Our exposure to legal liability is significant, and damages that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses.  We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing.  These risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, potential liability for “fairness opinions” and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of trading arrangements.  We are also subject to claims arising from disputes with employees for alleged discrimination or harassment, among other things.  These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As a brokerage and investment banking firm, we depend to a large extent on our reputation for integrity and high-caliber professional services to attract and retain clients.  As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses.  Moreover, our role as managing underwriter to our clients on important underwritings or as advisor for mergers and acquisitions and other transactions involves complex analysis and the exercise of professional judgment, including rendering “fairness opinions” in connection with mergers and other transactions.  Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including shareholders of our clients who could bring securities class actions against us.  Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be enforceable in all cases.  As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and adverse judgments.  Substantial legal liability or significant regulatory action against us could have a material adverse effect on our results of operations or cause significant reputational harm to us, which could seriously harm our business and prospects.

We are subject to claims and litigations in the ordinary course of our business.  For information regarding certain pending claims see Part I – Item 3 – Legal Proceedings.

Employee misconduct could harm us and is difficult to detect and deter.  There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at our Company.  For example, misconduct by employees could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm.  It is not always possible to deter employee misconduct and the precautions we take to detect and prevent this activity may not be effective in all cases, and we may suffer significant reputational harm for any misconduct by our employees.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties

The Company currently leases all of its office space.  The Company’s lease for its headquarters in New York, New York (approximately 36,000 square foot facility) expires on October 31, 2008. The Company is currently in the process of evaluating its lease alternatives in New York City.

A list of office locations as of December 31, 2007 by segment is as follows:

Equities, Fixed Income & Other	New York, NY
Equities & Fixed Income	Los Angeles, CA
Equities	Boston, MA
	Dallas, TX
	Denver, CO
	Evanston, IL
	Houston, TX
	Minneapolis, MN
	St. Louis, MO
	San Francisco, CA
Other	Albany, NY

Item 3.  Legal Proceedings

In 1998, the Company was named in lawsuits by Lawrence Group, Inc. and certain related entities (the “Lawrence Parties”) in connection with a private sale of Mechanical Technology Inc. stock from the Lawrence Parties that was previously approved by the United States Bankruptcy Court for the Northern District of New York (the “Bankruptcy Court”).  The Company acted as placement agent in that sale, and a number of persons who were employees and officers of the Company at that time, who have also been named as defendants, purchased shares in the sale.  The complaints alleged that the defendants did not disclose certain information to the sellers and that the price approved by the court was therefore not proper. The cases were initially filed in the Bankruptcy Court and the United States District Court for the Northern District of New York (the “District Court”), and were subsequently consolidated in the District Court.  The District Court dismissed the cases, and that decision was subsequently vacated by the United States Court of Appeals for the Second Circuit, which remanded the cases for consideration of the plaintiffs' claims as motions to modify the Bankruptcy Court sale order.  The plaintiffs' claims have now been referred back to the Bankruptcy Court for such consideration.  Discovery is currently underway.  The Company believes that it has strong defenses and intends to vigorously defend itself against the plaintiffs' claims, and believes that the claims lack merit.  However, an unfavorable resolution could have a material adverse effect on the Company’s financial position, results of operations and cash flows in the period resolved.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

In early 2008, Broadpoint Capital hired Tim O’Connor, and 9 other individuals to form a new capitalization and restructuring group within Broadpoint Capital’s Investment Banking division.  Mr. O’Connor, the new Head of Broadpoint's Investment Banking Division and each of the other employees are former employees of Imperial Capital, LLC (“Imperial”).  Upon Broadpoint Capital’s hiring of these employees, Imperial commenced an arbitration proceeding against Broadpoint Capital, Mr. O’Connor, another employee hired by Broapdoint, and a former employee of Imperial who is not employed by Broadpoint  before the Financial Industry Regulatory Authority (“FINRA”).  In the arbitration, Imperial alleges various causes of action against Broadpoint Capital as well as the individuals based upon alleged violations of restrictive covenants in employee contracts relating to the non-solicitation of employees and clients.  Imperial claims damages in excess of $100 million.   Concurrently with the filing of the arbitration proceeding, Imperial sought and obtained a temporary restraining order in New York State Supreme Court, pending the conclusion of the FINRA arbitration hearing, enjoining Broadpoint from disclosing or making use of any confidential information of Imperial, recruiting or hiring any employees of Imperial and seeking or accepting as a client any client of Imperial, except those clients for whom any of the hired individuals had provided services as a registered representative while employed by Imperial. Broadpoint Capital believes that it has strong defenses to and intends to vigorously defend itself against Imperial’s claims. However, an unfavorable resolution could have a material adverse effect on the Company’s financial position, results of operations and cash flows in the period resolved.

Due to the nature of our business, we are now, and likely in the future will be, involved in a variety of legal proceedings, including the matters described above.  These include litigations, arbitrations and other proceedings initiated by private parties and arising from our underwriting, financial advisory or other transactional activities, client account activities and employment matters.  Third parties who assert claims may do so for monetary damages that are substantial, particularly relative to our financial position.  In addition, the securities industry is highly regulated.  We are subject to both routine and unscheduled regulatory examinations of our business and investigations of securities industry practices by governmental agencies and self-regulatory organizations.  In recent years securities firms have been subject to increased scrutiny and regulatory enforcement activity.  Regulatory investigations can result in substantial fines being imposed on us.  Periodically we receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory organizations.  We do not always know the purpose behind these communications or the status or target of any related investigation.  Our responses to these communications have in the past resulted in our being cited for regulatory deficiencies, although to date these communications have not had a material adverse effect on our business.

We have taken reserves in our financial statements with respect to legal proceedings to the extent we believe appropriate.  However, accurately predicting the timing and outcome of legal proceedings, including the amounts of any settlements, judgments or fines, is inherently difficult insofar as it depends on obtaining all of the relevant facts (which is sometimes not feasible) and applying to them often-complex legal principles.  Based on currently available information, we do not believe that any litigation, proceeding or other matter to which we are a party or otherwise involved will have a material adverse effect on our financial condition, results of operations and cash flows in the period resolved, although an adverse development, or an increase in associated legal fees, could be material in a particular period, depending in part on our operating results in that period.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Item 4   Submission of Matters to a Vote of Security Holders

On December 28, 2007, we held a special meeting of shareholders (1) to consider and act upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to change the name of the Company to Broadpoint Securities Group, Inc. and (2) to consider and act upon a proposal to amend the Company’s Certificate of Incorporation to permit the shareholders to act by less than unanimous written consent.  The results of the vote at the special meeting are as follows:

1. To consider and act upon a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to change the name of the Company to Broadpoint Securities Group, Inc.
For:	50,717,820
Against:	846,174
Abstain:	6,659
Broker non-votes:	0
2. To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to permit the shareholders to act by less than unanimous written consent.
For:	42,491,956
Against:	913,477
Abstain:	64,296
Broker non-votes:	8,100,924

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of

Equity Securities

The Company's common stock trades on The NASDAQ Global Market under the symbol "BPSG".  As of February 12, 2008  there were approximately 2,326 holders of record of the Company's common stock. No dividends have been declared or paid on our common stock in the last two fiscal years. We do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future. The following table sets forth the high and low bid quotations for the common stock during each quarter for the fiscal years ended.

