AGAINST” the proposal.

With respect to the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

With respect to the adjournment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

 

Q: Will any other business be conducted at the Meeting?

 

A: We know of no other business that will be presented at the Meeting. If any other matter properly comes before the stockholders for a vote at the Meeting, however, the proxy holder will vote your shares in accordance with their best judgment.

 

Q: If my shares of Common Stock are held in “street name” by my broker, will my broker automatically vote my shares for me?

 

A: Other than with respect to certain routine matters, brokers holding shares of our Common Stock for beneficial owners must vote those shares according to the specific instructions they receive from the beneficial owners, unless the brokers have been given discretionary voting power by the beneficial owners. In certain circumstances, brokers holding shares for a beneficial owner may not have discretionary voting power and may not have received voting instructions from the beneficial owner of the shares. In such cases, a broker may not vote on a proposal, which is known as a “broker non-vote.” Broker non-votes will be counted for purposes of determining whether a quorum is present at the Meeting, but are not counted as votes cast.

 

13


Table of Contents

The proposal for the approval of the Issuance, the charter amendment proposal, the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and the adjournment proposal are not “routine” matters. Accordingly, if you do not provide voting instructions to your broker with respect to these proposals, your broker may not exercise discretion and is prohibited from giving a proxy to vote your shares with respect to such proposals. Broker non-votes will have no effect on the proposal for the approval of the Issuance, the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture and the adjournment proposal. Broker non-votes will have the effect of a vote “AGAINST” the charter amendment proposal.

You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. If you give instructions on how to vote to your broker, you may later revoke the instructions by taking the steps described in the information that you receive from your broker.

 

Q: Where can I obtain access to these proxy materials?

 

A: A copy of this Proxy Statement, proxy card and Notice will be mailed to each stockholder of the Company entitled to vote at the Meeting. The Notice contains instructions on how to access this Proxy Statement and our other proxy materials online and how to vote your shares.

 

Q: Who can help answer my questions, and where can I get additional information about matters described in this Proxy Statement and additional information about the Company?

 

A: If you have questions about the matters described in this Proxy Statement, or how to submit your proxy, or if you need additional copies of the Proxy Statement or the enclosed proxy card or voting instructions, you should contact Broadridge Corporate Issuer Solutions, Inc. at 1717 Arch Street, Suite 1300, Philadelphia, PA 19103 or by calling (800) 830-4936. If you would like additional information about the Company, please refer to our annual, quarterly and current reports, proxy statements and other information on file with the SEC.

 

14


Table of Contents

IMPORTANT NOTE

No person is authorized to make any representation with respect to the matters described in this Proxy Statement other than those contained, or incorporated by reference, in this Proxy Statement and, if given or made, such representation must not be relied upon as having been authorized by us or any other person or entity. This Proxy Statement, and the information incorporated herein, provides you with detailed information about the proposals to be considered and voted upon at the Meeting. The information in this Proxy Statement is current as of the date of this Proxy Statement. Stockholders are urged to carefully review this Proxy Statement, which discusses each of the proposals to be voted upon at the Meeting, and the information incorporated herein.

This Proxy Statement does not constitute the solicitation of a proxy from any person in any jurisdiction where it is unlawful to make such proxy solicitation. The delivery of this Proxy Statement shall not, under any circumstances, imply that there has not been any change in the information set forth herein since the date of this Proxy Statement.

 

15


Table of Contents

FORWARD-LOOKING STATEMENTS

This Proxy Statement and the documents incorporated herein by reference contain forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” or the negative of those terms or other variations of them or comparable terminology. In particular, statements, express or implied, concerning future actions, conditions or events, future operating results, the ability to generate sales, income or cash flow, to realize cost savings or other benefits associated with the Acquisition involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine actual results are beyond our ability to control or predict.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements:

Relating to the Acquisition and the Issuance:

 

    The ability to integrate City into the business of the Company successfully and the amount of time and expense spent and incurred in connection with the integration;

 

    The failure to obtain, delays in obtaining or adverse conditions contained in, any required regulatory approvals;

 

    The failure to realize the economic benefits that the Company anticipates as a result of the Acquisition;

 

    The failure to uncover all risks and liabilities associated with the Acquisition;

 

    The impact of the issuance of $60 million in aggregate principal amount of Convertible Notes and the use of proceeds thereof, including its impact on the Company’s liquidity, ability to raise additional capital and financial condition;

 

    The impact of the Issuance on the Company’s Common Stock, including dilution of the ownership of the Company’s Common Stock;

 

    The failure to satisfy any of the conditions of the Acquisition;

 

    Adverse effects on the market price of our Common Stock and on our operating results because of a failure to complete the Acquisition; and

 

    Significant transaction costs and/or unknown liabilities and general economic and business conditions that affect the Company following the completion of the Acquisition.

Relating to our Business Generally:

 

    Our ability to maintain adequate liquidity, including our ability to raise additional capital and secure additional financing;

 

    Our ability to maintain compliance with the Listing Rules of NYSE and to maintain the listing of our securities on a national securities exchange;

 

    Our ability to generate earnings or raise capital to maintain positive stockholders’ equity;

 

    The impact of domestic and international market and economic conditions on trading volumes and currency volatility, which influence our revenue and profitability;

 

16


Table of Contents
    The impact on our business, financial condition and results of operations and cash flows from a disruption or corruption of our proprietary technology or inability to maintain technological superiority in our industry;

 

    Security breaches of our computer infrastructure, or systems failures which could cause interruptions in our services or decreases in the responsiveness of our services;

 

    Attrition of customer accounts and failure to attract new accounts, or failure to attract new customers in a cost-effective manner;

 

    Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt;

 

    Loss of key personnel, which could have a material adverse effect on our business;

 

    Our ability to enter into, and the effects of, any additional potential strategic transactions;

 

    Adverse changes in accounting principles, tax laws or legal or regulatory requirements;

 

    Failure to comply with applicable laws and regulations;

 

    Liability resulting from actual or potential future litigation;

 

    The costs, uncertainties and other effects of legal and administrative proceedings;

 

    The costs of obtaining, and the potential inability to obtain, necessary or prudent insurance to cover our business operations;

 

    The impact of competition; and

 

    Actions of domestic and foreign governments and the effect of war or terrorist activity.

Forward-looking statements are based on the expectations and beliefs of management, based on information currently available, concerning future events affecting us. Although we believe that these forward-looking statements are based on reasonable assumptions, they are subject to uncertainties and factors related to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Any or all of the forward-looking statements in this Proxy Statement may turn out to be wrong. They may be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The foregoing list of factors should not be construed to be exhaustive. Many factors mentioned in this Proxy Statement, including the risks outlined under the caption “Risk Factors” contained in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports incorporated herein by reference, will be important in determining future results after the Acquisition, and actual future results may vary materially. There is no assurance that the actions, events or results of the forward-looking statements will occur, or, if any of them do, when they will occur or what effect they will have on our financial condition, results of operations or cash flows. In view of these uncertainties, we caution that investors should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

 

17


Table of Contents

RISK FACTORS

In addition to the other information included and incorporated by reference into this Proxy Statement, including the matters addressed in the section titled “Forward-Looking Statements,” you should carefully consider the following risks before deciding whether to vote for the approval of the proposals presented in this Proxy Statement. In addition, you should read and carefully consider the risks associated with our business. These risks can be found in our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC and incorporated by reference into this Proxy Statement. For further information regarding the documents incorporated into this Proxy Statement by reference, please see the sections titled “Where You Can Find More Information” and “Incorporation by Reference.” Realization of any of the risks described below, any of the events described under “Forward-Looking Statements” or any of the risks or events described in the documents incorporated by reference could have a material adverse effect on our business, financial condition, cash flows and results of operations and could result in a decline in the trading price of our Common Stock.

The Issuance will have a substantial dilutive effect on the Company’s Common Stock, which may adversely affect the market price of the Company’s Common Stock.

When the Acquisition is completed, there will be an additional 5,319,149 shares of Common Stock outstanding. In addition, although it is not possible to determine the exact maximum number of shares of Common Stock that will be issuable upon conversion of the Convertible Notes until the Convertible Notes are issued on or around the Closing Date, to the extent that the Company elects to settle any conversions of the Convertible Notes by issuing shares of its Common Stock or a combination of cash and shares of its Common Stock, the Convertible Notes will have a dilutive effect on the Company’s Common Stock, and such dilutive effect may be substantial. When the Acquisition is completed, the Common Stock owned by the Seller, including the maximum number of shares of Common Stock issuable upon conversion of the Convertible Notes, will likely represent more than 20% of the issued and outstanding shares of the Company Common Stock as of the Record Date on a fully diluted basis.

The Acquisition will result in integration and consolidation risks, and we may be unable to profitably operate our consolidated company.

We are entering into the Acquisition as part of our strategy to increase the range of products that we offer, especially into non-forex products, to expand our businesses into new markets and geographies and to achieve certain operating expense synergies. In order to realize the intended benefits of the Acquisition, we will need to successfully integrate the operations of the acquired business with our current operations. Our ability to successfully integrate the acquired business is subject to integration and consolidation risks, including:

 

    diversion of management time and focus from operating our business to address challenges that may arise in integrating the acquired business;

 

    transition of operations, users and customers onto trading platforms of the acquired business;

 

    failure to successfully further develop the acquired business;

 

    failure to realize anticipated operational or financial synergies;

 

    implementation or remediation of controls, procedures, and policies at the acquired business;

 

    the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries;

 

    liability for activities of the acquired company before the acquisition, such as violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; and

 

18


Table of Contents
    integration of the acquired business’ accounting, human resource and other administrative systems, and coordination of trading and sales and marketing functions.

Our failure to address these risks or other problems encountered in connection with the Acquisition could cause us to fail to realize the anticipated benefits of the Acquisition or incur unanticipated liabilities, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The continued expansion of our trading activities into other financial products, including contracts for difference, or CFDs and spread bets, entails significant risk, and unforeseen events could have an adverse effect on our business, financial condition and results of operations and cash flows.

Following the completion of the Acquisition, we expect the proportion of our revenue derived from CFDs and other non-forex products to increase materially in future periods. All of the risks that pertain to our trading activities in the forex market also apply to our CFDs and spread bets and any other products we may offer in the future. These risks include market risk, counterparty risk, liquidity risk, technology risk, third-party risk and risk of human error. In addition, unexpected events can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our trading platforms or our failure to properly manage the market risks associated with making markets for new products. The profit margins for these new products may not be similar to the profit margins we have realized with respect to forex trading.

The market price of the Common Stock may decline as a result of the Issuance.

We are unable to predict the potential effects of the Issuance on the trading activity and market price of our Common Stock. We have granted registration rights to the Seller and certain other investors for the resale of both the Consideration Shares and the Convertible Notes. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our Common Stock available for public trading. Sales of a substantial number of shares of our Common Stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our Common Stock.

If the Acquisition is not completed, the price of the Company’s Common Stock could decline and our future business and operations could be harmed.

The completion of the Acquisition is subject to conditions, many of which are beyond the control of the parties. If the Acquisition is not completed for any reason, the Company may be subject to a number of material risks, including the following:

 

    The Company will be required to pay the Seller a fee of $1 million if our stockholders reject the proposal for the approval of the Issuance;

 

    The price of our Common Stock may decline;

 

    The Company may be subject to litigation related to the failure to complete the Acquisition which could require substantial time and resources to resolve;

 

    Costs related to the Acquisition, such as financial advisory, legal, accounting, proxy solicitation and printing fees, must be paid even if the Acquisition is not completed;

 

    Matters relating to the Acquisition (including the negotiation of terms and integration planning) required a substantial commitment of time and resources by the Company management, which could otherwise have been devoted to other opportunities that may have been beneficial to the Company;

 

    The Company would not be able to realize the expected benefits of the Acquisition; and

 

    If the Acquisition is not completed, the Company may be unable to find a partner willing to engage in similar transactions on terms as favorable as those set forth in the Share Purchase Agreement, or at all.

 

19


Table of Contents

Some of our directors and executive officers have certain interests that are different from those of our stockholders generally.

Some of our directors and executive officers have interests that may be different from, or in addition to, your interests as a stockholder. You should consider these interests in voting on the proposals. These different interests are described under “Proposal No. 1—Approval of the Issuance—Interests of Certain of our Directors and Executive Officers in the Acquisition.”

The Company will incur significant transaction costs in connection with the Acquisition.

The Company expects to incur a number of non-recurring costs associated with the Acquisition. Non-recurring transaction costs include, but are not limited to, fees paid to financial advisors, legal, financial, tax and accounting advisors, filing fees and printing costs. The Company expects that approximately $5.0 million will be incurred in connection with such fees to complete the Acquisition. The Company may also incur additional unanticipated costs. Although the Company expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the Acquisition, should allow the Company to offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all.

The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.

In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such the Convertible Notes) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. The liability component of the Convertible Notes will initially be valued at the fair value of a similar debt instrument that does not have an associated equity component and will be reflected as a liability in the Company’s consolidated balance sheet in an amount equal to the fair value. The equity component of the Convertible Notes will be included in the additional paid-in capital section of the Company’s stockholders’ equity on the Company’s consolidated balance sheet, and the value of the equity component will be treated as original issue discount for purposes of accounting for the debt component. This original issue discount will be amortized to non-cash interest expense over the term of the Convertible Notes, and, as a result, the Company will record a greater amount of non-cash interest expense in future periods. Accordingly, the Company will report lower net income in its financial results than would have been recorded had it reflected only cash interest expense in its consolidated income statement because ASC 470-20 will require the interest expense associated with the Convertible Notes to include both the current period’s amortization of the debt discount and the Convertible Notes’ coupon interest, which could adversely affect the Company’s reported or future financial results, the trading price of the Company’s Common Stock and the trading price of the Convertible Notes.

In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as the Convertible Notes) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share unless the conversion value of the Convertible Notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the Convertible Notes are accounted for as if the number of shares of Common Stock that would be necessary to settle the excess, if the Company elected to settle the excess in shares, were issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If the Company is unable to use the treasury stock method in accounting for the shares of Common Stock, if any, issuable upon conversion of the Convertible Notes, then the Company’s diluted earnings per share could be adversely affected.

 

20


Table of Contents

PROPOSAL NO. 1

APPROVAL OF THE ISSUANCE

The Companies

GAIN Capital Holdings, Inc.

We are a Delaware corporation that provides trading technology and execution services to retail and institutional investors. We specialize in over-the-counter and exchange-traded markets, and we service customers in more than 180 countries worldwide. Our customers have access to a diverse range of over 12,500 financial products, including foreign exchange, precious metals, “contracts for difference”, indices, individual equities, bonds and interest rate products, OTC options on forex, as well as futures and options on futures on more than 30 global exchanges and binaries. In the United Kingdom, we also offer spread bets, which are investment products similar to “contracts for difference”, but that offer more favorable tax treatment to residents of that country.

We have invested considerable resources over the past 14 years to develop our proprietary trading platforms to provide our customers with advanced price discovery, trade execution and order management functions, while improving our ability to acquire and service our customers efficiently, as well as manage market and credit risk associated with our customer’s trading activity. Today our customers can trade through web-based, downloadable and mobile trading platforms and have access to trading tools to assist them with research and analysis, automated trading and account management.

Our headquarters are in Bedminster, New Jersey, and we have a global presence across North America, Europe and the Asia Pacific regions. Our registered office is at 135 US Highway 202/206, Suite 11, Bedminster, NJ 07921, United States of America and our phone number is: +1 908-731-0700.

City Index (Holdings) Limited

City is a privately held company incorporated and registered in England and Wales. Established in 1983, City is a global provider of retail trading services including spread betting (UK only), “contracts for difference” and margin forex. City is majority owned by IPGL, the private holding company for the interests of Michael Spencer, Founder and Chief Executive of ICAP plc, the global markets operator. City trades primarily under the City Index, Finspreads, FX Solutions and IFX Markets brands with core markets in the UK, Middle East and the Asia Pacific. City’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and City’s phone number is: +44 207-550-8500.

City Index Group Limited

The Seller is a company incorporated and registered in England and Wales. The Seller is the legal and beneficial owner of the entire issued share capital of City. The Seller’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and the Seller’s phone number is: +44 207-550-8500.

INCAP Gaming B.V.

INCAP is a company incorporated and registered in The Netherlands, whose registered office is at Luna Arena, Herikerbergweg 238, 1101 CM Amsterdam Zuidoost, the Netherlands. INCAP’s phone number is: +31 20-57-55-600.

IPGL Limited

IPGL is a company incorporated and registered in England and Wales. IPGL is the private holding company for the interests of Michael Spencer, Founder and Chief Executive of ICAP plc, the global markets operator. IPGL’s registered office is at Park House, 16 Finsbury Circus, London EC2M 7EB, United Kingdom, and IPGL’s phone number is: +44 207-107-7311.

 

21


Table of Contents

Principal Reasons for the Acquisition

The Board and the Company’s management believe that the Acquisition, of which the Issuance is a part, is extremely compelling as it offers the best opportunity to meet the multiple objectives of the Company’s operating strategies and should increase stockholder value. The Acquisition is expected to provide the Company with a number of strategic and financial benefits, including increased scale, a diversified global footprint, further diversification of the Company’s retail business, fixed operating expense synergies, a positive impact on the Company’s earnings, positive tax attributes and increased liquidity. The Acquisition will result in the combination of the Company’s strong presence in the global retail forex industry under the Forex.com brand with City’s significant market presence in the UK “contracts-for-difference” and spread bet markets under the well-known City Index brand. Both the Company and City have strong businesses in China and elsewhere in Asia and the Acquisition will allow the companies to become even stronger competitors in these markets.

Principal Terms of the Acquisition

The Acquisition and the Issuance

On October 31, 2014, the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL. Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, the Company agreed to purchase the Shares of City from the Seller. The Shares will be sold for an aggregate purchase price consisting of (i) $20,000,000 in cash; (ii) the Consideration Shares; and (iii) the Convertible Notes. The purchase price is subject to upwards or downwards adjustments based on City’s working capital, regulatory capital and cash and debt as of the Closing Date.

The Company and the Seller have each made customary warranties. Subject to certain limitations, the Seller has agreed to indemnify the Company for losses suffered by the Company in respect of certain known pre-existing liabilities. The Company may not make a claim against the Seller unless the Company provides notice of such claim to the Seller before certain dates. Subject to certain exceptions, the Seller’s liability under the Share Purchase Agreement is also subject to certain caps and thresholds. In addition, the Seller, City, and City’s subsidiaries are subject to customary covenants between the date of the Share Purchase Agreement and the Closing Date, including an agreement by the Seller to procure that the business of City and its subsidiaries is conducted in the normal course consistent with past practices, and not to take certain actions specified in the Share Purchase Agreement. The Seller and INCAP have each also agreed, subject to certain exceptions, for a period of two years from the Closing Date, to not engage in certain competitive and hiring actions in regards to City and its subsidiaries.

Closing of the Acquisition is subject to Company Stockholder Approval at the closing and the satisfaction of other closing conditions, including certain regulatory approvals. The Company is obligated to pay to the Seller a fee of $1,000,000 if Company Stockholder Approval is not obtained at a meeting of the Company’s stockholders. The Share Purchase Agreement will be terminated immediately on the Long Stop Date if the Acquisition is not closed by such time, unless otherwise agreed by the parties. The Share Purchase Agreement may also be terminated by the Company upon a material breach by the Seller of its obligations in connection with closing, its warranties or its pre-closing covenants.

INCAP has guaranteed the payment obligations of the Seller under the Share Purchase Agreement for a period of seven years following the Closing Date, unless IPGL elects to guarantee the payment obligations of the Seller under the Share Purchase Agreement prior to such time but on or after 18 months following the Closing Date.