		Quarter Ended
		Mar 31				Jun 30				Sep 30				Dec 31
2007
Stock Price Range
High		$	2.46			$	1.96			$	1.81			$	1.74
Low			1.42				1.51				1.22				0.99
2006
Stock Price Range
High		$	7.17			$	5.70			$	4.61			$	4.21
Low			5.40				3.85				3.17				1.93

Information relating to compensation plans under which our common stock is authorized for issuance will be set forth in our definitive proxy statement for our annual meeting of stockholders to be held in 2008 (to be filed within 120 days after December 31, 2007) and is incorporated by reference in Part III, Item 12.

ISSUANCE OF UNREGISTERED EQUITY SECURITIES

There were no undisclosed issuances of unregistered equity securities during 2007.

ISSUER PURCHASES OF EQUITY SECURITIES

We did not repurchase any shares of our common stock in the fourth quarter of 2007.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Item 6.  Selected Financial Data

The following selected financial data have been derived from the Consolidated Financial Statements of the Company.  This information should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein.

For the years ended December 31:		2007				2006				2005				2004				2003
(in thousands of dollars, except per share amounts)
Operating results:
Operating revenues		$	38,472			$	73,010			$	101,924			$	99,706			$	81,157
Interest income			8,639				8,295				9,750				4,931				2,421
Total revenues			47,111				81,305				111,674				104,637				83,578
Interest expense			7,027				8,417				6,423				2,289				992
Net revenues			40,084				72,888				105,251				102,348				82,586
Expenses (excluding interest)			71,709				120,329				111,201				121,247				86,277
Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principles			(31,625	)			(47,441	)			(5,950	)			(18,899	)			(3,691	)
Income tax expense (benefit)			(4,703	)			(828	)			7,512				(10,052	)			(1,125	)
Income (loss) from continuing operations			(26,922	)			(46,613	)			(13,462	)			(8,847	)			(2,566	)
Income (loss) from discontinued operations, net of taxes			7,460				2,205				3,245				5,260				13,127
Income (loss) before cumulative effect of an accounting change			(19,462	)			(44,408	)			(10,217	)			(3,587	)			10,561
Cumulative effect of accounting change, net of taxes			-				427				-				-				-
Net income (loss)		$	(19,462	)		$	(43,981	)		$	(10,217	)		$	(3,587	)		$	10,561
Basic earnings per share:																		$
Continuing operations		$	(0.98	)		$	(3.08	)		$	(0.97	)		$	(0.71	)		$	(0.24	)
Discontinued operations			0.27				0.15				0.23				0.42				1.24
Cumulative effect of an accounting change			-				0.03				-				-				-
Loss per share		$	(0.71	)		$	(2.90	)		$	(0.74	)		$	(0.29	)		$	1.00
Diluted earnings per share:
Continuing operations		$	(0.98	)		$	(3.08	)		$	(0.97	)		$	(0.71	)		$	(0.22	)
Discontinued operations			0.27				0.15				0.23				0.42				1.11
Cumulative effect of an accounting change			-				0.03				-				-				-
Loss per share		$	(0.71	)		$	(2.90	)		$	(0.74	)		$	(0.29	)		$	0.89
Cash dividend			-				-				0.05				0.20				0.20
Book Value			1.41				3.46				6.28				6.45				7.64
As of December 31:		2007				2006				2005				2004				2003
Financial condition:
Total assets		$	274,183			$	357,118			$	443,541			$	410,113			$	393,142
Short-term bank loans			-				128,525				150,075				139,875				138,500
Notes payable			-				12,667				30,027				32,228				14,422
Obligations under capitalized leases			-				3,522				5,564				3,110				3,183
Temporary capital			104				104				3,374				3,374				-
Subordinated debt			2,962				4,424				5,307				3,695				3.721
Stockholders’ equity			82,267				51,577				87,722				86,085				83.434

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Reclassification

Certain amounts in operating results for 2003 through 2006 have  been  reclassified to conform to the 2007 presentation.  Refer to the “Reclassification” section of Note 1 to the Consolidated Financial Statements for more information regarding reclassification of amounts included in discontinued operations.

Cumulative Effect of Accounting Change

Upon adoption of FASB Statement No. 123 (revised) “Share-based Compensation” as described in FASB Staff Position No. FAS 123(R)-3, Share-Based Payment on January 1, 2006, the Company recognized an after-tax gain of approximately $0.4 million as the cumulative effect of a change in accounting principle, primarily attributable to the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

There are included or incorporated by reference in this document statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are usually preceded by words such as “may,” “will”, “expect”, “anticipate”, “believe” , “estimate”, and “continue” or similar words. All statements other than historical information or current facts should be considered forward-looking statements. Forward-looking statements may contain projections regarding revenues, earnings, operations, and other financial projections, and may include statements of future performance, strategies and objectives. However, there may be events in the future, which the Company is not able to accurately predict or control which may cause actual results to differ, possibly materially, from the expectations set forth in the Company’s forward-looking statements. All forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors. Such factors include, among others, market risk, credit risk and operating risk. These and other risks are set forth in greater detail throughout this document. The Company does not intend or assume any obligation to update any forward-looking information it makes.

Business Overview

Broadpoint Securities Group, Inc., formerly First Albany Companies Inc. (the “Company”), is an independent investment bank that serves the growing institutional market and corporate middle market by providing clients with strategic, research-based investment opportunities, as well as advisory and financing services. The Company offers a diverse range of products through its Equities division, as well as Broadpoint Securities, Inc., its mortgage-backed security/asset-backed security trading subsidiary, and FA Technology Ventures Corp., its venture capital division. The Company, a New York corporation, is traded on The NASDAQ Global Market, which we refer to as NASDAQ, under the symbol “BPSG”. The Company changed its symbol from “FACT” to “BPSG” effective November 12, 2007.  The Company operates through three primary business segments: Equities, Fixed Income and Other.

 

The Company’s Equities segment is comprised of Equity Sales and Trading and Equities Investment Banking services. Equities Sales and Trading provides equity trade execution to institutional investors and generates revenues primarily through commissions and sales credits earned on executing equity transactions, trading gains and losses from market making activities and capital committed to facilitating customer transactions and fees received for equity research. Equities Investment Banking generates revenues by providing financial advisory, capital raising, mergers and acquisitions, and restructuring services to small and mid-cap companies focusing primarily on the healthcare, energy and powertech sectors of the economy.

 

The Company’s Fixed Income business consists of Fixed Income Sales and Trading and Fixed Income Investment Banking. Fixed Income Sales and Trading provides trade execution to institutional investors and generates revenues primarily through commissions and sales credits earned on executing securities transactions in the following products:

·               Mortgage-Backed and Asset-Backed Securities

·               High Grade Bonds (Investment Grade and Government Bonds)

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Fixed Income investment banking generates revenues by providing financial advisory and capital raising services in structuring asset-backed securities.

 

The Company’s Other segment includes the results from the Company’s investment portfolio, venture capital business, and costs related to corporate overhead and support.  The Company’s investment portfolio generates revenue from unrealized gains and losses as a result of changes in the value of the firm’s investments and realized gains and losses as a result of sales of equity holdings.  The Company’s venture capital business generates revenue through the management of and investment in venture capital funds.

The Company believes it has an opportunity to become one of the premier investment banking boutiques serving the middle market, which the Company believes is a largely under-served market.  The Company has taken steps to divest non-core and non-growth businesses and will focus on growing its middle market position by broadening its product line through growth and investments in key personnel.

In the second quarter of 2006, the Company ceased operations in its Taxable Fixed Income division due to a changing business environment and continued revenue declines.  In the third quarter of 2006, the Company determined that it would dispose of its Institutional Convertible Bond Arbitrage Advisory Group due to a continued decline in assets under management.  In April 2007, the Company ceased operations of the Institutional Convertible Bond Arbitrage Advisory Group and currently expects that any ongoing costs related to the shutdown will be immaterial.  In the second quarter of 2007, the Company discontinued operations in its Fixed Income Middle Markets Group following the departure of the employees from that group.  In the third quarter of 2007 the Company completed the sale of its Municipal Capital Markets division to DEPFA BANK plc, an Irish public limited company.

On September 21, 2007, the Company closed the investment from MatlinPatterson in which the Company received net proceeds from the sale of the Company’s common stock of $45.8 million.  Pursuant to the Investment Agreement, MatlinPatterson purchased 41.5 million newly issued shares and two co-investors received a total of 0.5 million newly issued shares which represented approximately 71.7 percent and 0.8 percent, respectively of the issued and outstanding voting power of the Company immediately following the closing of the investment transaction.

In March 2008, the Company and Broadpoint Capital completed its hiring of 47 employees of the New Jersey-based Fixed Income division of BNY Capital Markets, Inc. and the acquisition of certain related assets. The Company has formed a new Debt Capital Markets group within our Fixed Income segment with the new employees that operates a comprehensive sales and trading platform that specializes in high yield, distressed, investment grade corporate, treasury, government agency, convertible bond, and equity securities.

On March 4, 2008, the Company closed a $20 million investment transaction whereby investors purchased approximately 11.6 million shares from the Company at $1.70 per share.  A fund managed by MAST Capital Management, LLC, a Boston-based investment manager that focuses on special situations debt and equity investment opportunities, led the investment purchasing 7.1 million of the approximately 11.6 million shares issued. 

RESTRUCTURING

In 2007, the Company implemented a restructuring plan designed to properly size the Company’s infrastructure with its current levels of activity. As a result, the Company incurred approximately $2.7 million in restructuring costs during the fourth quarter of 2007, of an estimated $4.6 to $4.8 million in total restructuring costs.  The plan includes a reduction in support headcount of approximately 50 percent, outsourcing the Company’s clearing operations and data center management, and reducing non-compensation expenses.  The Company currently anticipates this restructuring plan will be completed in the second quarter of 2008 and will eliminate approximately $8 million in annual operating expenses.

 

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Environment in 2007

Investment banking revenues are driven by overall levels of capital raising activities in the marketplace and particularly the sectors that we focus on.  Public offering activity showed an increase over a year ago levels with public follow-on activity up  19 percent in terms of dollar volume while the number of transactions increased 2 percent.  Initial public offering transactions were up 10 percent year-over-year and dollar volume increased 6 percent compared to 2006.  The economic sectors of healthcare, energy and powertech comprised 33 percent of the public follow-on activity and 30 percent of the total initial public offering activity for 2007.   (Source: Commscan)

In the equity markets, NYSE daily trading volume was up 3 percent while the NASDAQ composite daily trading volume decreased 8 percent (Source: Factset).  Equity sales and trading revenues are dependent on trading volumes, commission rates and the value of our research product and other services that we can provide to our clients.  Our client’s ability to now execute trades electronically through electronic communication networks (“ECNs “) and other alternative trading platforms has put downward pressure on commission rates in our sales and trading business as larger clients have begun to unbundle research from  commission payments.   Beginning in June 2006, one of the Company’s largest institutional brokerage clients in terms of commission revenue, Fidelity Management and Research Company, began to separate payments for research services and services for trading commissions for brokerage services, instead of compensating research services through trading commissions.   The results of these changes have decreased commissions revenues from Fidelity compared to 2006, but have not yet had a material impact on commission rates from our other institutional clients.  If other institutional equity clients adopt similar practices, this trend can continue to have a negative impact on our commission revenue. 

In the fixed income markets, severe turmoil in the sub prime mortgage market spread to all areas of the credit market in the second half of 2007.  As a result, spreads relative to comparable treasuries widened across all fixed income products.  The yield curve steepened as treasury rates fell.  The spread between the 10 year Treasury note and 2 year Treasury note at the end 2007 had widened 111 basis points versus the beginning of the year. (Source: U.S. Treasury Department)

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

		Years ended December 31
(In thousands of dollars)		2007				2006				2005
Revenues
Commissions		$	4,666			$	11,386			$	17,254
Principal transactions			21,229				40,605				40,209
Investment banking			8,127				26,643				19,309
Investment gains (losses)			2,594				(7,602	)			21,591
Interest income			8,639				8,295				9,750
Fees and other			1,856				1,978				3,561
Total revenues			47,111				81,305				111,674
Interest expense			7,027				8,417				6,423
Net revenues			40,084				72,888				105,251
Expenses (excluding interest)
Compensation and benefits			41,286				76,351				73,241
Clearing, settlement and brokerage costs			3,127				5,833				8,310
Communications and data processing			7,827				9,273				9,855
Occupancy and depreciation			6,559				9,154				9,178
Selling			4,157				4,013				4,981
Impairment			-				7,886				-
Restructuring			2,698				-				-
Other			6,055				7,819				5,636
Total expenses (excluding interest)			71,709				120,329				111,201
Income (loss) before income taxes, discontinued operations and cumulative effect of an accounting change			(31,625	)			(47,441	)			(5,950	)
Income tax expense (benefit)			(4,703	)			(828	)			7,512
Loss from continuing operations			(26,922	)			(46,613	)			(13,462	)
Income from discontinued operations (including a pre-tax gain on sale of $7,944) (net of taxes)			7,460				2,205				3,245
Loss before cumulative effect of an accounting change			(19,462	)			(44,408	)			(10,217	)
Cumulative effect of an accounting change			-				427				-
Net loss		$	(19,462	)		$	(43,981	)		$	(10,217	)
Net interest income (expense)
Interest income			8,639				8,295				9,750
Interest expense			7,027				8,417				6,423
Net interest income (expense)		$	1,612			$	(122	)		$	3,327

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

2007 Financial Overview

For the year ended December 31, 2007, net revenues from continuing operations were $40.1 million, compared to $72.9 million for the year ended December 31, 2006.  An improved performance in investments gain (losses) was overshadowed by a decline in net revenues in equities investment banking, equities sales and trading and fixed income sales and trading.  $2.7 million in expenses related to the Company’s restructuring costs also negatively impacted the Company’s 2007 results.  The Company reported a loss from continuing operations of $26.9 million for the year ended December 31, 2007 compared to the Company’s loss from continuing operations of $46.6 million for the year ended December 31, 2006.  Loss per diluted share from continuing operations for the year ended December 31, 2007 was $0.98 compared to a loss per diluted share of $3.08 for the year ended December 31, 2006.  The Company reported a consolidated net loss of $19.5 million for the year ended December 31, 2007, compared to a consolidated net loss of $44.0 million for the year ended December 31, 2006. The Company recognized a pre-tax gain on the sale of its Municipal Capital Markets division of $7.9 million in 2007 as a component of discontinued operations. Consolidated diluted loss per share for the year ended December 31, 2007 was $0.71 compared to a consolidated loss per diluted share of $2.90 for the year ended December 31, 2006.

Net Revenues

Net revenues decreased $32.8 million, or 45.0 percent, to $40.1 million in 2007 led by a decline in equity investment banking and sales and trading. Revenue declines in equities investment banking of $19.6 million and equity sales and trading of $21.7 million.  A decrease in equity listed commission revenue resulted in a 59.0 percent decrease in commission revenue.  Principal transaction revenue decreased 47.7 percent due to a decrease in trading volume as a result of declines in customer activities. Net interest income increased $1.7 million for the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily as a result of an improvement in interest rate spreads primarily in the Fixed Income division.