Background of the Acquisition

Our Board and management periodically review and evaluate potential strategic opportunities to enhance stockholder value.

As part of the Company’s ongoing evaluation of potential investment and strategic opportunities, in early November 2013, Mr. Glenn Stevens, President and Chief Executive Officer of the Company, met with

 

22


Table of Contents

Mr. Matt Wreford, then the Chief Executive Officer of IPGL, for the purpose of engaging in preliminary discussions regarding a potential strategic transaction involving the Company and City. Following such meeting, in mid-November 2013, the Company provided Mr. Wreford with a preliminary proposal and other materials regarding a potential acquisition of City by the Company, including a proposed timeline for such potential transaction. On November 6, 2013, the Company and City Index Group Limited entered into a mutual confidentiality agreement. Also in November 2013, the Company requested preliminary information regarding City and its business and, after City provided certain of such information, employees of the Company began to review information provided by City.

On December 12, 2013, Mr. Diego Rotsztain, Executive Vice President, Head of Corporate Development, General Counsel and Secretary of the Company, and Mr. Wreford met in London to continue discussions with respect to an acquisition of City by the Company. On January 24, 2014, Mr. Rotsztain also met with Mr. Mark Preston, Chief Executive Officer of City, and had conversations with Mr. Preston regarding the preliminary proposal and materials relating to the proposed transaction that the Company previously provided to City.

On January 28, 2014 Tina Kilmister-Blue replaced Mr. Wreford as Chief Executive Officer of IPGL.

In February 2014, the Company retained Jefferies LLC (“Jefferies”) as its financial advisor in connection with the proposed transaction. On February 26, 2014, during a regularly scheduled Board meeting, Mr. Rotsztain updated the Board regarding the ongoing early-stage discussions between the Company and City regarding a potential transaction.

On March 6, 2014, management and advisors of the Company and City held a meeting at the offices of Keefe, Bruyette & Woods (“KBW”), financial advisor to IPGL, in New York to further discuss the Company’s preliminary proposal with respect to the potential transaction. Following such meeting, in early April 2014, Mr. Rotsztain provided a revised preliminary proposal with respect to the potential transaction to City, which included proposed key terms for the transaction, discussion regarding potential expense synergies and pro forma operating metrics for the combined company and the strategic rationale for the combination, among other matters. Throughout April 2014, the Company and City continued to evaluate and discuss the terms of the proposed transaction. On April 29, 2014, at another regularly scheduled Board meeting, Mr. Rotsztain updated the Board on the progress of discussions between the Company and City regarding a potential transaction, indicating that due diligence had begun and that the parties were in preliminary discussions regarding transaction terms. In early May 2014, Jefferies provided to City on behalf of the Company a further revised preliminary proposal of terms regarding the potential transaction.

On May 14, 2014, senior management of the Company, City and IPGL, including Mr. Rotsztain, Ms. Kilmister-Blue and Mr. Preston, and representatives of Jefferies and KBW met in KBW’s offices in London to discuss the revised preliminary proposal provided by the Company to City in early May. In addition, on June 4 and June 5, 2014, management and advisors of the Company and City held due diligence sessions in London.

On July 9, 2014, Mr. Stevens and Mr. Rotsztain made a detailed presentation to the Board regarding the potential transaction with City, including with respect to the strategic rationale for the proposed transaction, financial projections and valuation, overview of potential expense synergies and a view of the pro forma combined company from a financial and operating perspective, among other matters. On July 14, 2014, Mr. Michael Spencer, Founder and Chief Executive of ICAP plc, Mr. Stevens, Mr. Rotsztain and Ms. Kilmister-Blue held meetings in London to further advance discussions on the terms of the potential transaction. Also in July 2014, the Company retained Davis Polk & Wardwell LLP (“DPW”) as its legal counsel in connection with the potential transaction.

On July 22, 2014, Mr. Stevens and Mr. Rotsztain updated the Board regarding progress on the potential transaction with City, providing the Board with a detailed overview of the likely key terms for the transaction and outlining the principal next steps to be taken. Following continued discussions with respect to the terms of the proposed transaction and additional exchanges of information, in late July 2014, the parties reached non-binding agreement in principle on some of the key economic terms for the transaction, which provided for the

 

23


Table of Contents

acquisition of all the Shares of City by the Company in consideration for an aggregate purchase price consisting of $20,000,000 in cash, 5,319,149 shares of Common Stock and 4.125% unsecured convertible senior notes of the Company with an aggregate principal amount of $60,000,0000. In addition, the parties agreed that (i) the unsecured convertible notes of the Company would have a maturity of 5 years and be convertible into shares of Common Stock at a conversion price equal to 125% of the daily volume-weighted average price for the Common Stock over the period of 20 consecutive trading days ending immediately prior to the Closing Date, subject to a collar and (ii) the Common Stock and unsecured convertible notes of the Company issued as part of the purchase price would be subject to certain lock-up provisions.

In mid-August 2014, the Company instructed DPW to commence preparing initial drafts of the Share Purchase Agreement and related documents and, later that month, DPW distributed proposed drafts of the Share Purchase Agreement and the Stockholders’ Agreement to the Seller and its legal counsel, MacFarlanes LLP (“MacFarlanes”) and Kirkland & Ellis LLP (“K&E”).

Concurrently and throughout the period of negotiations described below, representatives and advisors of the Company continued to review City documents and have conversations with City’s representatives about diligence materials, exchanged information and continued to evaluate and discuss the terms of the proposed transaction.

In early September 2014, representatives of DPW and MacFarlanes had telephonic conferences to discuss the draft Share Purchase Agreement and the proposed terms and structure of the proposed transaction.

On September 10, 2014 and September 11, 2014, representatives of the Company and City met in London to discuss matters relating to the Company’s due diligence of City. On September 16 and 17, 2014, representatives of the Company and City met in New Jersey to discuss matters relating to City’s due diligence of the Company.

From October 13, 2014 through October 16, 2014, the Company and the Seller, along with their legal counsel, met to negotiate the terms of the Share Purchase Agreement and related documentation. Key terms negotiated during these meetings, which are discussed in detail below under “Share Purchase Agreement” on page 30, included the warranty package, including the scope of the warranties and their duration after the consummation of the transaction, terms of the indemnity with respect to such warranties and certain other matters, including the caps, baskets and the security for the payment obligations under such an indemnity, and the liquidity rights of the Seller with respect to the non-cash consideration to be issued to the Seller upon consummation of the transaction. Following such meetings, MacFarlanes and K&E distributed revised drafts of the Share Purchase Agreement and the Stockholders’ Agreement, respectively, to the Company and its legal counsel. DPW also distributed proposed drafts of the RRA and Indenture to the Seller and its counsel.

On October 15, 2014, Mr. Stevens and Mr. Rotsztain provided a further update to the Board regarding the potential transaction with City, outlining the key terms for the transaction and reviewing the principal remaining deal issues to be negotiated.

On October 16, 2014, representatives of the Company and City also met with representatives of the UK Financial Conduct Authority to review the proposed transaction.

In mid-October 2014, Mr. Rotsztain informed representatives of the Other Investors and the Edison Entities, each of whom was at such time a shareholder of the Company and a party to an investor rights agreement with the Company providing for certain registration and other rights to such shareholders as further described below under “Registration Rights Agreement” on page 38, of the terms of the proposed transaction and had discussions with them about the terms of the proposed RRA with the Seller and the need to harmonize the terms of the existing agreements with such proposed RRA. Through late October 2014, representatives and advisors of the Company had discussions with representatives and advisors of the Other Investors and the Edison Entities concerning their respective agreements to enter into the RRA and the Side Letter in connection with the proposed transaction and to terminate their existing investor rights agreement with the Company in order to effectuate the proposed RRA.

 

24


Table of Contents

On October 22, 2014, the Company, the Seller and their respective legal counsels held telephonic conferences to further discuss and negotiate the terms of the draft Share Purchase Agreement and the other transaction documents and the parties continued to negotiate the terms of the Share Purchase Agreement and the other transaction documents throughout October 2014.

On October 28, 2014, our Board held a meeting at which it reviewed the proposed final terms and financial aspects of the Acquisition. Prior to the meeting, our Board consulted with management, was furnished with written summaries of the principal terms of the primary transaction documents, and reviewed the proposed final drafts of such documents. At this meeting, Jefferies reviewed with our Board its financial analyses of the consideration payable by the Company in connection with the Acquisition. Also at this meeting, Jefferies delivered to our Board an oral opinion, confirmed by delivery of a written opinion dated October 28, 2014, to the effect that, as of that date and based on and subject to various assumptions, matters considered and limitations described in the opinion, the consideration to be paid by the Company pursuant to the Share Purchase Agreement was fair, from a financial point of view, to the Company. After discussion and deliberation based upon the information considered during its evaluation of the Acquisition, our Board determined that the Share Purchase Agreement and related transaction documents and the transactions contemplated thereby were advisable and in the best interests of the Company and determined to recommend that the Company’s stockholders approve the Issuance.

On October 31, 2014, the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL, the Stockholders’ Agreement with the Seller, INCAP, Francisco Partners II, L.P., Sun Luxco I, Sarl and Sun Luxco II, Sarl and the Side Letter with the Other Investors and the Edison Entities. Also on October 31, 2014, the Company issued a press release announcing entry into definitive documents relating to the Acquisition.

Opinion of the Company’s Financial Advisor

On October 28, 2014, at a meeting of the Company’s Board held to evaluate the Acquisition, Jefferies delivered to the Company’s Board an oral opinion, confirmed by delivery of a written opinion dated October 28, 2014, to the effect that, as of that date and based on and subject to various assumptions, matters considered and limitations described in Jefferies’ opinion, the consideration to be paid by the Company pursuant to the Share Purchase Agreement was fair, from a financial point of view, to the Company.

The full text of Jefferies’ opinion describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Jefferies. Jefferies’ opinion is attached as Annex A and is incorporated by reference into this document. Jefferies’ opinion was provided for the use and benefit of the Company’s Board in its consideration of the Acquisition, and did not address the relative merits of the transactions contemplated by the Share Purchase Agreement as compared to any alternative transaction or opportunity that might be available to the Company, nor did it address the underlying business decision by the Company to engage in the Acquisition or the terms of the Share Purchase Agreement or the documents referred to therein. Jefferies’ opinion does not constitute a recommendation as to how any holder of the Company common stock should vote in connection with the Acquisition or any matter related thereto. The following summary is qualified in its entirety by reference to the full text of Jefferies’ opinion. The Company’s stockholders are urged to read the entire opinion carefully in connection with their consideration of the Issuance.

In arriving at its opinion, Jefferies, among other things:

 

    reviewed the financial terms and conditions of a draft of the Share Purchase Agreement dated October 25, 2014;

 

    reviewed certain publicly available financial and other information about the Company and City;

 

    reviewed certain information furnished to Jefferies by the Company’s, Seller’s and City’s management, including financial forecasts and analyses relating to the business, operations and prospects of the Company and City;

 

25


Table of Contents
    held discussions with members of senior management of the Company, Seller and City concerning the matters described in the second and third bullets above;

 

    reviewed certain valuation metrics for City and compared them with those of certain publicly traded companies that Jefferies deemed relevant;

 

    compared the proposed financial terms of the Acquisition with the financial terms of certain other transactions that Jefferies deemed relevant;

 

    analyzed the discounted cash flows of City;

 

    considered the potential pro forma impact of the Acquisition;

 

    reviewed certain estimates as to the amount and timing of cost savings anticipated by the Company’s management to result from the Acquisition (the “Cost Savings”); and

 

    conducted such other financial studies, analyses and investigations as Jefferies deemed appropriate.

In its review and analysis and in rendering its opinion, Jefferies assumed and relied upon, but did not assume any responsibility to independently investigate or verify, the accuracy and completeness of all financial and other information that was supplied or otherwise made available by the Company, Seller or City or that was publicly available to Jefferies (including, without limitation, the information described above), or that was otherwise reviewed by Jefferies. Jefferies relied on assurances of the managements of the Company, Seller and City that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. In its review, Jefferies did not obtain any independent evaluation or appraisal of any assets or liabilities of, nor did Jefferies conduct a physical inspection of any of the properties or facilities of, the Company, Seller, INCAP or City, and Jefferies was not furnished with and assumed no responsibility to obtain any such evaluations or appraisals.

With respect to the financial forecasts provided to and examined by Jefferies, Jefferies’ opinion noted that projecting future results of any company is inherently subject to uncertainty. The Company, Seller and City informed Jefferies, however, and Jefferies assumed, that the financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the managements of the Company, Seller and City as to the future financial performance of the Company or City, as applicable. In addition, the Company’s management informed Jefferies, and Jefferies assumed, that the Cost Savings were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the Company’s management as to the amount and timing of certain cost savings anticipated by the Company’s management to result from the Acquisition, and Jefferies relied upon the assessment of the Company’s management as to the Company’s ability to achieve the Cost Savings in the amounts and at the times projected. In Jefferies’ review and analysis and in rendering its opinion, Jefferies assumed upon the advice of the Company’s management, that such Cost Savings will be realized in accordance with such estimates. Jefferies expressed no opinion as to the Company’s, Seller’s or City’s financial forecasts or the Cost Savings, or the assumptions on which they were made.

Jefferies’ opinion was based on economic, monetary, regulatory, market and other conditions existing and which could be evaluated as of the date of its opinion. Jefferies expressly disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion of which Jefferies became aware after the date of its opinion.

Jefferies made no independent investigation of any legal or accounting matters affecting the Company, Seller or City, and Jefferies assumed the correctness in all respects material to Jefferies’ analysis of all legal and accounting advice given to the Company and the Company’s Board, including, without limitation, advice as to the legal, accounting and tax consequences of the terms of, and the transactions contemplated by, the Share Purchase Agreement to the Company and its stockholders. In addition, in preparing its opinion, Jefferies did not take into account any tax consequences of the Acquisition to the Company or its stockholders, Seller or City. In

 

26


Table of Contents

rendering its opinion, Jefferies assumed that the final form of the Share Purchase Agreement would be substantially similar to the last draft reviewed by Jefferies. Jefferies also assumed that in the course of obtaining any necessary regulatory or third-party approvals, consents and releases for the Acquisition, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on the Company or City or the contemplated benefits of the Acquisition in any respect material to Jefferies’ opinion.

Jefferies was not asked to address, and its opinion does not address, the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of the Company. Jefferies expressed no view or opinion as to the fairness, financial or otherwise, of the amount or nature of any compensation payable or to be received by any of City’s officers, directors or employees, or any class of such persons, in connection with the Acquisition relative to the consideration to be paid by the Company pursuant to the Share Purchase Agreement. Jefferies’ opinion was authorized by Jefferies’ Fairness Committee.

In preparing its opinion, Jefferies performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the applications of those methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Jefferies believes that its analyses must be considered as a whole. Considering any portion of Jefferies’ analyses or the factors considered by Jefferies, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the conclusion expressed in Jefferies’ opinion. In addition, Jefferies may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described below should not be taken to be Jefferies’ view of City’s actual value. Accordingly, the conclusions reached by Jefferies are based on all analyses and factors taken as a whole and also on the application of Jefferies’ own experience and judgment.

In performing its analyses, Jefferies made numerous assumptions with respect to industry performance, general business, economic, monetary, regulatory, market and other conditions and other matters, many of which are beyond the Company’s, Seller’s, City’s and Jefferies’ control. The analyses performed by Jefferies are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. The analyses performed were prepared solely as part of Jefferies’ analysis of the fairness, from a financial point of view, of the consideration to be paid by the Company to Seller pursuant to the Share Purchase Agreement, and were provided to the Company’s Board in connection with the delivery of Jefferies’ opinion.

The following is a summary of the material financial and comparative analyses performed by Jefferies in connection with Jefferies’ delivery of its opinion to the Company’s Board on October 28, 2014. The financial analyses summarized below include information presented in tabular format. In order to fully understand Jefferies’ financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data described below without considering the full narrative descriptions of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Jefferies’ financial analyses. For purposes of the financial analyses summarized below, the term “implied transaction value” refers to the implied value of the consideration of $116.5 million based on (i) the issuance by the Company of 4.125% unsecured convertible loan notes with a principal amount of $60 million pursuant to the Convertible Note Instrument (as defined in the Share Purchase Agreement); (ii) the issuance by the Company of 5,319,149 shares of the Company common stock based on the Company’s closing price on October 24, 2014, of $6.86; (iii) the payment by the Company of the Final Payment (as defined in the Share Purchase Agreement) in cash; and (iv) the payment by the Company of the Escrow Amount (as defined in the Share Purchase Agreement) in cash. For purposes of Jefferies’ opinion, the Company informed Jefferies, and Jefferies assumed, that the sum of the Final Payment and the Escrow Amount will be an amount equal to $20 million in cash, and that the Connected Debt (as defined in the Share Purchase Agreement) of City will be fully discharged as contemplated by the Share Purchase Agreement on or prior to the closing of the Acquisition.

 

27


Table of Contents

Selected Public Companies Analysis

Jefferies reviewed selected financial data of City and the following four selected public companies in the retail foreign exchange trading sector:

 

    FXCM Inc.
    GAIN Capital Holdings, Inc.
    IG Group Holdings plc
    Plus500 Ltd.

Jefferies reviewed, among other things, the total enterprise values of the selected public companies as multiples of the selected public companies’ calendar year 2015 estimated total gross revenue, referred to as revenue, calendar year 2016 estimated revenue, calendar year 2015 estimated earnings before interest, taxes, depreciation and amortization, referred to as EBITDA, and calendar year 2016 estimated EBITDA. Jefferies then applied selected calendar year 2015 estimated revenue, calendar year 2016 estimated revenue, calendar year 2015 estimated EBITDA and calendar year 2016 estimated EBITDA multiples derived from the selected public companies to corresponding data of City. Jefferies also applied selected calendar year 2015 estimated EBITDA and calendar year 2016 estimated EBITDA multiples derived from the selected public companies to corresponding data of City assuming, in each case, synergies identified by the Company’s management and anticipated by the Company to be available to the combined company in connection with the Acquisition valued using a 13.50% - 15.50% discount rate and a terminal growth rate between 1.00% - 3.00%, referred to collectively as synergies. Estimated financial data of the selected public companies was based on publicly available research analysts’ estimates, public filings, market data and other publicly available information, in each case, as of October 24, 2014. Estimated financial data of City was based on information furnished to Jefferies by the Company’s management.

This analysis indicated the following approximate implied enterprise value ranges for City as compared to the implied transaction value of $116.5 million:

 

Selected Public
Company Multiple
  Selected Public
Company Reference
Range
  Implied Enterprise
Value Range ($millions)
  Implied Enterprise
Value Range with
Synergies ($millions)

EV / 2015E Revenue

  0.8x – 1.2x   $108 - $162  

EV / 2016E Revenue

  0.7x – 1.1x   $109 - $172  

EV / 2015E EBITDA

  5.6x – 7.1x   $20 - $25   $268 – $341

EV / 2016E EBITDA

  4.7x – 6.0x   $62 - $79   $310 – $395

Selected Precedent Transactions Analysis

Jefferies reviewed certain financial information for the following six recent merger and acquisition transactions in the retail foreign exchange and derivatives trading sectors with transaction values between $28 million and $1 billion. The following table sets forth the selected transactions considered, including their respective dates of announcement:

 

Date Announced   Buyer   Seller

4/25/2013

  GAIN Capital Holdings, Inc.   Global Futures & Forex, LTD

6/14/2012

  FXCM Inc.   Lucid Markets Trading Limited

4/20/2011

  Monex Group, Inc.   TradeStation Group, Inc.

3/21/2011

  Charles Schwab Corp.   OptionsXpress Holdings

1/8/2009

  TD Ameritrade Holding Corporation   Thinkorswim Group Inc.

  Private Transaction  

 

28


Table of Contents

Jefferies reviewed, among other things, transaction values of the selected transactions, calculated as the purchase price for the target company’s equity, as multiples of the target company’s revenue as of the last twelve month period ended September 30, 2014, referred to as LTM, and LTM EBITDA. Jefferies then applied selected LTM revenue and LTM EBITDA multiples derived from the selected transactions to corresponding data of City. Financial data of the selected transactions was based on available research analysts’ estimated, public filings and other information available at the time of announcement. Financial data of City was based on information furnished to Jefferies by the Company’s management.

This analysis indicated the following approximate implied enterprise value ranges for City as compared to the implied transaction value of $116.5 million:

 

Selected Transaction Multiple   Selected Transaction Reference
Range
  Implied Enterprise Value Range
($millions)

Transaction Value / LTM Revenue

  2.5x – 2.8x   $315 – $353

Transaction Value / LTM EBITDA

  10.6x – 11.2x   $112 – $119

Discounted Cash Flow Analyses

Jefferies performed certain discounted cash flow (“DCF”) analyses of City based on the Company management’s forecasts as of September 30, 2014, (i) on a standalone basis and (ii) including the value of synergies identified by the Company’s management and anticipated by the Company to be available to the combined company in connection with the Acquisition valued using a 13.50% - 15.50% discount rate and a terminal growth rate between 1.00% - 3.00%, referred to as the synergies DCF analysis.

Jefferies’ standalone and synergies DCF analyses of City utilized the following assumptions, among others:

 

    no cash taxes assumed during the projection period due to utilization of net operating losses for the standalone DCF analysis and a 35% tax rate applied to anticipated synergies for the synergies DCF analysis;

 

    a weighted average cost of capital between 13.50% and 15.50% for both the standalone and synergies DCF analyses;

 

    a discount rate of 13.50% - 15.50% and a terminal value based on a 2018 EBITDA exit multiple between 5.0x and 7.0x for the standalone DCF analysis; and

 

    a 1.61 USD/GBP exchange rate for the standalone DCF analysis.

These analyses indicated the following approximate implied enterprise value range based on the standalone DCF analysis and synergies DCF analysis, each as compared to the implied transaction value of $116.5 million:

 

DCF Analysis   Implied Enterprise Value Range
($millions)

Standalone

  $82 - $118

Standalone with Synergies

  $331 - $434

Other Information

Jefferies also noted for the Company’s Board certain additional factors that were not considered part of Jefferies’ financial analysis with respect to its opinion but were referenced for informational purposes, including, among other things, the following:

 

    comparison of selected multiples of selected public companies and selected multiples paid in selected precedent merger and acquisition transactions with corresponding implied multiples applicable to City in connection with the Acquisition; and

 

29


Table of Contents
    potential pro forma impact of the Acquisition after taking into account, among other things, potential synergies and restructuring costs anticipated by the Company’s management to result from the Acquisition on earnings for calendar year 2015 and 2016.

General

Jefferies’ opinion was one of many factors taken into consideration by the Company’s Board in making its determination to approve the Acquisition and should not be considered determinative of the views of the Company’s Board or management with respect to the Acquisition or the consideration to be paid by the Company to Seller pursuant to the Share Purchase Agreement.

Jefferies was selected by the Company’s Board based on Jefferies’ qualifications, expertise and reputation. Jefferies is an internationally recognized investment banking and advisory firm. Jefferies, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, financial restructurings and other financial services.

We have engaged Jefferies to act as our financial advisor in connection with the Acquisition, and Jefferies will receive an aggregate fee of $2.25 million for its services, a substantial portion of which is payable contingent upon consummation of the Acquisition. Jefferies also will be reimbursed, in accordance with the terms of its engagement letter, for expenses incurred. We have agreed to indemnify Jefferies against liabilities arising out of or in connection with the services rendered and to be rendered by Jefferies under such engagement. Jefferies, and certain of its affiliates, have, in the past, provided financial advisory and financing services and clearing and execution services to the Company and may continue to do so and have received, and may receive, fees for the rendering of such services. In addition, Jefferies and certain of its affiliates provide clearing and execution services to Seller and/or certain of its affiliates and engage in certain trading activities with certain affiliates of Seller and may continue to do so and have received, and may receive, fees or other compensation for the rendering of such services or the engagement in such trading activities. Jefferies maintains a market in the Company securities and those of certain affiliates of Seller, and in the ordinary course of Jefferies’ business, Jefferies and its affiliates may trade or hold our securities and/or securities of the Company’s affiliates or certain affiliates of Seller for Jefferies’ own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions in those securities. In addition, Jefferies may seek to, in the future, provide financial advisory, financing and clearing/execution services to the Company, Seller or INCAP or entities that are affiliated with the Company, Seller or INCAP, for which Jefferies would expect to receive compensation.

Share Purchase Agreement

The following is a summary of selected provisions of the Share Purchase Agreement, pursuant to which the Company will acquire the Shares of City. While the Company believes this description covers the material terms of the Share Purchase Agreement, it may not contain all of the information that is important to you and is qualified in its entirety by reference to the Share Purchase Agreement, which is filed as an exhibit to our current report on Form 8-K/A filed on January 12, 2015 and incorporated by reference into this Proxy Statement. We urge you to read the entire Share Purchase Agreement carefully.

Consideration

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, the Company has agreed to purchase the Shares of City from the Seller for an aggregate purchase price consisting of (i) $20,000,000 in cash, including $1,000,000 in cash to be held in escrow (the “Escrow Cash”); (ii) the Consideration Shares, including 4,787,234 Considerations Shares to be held in escrow (the “Escrow Shares”); and (iii) Convertible Notes with an aggregate principal amount of $60,000,000, including Convertible Notes with an aggregate principal amount of $54,000,000 to be held in escrow (the “Escrow Notes”).

 

30


Table of Contents

The Escrow Cash, Escrow Shares, and Escrow Notes will be held in escrow for a period of four years following the Closing Date to secure the purchase price adjustment, any indemnity obligations of the Seller and any liabilities which the Seller may have for breach of warranty under the Share Purchase Agreement, unless earlier released as a result of IPGL’s election to guarantee the obligations of the Seller under the Share Purchase Agreement. The Share Purchase Agreement also provides for staged scheduled releases of the Escrow Cash, Escrow Shares and Escrow Notes over such four year period. The purchase price is subject to upwards or downwards adjustments based on City’s working capital, regulatory capital and cash and debt as of the Closing Date.

Warranties

The Share Purchase Agreement contains warranties made by the Company and Seller as of specific dates. The warranties contained in the Share Purchase Agreement have been negotiated with the principal purpose of establishing the circumstances in which the Company may have an action for breach of warranty (and potentially the ability to recover damages) in the event of a breach, or in which the Company may have the right to terminate the Share Purchase Agreement, rather than establishing matters as facts. Some of these warranties are subject to specified exceptions and qualifications, including exceptions and other information contained in the confidential Disclosure Letter that the parties exchanged in connection with signing the Share Purchase Agreement, which are not included in this Proxy Statement. In addition, some of these warranties are qualified as to materiality. Moreover, information concerning the subject matter of such warranties may change after the date of the Share Purchase Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, you should not look to such warranties for information about the Company or the Seller.

The warranties by the Seller (each a “Seller’s Warranty” and collectively, “Sellers Warranties”) relate to a number of matters, including the following:

 

    Organization and good standing of the Seller;

 

    The right, requisite power and authority of the Seller to sell the Shares and enter into the Share Purchase Agreement and the documents related thereto and the enforceability of the Share Purchase Agreement and the documents related thereto against the Seller;

 

    The Seller’s ownership of City and its subsidiaries and the capitalization of City and its subsidiaries;

 

    The disclosure and accuracy of City’s and its subsidiaries’ constitutional and corporate documents;

 

    Compliance with laws and regulations, including anti-corruption, antitrust and data protection laws;

 

    Financial statements of City and its subsidiaries;

 

    Absence of certain changes and events since March 31, 2014;

 

    The absence of certain adverse effects potentially resulting from the sale of the Shares;

 

    The insurance policies of City and its subsidiaries;

 

    Absence of powers of attorney given by City or its subsidiaries;

 

    No undisclosed disputes or investigations involving City and its subsidiaries;

 

    Material contracts of City and its subsidiaries;

 

    Transactions between City and its subsidiaries and the Seller;

 

31


Table of Contents
    The financing and guarantees of City and its subsidiaries;

 

    Absence of insolvency proceedings or similar circumstances involving City and its subsidiaries;

 

    City’s and its subsidiaries’ possession and control over their assets;

 

    The intellectual property and information technology of City and its subsidiaries;

 

    Employment matters;

 

    Property owned by City and its subsidiaries;

 

    Compliance with environmental laws; and

 

    Tax matters.

The warranties by the Company relate to a number of matters, including the following:

 

    Organization and good standing of the Company;

 

    Corporate power and, upon receiving Company Stockholder Approval, authority to enter into the Share Purchase Agreement and the documents related thereto and the enforceability of the Share Purchase Agreement and the documents related thereto against the Company;

 

    The authorization and issuance of the Consideration Shares and Convertible Notes upon receiving Company Stockholder Approval; and

 

    Compliance with laws and SEC regulations and requirements.

Conduct of City’s Business Pending Consummation of Transactions

The Seller has agreed that from the date of the Share Purchase Agreement until the Closing Date, City’s business will be conducted in the normal course in the same manner as the business has been carried out before the date of the Share Purchase Agreement. The Seller has also agreed that from the date of the Share Purchase Agreement until the Closing Date, except as specifically allowed under the Share Purchase Agreement, City and its subsidiaries will not engage in, among other things, the following actions (“Seller’s Undertakings”):

 

    Acquire or dispose of any assets used or required for the operation of its business or grant any option in respect of any interest in any part of its business;

 

    Create, allot or issue, or grant any option over or other right to subscribe or purchase any securities of City and its subsidiaries, or repurchase or redeem any securities, other than the allotment or issue of shares of City to the Seller resulting from the capitalization of certain debt specified in the Share Purchase Agreement;

 

    Pass any resolution in a general meeting or by way of written resolution or make any changes to its constitutional documents;

 

    Enter into, modify or terminate any material contract or enter into any unusual or abnormal or onerous contract or commitment;

 

    Do or omit to do anything which would be reasonably likely to constitute grounds for the termination, revocation, suspension, adverse modification or non-renewal of any license, permission, authority franchise, approval, authority or consent held by it in respect of its business;

 

32


Table of Contents
    Subject to certain exceptions, fail to disclose to the Company all communications with regulators and governmental authorities regarding City’s and its subsidiaries’ business or communications with third parties that may be necessary or desirable to disclose to such regulatory or governmental authority;

 

    Knowingly contravene any law or regulation if it is reasonably foreseeable that such contravention will result in, among other things, any losses, claims, settlements or judgments against it;

 

    Subject to certain exceptions, correspond or meet with any regulator without consulting with the Company;

 

    Subject to certain exceptions, incur any capital expenditure on any individual item in excess of $10,000 or which together with all other capital commitments entered into between the date of the Share Purchase Agreement and Closing, exceeds $25,000;

 

    Borrow any sum or make any loan, other than with respect to trade credit in the normal course of business;

 

    Guarantee or indemnify the obligations of any person;

 

    Declare, authorize, make or pay any dividend or any other distribution of its assets, or return capital to shareholders;

 

    Make any material amendment to the terms and conditions of employment of any of its directors, officers or employees;

 

    Provide any non-contractual benefit to any director, officer, employee or their dependents;

 

    Subject to certain exceptions, dismiss or employ any employee with a salary above a specific amount;

 

    Institute or settle any legal proceedings relating to its business, except debt collection in the normal course of business;

 

    Take specified actions with respect to any intellectual property rights;

 

    Enter into any transaction with, or incur any liability to Seller;

 

    Make any substantial change in the nature or organization of its business;

 

    Discontinue or cease to operate any part of its business;

 

    Take specified action with respect to accounting procedures or tax practices;

 

    Knowingly contravene or fail to comply with specified actions of the Financial Services Act of 2012; or

 

    Enter into any agreement to do any of the above.

The Seller has agreed to use all reasonable endeavors to ensure that City incurs capital expenditures consistent with the budget agreed upon by the Seller and the Company. The Seller has also agreed that it will not take certain actions regarding City’s and its subsidiaries’ employees and City’s and its subsidiaries’ liabilities. The Seller will notify the Company of certain pertinent occurrences or information relating to City’s and its subsidiaries’ business.

Protection of the Company’s Interests

The Seller and INCAP have each agreed, subject to certain exceptions, for a period of two years from the Closing Date, (a) not to carry on any business that competes with City or its subsidiaries in any geographic area where

 

33


Table of Contents

City or its subsidiaries were engaged in business during the twelve months immediately preceding the Closing Date, (b) not to employ or solicit any current employee of City or any of its subsidiaries engaged in an executive or managerial position and (c) not to use in the course of any business certain words, trade or service marks, business or domain names, and designs or logos associated with City or its subsidiaries.

Indemnification and Limitations on Seller’s Liability

Subject to certain limitations, from and including the Closing Date, the Seller undertakes to indemnify, and to keep indemnified, the Company and City and its subsidiaries against all losses that arise directly or indirectly in connection with certain known and pre-existing claims, complaints and actions.

The Company may not make a claim against the Seller unless the Company provides notice of such claim to the Seller before (i) the fourth anniversary of the Closing Date in the case of claims for breach of tax warranties or tax covenants, (ii) the seventh anniversary of the Closing Date in the case of claims for breach of certain fundamental warranties and (iii) 18 months after the Closing Date in the case of claims for breach of any other warranties of the Seller. Subject to certain exceptions, the Seller’s liability under the Share Purchase Agreement is subject to an aggregate cap of $115,000,000 and, in the case of its liability in respect of breaches of the Seller’s Warranties (other than certain fundamental warranties) and tax covenants, a subcap of $48,000,000. The Seller’s liability in respect of claims arising from the breach of the Seller’s Warranties (other than certain fundamental warranties) is also subject to a threshold of $1,000,000.

INCAP and IPGL Guarantees

INCAP has guaranteed the payment obligations of the Seller under the Share Purchase Agreement for a period of seven years following the Closing Date, unless IPGL elects to guarantee the payment obligations of the Seller under the Share Purchase Agreement prior to such time but on or after 18 months following the Closing Date. The total amount recoverable by the Company from INCAP (or IPGL if it elects to guarantee the payment obligations of the Seller under the Share Purchase Agreement) shall not exceed $103,500,000.

Stockholders Meeting

The Share Purchase Agreement requires the Company to cause a meeting of its stockholders to be duly called and held for the purpose of voting approval of the Issuance. The Board is required to recommend to the Company’s stockholders their approval of the Issuance, use all reasonable endeavors to obtain such approval, and otherwise comply with all legal requirements applicable to such meeting. However, if the Board determines that making the recommendation would be inconsistent with its fiduciary duties, it can fail to make, withdraw or modify its recommendation.

Conditions to Closing

The closing of the Share Purchase Agreement is conditional on the following conditions (the “Conditions”) having been satisfied or waived in accordance with the Share Purchase Agreement on or before the Long Stop Date:

 

    The U.K. Financial Conduct Authority having approved the acquisition of control of City Index Limited (a City subsidiary) by the Company (which approval was obtained on December 29, 2014);

 

    The Monetary Authority of Singapore having provided written approval in satisfaction of the requirements in relevant local laws and any other conditions in the capital markets services license of City Index Asia Pte Limited (a City subsidiary);

 

    The Company having received all approvals required by section 11.10 of National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) and Dealer Member Rule 5.4. of the Investment Industry Regulatory Organization of Canada;

 

34


Table of Contents
    No communication from ASIC having been received by the Company or City Index Australia Pty Limited (a City subsidiary) to the effect that ASIC has any material objection or concern in connection with the transaction contemplated by the Share Purchase Agreement, or which suggests that ASIC may do, or refrain from doing, anything which may have a material adverse impact on the licenses or authorizations of the Company or City Index Australia Pty Limited in Australia;

 

    The receipt of approval from the Company’s stockholders of the Issuance; and

 

    The grant of a license to assign or underlet a specified property which is used as City’s offices in London.

Termination of the Share Purchase Agreement

The Share Purchase Agreement may be terminated at any time prior to closing of the sale and purchase of the Shares in accordance with the Share Purchase Agreement if any of the following occurs:

 

    The Seller does not comply with certain of its obligations in connection with closing in any material respect and the Company gives notice to the Seller to terminate the Share Purchase Agreement;

 

    Any of the Conditions has not been satisfied or waived in accordance with the Share Purchase agreement by the Long Stop Date; or

 

    The Company becomes aware of (i) any fact, matter or event, which constitutes a Material Breach of a Seller’s Warranty; and/or (ii) any fact, matter, or event, which constitutes a Material Breach of any of the Seller’s Undertakings, and the Company elects to terminate the Share Purchase Agreement. For purposes of determining the Company’s right to terminate, a “Material Breach” means a breach of a Seller’s Warranty or a breach of any of the Seller’s Undertakings which would entitle the Company to damages equal to or greater than $5,000,000.

The Company is obligated to pay to Seller a fee of $1,000,000 if the Company does not obtain Company Stockholder Approval.

Stockholders’ Agreement

In connection with the Share Purchase Agreement, the Company entered into the Stockholders’ Agreement with the Seller, INCAP, Francisco Partners II, L.P., Sun Luxco I, Sarl and Sun Luxco II, Sarl (each, a “Stockholder” and together, the “Stockholders”) dated as of October 31, 2014. The following is a summary of selected provisions of the Stockholders’ Agreement. The description of the Stockholders’ Agreement in this Proxy Statement has been included to provide you with information regarding its terms. While the Company believes this description covers the material terms of the Stockholders’ Agreement, it may not contain all of the information that is important to you and is qualified in its entirety by reference to the Stockholders’ Agreement, which is filed as an exhibit to our current report on Form 8-K/A filed on January 12, 2015 and incorporated by reference into this Proxy Statement. We urge you to read the entire Stockholders’ Agreement carefully.

Board Composition

Under the terms and subject to the conditions of the Stockholders’ Agreement, including the satisfaction of the eligibility standards established by the Company’s Nominating and Corporate Governance Committee, INCAP will have the right to nominate one director to the Board and the Company will increase the size of the Board by one member upon INCAP’s request to nominate its director designee to the Board. INCAP’s director designee shall be entitled to remain a director, subject to certain conditions, until the earlier of such time as (i) INCAP’s beneficial ownership falls below the Ownership Threshold and (ii) INCAP’s right to nominate a director is terminated by the Company following such time as INCAP ceases to be controlled by the direct or indirect equity holders of INCAP as of the date of the Stockholders’ Agreement. At any time INCAP’s director designee is not

 

35


Table of Contents

serving on the Board and INCAP has the right to nominate a director under the Stockholders’ Agreement, INCAP has the right to designate one individual as a non-voting observer to the Board.

Each of the Stockholders agrees to vote all voting securities held by it or over which it has voting power for all of the nominees on the slate of directors recommended for election by the Board at the 2015 annual meeting of the stockholders of the Company.

Stockholder Standstill

Subject to the rights of each Stockholder to vote its voting securities, enter into or agree, offer, propose or seek to enter into, or otherwise be involved in or part of, certain fundamental transactions involving the Company, each Stockholder agrees that it will not, among other things, directly or indirectly:

 

    Make, or in any way participate in, any solicitation of proxies to vote with respect to the voting of any voting securities of the Company;

 

    Form, join or otherwise participate in a group with respect to any voting securities of the Company; or

 

    Seek, propose or otherwise act in concert with others to influence or control the management, Board or policies of the Company.