Non-Interest Expense

Non-interest expense decreased $48.6 million, or 40.3 percent, to $71.7 million in the year ended December 31, 2007.

Compensation and benefits expense decreased 45.9 percent, or $35.1 million, to $41.3 million in the year ended December 31, 2007. The decrease was the result of  a reduction in other compensation of $22.3 million and salary expense of $8.0 million.  The decline in other compensation was directly related to a decrease in net revenue of 45.0 percent.  The decline in salary expense was the result of a 26.2 percent decrease in average full time headcount. Included in compensation and benefit expense for the year ended December 31, 2007 is $2.4 million that the Company expects will not continue upon completion of the previously announced restructuring plan discussed above.

Clearing, settlement, and brokerage costs were $3.1 million representing a decrease of 46.4 percent in the year ended December 31, 2007 compared to the prior year.  The year-over-year decline was primarily due to both a reduction in ECN expense of $1.5 million and transaction fee expense of $0.6 million, as a result of a decrease in NASDAQ trading activity.

Communications and data processing costs decreased $1.4 million or 15.6 percent in the year ended December 31, 2007.  There was a $0.8 million decline in data processing expense and a $0.6 million decrease in market data services expense.  Data processing expense was down in equities due to lower trading volumes and additional pricing concessions from the Company’s back-office vendor.  A decrease in headcount of 26.2 percent accounted for the decrease in market data services.

Occupancy and depreciation expense decreased $2.6 million or 28.3 percent in the year ended December 31, 2007.  The decrease was due to expenses related to office consolidations in the year ended December 31, 2006 in which the Company incurred $1.8 million in charges as a result of consolidating its office space in Albany, New York City, Boston and Greenwich, CT along with incurring an additional $0.6 million in costs related to the Company’s additional office space in New York City.  Included in occupancy and depreciation expenses for the year ended December 31, 2007 are $1.2 million that the Company expects will not continue upon completion of the previously announced restructuring plan.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Selling expense increased 3.6 percent, or $0.1 million, in the year ended December 31, 2007 as a result of a slight increase in travel and entertainment and promotional expenses.

In the year ended December 31, 2006, the Company recorded an impairment of its intangible assets including goodwill relating to Broadpoint Securities of $7.9 million. The Company had no impairment in the year ended December 31, 2007.

Other expense decreased $1.8 million, or 22.6 percent, for the year ended December 31, 2007.  The decrease was driven primarily by a decline in legal expenses of $1.8 million relating to various legal settlements during the year ended December 31, 2006.

The Company reported a benefit for federal and state income taxes of $4.7 million for the year ended December 31, 2007, an increase of $3.9 million from the year ended December 31, 2006. Due to the sale and related discontinuance of the Municipal Capital Markets division, the Company recognized income from discontinued operations for the year ended December 31, 2007 of $7.5 million.  The Company had loss from continuing operations and continues to have a full valuation allowance.   Under the accounting for income tax rules described in FASB Statement No. 109, the Company must record a benefit in continuing operations to offset tax expense recorded in discontinued operations.  The Company recorded tax expense of $4.7 million in discontinued operations for the year ended December 31, 2007.

2006 Financial Overview

For the fiscal year ended December 31, 2006, net revenues from continuing operations were $72.9 million, compared to $105.3 million in 2005. An improved performance in equities investment banking and fixed income sales and trading were overshadowed by a decline in net revenues in equities sales and trading and investment gains (losses). Results were negatively impacted by $6.8 million in expenses related to the Company’s retention program, $7.9 million related to the impairment of goodwill and $2.4 million in expenses incurred as part of the Company’s effort to consolidate offices. Including these charges, the Company reported a net loss from continuing operations of $46.6 million in 2006 compared to a net loss from continuing operations of $13.5 million for the same period in 2005. Earnings per diluted share from continuing operations for the year ended December 31, 2006 was a net loss of $3.08 compared to a net loss of $0.97 per diluted share for the same period in 2005. The Company reported a consolidated net loss of $44.0 million for the year ended December 31, 2006, compared to a consolidated net loss of $10.2 million for the same period in 2005. Consolidated diluted earnings per share for the year ended December 31, 2006, was a net loss of $2.90 compared to a net loss of $0.74 for the same period in 2005.

Net Revenues

Net revenues fell $32.4 million, or 30.8 percent, in 2006 to $72.9 million led by a decline in investment gains (losses). Strong revenue growth in equities investment banking of $7.2 million was offset by a decline in fixed income investment banking. A decrease in equity listed commission revenue resulted in a 34.0 percent decrease in commission revenue. Principal transaction revenue remained relatively flat during the period. Declines in customer activity and pressure on overall commission rates for both listed and NASDAQ led to the decline in commission revenue. Fees and other revenue decreased $1.6 million primarily as a result of a $1.5 million gain on the sale of the Company’s NYSE seat realized in 2005. Net interest expense of $0.1 million in 2006 represented a 103.7 percent decrease compared to 2005, as a result of a continued decline in interest rate spreads.

 

Non-Interest Expense

Non-interest expense increased $9.1 million, or 8.2 percent, to $120.3 million in 2006.

 

Compensation and benefits expense increased 4.2 percent or $3.1 million to $76.4 million. Retention compensation of $6.8 million was offset by decreases in incentive compensation expense of $1.3 million and salary expense of $3.5 million. The decline in salary expense was the result of a 12 percent decrease in average full time headcount.

 

Clearing, settlement, and brokerage costs of $5.8 million represented a decrease of 29.8 percent compared to the prior year. A reduction in ECN expense of $1.3 million and transaction fee expense of $0.6 million, as the result of a decrease in NASDAQ trading activity, drove the variance.

 

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Communications and data processing costs decreased $0.6 million or 5.9 percent. A $0.5 million decline in data processing expense was offset by a $0.1 million increase in market data services expense. Data processing expense was down in equities due to lower trading volumes and additional pricing concessions from the Company’s back-office vendor. An increase in trading communications costs in Fixed Income accounted for the increase in market data services.

 

Occupancy and depreciation expense remained relatively unchanged at $9.2 million in the year ended December 31, 2007.  In the year ended December 31, 2006, the Company incurred $1.8 million in charges as a result of consolidating its office space in Albany, New York City, Boston and Greenwich, CT along with incurring an additional $0.6 million in costs related to the Company’s additional office space in New York City. In the year ended December 31, 2005, the Company incurred $2.1 million in costs relating to its additional office space in New York City and San Francisco. 

Selling expense was down 19.4 percent, or $1.0 million, in 2006 as a result of a decrease in travel and entertainment and promotional expenses.

 

The Company recorded an impairment of its intangible assets including goodwill relating to Broadpoint Securities of $7.9 million in 2006.  There was no impairment charge for the period ending December 31, 2005.

 

Other expense increased $2.2 million, or 38.7 percent, in 2006. The decrease was driven primarily by an increase in legal expenses of $2.2 million relating to various legal matters.

 

The Company recorded $0.8 million of income tax benefit during the year ended December 31, 2006, representing the tax benefit for the period resulting from the tax expense recorded on the gain from discontinued operations. The Company recorded a net income tax expense for the year ended December 31, 2005, primarily due to the valuation allowance recorded related to the Company’s deferred net tax asset position. See Note 15 of the Notes to the Consolidated Financial Statements for more detail.

Business Highlights

For presentation purposes, net revenue within each of the businesses is classified as sales and trading, investment banking including advisory services, investment gains (losses), or net interest / other.  Sales and trading net revenue includes commissions and principal transactions.  Investment banking includes revenue related to underwritings and other investment banking transactions.  Investment gains (losses) reflects gains and losses on the Company’s investment portfolio.  Net interest / other includes interest income, interest expense, fees and other revenue.   Net revenue presented within each category may differ from that presented in the financial statements as a result of differences in categorizing revenue within each of the revenue line items listed below for purposes of reviewing key business performance.

Equities

(In thousands of dollars)		2007				2006				2005
Net revenue
Sales and Trading		$	11,285			$	32,994			$	40,749
Investment Banking			7,427				27,065				19,899
Net Interest / Other			612				413				288
Total Net Revenue		$	19,324			$	60,472			$	60,936
Operating Income (Loss)		$	(13,677	)		$	3,559			$	(957	)

2007 vs. 2006

Net revenues in equities decreased $41.1 million or 68.0 percent to $19.3 million in 2007. In 2007, equities represented 51.5 percent of consolidated net revenue excluding the impact of investment gains (losses) compared to 75.1 percent in 2006. Equity sales and trading revenue decreased across all products with net revenue down 65.8 percent compared to 2006.  Compared to 2006, NASDAQ net revenue was down 68.5 percent to $7.5 million and listed net revenue of $3.8 million represented a 63.1 percent decrease relative to the prior year.  Declines in customer activity and pressure on overall commission rates for both listed and NASDAQ were partially offset by improved trading loss ratios related to

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

market-making activities in both groups.  Investment banking net revenues decreased 72.6 percent versus the prior year due to lower transaction volume and lower average fees per transaction.

2006 vs. 2005

Net revenues in equities were essentially flat with revenues decreasing only $0.5 million or 0.8 percent to $60.5 million in 2006. In 2006, equities represented 75.1 percent of consolidated net revenue excluding the impact of investment gains (losses) compared to 72.8 percent in 2005. Equity Sales and Trading revenue decreased across all products with net revenue down 19.0 percent compared to 2005. Compared to 2005, NASDAQ net revenue was down 12.8 percent to $23.1 million and listed net revenue of $9.9 million represented a 29.1 percent decrease relative to the prior year.  Declines in customer activity and pressure on overall commission rates for both listed and NASDAQ were partially offset by improving trading loss ratios related to market-making activities in both groups.  Investment banking net revenues had a solid performance with an increase of 36.0 percent versus the prior year.  The group showed improvements across all product groups with public offering revenue up 21.5 percent with net revenue of $13.9 million, and advisory, private placement and other revenue increasing more than 80  percent to $13.1million.  In terms of volume, investment banking completed 45 transactions in 2006 compared to 35 in 2005.

Fixed Income

(In thousands of dollars)		2007				2006				2005
Net revenue
Sales and Trading		$	14,373			$	18,145			$	15,868
Investment Banking			730				223				369
Net Interest / Other			160				(808	)			1,961
Total Net Revenue		$	15,263			$	17,560			$	18,198
Operating Income		$	2,757			$	(922	)		$	(3,097	)

2007 vs. 2006

Fixed income net revenue declined 13.1 percent to $15.3 million in 2007.  Fixed income sales and trading net revenue was down $3.8 million or 20.8 percent compared to the prior year.  Fixed income investment banking net revenue of $0.8 million represented a 227.4 percent increase compared to the prior year.  Fixed income sales and trading decreased due to several large block transactions in the second quarter 2006.  Net interest income increased as a result of an improvement in interest rate spreads.

2006 vs. 2005

Fixed income net revenue declined 3.5 percent to $17.6 million in 2006. Fixed income sales and trading net revenue was up $2.3 million or 14.3 percent compared to the prior year. The increase was due to the impact of several large block transactions in the second quarter of 2006.  Fixed income investment banking net revenue of $0.2 million represented a 39.6 percent decrease compared to the prior year. The decrease in fixed income investment banking was primarily driven by a decrease in underwriting related revenue. Operating income in 2005 was negatively impacted primarily by compensation expense based on an unfavorable mix in revenues.

Other

(In thousands of dollars)		2007				2006				2005
Net revenue
Investment Gain (Losses)		$	2,594			$	(7,602	)		$	21,591
Net Interest / Other			2,903				2,458				4,526
Total Net Revenue		$	5,497			$	(5,144	)		$	26,117
Operating Loss
Investment Gain (Losses)		$	2,594			$	(7,602	)		$	21,591
Administration			(19,338	)			(42,056	)			(23,803	)
Transition			(912	)			-				-
Restructuring			(2,698	)			-				-
FA Tech Ventures			(351	)			(420	)			316
Total Operating Loss		$	(20,705	)		$	(50,078	)		$	(1,896	)

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

2007 vs. 2006

Net revenue increased $10.6 million compared to 2006 as a result of a change in value related to the Company’s investment portfolio.  Net Interest/Other increased $0.4 million due to a $0.5 million increase in investment advisory fees.  The improvement in profitability was primarily the result of a $10.2 million improvement in investment gains, $7.9 million in impairment charge and $6.8 million in retention expense recognized in 2006. In 2007, transition expense was $0.9 million due to compensation and occupancy expenses relating to the movement of the Company’s headquarters.

2006 vs. 2005

Net revenue was down $31.3 million compared to 2005 as a result of a $29.2 million decrease in investment gains  related to the Company’s Investment portfolio.  Net Interest/Other increased $0.4 million due to a $1.5 million gain on sale of the Company’s NYSE seat in 2005 and a $0.5 million decrease in management fee revenues from the Company’s venture capital group.  Operating loss was negatively impacted by the decrease in revenues, an increase in retention compensation of $6.8 million, goodwill impairment of $7.9 million, and legal expenses of $1.2 million offset by a reduction in incentive compensations of $3.9 million.

LIQUIDITY AND CAPITAL RESOURCES

A substantial portion of the Company's assets, similar to other brokerage and investment banking firms, are liquid, consisting of cash and assets readily convertible into cash.  These assets are financed primarily by the Company's payables to brokers and dealers, bank lines of credit and customer payables.  The level of assets and liabilities will fluctuate as a result of the changes in the level of positions held to facilitate customer transactions and changes in market conditions.

In 2007, the Company was able to substantially improve its liquidity and capital position as a result of the sale of the Municipal Capital Markets Group, the discontinuation of the Fixed Income Middle Markets Group, and the investment by MatlinPatterson. As a result, cash and cash equivalents increased $27.6 million, while notes payable and capital lease obligations declined $16.2 million.

On September 14, 2007, the Company completed the asset sale to DEPFA Bank plc (“DEPFA”) pursuant to which DEPFA acquired the Municipal Capital Markets Group of the Company’s subsidiary, Broadpoint Capital, in connection with which the Company recognized a pre-tax gain on the sale in the amount of $7.9 million. On September 21, 2007, the Company also closed the previously announced investment from MatlinPatterson in which the Company received net proceeds from the sale of common stock of $45.8 million.  Pursuant to the Investment Agreement, MatlinPatterson received 41.5 million newly issued shares and two co-investors received a total of 0.5 million newly issued shares which represented approximately 71.7 percent and 0.8 percent, respectively of the issued and outstanding voting power of the Company immediately following the closing of the investment transaction.

On March 5, 2008 the Company completed a $19.7 million investment at $1.70 per share.  A fund managed by MAST Capital Management, LLC, a Boston-based investment manager that focuses on special situations debt and equity investment opportunities, led the investment purchasing 7.1 million of the approximately 11.6 million shares issued. 