The foregoing standstill provisions will cease to apply to a Stockholder upon the earlier to occur of (i) the time at which the Stockholder and its affiliates beneficially own less than the Ownership Threshold, (ii) five years from the date of the Stockholders’ Agreement and (iii) the public announcement by the Company that it has entered into a definitive agreement with respect to a fundamental transaction with a third party.

Restrictions on Transfer

Each of the Stockholders agrees that it will not transfer any securities of the Company (i) in contravention of the terms and conditions of the Stockholders’ Agreement, (ii) unless there is an effective registration statement under the Securities Act covering such Company securities, the sale is made in accordance with Rule 144 under the Securities Act, or such transfer is exempt from registration requirements of the Securities Act or (iii) if such transfer would violate any other applicable securities or “blue sky” laws. Notwithstanding the foregoing, subject to certain conditions, each of the Stockholders may at any time transfer any or all of its Company securities to permitted transferees without the consent of the Company.

The restrictions on transfers set forth in the Stockholders’ Agreement provide that prior to the second anniversary of the date of the Stockholders’ Agreement, no Stockholder will, without the Company’s prior written consent, transfer any Company securities, except:

 

    A Stockholder may transfer Company securities to one or more of its permitted transferees as described above;

 

    A Stockholder may transfer Company securities that comprise up to 16.67% of the initial ownership of such stockholder, the exact number of shares to be determined prior to the Closing Date, every three months following the date that is six months after the Closing Date, plus any unsold allotment that is not sold during any prior three month period; and

 

    A Stockholder may transfer Company securities into a tender or exchange offer for the Company’s outstanding Common Stock.

Convertible Notes Indenture

The Company will issue $60 million in aggregate principal amount of Convertible Notes as part of the consideration for the Shares. The Convertible Notes will be issued pursuant to the Indenture, which will be dated

 

36


Table of Contents

on or about the Closing Date. The following is a summary of selected provisions of the Indenture and the Convertible Notes. While the Company believes this description covers the material terms of the Indenture and the Convertible Notes, it may not contain all of the information that is important to you and is qualified in its entirety by the Indenture, which is filed as an exhibit to our current report on Form 8-K/A filed on January 12, 2015 and incorporated by reference into this Proxy Statement. We urge you to read the entire Indenture carefully.

Principal Amount

The aggregate principal amount of Convertible Notes issuable pursuant to the Indenture will be limited to $60 million.

Maturity

The Maturity Date will be approximately five years from the date of issuance. The Convertible Notes will be due and payable in full in cash on the Maturity Date, except to the extent any of the Convertible Notes have previously been repurchased, converted into shares of Common Stock or redeemed by the Company.

Interest

The Convertible Notes will bear interest at a fixed rate of 4.125% per year, payable in cash to the holders of the Convertible Notes semi-annually in arrears.

Conversion

Prior to the date that is six months immediately preceding the Maturity Date, the Convertible Notes will be convertible only upon the occurrence of specified events set forth in the Indenture. Thereafter, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time.

The Company will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of Common Stock or a combination thereof, at its election. The conversion rate for the Convertible Notes will be equal to $1,000, divided by the initial conversion price, rounded to the nearest 1/10,000th share of Common Stock. The initial conversion price will be equal to 125% of the arithmetic average of the daily volume-weighted average price for the Common Stock over the 20 consecutive trading day period ending on, and including, the trading day immediately preceding the Closing Date; provided that the initial conversion price (x) shall not exceed the greater of (i) $9.25 and (ii) the last reported sale price of the Common Stock on the Closing Date and (y) shall not be less than $7.20. The conversion rate and the corresponding conversion price will be subject to customary anti-dilution adjustments, as described in the Indenture, including, but not limited to, Common Stock splits, Common Stock combinations, issuances of Common Stock as a dividend on the Common Stock, issuances of options rights, warrants or other securities of the Company as a dividend on the Common Stock, payment by the Company of any cash dividend in excess of $0.05 per quarter per share of Common Stock, and above-market tender offers or exchange offers by the Company or its subsidiaries for the Common Stock. In addition, in certain circumstances, the Company may be required to increase the conversion rate for any Convertible Notes converted in connection with a make-whole fundamental change (as defined in the Indenture).

Stockholders are being asked to approve the issuance of all shares of Common Stock that may be issuable upon the conversion of the Convertible Notes, including in connection with any adjustment to the conversion rate pursuant to the foregoing provisions.

Repurchase at the Option of the Holder

If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or part of their Convertible Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date of repurchase.

 

37


Table of Contents

Redemption at the Option of the Company

Prior to the date that is two years immediately preceding the Maturity Date, the Company will not have the right to redeem the Convertible Notes. During the two year period immediately preceding the Maturity Date, the Company may redeem for cash all, but not less than all, of the Convertible Notes if the last reported sale price of the Common Stock equals or exceeds 130% of the conversion price for the Convertible Notes for at least 20 trading days, whether or not consecutive, during the 30 consecutive trading day period ending on the trading day immediately preceding the date the Company delivers notice of redemption. If the Company elects to redeem the Convertible Notes, holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding the redemption date.

Events of Default

The Indenture will contain events of default customary for convertible debt securities (with customary grace periods, as applicable) and will provide that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company, all outstanding Convertible Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the holders of at least 25% in aggregate principal amount of the then outstanding Convertible Notes or the trustee may declare all of the outstanding Convertible Notes to be due and payable immediately.

Covenants of the Company

The Indenture will contain customary covenants for convertible debt securities, including, but not limited to, the following:

 

    The Company will timely pay the principal and interest on the Convertible Notes.

 

    For so long as any Convertible Notes are outstanding, the Company will provide the holders of the Convertible Notes copies of all quarterly and annual reports that the Company is required to deliver to the SEC on Forms 10-Q and 10-K, and any other documents, information or other reports that the Company is required to file with the SEC under Sections 13 or 15(d) of the Exchange Act.

 

    The Company will not consolidate or merge with or into another person or sell, convey, transfer or lease all or substantially all of its properties and assets to another person unless (i) either (A) the Company is the surviving corporation, or (B) the resulting, surviving or transferee person is a corporation existing under the laws of the United States or any state thereof, and expressly assumes all of the obligations of the Company under the Indenture.

The Indenture will not contain any financial covenants or restrict the ability of the Company to incur additional debt in the future.

Ranking

The Convertible Notes will be the senior, unsecured obligations of the Company and will rank equal in right of payment with its existing and future senior, unsecured debt, and will be senior in right of payment to any future debt that is expressly subordinated to the Convertible Notes. The Convertible Notes will be structurally subordinated to all debt and other liabilities and commitments of the Company’s subsidiaries, including trade payables and any guarantees that they may provide with respect to any of the Company’s existing or future debt, and will be effectively subordinated to any secured debt that the Company may incur to the extent of the assets securing such debt.

Registration Rights Agreement

On the Closing Date, the Company will enter into the RRA with the Other Investors, the Seller and INCAP. At the time the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL, it was

 

38


Table of Contents

contemplated that the Edison Entities would be parties to the RRA. However, the Edison Entities have since divested their holdings in the Company and will therefore not be parties to the RRA. Pursuant to the terms of the RRA, upon the request of the Seller, any Other Investor or other parties to the RRA holding Registrable Securities, the Company must use its reasonable best efforts to prepare and file a registration statement registering the offer and sale of the number of shares of Registrable Securities requested to be registered in such request. The Company must also use reasonable best efforts to file and cause to become effective a shelf registration statement registering all Registrable Securities within six months of the Closing Date. The Company shall use its reasonable best efforts to keep such shelf registration statement continuously effective under the Securities Act in order to permit the prospectus forming a part thereof to be usable by holders of Registrable Securities until the earlier of (i) three years following the effectiveness under the Securities Act of the shelf registration statement and (ii) the date on which each of the holders of Registrable Securities is permitted to sell all of its Registrable Securities without registration pursuant to Rule 144 without limitation or restriction under any of the requirements of Rule 144. The Seller and the Other Investors also have customary piggy-back registration rights under the RRA.

Neither the Other Investors (taken together) nor the Seller may request a registration of Registrable Securities more than twice and Seller may not request a registration of Registrable Securities prior to the second anniversary of the Closing Date. The Seller’s and the Other Investors’ registration rights are also subject to additional limitations, including a limitation that no registration is required by the Company unless the anticipated aggregate price to the public (after deduction for underwriter’s discounts and expenses related to the issuance) of the Registrable Securities requested to be registered is equal to or greater than $20,000,000.

Concurrently with the entry into the RRA by the Company, the Other Investors, the Seller and INCAP, the Amended and Restated Investor Rights Agreement dated January 11, 2008 among the Company, the Other Investors, the Edison Entities, Mark Galant, The Mark E. Galant 2007 GRAT, Cross Atlantic Technology Fund, L.P., Blue Rock Capital, L.P., Tudor Ventures II, L.P., The Raptor Global Portfolio, Ltd., ALTAR Rock Fund L.P., 3i U.S. Growth Partners L.P. and 3i Technology Partners III L.P, as amended by the Amendment to the Investor Rights Agreement dated November 18, 2013 among the Company, the Other Investors, Edison Venture Fund IV SBIC L.P. and Mark E. Galant, pursuant to which the Other Investors had certain registration and other rights, will be automatically terminated.

The description of the RRA in this Proxy Statement has been included to provide you with information regarding its terms. While the Company believes this description covers the material terms of the RRA, it may not contain all of the information that is important to you and is qualified in its entirety by reference to the RRA, which is filed as an exhibit to our current report on Form 8-K/A filed on January  12, 2015 and incorporated by reference into this Proxy Statement. We urge you to read the entire RRA carefully.

Side Letter with the Other Investors

On October 31, 2014, in connection with the RRA to be entered at the closing of the Acquisition by the Company, the Seller, INCAP and each Other Investor, the Company, the Other Investors and the Edison Entities entered into the Side Letter. Since entering into the Side Letter, the Edison Entities have divested their share ownership in the Company in a manner resulting in the termination of their rights under the Side Letter and the IRA. Pursuant to the Side Letter, the Company and the Other Investors agreed, among other things, that concurrently with the closing of the Acquisition, each Other Investor will enter into the RRA and the IRA will be automatically terminated.

In addition, in order to preserve certain rights of the Other Investors under the IRA following its termination and entry into the RRA, the Side Letter provides that, effective as of the entry into the RRA by the parties thereto, among other things:

 

    The Company will reimburse each member of the Board for all reasonable out of pocket expenses incurred in connection with the performance of such member’s duties as a director and other reasonable expenses incurred that are pre-approved by the Company;

 

39


Table of Contents
    The Company’s Certificate of Incorporation will provide (a) for elimination of the liability of directors to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law. In addition, the Company will enter into indemnification contracts with each of its directors to indemnify such directors to the maximum extent permissible under Delaware law;

 

    The Company will maintain directors and officers liability insurance covering the directors and officers of the Company in an amount of at least $10,000,000; and

 

    Any Other Investor’s representatives on the Board will be accorded no less favorable treatment than the treatment which any other member of the Board receives in his or her capacity as a member of the Board with respect to all matters, except in respect of equity compensation received by independent directors.

The obligations of the Company under the Side Letter will terminate with respect to each Other Investor on the earliest to occur of (i) the termination of the Share Purchase Agreement without closing thereunder, (ii) the date on which such Other Investor does not have any representatives on the Board and (iii)  mutual agreement between such Other Investor and the Company to terminate such obligations.

Regulatory Approvals and Regulatory Notifications To Be Obtained in Connection with the Acquisition

Closing of the Acquisition described herein is subject to the following regulatory approvals and regulatory notifications:

 

    The U.K. Financial Conduct Authority having approved the acquisition of control of City Index Limited (a City subsidiary) by the Company (which approval was obtained on December 29, 2014);

 

    The Monetary Authority of Singapore having provided written approval in satisfaction of the requirements in relevant local laws and any other conditions in the capital markets services license of City Index Asia Pte Limited (a City subsidiary);

 

    The Company having received all approvals required by section 11.10 of National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) and Dealer Member Rule 5.4. of the Investment Industry Regulatory Organization of Canada; and

 

    No communication from ASIC having been received by the Company or City Index Australia Pty Limited (a City subsidiary) within a time period of no later than six months from submission of the relevant notification to ASIC, to the effect that ASIC has any material objection or concern in connection with the transaction contemplated by the Share Purchase Agreement, or which suggests that ASIC may do, or refrain from doing, anything which may have a material adverse impact on the licenses or authorizations of the Company or City Index Australia Pty Limited in Australia.

In the United States, the Company must comply with applicable federal and state securities laws and the NYSE Listing Rules in connection with the Issuance. The rules of the NYSE require stockholder approval prior to the issuance of securities in connection with the acquisition of the stock or assets of another company if the issuance would constitute more than 20% of the total number of shares of common stock outstanding before the issuance.

Interests of Certain of our Directors and Executive Officers in the Acquisition

On the Closing Date, the Company will enter into the RRA with the Other Investors, the Seller and INCAP. In connection with the RRA, the Company, the Other Investors and the Edison Entities entered into the Side Letter. At the time the Company entered into the Share Purchase Agreement with the Seller, INCAP and IPGL and the Side Letter with the Other Investors and the Edison Entities, it was contemplated that the Edison Entities would be parties to the RRA. However, the Edison Entities have since divested their holdings in the Company and will

 

40


Table of Contents

therefore not be parties to the RRA. Although the Edison Entities are parties to the Side Letter, they no longer hold shares in the Company. Certain affiliates of the Other Investors are members of the Board. One purpose of the RRA and Side Letter is to preserve certain rights of the Other Investors. For a description of the RRA and Side Letter, please refer to “Proposal No. 1 Approval of the Issuance—Side Letter with the Other Investors” and “Proposal No. 1 Approval of the Issuance—Registration Rights Agreement.”

Impact of the Issuance on Existing Stockholders

The Issuance will significantly dilute the Common Stock ownership percentages of our existing stockholders. When the Acquisition is completed, there will be an additional 5,319,149 shares of Common Stock outstanding. In addition, although it is not possible to determine the exact maximum number of shares of Common Stock that will be issuable upon conversion of the Convertible Notes until the Convertible Notes are issued on or around the Closing Date, to the extent that the Company elects to settle any conversions of the Convertible Notes by issuing shares of its Common Stock or a combination of cash and shares of its Common Stock, the Convertible Notes will have a dilutive effect on the Company’s Common Stock, and such dilutive effect may be substantial. When the Acquisition is completed, the Common Stock owned by the Seller, including the maximum number of shares of Common Stock issuable upon conversion of the Convertible Notes, will likely represent more than 20% of the issued and outstanding shares of the Company’s Common Stock as of the Record Date on a fully diluted basis.

As a result of the Issuance, the Seller will become a significant stockholder of the Company with substantial influence over matters submitted to a vote of our stockholders, including the election of directors, amendment of our organizational documents, acquisitions or other business combinations involving the Company and potentially the ability to prevent extraordinary transactions such as a takeover attempt. In addition, as a result of the Acquisition, INCAP will have representation on the Board. Under the terms and subject to the conditions of the Stockholders’ Agreement, INCAP will have the right to nominate one director to the Board and the Company will increase the size of the Board by one member upon INCAP’s request to nominate its director designee to the Board.

Dissenters’ or Appraisal Rights of Existing Stockholders

Under applicable Delaware law, the Company’s stockholders do not have dissenters’ or appraisal rights in connection with the Issuance, and we do not plan to independently provide stockholders with any such rights.

Vote Required and Recommendation of the Board

With respect to the proposal for the approval of the Issuance, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

The Board evaluated the Acquisition and consulted with our management and financial and legal advisors. The Board:

 

    Determined that the Acquisition, including the Issuance, is advisable and in the best interests of the Company and its stockholders and unanimously approved the Acquisition; and

 

    Determined to recommend that our stockholders approve the Issuance.

In reaching these decisions, the Board consulted with its financial advisors and legal counsel and with management, and considered many factors, including without limitation the following, each of which the Board believed supported its decision:

 

    The Issuance is required to complete the Acquisition;

 

41


Table of Contents
    The fact that the Acquisition is expected to increase scale in the Company’s operations with respect to funded accounts, customer assets and retail trading volume;

 

    The fact that the Acquisition is expected to diversify the Company’s global footprint and position the combined company as a top provider in several key global markets;

 

    The fact that the Acquisition is expected to lead to further diversification of the Company’s retail business;

 

    The fact that the Acquisition is expected to provide a number of financial benefits, including fixed operating expense synergies, a positive impact on the Company’s earnings, positive tax attributes and an increase in the Company’s liquidity;

 

    Our ability to use the Common Stock as currency, compared to the cost of capital that would be required for us to achieve the same expansion of our business through internal growth;

 

    Historical and current information concerning the Company’s and City’s respective businesses, including trends in financial performance, financial condition, operations and competitive position;

 

    The terms and conditions of the Share Purchase Agreement, including the purchase price;

 

    Our prospects if the Acquisition is not completed; and

 

    The Company’s historical stock price and the price at which the Common Stock may be issued to the Seller in connection with the Acquisition and the potential conversion rate of the Convertible Notes.

In the course of its deliberations, the Board also considered a variety of risks and other potentially negative factors concerning the Acquisition, including the following:

 

    The substantial dilution to the Company’s stockholders as a result of the Issuance;

 

    The risk that the Acquisition might not be completed in a timely manner or at all due to failure to satisfy the closing conditions, a number of which are outside of the Company’s control;

 

    If the Acquisition is not completed, the potential adverse effect of the public announcement of the termination of the Acquisition on our business;

 

    The possible volatility, at least in the short term, of the trading price of the Common Stock resulting from the announcement and pendency of the Acquisition and the Issuance;

 

    The fact that under the Stockholders’ Agreement, INCAP will have the right to nominate one director to the Board and the Company will increase the size of the Board by one member upon INCAP’s request to nominate its director designee to the Board;

 

    The fact that the Seller’s large ownership stake may make it more difficult and expensive for a third party to pursue a strategic transaction with the Company in the future, including a change of control of the Company, even if such a transaction would generally benefit the Company’s stockholders;

 

    The possibility that the financial and strategic benefits expected to be achieved by the Acquisition might not be obtained on a timely basis or at all, which would have a detrimental impact on our ability to become more profitable and to fund our debt obligations; and

 

    The risks and costs that could be borne by us if the Acquisition is not completed, including the diversion of management and employee attention prior to completion of the Acquisition, and the potential adverse effect on our business.

 

42


Table of Contents

The Board also considered a number of risks involved with the Acquisition which are described under the section entitled “Risk Factors” in this Proxy Statement.

The foregoing discussion of the information considered by the Board is not exhaustive, but includes the material factors that the Board considered in approving the Acquisition and related agreements, and recommending approval of the Issuance by the Company’s stockholders. In view of the wide variety of factors considered by the Board in connection with its evaluation of the Acquisition and the complexity of these factors, the Board did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign any specific or relative weights to the specific factors that it considered in reaching its decision. In considering the factors described above, individual directors may have assigned different weights to different factors. The Board did not reach any specific conclusion on each factor considered, but instead conducted an overall analysis of the totality of the benefits and risks relating to the Acquisition. The Board discussed the factors described above, including asking questions of senior management and legal and financial advisors, and determined that the Acquisition was advisable and in the best interests of the Company and its stockholders.

AFTER CAREFUL CONSIDERATION, THE BOARD RECOMMENDS THAT THE COMPANY’S STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 1 TO APPROVE THE ISSUANCE.