The Company implemented a restructuring plan designed to properly size the Company’s infrastructure with its current levels of activity. As a result, the Company incurred approximately $2.7 million in restructuring costs during the fourth quarter, of an estimated $4.6 to $4.8 million in total restructuring costs.  The plan includes a reduction in support headcount of approximately 50 percent, outsourcing the Company’s clearing operations and data center management, and reducing non-compensation expenses.  The Company anticipates this restructuring plan will be completed in the second quarter of 2008 and will eliminate approximately $8 million in annual operating expenses.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

In connection with the plan announced on October 17, 2007, on November 2, 2007, the Company entered into a Fifth Amendment to Sub-Lease Agreement (the “Amendment”) with Columbia 677, L.L.C. (the “Landlord”) pursuant to which the Company’s Sublease-Agreement with the Landlord dated August 12, 2003 concerning the lease of certain space in the building located at 677 Broadway, Albany, New York (the “Albany Premises”) was amended.  The Amendment provides that the Company will surrender a total of 15,358 square feet (the “Surrender Premises”) of the Albany Premises, a portion at a time, on or before three surrender dates:  November 15, 2007, December 15, 2007 and April 1, 2008.  If the Company fails to vacate the portion of the Surrender Premises on the applicable surrender dates, it will owe the Landlord $1,667.67 for each day of such failure.    The Company will fail to vacate 1,398 aquare feet of the surrender premises by April 1, 2008 and as a result will begin to incur the daily fee on such date.  the Comapny currently expects it will vacate such portion of hte surrender premises by June 30, 2008.  In consideration of the Landlord agreeing to the surrender of the Surrender Premises, the Amendment provides that the Company shall pay the Landlord a surrender fee equal to $1,050,000 payable in three installments, of which 0.7 million had been paid as of December 31, 2007.

Short-term Bank Loans and Notes Payable

We rely on short-term bank loans and similar debt facilities to finance our operations generally and to maintain our margin requirements with Ridge and Pershing in particular.  The Company had $129 million outstanding in short-term bank loans at December 31, 2006. The weighted average interest rate on these loans was 5.74% at December 31, 2006. These loans bore interest at a variable rate based primarily on the Federal Funds interest rate. At December 31, 2007, the Company had no outstanding short-term bank loans. 

During the twelve months ended December 31, 2007, the Company paid the remaining balance of the term loan of $10.6 million related to the acquisition of Broadpoint Securities, Inc. pursuant to an agreement (the “Loan Agreement”) entered into on August 6, 2007 with the Company’s lender and lessor.  The Company agreed to repay, upon closing of the DEPFA transaction, obligations equal to 75 percent of the net proceeds received by the Company and upon closing of the MatlinPatterson transaction to pay in full the remaining balance of the loan.  On September 14, 2007, upon the close of the DEPFA transaction, the Company made a principal payment of $0.8 million pursuant to the Agreement.  On September 21, 2007, upon the close of the MatlinPatterson transaction, the Company paid the remaining $9.8 million balance of the term loan.

Regulatory

As of December 31, 2007, Broadpoint Capital Inc. and Broadpoint Securities, Inc., the Company’s two  registered broker-dealer subsidiaries, were in compliance with the net capital requirements of the Securities and Exchange Commission. The net capital rules restrict the amount of a broker-dealer’s net assets that may be distributed. Also, a significant operating loss or extraordinary charge against net capital may adversely affect the ability of the Company’s broker-dealer subsidiaries to expand or even maintain their present levels of business and the ability to support the obligations or requirements of the Company. As of December 31, 2007, Broadpoint Capital had net capital of $9.1 million, which exceeded minimum net capital requirements by $8.1 million, while Broadpoint Securities had net capital of $21.1 million, which exceeded minimum net capital requirements by $20.8 million.

The Company enters into underwriting commitments to purchase securities as part of its investment banking business. Also, the Company may purchase and sell securities on a when-issued basis. As of December 31, 2007, the Company had no outstanding underwriting commitments and had purchased $9.9 million and sold $65.0 million securities on a when-issued basis.

Investments and Commitments

As of December 31, 2007, the Company had a commitment to invest up to an additional $1.3 million in FA Technology Ventures, L.P. (the “Partnership”). The initial investment period expired in July 2006; however, the general partner may continue to make capital calls up through July 2011 for additional investments in portfolio companies and for the payment of management fees.  The Company intends to fund this commitment from its working capital. The Partnership’s primary purpose is to provide investment returns consistent with risks of investing in venture capital. In addition to the Company, certain other limited partners of the Partnership serve as officers or directors of the Company. The majority of the commitments to the Partnership are from non-affiliates of the Company.

The general partner for the Partnership is FATV G.P LLC. The General Partner is responsible for the management of the Partnership, including among other things, making investments for the Partnership. The members of the General Partner are George McNamee, a Director of the Company, Broadpoint Enterprise Funding, Inc., a wholly owned subsidiary of the Company, and other employees of the Company or its subsidiaries. Mr. McNamee is required under the partnership agreement to devote a majority of his business time to the conduct of the affairs of the Partnership and any parallel funds. Subject to the terms of the partnership agreement, under certain conditions, the General Partner is entitled to share in the gains received by the Partnership in respect of its investment in a portfolio company. TheGeneral Partner has contracted with FATV to act as its investment advisor with respect to the Partnership and any parallel funds.

 

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of December 31, 2007, the Company had an additional commitment to invest up to $0.2 million in funds that invest in parallel with the Partnership, which it intends to fund, at least in part, through current and future Employee Investment Funds (“EIF”). The investment period expired in July 2006, but the General Partner may continue to make capital calls up through July 2011 for additional investments in portfolio companies and for the payment of management fees.  The Company anticipates that the portion of the commitment that is not funded by employees through the EIF will be funded by the Company from working capital.

Over the last several years the Company funded much of its operating losses through the sale of its publicly held investments.  The Company’s current investment portfolio consists almost entirely of its interest in the Partnership, the General Partner, and the EIF.  Such investments are illiquid and the Company may not realize any return on these investments for some time or at all.

Contingent Consideration

On May 14, 2004, the Company acquired 100 percent of the outstanding common shares of Descap Securities, Inc., now known as Broadpoint Securities, Inc., a New York-based broker-dealer and investment bank.  Per the acquisition agreement, the sellers can receive future contingent consideration (“Earnout Payment”) based on the following:  for each of the years ending May 31, 2005, May 31, 2006 and May 31, 2007, if Broadpoint Securities’ Pre-Tax Net Income (as defined) (i) is greater than $10 million, the Company shall pay to the Sellers an aggregate amount equal to fifty percent (50%) of Broadpoint Securities’ Pre-Tax Net Income for such period, or (ii) is equal to or less than $10 million, the Company shall pay to the Sellers an aggregate amount equal to forty percent (40%) of Broadpoint Securities’ Pre-Tax Net Income for such period.  Each Earnout Payment shall be paid in cash, provided that Buyer shall have the right to pay up to seventy-five percent (75%) of each Earnout Payment in the form of shares of Company Stock.  The amount of any Earnout Payment that the Company elects to pay in the form of Company stock shall not exceed $3.0 million for any Earnout Period and in no event shall such amounts exceed $6.0 million in the aggregate for all Earnout Payments.  Based upon Broadpoint Securities’ Pre-Tax Net Income from June 1, 2004 through May 31, 2005, $2.2 million of contingent consideration was paid to the Sellers and from June 1, 2005 through May 31, 2006, $1.0 million of contingent consideration has been accrued at December 31, 2007.  Based upon Broadpoint Securities’ Pre-Tax Net Income from June 1, 2006 to May 31, 2007, no contingent consideration is payable to the sellers for this period . See Note 4 of the Consolidated Financial Statements.