 

43


Table of Contents

PROPOSAL NO. 2

APPROVAL OF THE CHARTER AMENDMENT PROPOSAL

Our Certificate of Incorporation currently authorizes us to issue up to 60,000,000 shares of Common Stock. As of the Record Date, we had 43,088,234 shares of Common Stock outstanding (not including 2,596,175 shares held by the Company as treasury stock). Although the Issuance will not result in the number of outstanding shares of Common Stock exceeding the number of authorized shares under our Certificate of Incorporation, the Company believes it is prudent and in the best interests of our stockholders to amend the Certificate of Incorporation to increase the number of authorized shares. Increasing the number of authorized shares will provide us with the flexibility to engage in transactions that require the issuance of Common Stock with greater effectiveness and would allow us to react more quickly to certain possible acquisition or financing opportunities. As a result, we are asking our stockholders to approve an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 60,000,000 to 120,000,000. The full text of the proposed amendment is included as Annex B to this proxy statement and incorporated herein by reference.

Vote Required and Board Recommendation

With respect to the charter amendment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority of the stock entitled to vote on the proposal (provided that a quorum is present at the meeting). Abstentions, failures to vote and broker non-votes, if any, will have the effect of a vote “AGAINST” the proposal.

OUR BOARD RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE CHARTER AMENDMENT PROPOSAL.

 

44


Table of Contents

PROPOSAL NO. 3

APPROVAL OF REMOVAL OF THE AGGREGATE SHARE CAP AND THE CONVERSION SHARE CAP FROM THE TERMS OF THE EXISTING CONVERTIBLE NOTES AND THE EXISTING INDENTURE

The Company’s Existing 4.125% Convertible Senior Notes due 2018

On November 27, 2013, the Company issued the Existing Convertible Notes in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Existing Convertible Notes were issued pursuant to the Existing Indenture between the Company and the Bank of New York Mellon, as trustee. The Existing Convertible Notes bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on June 1 and December 1 of each year, and will mature on December 1, 2018, unless earlier converted, redeemed or repurchased.

Removal of Share Cap

The Existing Convertible Notes are convertible into cash, shares of the Company’s Common Stock, or a combination thereof, at the Company’s election; provided that, prior to obtaining stockholder approval to issue shares of Common Stock in excess of the Aggregate Share Cap (as defined in the Existing Indenture) (i) the Company must settle conversions of the Existing Convertible Notes by paying and delivering, as the case may be, a combination of cash and shares of Common Stock with a Specified Dollar Amount (as defined in the Existing Indenture) of at least $1,000 per $1,000 principal amount of Existing Convertible Notes, (ii) the number of shares of Common Stock deliverable upon conversion of all Existing Convertible Notes in the aggregate may not exceed the Aggregate Share Cap and (iii) the number of shares of Common Stock deliverable upon conversion of each $1,000 principal amount of Existing Convertible Notes may not exceed the Conversion Share Cap (as defined in the Existing Indenture).

Stockholders are being asked to approve the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture in order to provide the Company with additional flexibility in determining how to settle the Existing Convertible Notes. If Proposal No. 3 is approved (x) the number of shares of Common Stock delivered upon conversion of the Existing Convertible Notes will not be subject to the Aggregate Share Cap or the Conversion Share Cap and (y) the Company will have the right to settle conversions of its Existing Convertible Notes by paying cash, delivering solely shares of its Common Stock, or paying and delivering, as the case may be, any combination of cash and shares of its Common Stock, with any Specified Dollar Amount, at the Company’s election. Consequently, as of the date hereof, a total of 9,009,008 shares of Common Stock would be reserved for issuance upon conversion of the Existing Convertible Notes, as such number may be adjusted pursuant to the terms of the Existing Indenture and which includes 7,801,711 shares of Common Stock that are already reserved for issuance upon conversion of the Existing Convertible Notes.

Vote Required and Board Recommendation

With respect to the proposal for the removal of the Aggregate Share Cap and the Conversion Share Cap from the terms of the Existing Convertible Notes and the Existing Indenture, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

OUR BOARD RECOMMENDS A VOTE “FOR” PROPOSAL NO. 3 TO APPROVE THE REMOVAL OF THE AGGREGATE SHARE CAP AND THE CONVERSION SHARE CAP FROM THE TERMS OF THE EXISTING CONVERTIBLE NOTES AND THE EXISTING INDENTURE.

 

45


Table of Contents

PROPOSAL NO. 4

APPROVAL OF THE ADJOURNMENT OR POSTPONEMENT OF THE MEETING

Adjournment or Postponement

If there are insufficient votes at the time of the Meeting to approve Proposal Nos. 1, 2 or 3, we may propose to adjourn the Meeting for the purpose of soliciting additional proxies to approve Proposal Nos. 1, 2 or 3. We currently do not intend to propose adjournment at the Meeting if there are sufficient votes to approve Proposal Nos. 1, 2 and 3. The Board believes this proposal to be advisable and in the best interests of the Company’s stockholders because it gives the Company the flexibility to solicit the vote of additional holders of the Company’s voting securities to vote on matters the Board deems important to the Company.

Vote Required and Board Recommendation

With respect to the adjournment proposal, you may vote in favor of the proposal, against the proposal or abstain from voting on the proposal. Approval of the proposal requires the affirmative vote of the holders of a majority in voting power of the shares of stock present or represented and voting on the proposal (provided that a quorum is present at the Meeting). Abstentions, failures to vote and broker non-votes, if any, are not considered votes cast and will therefore have no effect on the outcome of the vote on this proposal.

THE BOARD RECOMMENDS A VOTE “FOR” THE ADJOURNMENT PROPOSAL.

 

46


Table of Contents

DESCRIPTION OF CAPITAL STOCK

The following summary description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by reference to the Delaware General Corporation Law and our Certificate of Incorporation and By-laws, copies of which have been filed as exhibits to our Form S-1, filed with the SEC on November 24, 2010. To obtain copies of these and other filings, please see the section entitled “Where You Can Find More Information” in this Proxy Statement.

General

Our Certificate of Incorporation provides that we may issue up to 75,000,000 shares of stock, consisting of 60,000,000 shares of Common Stock, $0.00001 par value per share, and 15,000,000 shares of Preferred Stock, $0.00001 par value per share (“Preferred Stock”). As of the Record Date, 43,088,234 shares of Common Stock were issued and outstanding (not including 2,596,175 shares held by the Company as treasury stock), and no shares of Preferred Stock were issued and outstanding.

Common Stock

The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of Common Stock are entitled to receive ratably those dividends, if any, that may be declared from time to time by our Board out of funds legally available, subject to preferences that may be applicable to Preferred Stock, if any, then outstanding. In the event of a liquidation, dissolution or winding up of our company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable.

Preferred Stock

The Board is authorized to issue Preferred Stock in one or more series, to establish the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of these shares and any qualifications, limitations or restrictions thereof. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, we have no plans to issue any of the Preferred Stock.

Restricted Stock Units

Restricted stock units are units that represent shares of our stock. Under the GAIN Capital Holdings, Inc. 2010 Omnibus Incentive Compensation Plan, (the “2010 Plan”), restricted stock units become payable on terms and conditions determined by the Board, or a committee consisting of members of the Board, and are payable in cash or shares of our stock as determined by the committee. Our restricted stock unit grants vest at the rate of 25.0% per year over four years beginning on the first anniversary of the date of grant. All unvested restricted stock units are forfeited if the grantee’s employment or service is terminated for any reason, unless the committee determines otherwise. Certain of our officers and directors are also entitled to certain additional vesting with respect to their outstanding equity grants in the event they are terminated without cause or upon a change in control. We have also granted restricted stock units that vest upon attainment of performance criteria from time to time. Once vested, delivery of the vested restricted stock units is made upon the occurrence of a specified date, or upon the occurrence of a change in control or the grantee’s separation from service or death, whichever is earliest. In the event of a change in control, in the case of outstanding restricted stock units held by all grantees, all restricted stock units vest, unless the committee determines otherwise. As of January 8, 2015, approximately 1.1 million restricted stock units were outstanding, which were all non-vested.

 

47


Table of Contents

Registration Rights

On the Closing Date, the Company will enter into the RRA with the Other Investors, the Seller and INCAP. Pursuant to the terms of the RRA, upon the request of the Seller, any Other Investor or other parties to the RRA holding Registrable Securities, the Company must use its reasonable best efforts to prepare and file a registration statement registering the offer and sale of the number of shares of Registrable Securities requested to be registered in such request. Neither the Other Investors (taken together) nor the Seller may request a registration of Registrable Securities more than twice and Seller may not request a registration of Registrable Securities prior to the second anniversary of the Closing Date. The Seller’s and the Other Investors’ registration rights are also subject to additional limitations, including a limitation that no registration is required by the Company unless the anticipated aggregate price to the public (after deduction for underwriter’s discounts and expenses related to the issuance) of the Registrable Securities requested to be registered is equal to or greater than $20,000,000. The Company must also use reasonable best efforts to file and cause to become effective a shelf registration statement registering all Registrable Securities within six months of the Closing Date. The Seller and the Other Investors also have customary piggy-back registration rights under the RRA.

Anti-Takeover Effects of Our Certificate of Incorporation and By-laws and Delaware Law

Some provisions of Delaware law and our Certificate of Incorporation and By-laws could make the following transactions more difficult:

 

    Acquisition of the Company by means of a tender offer, a proxy contest or otherwise; and

 

    Removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage and prevent coercive takeover practices and inadequate takeover bids. These provisions are designed to encourage persons seeking to acquire control of the Company to negotiate first with the Board. They are also intended to provide our management with the flexibility to enhance the likelihood of continuity and stability if the Board determines that a takeover is not in the best interests of our stockholders. These provisions, however, could have the effect of discouraging attempts to acquire us, which could deprive our stockholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. We believe that the benefits of these provisions, including increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company, outweigh the disadvantages of discouraging takeover proposals, because negotiation of takeover proposals could result in an improvement of their terms.

Election and Removal of Directors. Our Certificate of Incorporation and By-laws contain provisions that establish specific procedures for appointing and removing members of the Board. Under our Certificate of Incorporation and By-laws, the Board consists of three classes of directors: Class I, Class II and Class III. A nominee for director shall be elected to the Board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election; provided, however, under certain circumstances, directors shall be elected by a plurality of the votes cast at any meeting of stockholders. Each director will serve a three-year term and will stand for election upon the third anniversary of the annual meeting at which such director was elected. In addition, our Certificate of Incorporation and By-laws provide that vacancies and newly created directorships on the Board may be filled only by a majority of the directors then serving on the Board, except as otherwise required by law or by resolution of the Board. Directors may be removed by the stockholders only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of all of the then-outstanding shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class.

Special Stockholder Meetings. Under our Certificate of Incorporation and By-laws, only the Board, the Chairman of the Board, the President and the Chief Executive Officer may call special meetings of stockholders.

Requirements for Advance Notification of Stockholder Nominations and Proposals. Our By-laws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the Board or a committee of the Board.

 

48


Table of Contents

Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware General Corporation Law, which is an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date that the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a business combination includes a merger, asset or stock sale, or another transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns 15% or more of the corporation’s voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions that are not approved in advance by the Board, including discouraging attempts that might result in a premium over the market price for the shares of Common Stock held by stockholders.

Elimination of Stockholder Action by Written Consent. Our Certificate of Incorporation and By-laws eliminate the right of stockholders to act by written consent without a meeting.

No Cumulative Voting. Under Delaware law, cumulative voting for the election of directors is not permitted unless a corporation’s Certificate of Incorporation authorizes cumulative voting. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors. Cumulative voting allows a minority stockholder to vote a portion or all of its shares for one or more candidates for seats on the Board. Without cumulative voting, a minority stockholder will not be able to gain as many seats on the Board based on the number of shares of our stock the stockholder holds as the stockholder would be able to gain if cumulative voting were permitted. The absence of cumulative voting makes it more difficult for a minority stockholder to gain a seat on the Board to influence its decision regarding a takeover.

Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for the Board to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company.

Stockholder Rights Plan. We have adopted a stockholder rights plan, commonly referred to as a poison pill. The stockholder rights plan is designed to reduce the likelihood that a potential acquirer would gain control of the Company by open market accumulation or other tactics without paying an appropriate premium for all of the Company’s shares. Under the plan, rights will be distributed as a dividend at the rate of one right for each share of Common Stock of the company held by stockholders of record at the close of business on April 22, 2013. Each right will entitle stockholders to buy, upon occurrence of certain events, one one-hundredth of a share of a new series of participating Preferred Stock at an exercise price of $17.00. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s Common Stock, or commences a tender or exchange offer that, upon consummation, would result in a person or group owning 15% or more of the Company’s Common Stock, subject to certain exceptions. Under certain circumstances the new rights are redeemable at a price of $0.01 per right. Unless earlier exchanged, redeemed, amended or exercised, the rights will expire on April 9, 2016.

Amendment of Certificate of Incorporation Provisions. The amendment of certain of the above provisions in our Certificate of Incorporation and By-laws requires approval by holders of at least two-thirds of our outstanding capital stock entitled to vote generally in the election of directors.

These and other provisions could have the effect of discouraging others from attempting hostile takeovers, and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Common Stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests.

Transfer Agent

The transfer agent for our common stock is Broadridge Corporate Issuer Solutions, Inc.

 

49


Table of Contents

Listing

Our Common Stock is listed on the New York Stock Exchange under the symbol “GCAP.”

SELECTED FINANCIAL DATA OF THE COMPANY

The selected historical consolidated financial information of the Company for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 is set forth in the Company’s 2013 Annual Report, which is incorporated by reference herein. The financial information incorporated herein by reference should be read in conjunction with, and is qualified in its entirety by reference to the “Part II—Item 8. Financial Statements and Supplementary Data” and “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2013 Annual Report.

 

50


Table of Contents

UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

Background

On October 31, 2014, GAIN Capital Holdings, Inc., a Delaware corporation (the “Company” or “GAIN”), entered into a definitive agreement to acquire City Index (Holdings) Limited (“City Index”) (the “Transaction”).

The purchase price will consist of (i) $20,000,000 in cash payable upon the closing of the transaction, (ii) 5,319,149 shares of the Company’s common stock and (iii) $60,000,000 of convertible notes.

The Company has a fiscal year ending December 31 and prepares its financial statements and related notes in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) using U.S. Dollar (“USD”) presentational currency. City Index has a fiscal year ending March 31 and prepares its financial statements and related notes in conformity with accounting practices generally accepted in the United Kingdom (“U.K. GAAP”) using British Pounds (“GBP”) presentational currency. Historical financial statements and pro forma financial information relating to Global Futures & Forex, Ltd. (“GFT”) was included in a Form 8-K/A filed with the SEC on November 18, 2013.

Unaudited Pro Forma Condensed Consolidated Financial Statements

The following unaudited pro forma condensed consolidated financial statements of the Company have been prepared to give effect to (i) the Transaction as if it had been consummated on September 30, 2014 for purposes of the pro forma condensed consolidated balance sheet and (ii) the Transaction and the Company’s acquisition of GFT (which was consummated on September 24, 2013), as if both had been consummated on January 1, 2013 for purposes of the pro forma condensed consolidated statements of operations.

The historical financial data for the Company has been derived from its respective financial statements as of the date and for the periods indicated. The fiscal year end of City Index is March 31 and, therefore, consistent with applicable SEC rules the City Index consolidated statement of operations for the year ended March 31, 2014 has been assumed to be the City Index consolidated statement of operations for the year ended December 31, 2013 for the purpose of the unaudited pro forma condensed consolidated statement of operations for that period. The City Index condensed consolidated statement of operations for the nine months ended September 30, 2014, which has not been included in this Definitive Proxy Statement on Schedule 14A, has been used for the unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 2014. Therefore, the results of operations of City Index for the period from January 1, 2014 to March 31, 2014 has been included both in the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2013 and for the nine months ended September 30, 2014. The revenue and operating loss for City Index for this period under U.S. GAAP were $30.0 million and $7.5 million, respectively.

These pro forma financial statements are presented in USD and U.S. GAAP. City Index financial data has been converted into U.S. GAAP. Additionally, City Index financial data has been converted from GBP into USD at the spot rate on September 30, 2014 for the balance sheet and at average rates over the relevant periods for the statements of operations. The following rates were used:

 

Period    GBP to USD  

Spot rate at September 30, 2014

     1.6211   

Average rate for the nine months ended September 30, 2014

     1.6696   

Average rate for the twelve months ended March 31, 2014

     1.5896   

The pro forma adjustments are based on a preliminary estimate of the consideration transferred and preliminary purchase price allocations. The actual consideration paid will be determined by the Company’s share price at the date the Transaction closes. Actual allocations will be based on final appraisals and other analysis of the fair

 

51


Table of Contents

value of, among other items, identifiable intangible assets, goodwill, income taxes and contingencies. Differences, if any, between the preliminary and final allocations could have a material impact on the unaudited pro forma condensed consolidated financial statements.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2013 and its unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2014, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and its quarterly report on Form 10-Q for the nine months ended September 30, 2014, respectively, and City Index’s audited financial statements as of and for the year ended March 31, 2014 and its unaudited condensed consolidated financial statements for the six months ended September 30, 2014 included in this Definitive Proxy Statement on Schedule 14A.

The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the financial position or results of operations that would have been achieved as of the date or for the periods indicated, or the results of operations or financial position that may be achieved in the future. The unaudited pro forma condensed consolidated financial statements do not take into account any cost synergies that may arise in connection with the integration of the Company, GFT and City Index.