 

Contingent Liability

 

Pursuant to the asset purchase agreement with Depfa Bank plc relating to the sale of the Company’s Municipal Capital Markets Group, the Company was required to deliver an estimate of the accrued bonuses at closing and a final accrued bonus calculation thirty days following closing.  The Company accrued the bonuses consistent with the asset purchase agreement. All items arising from the sale of the business were reflected in the Gain on Sale of Discontinued Operations.  This includes the closing bonuses paid to employees and the reversal of restricted stock and deferred cash amortization as a result of the employees’ termination of employment.  On October 30, 2007, Depfa Bank plc, provided the Company notice that it was exercising its option pursuant to the agreement to appoint an independent accounting firm to conduct a special audit of the final accrued bonus amount.  Although there can be no assurance as to the eventual outcome of this special audit, the Company believes that it has appropriately calculated and accounted for the accrued bonuses.

Legal Proceedings

From time to time the Company and its subsidiaries are involved in legal proceedings or disputes. (See Part I – Item 3 - Legal Proceedings).  An adverse result or development in respect of these matters, whether in settlement or as a result of litigation or arbitration, could materially adversely affect the Company's consolidated financial condition, results of operations, cash flows and liquidity.

 

In addition, the securities industry is highly regulated.  We are subjct to both routine and unscheduled regulatory exaiminations of our business and investigations of securities industry practices by governmental agencies and self-regulatory organizations.  In recent years, securities firms have been subject to increased scrutiny and regulatory endorcement activity.  Regulatory investigations can result in substantial fines being imposed on us.  Periodically, we receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory organizations.  We do not always know the purpose behind these communications or the status or target of any related investigation.  Our responses to these communications have in the past resulted in our being cited for regulatory deficiences; although, to date, these communications have not had a material adverse effect on our business.

Intangible Assets

Intangible assets consist predominantly of customer related intangibles and goodwill related to the acquisitions of Broadpoint Securities.  These intangible assets were allocated to the reporting units within Broadpoint Securities Group, Inc.  pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”  Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.  In accordance with SFAS No. 142, indefinite

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

life intangible assets and goodwill are not amortized.  The Company reviews its goodwill in order to determine whether its value is impaired on an annual basis.  In addition to annual testing, goodwill is also tested for impairment at the time of a triggering event requiring re-evaluation, if one were to occur.  Goodwill is impaired when the carrying amount of

the reporting unit exceeds the implied fair value of the reporting unit.  When available, the Company uses recent, comparable transactions to estimate the fair value of the respective reporting units.  The Company calculates an estimated fair value based on multiples of revenues, earnings and book value of comparable transactions.  However, when such comparable transactions are not available or have become outdated, the Company uses Income and Market approaches to determine fair value of the reporting unit.  The Income approach applies a discounted cash flow analysis based on management’s projections, while the Market approach analyzes and compares the operating performance and financial condition of the reporting unit with those of a group of selected publicly-traded companies that can be used for comparison.

As of December 31, 2007, $17.4 million of goodwill and $0.4 million of amortizable customer intangibles have been recorded on Broadpoint Securities Group, Inc.’s financial statements.  As a result of annual impairment testing, the goodwill related to the acquisition of Broadpoint Securities Inc. was determined not to be impaired.  In 2006, the Company recognized an impairment loss of $7.9 million as a result of the annual impairment testing.

Tax Valuation Allowance

At December 31, 2007, the Company had a valuation allowance of $27.0 million compared to $21.8 million at December 31, 2006. The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s history of cumulative losses over at least the past three years and the difficulty of forecasting future taxable income.  As a result, the Company does not anticipate that the payment of future taxes will have a significant negative impact on its liquidity and capital resources. See Note 15 of the Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGMENTS

Information concerning the Company’s off balance sheet arrangements are included in the Contractual Obligations section which follows. Except as set forth in such section, the Company has no off-balance sheet arrangements.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONTRACTUAL OBLIGATIONS

The following table sets forth these contractual obligations by fiscal year:

(In thousands of dollars)		Total				2008				2009				2010				2011				2012				Thereafter				All Others
Operating leases (net of sublease rental income)(1)			13,101				3,803				1,693				1,621				1,599				1,578				2,807				-
Guaranteed compensation payments (2)			4,868				3,863				1,005				-				-				-				-				-
Restructuring compensation payments (3)			1,373				1,373				-				-				-				-				-				-
Partnership and employee investment funds commitments (4)			1,500				1,500				-				-				-				-				-				-
Subordinated debt (5)			2,962				1,299				465				287				108				208				595				-
Liabilities from unrecognized tax benefits (6)			1,144				-				-				-				-				-				-				1,144
Total		$	24,948			$	11,838			$	3,163			$	1,908			$	1,707			$	1,786			$	3,402			$	1,144

(1)

The Company’s headquarters and sales offices, and certain office and communication equipment, are leased under non-cancelable operating leases, certain of which contain escalation clauses and which expire at various times through 2015 (see Notes to the unaudited Condensed Consolidated Financial Statements).  The 2012 obligation is $1,578 and the remaining obligation thereafter is $2,807.

(2)	Guaranteed compensation payments primarily include various employment and consulting compensation arrangements.

(3)          Restructuring compensation payments are comprised of various severance agreements.

(4)	The Company has a commitment to invest in FA Technology Ventures L.P. (the “Partnership”) and an additional commitment to invest in funds that invest in parallel with the Partnership (see “Notes to the Consolidated Financial Statements”).

(5)

A select group of management and highly compensated employees are eligible to participate in the Broadpoint Securities Group, Inc. Deferred Compensation Plan for Key Employees (the “Plan”).  The employees enter into subordinate loans with the Company to provide for the deferral of compensation and employer allocations under the Plan.  The accounts of the participants of the Plan are credited with earnings and/or losses based on the performance of various investment benchmarks selected by the participants.  Maturities of the subordinated debt are based on the distribution election made by each participant, which may be deferred to a later date by the participant.  As of February 28, 2007, the Company no longer permits any new amounts to be deferred under the Plan.

(6)

At December 31, 2007, the Company has a reserve for unrecognized tax benefits including related interest of $1.1 million.  The Company is unable at this time to estimate the periods in which potential cash outflows relating to these liabilities would occur because the timing of the cash flows are dependant upon audit by the relevant taxing authorities.   The Company does not currently have any tax returns under examination.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING POLICIES

The following is a summary of the Company’s critical accounting policies.  For a full description of these and other accounting policies, see Note 1 of the Consolidated Financial Statements.  The Company believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity.  These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements.  Due to their nature, estimates involve judgment based upon available information.  Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements.  Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company.

Valuation of Securities and Other Assets

Substantially all financial instruments are reflected  in the consolidated financial statements at fair value or amounts that approximate fair value, including cash, securities purchased under agreements to resell, securities owned, investments and securities sold but not yet purchased.  Unrealized gains and losses resulting from valuing investments at market value or fair value as determined by management are included as revenues from investment gains (losses).