 

52


Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2014

(in thousands)

 

   

 

   

 

   

 

 
    GAIN     City Index     Pro Forma
Adjustments
    Pro Forma  

ASSETS:

       
Cash and cash equivalents   $ 82,172      $ 24,526      $ (20,000 )2    $ 86,698   
Cash and securities held for customers     849,737        319,805               1,169,542   
Short term investments, at fair value     852        84               936   
Receivables from banks and brokers     165,327        45,295               210,622   
Property and equipment, net of accumulated depreciation     19,732        20,430        (13,416 )3      26,746   
Prepaid assets     4,173        9,042               13,215   
Goodwill     30,442        55,056        (24,418 )4      61,080   
Intangible assets, net     63,800        12,578        36,151 5      112,529   
Other assets, net     43,761        7,766               51,527   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,259,996      $ 494,582      $ (21,683   $ 1,732,895   
 

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

       

Liabilities

       
Payables to customers, brokers, dealers, FCMs and other regulated entities   $ 849,737      $ 319,805      $      $ 1,169,542   

Accrued compensation and benefits

    10,235        946               11,181   

Accrued expenses and other liabilities

    63,826        48,105        2,343 10      114,274   

Income tax payable

    5,706                      5,706   

Convertible senior notes

    67,726               50,571 6      118,297   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    997,230        368,856        52,914        1,419,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingent liabilities

       
 

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable non-controlling interest

    10,448                      10,448   

Shareholders’ equity

       

Common stock

           126        (126 )7        

Accumulated other comprehensive income

    2,307        48,740        (48,740 )7      2,307   

Additional paid-in capital

    150,778        239,231        (185,759 )7      204,250   

Treasury stock, at cost

    (16,263                   (16,263

Retained earnings

    115,496        (162,371     160,028 7      113,153   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    252,318        125,726        (74,597     303,447   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,259,996      $ 494,582      $ (21,683   $ 1,732,895   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements

 

53


Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014

(in thousands)

 

    

 

    

 

   

 

 
     GAIN      City Index     Pro Forma
Adjustments
    Pro Forma  

REVENUE:

         

Trading revenue

   $ 151,587       $ 94,921      $ (288 )8    $ 246,220   

Commission revenue

     97,193                       97,193   

Other revenue

     5,198                       5,198   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     253,978         94,921        (288     348,611   

Interest revenue

     1,123         860               1,983   

Interest expense

     319         1,773               2,092   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total net interest revenue

     804         (913            (109
  

 

 

    

 

 

   

 

 

   

 

 

 

Total net revenue

     254,782         94,008        (288     348,502   
  

 

 

    

 

 

   

 

 

   

 

 

 

EXPENSES:

         

Employee compensation and benefits

     71,440         31,919               103,359   

Selling and marketing

     16,118         13,077               29,195   

Referral fees

     65,865         19,847        (288 )8      85,424   

Trading expenses

     20,089         5,370               25,459   

General and administrative

     28,113         15,207               43,320   

Depreciation and amortization

     5,725         9,897        (7,510 )3      8,112   

Purchased intangible amortization

     4,841                3,665 9      8,506   

Goodwill impairment

             3,062               3,062   

Communications and technology

     11,645         8,431               20,076   

Bad debt provision

     2,690         (892            1,798   

Acquisition expense

     1,545                (917 )10      628   

Restructuring

     1,007                       1,007   

Integration

     1,719                       1,719   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expense

     230,797         105,918        (5,050     331,665   
  

 

 

    

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

     23,985         (11,910     4,762        16,837   

Interest expense on long term borrowings

     4,390                3,050 11      7,440   
  

 

 

    

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     19,595         (11,910     1,712        9,397   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expense

     4,595         916        642 12      6,153   

NET INCOME

     15,000         (12,826     1,070        3,244   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interest

     987                       987   
  

 

 

    

 

 

   

 

 

   

 

 

 
NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.    $ 14,013       $ (12,826   $ 1,070      $ 2,257   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per common share:

         

Basic

   $ 0.32           $ 0.05   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.30           $ 0.05   
  

 

 

    

 

 

   

 

 

   

 

 

 
Weighted average common shares outstanding used in computing earnings per common share:          

Basic

     40,243,330           5,319,149 4      45,562,479   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

     43,054,959           5,319,149 4      48,374,108   
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements

 

54


Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2013

(in thousands)

 

   

 

   

 

   

 

   

 

 
    GAIN     GFT     City Index     Pro Forma
Adjustments
    Pro
Forma
 

REVENUE:

         

Trading revenue

  $ 205,133      $ 85,529      $ 139,976      $ (1,753 )8    $ 428,885   

Commission revenue

    60,727        2,639                      63,366   

Other revenue

    1,099        (421                   678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest revenue

    266,959        87,747        139,976        (1,753     492,929   

Interest revenue

    821        106        1,035               1,962   

Interest expense

    156        3        1,744               1,903   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest revenue

    665        103        (709            59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    267,624        87,850        139,267        (1,753     492,988   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES:

         

Employee compensation and benefits

    74,185        28,392        40,990               143,567   

Selling and marketing

    22,337        4,727        21,647               48,711   

Referral fees

    52,503        23,838        35,601        (1,753 )8      110,189   

Trading expenses

    18,164        18,123        9,329               45,616   

General and administrative

    26,813        11,121        20,457               58,391   

Depreciation and amortization

    7,768        6,025        12,687        (13,257 )3      13,223   

Purchased intangible amortization

    2,906                      7,181 9      10,087   

Goodwill impairment

                  2,916               2,916   

Communications and technology

    11,315        8,677        9,894               29,886   

Bad debt provision

    1,501        (107     (225            1,169   

Acquisition expense

    1,824                      (1,824 )10        

Restructuring

    1,570                             1,570   

Integration

    1,950                             1,950   

Impairment of investment

    450                             450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    223,286        100,796        153,296        (9,653     467,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

    44,338        (12,946     (14,029     7,900        25,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on extinguishment of debt

    2,000                             2,000   

Interest expense on long term borrowings

    1,233                      4,077 11      5,310   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
INCOME BEFORE INCOME TAX EXPENSE     45,105        (12,946     (14,029     3,823        21,953   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

    13,794        915        1,107        1,434 12      17,250   

NET INCOME

    31,311        (13,861     (15,136     2,389        4,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net income attributable to non-controlling interest                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.   $ 31,311      $ (13,861   $ (15,136   $ 2,389      $ 4,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

         

Basic

  $ 0.85            $ 0.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.79            $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Weighted average common shares outstanding used in computing earnings per common share:          

Basic

    36,551,246            5,319,149 4      41,870,395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    39,632,878            5,319,149 4      44,952,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements

 

55


Table of Contents

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

The City Index consolidated financial statements were originally prepared in accordance with U.K. GAAP, which differs in certain respects from U.S. GAAP. Reconciliations of the City Index Consolidated balance sheet and the City Index Consolidated statements of operations from U.K. GAAP to U.S. GAAP, along with the corresponding adjustments to U.S. GAAP, are set out below:

CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2014

(in thousands)

 

   

 

   

 

   

 

 
    U.K. GAAP     U.S. GAAP
Adjustments
    U.S. GAAP  

ASSETS:

     

Cash and cash equivalents

  $ 59,519      $ (34,993   $ 24,526   

Cash and securities held for customers

           319,805        319,805   

Short term investments, at fair value

    84               84   

Receivables from banks and brokers

    45,295               45,295   
Property and equipment, net of accumulated depreciation     21,486        (1,056     20,430   

Prepaid assets

    9,042               9,042   

Goodwill

    22,141        32,915        55,056   

Intangible assets, net

           12,578        12,578   

Other assets, net

    7,766               7,766   
 

 

 

   

 

 

   

 

 

 

Total assets

  $ 165,333      $ 329,249      $ 494,582   
 

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

     

Liabilities

     
Payables to customers, brokers, dealers, FCMs and other regulated entities   $ 34,993      $ 284,812      $ 319,805   

Accrued compensation and benefits

    946               946   

Accrued expenses and other liabilities

    46,340        1,765        48,105   
 

 

 

   

 

 

   

 

 

 

Total liabilities

    82,279        286,577        368,856   
 

 

 

   

 

 

   

 

 

 

Shareholders’ equity

     

Common stock

    126               126   

Accumulated other comprehensive income

    34,327        14,413        48,740   

Additional paid-in capital

    239,231               239,231   

Retained earnings

    (190,630     28,259        (162,371
 

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    83,054        42,672        125,726   
 

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 165,333      $ 329,249      $ 494,582   
 

 

 

   

 

 

   

 

 

 

 

56


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014

(in thousands)

 

    

 

   

 

   

 

 
     U.K. GAAP     U.S. GAAP
Adjustments
    U.S. GAAP  

REVENUE:

      

Trading revenue

   $ 93,085      $ 1,836      $ 94,921   
  

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     93,085        1,836        94,921   

Interest revenue

     860               860   

Interest expense

     1,773               1,773   
  

 

 

   

 

 

   

 

 

 

Total net interest expense

     (913            (913
  

 

 

   

 

 

   

 

 

 

Net revenue

     92,172        1,836        94,008   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Employee compensation and benefits

     31,229        690        31,919   

Selling and marketing

     11,241        1,836        13,077   

Referral fees

     19,847               19,847   

Trading expenses and commissions

     6,241        (871     5,370   

General and administrative

     15,318        (111     15,207   

Depreciation and amortization

     6,280        3,617        9,897   

Purchased intangible amortization

     11,711        (11,711       

Goodwill impairment

            3,062        3,062   

Communications and technology

     8,431               8,431   

Bad debt provision

     (892            (892
  

 

 

   

 

 

   

 

 

 

Total operating expense

     109,406        (3,488     105,918   
  

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

     (17,234     5,324        (11,910

Income tax expense

     916               916   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ (18,150   $ 5,324      $ (12,826
  

 

 

   

 

 

   

 

 

 

 

57


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED MARCH 31, 2014

(in thousands)

 

    

 

   

 

   

 

 
     U.K. GAAP     U.S. GAAP
Adjustments
    U.S. GAAP  

REVENUE:

      

Trading revenue

   $ 136,204      $ 3,772      $ 139,976   
  

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     136,204        3,772        139,976   

Interest revenue

     1,035               1,035   

Interest expense

     1,744               1,744   
  

 

 

   

 

 

   

 

 

 

Total net interest expense

     (709            (709
  

 

 

   

 

 

   

 

 

 

Net revenue

     135,495        3,772        139,267   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Employee compensation and benefits

     40,452        538        40,990   

Selling and marketing

     17,875        3,772        21,647   

Referral fees

     35,601               35,601   

Trading expenses and commissions

     10,159        (830     9,329   

General and administrative

     19,685        772        20,457   

Depreciation and amortization

     7,185        5,502        12,687   

Purchased intangible amortization

     21,552        (21,552       

Goodwill impairment

     44,986        (42,070     2,916   

Communications and technology

     9,894               9,894   

Bad debt provision

     (225            (225
  

 

 

   

 

 

   

 

 

 

Total operating expense

     207,164        (53,868     153,296   
  

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

     (71,669     57,640        (14,029

Income tax expense

     1,107               1,107   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ (72,776   $ 57,640      $ (15,136
  

 

 

   

 

 

   

 

 

 

Significant differences between U.K. GAAP and U.S. GAAP

The City Index financial statements presented in these unaudited pro forma consolidated financial statements have been adjusted from U.K. GAAP to U.S. GAAP to conform with the Company’s financial statements. The information below is a summary of certain key differences between U.S. GAAP and U.K. GAAP relevant to the City Index financial statements.

(a) Business combinations, goodwill and impairment

Under U.K. GAAP, goodwill is presumed to have a finite useful economic life of 20 years or less. Accordingly, goodwill arising on consolidation has been amortized over 10 years for U.K. GAAP reporting purposes. In accordance with the requirements of ASC 350, goodwill arising from business combinations is not subject to annual amortization for reporting under U.S. GAAP. U.S. GAAP prohibits the amortization of goodwill and indefinite lived intangible assets and requires that goodwill be tested annually for impairment, requiring that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

Under U.K. GAAP, FRS 10, Goodwill and intangibles, states that goodwill represents the excess of the cost of an investment over the fair value of the acquired assets and liabilities. Intangible assets acquired, such as

 

58


Table of Contents

brands, may be regarded as indistinguishable from goodwill and accounted for as such. There is a rebuttable presumption that the useful economic lives of goodwill and intangible assets are limited and do not exceed 20 years from the date of acquisition. However, the useful economic lives may be greater than 20 years or even indefinite. City Index amortizes goodwill arising on acquisitions over 10 years.

Under U.S. GAAP, the acquirer recognizes goodwill as of the acquisition date, measured as the consideration transferred, plus transaction costs less the acquisition date amounts of the identifiable assets acquired and liabilities assumed. U.S. GAAP provides specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, unlike U.K. GAAP. In some instances, specifically identifiable intangible assets recognized under U.S. GAAP do not meet the recognition criteria of U.K. GAAP. Identifiable intangible assets would generally be expected to include patented and unpatented technology, trademarks/ trade names, and customer lists/relationships. Under U.S. GAAP, such definite-lived intangible assets are amortized over their estimated useful lives, other than in-process research and development which is expensed at the date of acquisition.

City Index has recognized a number of definite-lived intangibles separate from goodwill under U.S. GAAP, on acquisition, as a result of its acquisitions of IFX Group in September 2006 and Sunblock/FX Solutions in February 2008. Such intangibles and their estimated useful economic lives are as follows:

 

Intangible   Useful economic life

Brand/Trade name

  7 years

Software

  2-5 years

Customer relationships

  4-10 years

Trading licences

  Indefinite

The excess of the purchase price paid over the underlying fair value allocated to the identifiable assets (including intangibles) has been recorded as goodwill. Such goodwill has also been adjusted for deferred tax liabilities recognized on the creation of definite-lived intangibles under U.S. GAAP.

Under U.K. GAAP, FRS 11 - Impairment of fixed assets and goodwill, assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Fair value of an asset is determined by the present value of the future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as “Income Generating Units”. Goodwill must be reviewed for impairment at the end of the first year following the acquisition and again if there is a change of circumstances in future years indicating impairment in value. In September 2013, an indication of impairment was identified by City Index as a result of a decline in parts of the business, including the decision to wind down the FX Solutions brand. City Index performed a value in use calculation and City Index management determined that goodwill had been impaired by $45.0 million. There were no indicators of impairment in September 2014.

Under U.S. GAAP, ASC 350 requires that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment annually. Intangible assets that have a finite life are amortized over the estimated useful life of the asset. ASC 350 requires that capitalized goodwill be allocated to reporting units and tested annually for impairment under a two-step approach. The first step of the impairment test is performed by comparing the fair value of the reporting unit with the book value of the reporting unit. Where the fair value of the reporting unit is above book value, no further analysis is required. However, where the book value is higher than the fair value of the reporting unit, the second step of the impairment test is performed in order to calculate the implied fair value of goodwill. The implied fair value of the reporting unit’s goodwill is calculated by allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business

 

59


Table of Contents

combination. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized and reported in the income statement as a component of operating income for the excess amount. In connection with the reconciliation from U.K. GAAP to U.S. GAAP for the year ended March 31, 2013 City Index identified in its Step 1 analysis that two of its reporting units had carrying values lower than fair value. City Index then performed step 2 of the analysis and an impairment of goodwill was recognized for each of those reporting units for approximately $73.4 million. In connection with the reconciliation from U.K. GAAP to U.S. GAAP for the six months ended September 30, 2013, City Index performed the same analysis and identified in its Step 1 analysis that one of its other reporting units had carrying values lower than fair value. City Index then performed step 2 of the analysis and an impairment of goodwill was recognized for each of those reporting units for approximately $3.1 million. No further impairments were identified in subsequent periods.

A reporting unit for goodwill impairment testing under U.S. GAAP is different than an Income Generating Unit under U.K. GAAP.

Under both U.K. GAAP and U.S. GAAP, where an acquired entity has a different functional currency than its acquirer the step-up in basis is deemed to be held in the functional currency of the acquiree with such foreign currency denominated goodwill balances translated through reserves. As goodwill is not amortized under U.S. GAAP, functional currency differences also arise therefrom due to the higher value of goodwill held in foreign currency under U.S. GAAP than under U.K. GAAP.

(b) Deferred taxation

Under U.K. GAAP, deferred tax is accounted for in accordance with FRS 19 Deferred taxation. Deferred tax is recognized for all timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Where transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at the balance sheet date, deferred tax is recognized.

A net deferred tax asset is considered recoverable and therefore recognized only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. FRS 19 permits, but does not, require discounting and deferred tax is measured by City Index on an undiscounted basis.

Under U.S. GAAP, deferred taxation is provided for on a full liability basis. Under the liability method, deferred tax assets and liabilities represent the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to be in effect when these temporary differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. Under U.S. GAAP, there is no accepted cap on the look-out period when the company had a history of profitability. The effect of other differences between U.K. and U.S. GAAP affecting the carrying value of assets and liabilities gives rise to other timing differences on which deferred tax may be recognized under U.S. GAAP.

There are no tax adjustments for any of the U.S. GAAP adjustments because City Index is in a full valuation allowance in each tax reporting jurisdiction for each of the periods ended September 30, 2014 and 2013, respectively. The valuation allowance is due to the fact that it is not more likely than not that the net deferred tax assets will be realized due to a history of losses in each reporting jurisdiction.

 

60


Table of Contents

(c) Lease incentives and leasehold improvements

Under U.K. GAAP, rent free periods and lease incentives are accounted for under the provision of UITF Abstract 28 - Operating lease incentives and are recognized straight line over the shorter of the lease term or a period ending on a date from which it is expected the prevailing market rental will be payable, typically known as a breakout clause. Under U.K. GAAP, leasehold improvements are also depreciated up to the date of the first break in the lease.

Under U.S. GAAP, rent free periods and lease incentives should be spread across the expected length of the lease term, which has been indicated by City Index management to be longer than the period to the first breakout clause under U.K. GAAP. Under U.S. GAAP, leasehold improvements should be depreciated over the expected length of the lease term.

(d) Vacation pay

Under U.K. GAAP, vacation pay traditionally is not accrued.

Under U.S. GAAP, vacation pay is recognized as a liability and measured as the additional amount that the entity expects to pay as a result of unused entitlement that has accumulated at the end of the reporting period.

(e) Provisions

Under U.K. GAAP, FRS 12 - Provisions, contingent liabilities and contingent assets, a provision is defined as a liability of uncertain timing or amount to be settled by the transfer of economic benefits and a contingent liability is defined as possible obligations whose outcome will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events outside the entity’s control.

Under U.S. GAAP, ASC 450 - Contingencies, defines contingencies as existing uncertainties that may have financial impact, depending on future events. Loss contingencies are those that may result in the incurrence of a liability or the impairment of an asset. A liability is recognized for a contingent loss when: (a) the underlying causal event has occurred prior to the balance-sheet date; (b) it is probable (i.e., likely) that a loss has been incurred; and (c) there is a reasonable basis for estimating that loss.

Under U.S. GAAP, the requirements for recording provisions are more stringent than those under U.K. GAAP.

(f) Account opening bonus

Under U.K. GAAP, account opening bonuses are classified as a component of cost of sales as promotion offered is considered to be akin to a free product or service where no applicable revenue has been recorded at the time of issue.

Under U.S. GAAP, as the account opening bonuses are credited to the customer’s trading account, the bonuses are considered a form of cash payment by City Index to its customer which ASC 605-50, “Revenue Recognition - Customer Payments and Incentives”, requires to be recorded as a reduction of revenue.

 

61


Table of Contents

(g) Cash and securities held for customers

Under U.K. GAAP, monies held on behalf of clients in segregated bank accounts are not considered to represent assets of the entity, as the group is not beneficially entitled to them. Accordingly, monies held in segregated accounts on behalf of clients and the corresponding liabilities, are not recognized in the balance sheet.

Under U.S. GAAP, cash and securities held for customers to fund customer liabilities in connection with trading positions are recognized gross with a corresponding liability.

 

62


Table of Contents

During 2014, the Company changed the presentation of certain expense items from the presentation in its 2013 Annual Report on Form 10-K to the current format, first used in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014. The retrospective effect of the changes on prior periods is as follows:

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2013

(in thousands)

 

    

 

   

 

   

 

 
     As Reported     Presentation
Adjustments
    2013 Adjusted  

REVENUE:

      

Trading revenue

   $ 205,133      $      $ 205,133   

Commission revenue

     60,727               60,727   

Other revenue

     1,099               1,099   
  

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     266,959               266,959   

Interest revenue

     821               821   

Interest expense

     1,389        (1,233     156   
  

 

 

   

 

 

   

 

 

 

Total net interest (expense) / revenue

     (568     1,233        665   
  

 

 

   

 

 

   

 

 

 

Net revenue

     266,391        1,233        267,624   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Employee compensation and benefits

     67,134        7,051        74,185   

Selling and marketing

     22,337               22,337   

Referral fees

            52,503        52,503   

Trading expenses and commissions

     77,718        (59,554     18,164   

General and administrative

     26,813               26,813   

Depreciation and amortization

     7,768               7,768   

Purchased intangible amortization

     2,906               2,906   

Communications and technology

     11,315               11,315   

Bad debt provision

     1,501               1,501   

Acquisition expense

     1,824               1,824   

Restructuring

     1,570               1,570   

Integration

     1,950               1,950   

Impairment of investment

     450               450   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     223,286               223,286   
  

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

     43,105        1,233        44,338   

Gain on extinguishment of debt

     2,000               2,000   

Interest expense on long term borrowings

            1,233        1,233   
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     45,105               45,105   

Income tax expense

     13,794               13,794   
  

 

 

   

 

 

   

 

 

 
NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.    $ 31,311      $      $ 31,311   
  

 

 

   

 

 

   

 

 

 

 

63


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2012

(in thousands)

 

    

 

   

 

   

 

 
     As Reported     Presentation
Adjustments
    2012 Adjusted  

REVENUE:

      

Trading revenue

   $ 127,520      $      $ 127,520   

Commission revenue

     21,373               21,373   

Other revenue

     2,331               2,331   
  

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     151,224               151,224   

Interest revenue

     627               627   

Interest expense

     491        (444     47   
  

 

 

   

 

 

   

 

 

 

Total net interest revenue

     136        444        580   
  

 

 

   

 

 

   

 

 

 

Net revenue

     151,360        444        151,804   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Employee compensation and benefits

     47,469        1,888        49,357   

Selling and marketing

     26,969               26,969   

Referral fees

            26,373        26,373   

Trading expenses and commissions

     38,047        (28,261     9,786   

General and administrative

     19,865               19,865   

Depreciation and amortization

     4,921               4,921   

Purchased intangible amortization

     4,134               4,134   

Communications and technology

     7,736               7,736   

Bad debt provision

     358               358   

Acquisition expense

     85               85   

Restructuring

     634               634   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     150,218               150,218   
  

 

 

   

 

 

   

 

 

 
OPERATING PROFIT      1,142        444        1,586   
Gain on extinguishment of debt                      
Interest expense on long term borrowings             444        444   
  

 

 

   

 

 

   

 

 

 
INCOME BEFORE INCOME TAX EXPENSE      1,142               1,142   
Income tax benefit      (1,479            (1,479
  

 

 

   

 

 

   

 

 

 
NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.    $ 2,621      $      $ 2,621   
  

 

 

   

 

 

   

 

 

 

 

64


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011

(in thousands)

 

    

 

   

 

   

 

 
     As Reported     Presentation
Adjustments
    2011 Adjusted  

REVENUE:

      

Trading revenue

   $ 175,854      $      $ 175,854   

Commission revenue

     4,691               4,691   

Other revenue

     1,790               1,790   
  

 

 

   

 

 

   

 

 

 

Total non-interest revenue

     182,335               182,335   

Interest revenue

     544               544   

Interest expense

     1,414        (543     871   
  

 

 

   

 

 

   

 

 

 

Total net interest (expense) / revenue

     (870     543        (327
  

 

 

   

 

 

   

 

 

 

Net revenue

     181,465        543        182,008   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Employee compensation and benefits

     46,362        389        46,751   

Selling and marketing

     36,195               36,195   

Referral fees

            27,961        27,961   

Trading expenses and commissions

     33,040        (28,350     4,690   

General and administrative

     21,842               21,842   

Depreciation and amortization

     3,898               3,898   

Purchased intangible amortization

     8,893               8,893   

Communications and technology

     7,139               7,139   

Bad debt provision

     852               852   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     158,221               158,221   
  

 

 

   

 

 

   

 

 

 
OPERATING PROFIT      23,244        543        23,787   
Interest expense on long term borrowing             543        543   
  

 

 

   

 

 

   

 

 

 
INCOME BEFORE INCOME TAX EXPENSE      23,244               23,244   
Income tax expense      7,546               7,546   
  

 

 

   

 

 

   

 

 

 
NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC.    $ 15,698      $      $ 15,698   
  

 

 

   

 

 

   

 

 

 

The Company acquired Global Futures and Forex, Ltd (“GFT”) as of September 24, 2013. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2013 includes the financial results of GFT for the period from January 1, 2013 through September 23, 2013. GFT’s financial results for the period from September 24, 2013 through December 31, 2013 are included as part of the Company’s results of operations for the year ended December 31, 2013.

 

2. The preliminary purchase price for City Index includes a cash payment of $20.0 million to be paid upon the closing of the Transaction.

 

3.

City Index records internally developed software within Property and equipment. The Company records acquired software at fair value within Intangible assets, net. A pro forma adjustment is therefore required to align the presentation by removing the carrying value of City Index internally developed software,

 

65


Table of Contents
  $13.4 million, from Property and equipment. The subsequent fair value adjustment to the software acquired, now presented in Intangible assets, net, is reflected in notes 4 and 5 below.

An additional pro forma adjustment is required to remove the depreciation and amortization associated with the internally developed software from the post acquisition period. This also occurred in connection with the GFT acquisition. The resulting adjustments are as follows:

 

     (In thousands)  
     Nine months ended
September 30, 2014
    Year ended
December 31, 2013
 

Removal of City Index depreciation and amortization

   $ (7,510   $ (9,534

Removal of GFT depreciation and amortization

            (3,723
  

 

 

   

 

 

 

Adjustment required

   $ (7,510   $ (13,257
  

 

 

   

 

 

 

 

4. The preliminary purchase price of City Index was derived as follows:

 

         (In thousands)      

Cash

   $ 20,000   

Convertible notes

     60,000   

Common Stock issued - 5,319,149 shares at January 8, 2015

     44,043   

Preliminary working capital adjustment

       
  

 

 

 

Total purchase price

   $ 124,043   
  

 

 

 

The shares included in the consideration above were assigned the Company’s common stock fair market value as of January 8, 2015, which was $9.20. We have assigned a 10% discount to the shares to account for their being unregistered in nature. Until the fair market value is fixed at the closing date, the fair market value is subject to change, due to fluctuations in the trading price of the Company’s common stock. In the last twelve months the share price has fluctuated with a high of $11.81 and a low of $6.01.

The preliminary purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. This allocation is preliminary.

 

         (In thousands)      

Cash and cash equivalents acquired

   $ 24,526   

Cash and cash equivalents held for customers acquired

     319,805   

Short term investments, at fair value

     84   

Receivable from banks and brokers

     45,295   

Property and equipment

     7,014   

Prepaid assets

     9,042   

Other current assets

     7,766   
  

 

 

 

Total assets

     413,532   
  

 

 

 

Total liabilities assumed

     368,856   
  

 

 

 

Net assets

     44,676   
  

 

 

 

Consideration less net assets

     79,367   

 

66


Table of Contents
       (In thousands)    

Identifiable intangible assets:

  

Software

   $ 25,196   

Customer relationships

     14,918   

Trade Name

     8,615   
  

 

 

 

Intangible assets, net

     48,729   
  

 

 

 

Goodwill

   $ 30,638   
  

 

 

 

The excess of the total consideration payable over the preliminary fair value of the net assets acquired was $30.6 million, which was recorded as Goodwill.

 

       (In thousands)    

Goodwill per City Index

   $ 55,056   

Goodwill acquired

     30,638   
  

 

 

 

Adjustment required

   $ (24,418
  

 

 

 

 

5. The estimated fair value of intangible assets acquired from City Index was $48.7 million, compared to the $12.6 million reported by City Index. The following pro forma adjustment is required as a result:

 

       (In thousands)    

Intangibles per City Index

   $ 12,578   

Fair value of Intangibles acquired

     48,729   
  

 

 

 

Adjustment required

   $ 36,151   
  

 

 

 

 

6. The preliminary purchase price includes a $60.0 million convertible note, which has both equity and liability components, making it a hybrid instrument. If the Company were to issue at par a $60 million note without a convertible feature, the interest rate would be higher than the convertible note’s coupon rate. The difference between these rates is deemed to be the value of the convertible note’s equity component. The split between liability and equity is shown below:

 

       (In thousands)    

Convertible note (liabilities section)

   $ 50,571   

Additional paid in capital

     9,429   
  

 

 

 

Total face value

   $ 60,000   
  

 

 

 

 

7. The preliminary purchase price for City Index included $44.0 million of share capital and $60.0 million of convertible notes. The convertible notes include an equity component as described in note 6 above. In addition, an adjustment is required to eliminate the City Index Additional paid-in capital balance on consolidation in accordance with the applicable accounting principles under U.S. GAAP. The aggregate pro forma adjustment is reflected below:

 

       (In thousands)    

Convertible note - equity component

   $ 9,429   

Elimination of City Index Additional paid-in capital

     (239,231

Common stock issued as part of purchase price

     44,043   
  

 

 

 

Pro forma adjustment

   $ (185,759
  

 

 

 

 

67


Table of Contents

City Index retained earnings pre-acquisition are eliminated. In addition, an adjustment is required to accrue for additional Acquisition expenses that are not yet reflected in the historical financial statements:

 

       (In thousands)    

City Index pre-acquisition retained earnings

   $ 162,371   

Acquisition expenses

     2,343   
  

 

 

 

Pro forma adjustment

   $ 160,028   
  

 

 

 

In addition to the adjustments above, all other City Index equity is eliminated in the pro forma financial statements.

 

8. City Index and GFT generate Trading revenue from contractual arrangements with the Company. The Company records the corresponding expense in Referral fees. These contractual arrangements existed prior to the acquisition of each company, therefore a pro forma adjustment is required to eliminate these pre-acquisition amounts:

 

     (in thousands)  
     Nine months ended
September 30, 2014
     Year ended
December 31, 2013
 

GFT

   $       $ 1,217   

City Index

     288         536   
  

 

 

    

 

 

 

Total Trading Revenue

   $ 288       $ 1,753   
  

 

 

    

 

 

 

 

9. The following tables set forth the amortization of purchased intangible assets acquired as part of the Company’s acquisitions of City Index and GFT in 2014 and 2013. These intangible assets are being amortized on a straight-line basis over their estimated useful lives.

 

        (in thousands)  
        Nine months ended
September 30, 2014
 
   

Life

(in years)

  Pro Forma Purchased Intangible
Amortization
 

Intangible asset amortization - GFT

   

Technology

  10   $ 1,892   

Customer list

  5     471   
   

 

 

 

Total - GFT

      2,363   
   

 

 

 
   

Intangible asset amortization - City Index

   

City Index Software

  10     1,882   

City Index Brand

  10     643   

FX Solutions Software

  5     5   

FX Solutions Brand

  5     16   

Customer List

  10     1,119   
   

 

 

 

Total - City

      3,665   
   

 

 

 
   
   

 

 

 
Insignificant acquisitions and non acquisition intangibles       2,478   
   

 

 

 
   
   

 

 

 
Total Amortization     $ 8,506   
   

 

 

 

 

68


Table of Contents
          

 

 
           Year ended December 31,
2013
 
   

Life

(in years)

     Pro Forma Purchased
Intangible Amortization
 
Intangible asset amortization - GFT     
Technology     10       $ 2,530   
Customer list     5         630   
    

 

 

 
Total - GFT        3,160   
    

 

 

 
    
Intangible asset amortization - City Index     
City Index Software     10         2,509   
City Index Brand     10         858   
FX Solutions Software     5         21   
FX Solutions Brand     5         7   
Customer List     10         1,492   
    

 

 

 
Total - City      $ 4,887   
    

 

 

 
    
    

 

 

 
Insignificant acquisitions and non acquisition intangibles        2,040   
    

 

 

 
    
    

 

 

 
Total Amortization      $ 10,087   
    

 

 

 

As noted above, the pro forma purchased intangible amortization charges for the nine months ended September 30, 2014 and year ended December 31, 2013 are $8.5 million and $10.1 million respectively. The following pro forma adjustment is required as a result:

 

     (In thousands)  
     Nine months ended
September 30, 2014
     Year ended
December 31, 2013
 

Purchased intangible amortization required

   $ 8,506       $ 10,087   
Remove purchased intangible amortization recorded by GAIN      (4,841      (2,906
  

 

 

    

 

 

 

Adjustment required

   $ 3,665       $ 7,181   
  

 

 

    

 

 

 

 

10. Acquisition expenses incurred that relate to the GFT and City Index acquisitions are removed for the purposes of the unaudited pro forma condensed statement of operations for the periods indicated. A pro forma adjustment is made to Accrued expenses and other liabilities to reflect City Index acquisition expenses that are expected to be paid after the Transaction closes.

 

11. The convertible notes bear interest at 4.125% per annum. The pro forma information presented for the nine months ended September 30, 2014 and the year ended December 31, 2013, reflects interest expense adjustments of $3.1 million and $4.1 million, respectively, relating to the convertible notes. In addition, the Company has assumed that none of the notes were converted to equity, nor are they currently dilutive.

 

12. All pro forma adjustments have been tax affected at the statutory tax rate of 37.5% for the year ended December 31, 2013 and the nine months ended September 30, 2014. The resultant pro forma tax charge is not representative of the expected future tax charge applicable to the combined company as it does not contemplate the utilization of tax losses from GFT and City Index and the tax charges for GFT and City Index include certain non-deductible expense items which have resulted in such companies’ having tax charges for these periods notwithstanding their generation of pre-tax losses.

 

69


Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Persons That Beneficially Own More Than 5% of Our Voting Securities

The following table shows, as of the Record Date, the persons that are known to the Company to be the beneficial owners of more than 5% of our Common Stock, which is the only class of voting stock we have outstanding. Each share of our Common Stock is entitled to one vote. As of the Record Date, there were 43,088,234 shares of Common Stock outstanding (not including 2,596,175 shares held by the Company as treasury stock). The table is based on information available to us, including stockholder filings with the SEC under Section 13 of the Exchange Act.

 

Name of Beneficial Owner

   Amount and Nature
of Beneficial
Ownership
       Percent of Class    

VantagePoint Capital Partners Entities(1)

     9,119,690         21.8

Rima Senvest Management, LLC(2)

     3,838,865         9.2

Gary L. Tilkin(3)

     3,625,721         8.7

3i Entities(4)

     2,299,761         5.5

 

(1) Includes (i) 6,576,911 shares of Common Stock held by VantagePoint Venture Partners IV (Q), L.P., (ii) 658,417 shares of Common Stock held by VantagePoint Venture Partners IV, L.P., (iii) 23,956 shares of Common Stock held by VantagePoint Venture Partners IV Principals Fund, L.P., and (iv) 1,814,824 shares of Common Stock held by VP New York Venture Partners, L.P., as reported on a Schedule 13G filed on February 11, 2011, and 45,581 restricted stock units granted to Mr. Bevilacqua as director compensation, of which 44,325 have vested and 1,256 will vest in the next sixty days. VantagePoint Venture Associates IV, L.L.C. is the general partner of these VantagePoint limited partnerships and may be deemed to have beneficial ownership of these shares. Alan E. Salzman, Managing Member of VantagePoint Venture Associates IV, L.L.C., may be deemed to beneficially own the shares. Mr. Bevilacqua disclaims beneficial ownership of all shares beneficially owned by entities affiliated with VantagePoint Capital Partners, except to the extent of his pecuniary interests therein. The address of VantagePoint Capital Partners, Mr. Bevilacqua, and Mr. Salzman is 1001 Bayhill Drive, Suite 300, San Bruno, California 94066.
(2) Amounts shown were reported in a Schedule 13G/A filed by Rima Senvest Management, LLC, Richard Mashaal and Senvest Master Fund, L.P. on February 13, 2014. According to that Schedule 13G/A, (i) Rima Senvest Management, LLC and Mr. Mashaal each have shared voting and dispositive power with respect to 3,838,865 shares of Common Stock and (ii) Senvest Master Fund, L.P. has shared voting and dispositive power with respect to 2,897,296 shares. The address for Rima Senvest Management, LLC and Mr. Mashaal is 110 East 55th Street, New York, NY 10022. The address for Senvest Master Fund, L.P. is Gardenia Court, Suite 3307, 45 Market Street, Camana Bay, Grand Cayman KY1-1103, Cayman Islands.
(3) Amounts shown were reported in a Schedule 13G filed by Mr. Tilkin on October 4, 2013. The address of Mr. Tilkin is 618 Kenmoor SE, Grand Rapids, MI 49546.
(4) Amounts shown were reported on a Schedule13G/A filed on May 7, 2014 and reflect the aggregate number of shares of Common Stock held by 3i Corporation, 3i U.S. Growth Corporation and 3i Investments plc. According to that Schedule 13G/A, (i) 3i Corporation is the manager of each of 3i U.S. Growth Partners L.P. (“Growth Partners”), 3i Growth Capital (USA) D L.P. (“Growth Capital D”), 3i Growth Capital (USA) E L.P. (“Growth Capital E”) and 3i Growth Capital (USA) P L.P. (“Growth Capital P” and, together with “Growth Partners, Growth Capital D and Growth Capital E, the “Growth Funds”); (ii) 3i U.S. Growth Corporation is the general partner of the Growth Funds; and (iii) 3i Investments plc is the manager of Mayflower L.P. (“Mayflower”). The Growth Funds and Mayflower directly own the shares of Common Stock. 3i Corporation and 3i U.S. Growth Corporation have investment authority over the shares held by the Growth Funds. 3i Investments plc has investment authority over the shares held by Mayflower. The address of 3i Corporation and 3i U.S. Growth Corporation is 400 Madison Avenue, 9th Floor, New York, N.Y. 10017. The address for 3i Investments plc is 16 Palace Street, London SW1E 5JD UK.

 

70


Table of Contents

Ownership of Our Common Stock By Directors and Executive Officers

The following table shows, as of the Record Date, the beneficial ownership of our Common Stock by our directors, our executive officers and all of our directors and executive officers as a group. None of the shares listed below has been pledged as security except as specifically described in the footnotes to this table. Unless otherwise stated in the footnotes to the table below, the business address of each person listed is c/o GAIN Capital Holdings, Inc., Bedminster One, 135 U.S. Highway 202/206, Bedminster, New Jersey 07921.

 

Name of Beneficial Owner

   Amount and Nature of
Beneficial Ownership
     Percent of Class(1)

Christopher S. Sugden(2)

     91,170       *

Christopher W. Calhoun(3)

     104,671       *

Joseph Schenk(4)

     127,214       *

Peter Quick(5)

     120,106       *

Thomas Bevilacqua(6)

     46,655       *

Glenn H. Stevens(7)

     1,578,666         3.6%

Jason E. Emerson(8)

     12,322       *

Diego A. Rotsztain(9)

     82,781       *

Jeffrey A. Scott(10)

     113,826       *

Samantha Roady(11)

     363,268       *

All directors and executive officers as a group (10 persons)

     2,868,202         6.7%

 

* Less than 1%.

 

(1) Calculated based on 43,088,234 shares of Common Stock outstanding as of the Record Date, (not including 2,596,175 shares held by the Company as treasury stock).
(2) Includes 45,581 restricted stock units granted to Mr. Sugden as director compensation, of which 44,325 have vested and 1,256 will vest in the next sixty days.
(3) Includes (i) 6,454 restricted stock units granted to Mr. Calhoun as director compensation, of which 5,198 have vested and 1,256 will vest in the next sixty days, and (ii) 98,217 vested restricted stock units under which shares are to be delivered as soon as administratively practicable on or after December 31, 2014.
(4) Includes (i) 45,581 restricted stock units granted to Mr. Schenk as director compensation, of which 44,325 have vested and 1,256 will vest in the next sixty days, (ii) 52,023 options vested, and (iii) 10,910 shares delivered pursuant to vested restricted stock units under which delivery had been deferred until as soon as administratively practicable after December 31, 2014.
(5) Includes (i) 45,581 restricted stock units granted to Mr. Quick as director compensation, of which 44,325 have vested and 1,256 will vest in the next sixty days, (ii) 52,023 options vested, and (iii) 22,502 shares delivered pursuant to vested restricted stock units under which delivery had been deferred until as soon as administratively practicable after December 31, 2014.
(6) Includes 45,581 restricted stock units granted to Mr. Bevilacqua as director compensation, of which 44,325 have vested and 1,256 will vest in the next sixty days. VantagePoint Venture Associates IV, L.L.C. has voting and investment control over these shares. Mr. Bevilacqua disclaims beneficial ownership of the reported securities except to the extent of his pecuniary interest therein.
(7) Includes (i) 377,241 shares of Common Stock, (ii) 610,386 options, of which 496,745 have vested and 113,641 will vest in the next sixty days, (iii) 10,750 restricted stock awards, (iv) 73,582 unvested restricted stock units that will vest in the next sixty days and (v) 506,707 shares delivered pursuant to vested restricted stock units under which delivery had been deferred until as soon as administratively practicable after December 31, 2014.
(8) Mr. Emerson joined the Company in September 2013 and was granted 29,748 restricted stock units and 19,538 stock options on March 5, 2014. These restricted stock units and stock options vest at a rate of 25% annually starting on the first anniversary of the initial grant date. Consequently, the number reported in the table above Includes (i) 4,885 options that will vest in the next sixty days and (ii) 7,437 restricted stock units that will vest in the next sixty days.

 

71


Table of Contents
(9) Includes (i) 16,653 shares of Common Stock, (ii) 33,753 unvested options that will vest in the next sixty days, (iii) 5,845 restricted stock awards and (iv) 26,530 unvested restricted stock units that will vest in the next sixty days.
(10) Includes (i) 6,250 shares of Common Stock, (ii) 82,300 options, of which 45,000 have vested and 37,300 will vest in the next sixty days, (iii) 5,000 restricted stock awards and (iv) 20,275 unvested restricted stock units that will vest in the next sixty days.
(11) Includes (i) 101,803 shares of Common Stock, (ii) 152,688 options, of which 121,718 have vested and 30,970 will vest in the next sixty days, (iii) 3,000 restricted stock awards, (iv) 16,647 unvested restricted stock units that will vest in the next sixty days and (v) 89,130 shares delivered pursuant to vested restricted stock units under which delivery had been deferred until as soon as administratively practicable after December 31, 2014.

TRANSACTIONS WITH RELATED PERSONS AND CERTAIN CONTROL PERSONS

Transactions With Related Persons

Since January 1, 2013, we have not entered into any transactions with related persons, nor are there any currently proposed transactions with related persons, involving more than $120,000.

Review of Related Person Transactions

Our Board has adopted a written Code of Business Conduct and Ethics, under which our employees and officers are discouraged from entering into any transaction that may cause a conflict of interest for us. In addition to the Code of Business Conduct and Ethics, our Board has adopted a Related Person Transaction Policy in order to assist the Board in reviewing, approving and ratifying related person transactions and to assist the Company in complying with its disclosure obligations. Under the Related Person Transaction Policy, any transaction involving the Company in which a related person has a direct or indirect material interest must be approved or ratified by the Board. In approving or rejecting such proposed transactions, the Board considers the facts and circumstances that are available and deemed relevant, including the material terms of the transactions, risks, benefits, costs, availability of other comparable services or products and, if applicable, the impact on a director’s independence. Our Board will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Board determines in the good-faith exercise of its discretion. Copies of each of the Code of Business Conduct and Ethics and the Related Person Transaction Policy are posted in the “Investor Relations” section of our website (ir.gaincapital.com) under the “Governance” tab.

STOCKHOLDER PROPOSALS FOR THE 2015 ANNUAL MEETING

We will hold a regular annual meeting of stockholders in 2015 regardless of whether the Acquisition is completed.

Any stockholder proposal submitted to us pursuant to SEC Rule 14a-8 under the Exchange Act for inclusion in the proxy statement and proxy relating to our 2015 annual meeting must be received by us no later than the close of business on December 31, 2014. If we do not receive notice of any non-Rule 14a-8 matter that a stockholder wishes to raise at the annual meeting in 2015 by March 16, 2015, the proxy holders will retain discretionary authority to vote proxies on any such matter if it is raised at the 2015 annual meeting.

In order for a stockholder to nominate a person for election to the Board or bring other business before the 2015 annual meeting of stockholders, the stockholder must comply with the advance notice provisions of our By-laws, which require, among other things, that the stockholder deliver written notice to the Secretary at the principal executive offices of the corporation no earlier than February 25, 2015 and no later than March 27, 2015.

COMMUNICATIONS WITH THE BOARD

Stockholders and other parties interested in communicating directly with the Board as a group or with our independent directors may do so by writing to the Board of Directors, c/o Secretary, Bedminster One, 135 U.S.

 

72


Table of Contents

Highway 202/206, Bedminster, New Jersey 07921. The Secretary will review all correspondence and regularly forward to the Board or independent directors, as applicable, all such correspondence that, in the opinion of the Secretary, deals with the functions of the Board or committees thereof or that the Secretary otherwise determines requires attention. Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Chairman of the Audit Committee. We have adopted a Whistleblower Policy in our Code of Business Conduct and Ethics, which establishes procedures for submitting these types of concerns, either personally or anonymously through a toll-free telephone “hotline” operated by an independent third party. All communications through our Whistleblower Policy are sent to Peter Quick, the Chairman of our Board of Directors and Joseph Schenk, the Chairman of our Audit Committee. A copy of our Code of Business Conduct and Ethics, which contains our Whistleblower Policy, is available in the “Investor Relations” section of our website (ir.gaincapital.com) under the “Governance” tab.

SOLICITATION OF PROXIES

The Company will bear the costs of solicitation of proxies for the Meeting, including preparation, assembly, printing and mailing of this Proxy Statement, the proxy card and any additional information furnished to stockholders. Copies of this Proxy Statement, the proxy card and any additional information will be furnished to banks, brokerage firms, fiduciaries and custodians holding shares of Common Stock beneficially owned by others to forward to such beneficial owners. We may reimburse persons representing beneficial owners of Common Stock for their costs of forwarding solicitation material to such beneficial owners. No additional compensation will be paid to our directors, officers or other employees in connection with the Meeting.

OTHER MATTERS

The Board currently knows of no other business to be presented for consideration at the Meeting. If any other matters properly come before the Meeting, the proxies will be voted on such matters in accordance with the judgment of the persons named as proxies therein, or their substitutes, present and acting at the Meeting.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy such material at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing to the Public Reference Room of the SEC, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also find the Company’s SEC filings at the SEC’s website at http://www.sec.gov. You may also obtain copies of this Proxy Statement and any other reports or information that we file with the SEC, free of charge, by written request to our Secretary at our offices at Bedminster One, 135 U.S. Highway 202/206, Bedminster, New Jersey 07921 or by calling (908) 731-0700.

Our website is http://www.gaincapital.com. The information contained on our website is not incorporated into this Proxy Statement. The following documents are posted on our website, and can also be obtained from us by written request to our Secretary at our offices at Bedminster One, 135 U.S. Highway 202/206, Bedminster, New Jersey 07921 or by calling (908) 731-0700:

 

    Our Insider Trading Policy;

 

    Our Disclosure Policy;

 

    Our Corporate Governance Guidelines;

 

    Our Code of Business Conduct and Ethics;

 

    Our Related Personal Transaction Policy; and

 

    The charters of each of our standing Board committees.

 

73


Table of Contents

INCORPORATION BY REFERENCE

The SEC allows us to “incorporate by reference” into this Proxy Statement documents we file with the SEC, meaning that we are disclosing important information to you by referring you to another document filed separately with the SEC. The information that we incorporate by reference is considered to be a part of this Proxy Statement, and later information that we file with the SEC will update and supersede that information. We will not, however, incorporate by reference any documents or portions thereof that are not deemed “filed” with the SEC, including any information furnished pursuant to Item 2.02 or Item 7.01 of our current reports on Form 8-K unless, and except to the extent, specified in such current reports. This Proxy Statement incorporates by reference the documents set forth below that have been previously filed with the SEC:

 

    Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014;

 

    Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed with the SEC on May 12, 2014;

 

    Amended Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed with the SEC on August 11, 2014;

 

    Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 11, 2014;

 

    Current Report on Form 8-K filed with the SEC on October 31, 2014;

 

    Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 10, 2014;

 

    Current Report on Form 8-K filed with the SEC on December 12, 2014; and

 

    Amended Current Report on Form 8-K filed with the SEC on January 12, 2015.

We also incorporate by reference into this Proxy Statement additional documents that we may file with the SEC from the date of this Proxy Statement to the date of the Meeting. These include reports such as quarterly reports on Form 10-Q and current reports on Form 8-K.

A copy of all documents incorporated into this Proxy Statement by reference will be provided, without charge, upon written or oral request, by first class mail and within one business day of our receipt of such request. Requests for such documents should be directed to our Secretary at GAIN Capital Holdings, Inc., Attention: Secretary, Bedminster One, 135 U.S. Highway 202/206, Bedminster, New Jersey 07921 or by calling (908) 731-0700.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GAIN CAPITAL HOLDINGS, INC.

 

74


Table of Contents

City Index (Holdings) Limited Consolidated Financial Statements for the Three Years

Ended 31 March 2014

Independent Auditor’s Report

Board of Directors

City Index (Holdings) Limited

London, United Kingdom

We have audited the accompanying consolidated financial statements of City Index (Holdings) Limited and its subsidiaries, which comprise the consolidated balance sheet as at 31 March 2014, and the related consolidated profit and loss account, statement of total recognised gains and losses, reconciliation of movement in shareholders’ funds, and cash flows for the year ended 31 March 2014, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United Kingdom generally accepted accounting practice; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City Index (Holdings) Limited and its subsidiaries as at 31 March 2014, and the results of their operations and their cash flows for the year ended 31 March 2014 in accordance with United Kingdom generally accepted accounting practice.

Emphasis of Matter

United Kingdom generally accepted accounting practice varies in certain significant respects from accounting principles generally accepted in the United States of America. We have audited the information relating to the nature and effect of such differences on shareholders’ equity as at 31 March 2014 and 2013 and net income and cash flows for each of the two years then ended is disclosed in Note 28 to the consolidated financial statements. We were not engaged to audit, review or apply procedures to the 2013 consolidated financial statements prepared in accordance with United Kingdom generally accepted accounting practice taken as a whole and accordingly we do not express an opinion on the 2013 consolidated financial statements.

/s/ BDO LLP

London, United Kingdom

9 January 2015

 

                            

City Index (Holdings) Limited

     Page        F-1         


Table of Contents

Independent Auditor’s Report

Board of Directors

City Index (Holdings) Limited

London, United Kingdom

We have audited the accompanying consolidated financial statements of City Index (Holdings) Limited and its subsidiaries (the “Group”), which comprise the Consolidated Balance Sheet as at March 31, 2013, and the related Consolidated Profit and Loss Accounts, the Consolidated Statements of Total Recognised Gains and Losses, the Consolidated Reconciliations of Movement in Shareholders’ Funds, and the Consolidated Cash Flow Statements for the years ended March 31, 2013 and 2012 and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United Kingdom; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City Index (Holdings) Limited and its subsidiaries as at March 31, 2013, and the results of their operations and their cash flows for the years ended March 31, 2013 and 2012, in accordance with accounting principles generally accepted in the United Kingdom.

Emphasis of Matter

As discussed in Note 3 to the consolidated financial statements, the Group prepared its 2013 and 2012 consolidated financial statements in accordance with accounting principles generally accepted in the United Kingdom, which differ from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences as at 31 March 2013, and for the year ended 31 March 2013 is presented in Note 28 to the consolidated financial statements. We were not engaged to audit, review, or apply any procedures to the information in Note 28 to the consolidated financial statements related to the nature and effect of differences between accounting principles generally accepted in the United Kingdom and accounting principles generally accepted in the United States of America and, accordingly, we do not express an opinion or any other form of assurance about such information. This information was audited by other auditors. Our opinion is not modified with respect to this matter.

/s/ DELOITTE LLP

London, United Kingdom

9 January, 2015

 

                            

City Index (Holdings) Limited

     Page        F-2         


Table of Contents

Consolidated Profit and Loss Accounts

 

(in thousands of £)        For the year ended 31 March  
      Notes      2014      2013      2012  

Trading Revenue

       68,511         94,620         107,190   

Net finance income

  4      17,173         14,587         11,076   

Total operating income

       85,684         109,207         118,266   

Cost of Sales

       29,653         39,753         36,387   

Net operating income

       56,031         69,454         81,879   

Administrative expenses

       71,693         85,519         88,974   

Impairment of goodwill and intangibles

  10      28,300         -         -   

Impairment of tangible fixed assets

 

  11

 

    

 

706

 

  

 

    

 

-

 

  

 

    

 

-

 

  

 

Operating loss

               (44,668)                 (16,065)                 (7,095)   

Interest income

  7      651         729         985   

Interest expense

  8      (1,097)         (283)         (91)   

Dividend received

       26         32         25   

Loss on ordinary activities before taxation

       (45,088)         (15,587)         (6,176)   

Tax on loss on ordinary activities

 

  9

 

    

 

(693)

 

  

 

    

 

(659)

 

  

 

    

 

(105)

 

  

 

Loss for the financial year

       (45,781)         (16,246)         (6,281)   

All financial results are derived from continuing operations in the current and preceding years.

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

                            

City Index (Holdings) Limited

     Page        F-3         


Table of Contents

Consolidated Statements of Total Recognised Gains and Losses

 

                          
(in thousands of £)        For the year ended 31 March  
        Note                2014                      2013                      2012          

Loss for the financial year

       (45,781)         (16,246)         (6,281)   
Currency translation (losses)/profits on other net assets held in foreign subsidiaries        (1,628)         1,892         (7)   

Currency translation (losses)/profits - intangible assets

  10      (4,377)         2,915         109   

Total recognised losses for the year

       (51,786)         (11,439)         (6,179)   

The accompanying notes are an integral part of these Consolidated Financial Statements

 

 

                            

City Index (Holdings) Limited

     Page        F-4         


Table of Contents

Consolidated Balance Sheets

 

(in thousands of £)                  
        

As at 31 March

 

 
      Notes      2014      2013  

Fixed assets

       

Intangible assets

  10      17,174         63,409   

Tangible fixed assets

  11      12,791         11,765   
    

 

 

    

 

 

 
       29,965         75,174   
    

 

 

    

 

 

 

Current assets

       

Deferred tax assets

  9      -         115   

Financial assets available-for-sale

  12      52         52   

Trade debtors

  13      29,898         25,046   

Prepayments and other debtors

  14      7,572         7,776   

Cash at bank and in hand

  15      39,870         60,458   
    

 

 

    

 

 

 
       77,392         93,447   
    

 

 

    

 

 

 

Creditors: Amounts due in less than one year

       

Trade creditors

  16      22,527         26,908   

Other creditors

  17      10,388         14,180   

Current tax liabilities

       -         4   

Loans payable

  18      16,634         23,000   

Provisions for liabilities and charges

  19      1,722         2,657   
    

 

 

    

 

 

 
       51,271         66,749   
    

 

 

    

 

 

 

 

    

 

 

    

 

 

 

NET CURRENT ASSETS

       26,121         26,698   

 

    

 

 

    

 

 

 

NET ASSETS

       56,086         101,872   

Capital and reserves

       

Ordinary share capital

  20      78         78   

Preference shares

  21      76,638         70,638   

Share premium

       70,934         70,934   

Foreign exchange reserve

       21,054         27,059   

Accumulated Deficit

       (112,618)         (66,837)   

 

    

 

 

    

 

 

 

TOTAL EQUITY

               56,086                 101,872   

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

                            

City Index (Holdings) Limited

     Page        F-5         


Table of Contents

Consolidated Reconciliations of Movements in Shareholders’ Funds

 

(in thousands of £)                                        

 

          Ordinary
share
capital
        Preference
shares
    Share
    premium
    Foreign
 exchange
reserve
     Accumulated
deficit
        Total equity  

Balance at 1 April 2012

      78        60,638        70,934        22,252        (50,591)        103,311   
Foreign exchange translation gains       -           -           -           1,892        -            1,892   
Foreign exchange translation gains - intangible assets (see Note 10)       -           -           -           2,915        -            2,915   

Issue of preference shares

      -           10,000        -           -           -            10,000   

Loss for the financial year

      -           -           -           -           (16,246)        (16,246)   

Balance at 31 March 2013

      78        70,638        70,934        27,059        (66,837)        101,872   
Foreign exchange translation losses       -           -           -           (1,628)        -            (1,628)   
Foreign exchange translation losses - intangible assets (see Note 10)       -           -           -           (4,377)        -            (4,377)   

Issue of preference shares

      -           6,000        -           -           -            6,000   

Loss for the financial year

      -           -           -           -           (45,781)        (45,781)   

Balance at 31 March 2014

      78        76,638        70,934        21,054        (112,618)        56,086   

The share premium reserve represents the difference between the nominal value of the shares issued and the consideration received.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

                            

City Index (Holdings) Limited

     Page        F-6         


Table of Contents

Consolidated Cash Flow Statement

 

(in thousands of £)           
        

For the year ended 31 March

 

 
        Notes              2014                  2013                  2012        
Net cash (outflow)/ inflow from operating activities   23      (11,546)         (32,740)         17,190   
Returns on investments and servicing of finance           
Interest income   7      651         729         985   
Interest paid        (274)         (283)         (91)   
Dividend received        26         32         25   
       403         478         919   
Tax (paid)/received        (385)         (659)         1,687   
Capital expenditure and financial investment           
Purchase of tangible fixed assets   11      (6,361)         (5,795)         (3,206)   
       (6,361)         (5,795)         (3,206)   

 

    

 

 

    

 

 

    

 

 

 

Net cash (outflow)/inflow before financing

       (17,889)         (38,716)         16,590   
Financing           
Loans repaid - other        -         -         (5,250)   
Loans (repaid)/received - ultimate parent undertakings   18      (1,189)         23,000         -   
Preference shares issued   21      -         10,000         -   
       (1,189)         33,000         (5,250)   

 

    

 

 

    

 

 

    

 

 

 

(Decrease)/increase in cash at bank and in hand in the year

               (19,078)                 (5,716)                 11,340   

The reconciliation of net funds is detailed in note 22 to the Consolidated Financial Statements.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

                            

City Index (Holdings) Limited

     Page        F-7         


Table of Contents

Notes to the Consolidated Financial Statements

 

1.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The directors are responsible for preparing these consolidated financial statements for City Index (Holdings) Limited and its subsidiaries (together, the group) for the periods presented, in conformity with United Kingdom generally accepted accounting practice (UK GAAP).

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the group, and for identifying and ensuring that the group complies with the law and regulations applicable to their activities. They are also responsible for safeguarding the assets of the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors confirm that suitable accounting policies have been used and applied consistently for the periods presented. They also confirm that reasonable and prudent judgements and estimates have been made in preparing the consolidated financial statements, that applicable accounting standards have been followed and that it is appropriate to prepare the financial statements on the going concern basis.

These consolidated financial statements of City Index (Holdings) Limited as at 31 March, 2014 and 2013 and for each of the three years ended 31 March 2014 were approved by the Board of Directors and authorised for issue on 9 January 2015.

 

2.

ORGANISATION

City Index (Holdings) Limited (the “Company” or “CIHL”) is a private limited liability company incorporated in England and Wales under the United Kingdom’s Companies Act and is the parent for a group of companies incorporated in a number of jurisdictions (collectively, the “Group”).

The immediate parent company is City Index Group Limited (“CIGL”), a company incorporated in England and Wales, and which is the top company of the operating sub-group that the Directors consider the Company to be part of. This sub-group is generally referred to as the City Index Group. The ultimate parent company and controlling party is IPGL Limited (“IPGL”), which is the largest group that prepares financial statements into which the Company is consolidated.

These consolidated financial statements do not constitute the statutory consolidated financial statements of the Group. Copies of the consolidated statutory financial statements can be obtained from the Register at Companies House in the United Kingdom.

The Group’s business activities, during the years were the provision of market-making and spread-trading services in a variety of financial products and markets. The product offerings currently include spread-trading on equities, equity indices, precious and base metals, soft commodities, exchange rates, interest rates, exchange traded futures and options on equities, equity indices, precious and base metals, soft commodities, exchange rates, interest rates and other financial instruments. There have not been any significant changes in the Group’s principal activities in the years under review.

 

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The Financial Statements of the Group are prepared in accordance with the historical cost basis, except for the revaluation of certain financial instruments as described below, and in accordance with applicable United Kingdom accounting standards. The principal accounting policies applied in the preparation of