 

Proprietary securities transactions in regular-way trades are recorded on the trade date, as if they had settled.  Profit and loss arising from all securities transactions entered into for the account and risk of the Company are recorded on a trade date basis.  Customers’ securities transactions are reported on a settlement date basis with related commission income and expenses reported on a trade date basis.  Equity securities owned and equity securities sold, but not yet purchased are comprised of United States equity securities and are valued at market value based on quoted market prices.  Fixed income securities owned and fixed income securities sold, but not yet purchased, generally are valued on the basis of prices furnished by a pricing service when the Company believes such prices accurately reflect the fair value of such securities.  A pricing service utilizes electronic data processing techniques based on yield spreads relating to securities with similar characteristics to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices.  If the Company decides that a price provided by the pricing service does not accurately reflect the fair value of the securities, when prices are not readily available from a pricing service, or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Company. However, these assumptions may be incorrect and the actual value realized upon disposition could be different from the current carrying value.  For investments in illiquid and privately held securities that do not have readily determinable fair values, the Company’s estimate of fair value is generally reflected as our original cost basis unless the investee has raised additional debt or equity capital, and we believe that such a transaction, taking into consideration differences in the terms of securities, is a better indicator of fair value; or we believe the fair value is less than our original cost basis.  All of our investments are evaluated quarterly for changes in fair value.  Factors that have an impact on our analysis include subjective assessments about a fair market valuation of the investee, including but not limited to assumptions regarding the expected future financial performance of the investee and our assessment of the future prospects of the investee’s business model.  Securities owned and investments include, at December 31, 2007 and 2006, $15.9 million and $11.2 million, respectively, of private equity securities related to the venture capital funds managed by FATV.

Intangible Assets

Intangible assets consist predominantly of customer related intangibles and goodwill related to the acquisition of Broadpoint Securities.  These intangible assets were allocated to the reporting units within Broadpoint Securities pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”  Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.  In accordance with SFAS No. 142, indefinite-life intangible assets and goodwill are not amortized.  The Company reviews its goodwill in order to determine whether its value is impaired on an annual basis.  In addition to annual testing, goodwill is also tested for impairment at the time of a triggering event requiring re-evaluation, if one were to occur.  Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit including goodwill.  When available, the Company uses recent, comparable transactions to estimate the fair value of the respective reporting units.  The Company calculates an estimated fair value based on multiples of revenues, earnings and book value of comparable transactions.  However, when such comparable transactions are not available or have become outdated, the Company uses Income and Market approaches to determine fair value of the reporting unit.  The Income approach applies a discounted cash flow analysis based on management’s projections, while the Market approach analyzes and compares the operating

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

performance and financial condition of the reporting unit with those of a group of selected publicly-traded companies that can be used for comparison.

Contingent Liabilities

The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, tax and other claims.  The Company records reserves related to legal and other claims in “accrued expenses.”  The determination of these reserve amounts requires significant judgment on the part of management.  Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss, if any incurred by the other party, the basis and validity of the claim; the possibility of wrongdoing on the part of the Company; likely insurance coverage; previous results in similar cases; and legal precedents and case law.  Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management.  Any change in the reserve amount is recorded in the consolidated financial statements and is recognized as a charge/credit to earnings in that period.  The assumptions of management in determining the estimates of reserves may prove to be incorrect, which could materially affect results in the period the claims are ultimately resolved.

Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contingent Consideration” for details on the liability for contingent consideration related to the acquisition of Descap.

 

Risk and Uncertainties

The Company also records reserves or allowances for doubtful accounts related to receivables.  Receivables at the broker/dealers are generally collateralized by securities owned by the brokerage clients.  Therefore, when a receivable is considered to be impaired, the amount of the impairment is generally measured based on the fair value of the securities acting as collateral, which is measured based on current prices from independent sources such as listed market prices or broker/dealer price quotations.

The Company also makes loans or pays advances to employees for recruiting and retention purposes.  The Company provides for a specific reserve on these receivables if the employee is no longer associated with the Company and it is determined that it is probable the amount will not be collected.  At December 31, 2007, the receivable from employees for recruiting and retention purposes was $0.1 million.

Income Taxes

Income tax expense is recorded using the asset and liability method.  Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using current tax rates.  A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset will not be realized.

The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent that the Company believes that recovery is not likely, it must establish a valuation allowance.  Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.  The Company has recorded  a valuation allowance as a result of uncertainties related to the realization of its net deferred tax asset, at December 31, 2007, of approximately $27.0 million. The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s history of cumulative losses over the past three years and the difficulty of forecasting future taxable income. The valuation allowance reflects the conclusion of management that it is more likely than not that the benefit of the deferred tax assets will not be realized.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Significant judgment is required in determining income tax provisions under Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (SFAS No. 109) and in evaluating tax positions. The Company recognizes tax benefits from uncertain tax positions only when  positions meet the minimum probability threshold, as defined by FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of the Company’s provision for income taxes.  There are no returns currently under examination.

In the event actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

Securities Issued for Services

Options:  The Company granted incentive and nonqualified stock options periodically to certain employees.  The options are granted at an exercise price equal to the fair value of the underlying shares at the date of grant, they generally vest over one to three years following the date of grant, and they have a term of ten years. Effective January 1, 2006, the Company adopted FAS 123(R).

Additional information related to stock options is presented in Note 16 in the Consolidated Financial Statements.

Restricted Stock Awards/Restricted Stock Units:  Restricted stock awards under the plan have been valued at the market value of the Company’s common stock as of the grant date and are amortized over the period in which the restrictions are outstanding, which is typically 3-5 years.  The Company’s 2007 Incentive Compensation Plan (the “Incentive Plan”) also allows for grants of restricted stock units. Restricted stock units give a participant the right to receive fully vested shares at the end of a specified deferral period. Restricted stock units are generally subject to forfeiture conditions similar to those of the Company’s restricted stock awards granted under its other stock incentive plans historically. One advantage of restricted stock units, as compared to restricted stock, is that the period during which the award is deferred as to settlement can be extended past the date the award becomes non-forfeitable, allowing a participant to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, restricted stock units carry no voting or dividend rights associated with the stock ownership.

NEW ACCOUNTING STANDARDS

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Company’s consolidated statement of financial condition or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.

In February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS No. 157-2 on the Company’s consolidated statement of financial condition and results of operations.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on the Company’s consolidated statement of financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company is currently assessing the impact of SFAS No. 160 on the consolidated statement of financial condition and results of operations.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

MARKET RISK

Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and equity prices, changes in the implied volatility of interest rates and equity prices and also changes in the credit ratings of either the issuer or its related country of origin.  Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures extends beyond derivatives to include all market-risk-sensitive financial instruments.  The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading.

The Company trades U.S. Treasury bills, notes, and bonds; U.S. Government agency notes and bonds; mortgage-backed securities, and corporate obligations.  The Company is also an active market maker in the NASDAQ equity markets.  In connection with these activities, the Company may be required to maintain inventories in order to facilitate customer transactions.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table categorizes the Company’s market risk sensitive financial instruments by type of security and maturity date, if applicable (equity securities and other investments with no maturity are being shown in the table under 2008).  The amounts shown are net of long and short positions.

(In thousands of dollars)		2008				2009				2010				2011				2012				Thereafter				Total
Fair value of securities
Corporate bonds		$	-			$	41			$	133			$	-			$	1			$	48,306			$	48,481
State and municipal bonds			(1	)			1				-				-				0				5				5
US Government and federal agency obligations			268				(2,792	)			(2,909	)			3,007				905				64,211				62,690
Subtotal			267				(2,750	)			(2,776	)			3,007				906				112,522				111,176
Equity securities			4,100				-				-				-				-				-				4,100
Investments			15,436				-				-				-				-				-				15,436
Fair value of securities		$	19,803			$	(2,750	)		$	(2,776	)		$	3,007			$	906			$	112,522			$	130,712

The following is a discussion of the Company's primary market risk exposures as of December 31, 2007, including a discussion of how those exposures are currently managed.

Interest Rate Risk

Interest rate risk is a consequence of maintaining inventory positions and trading in interest-rate-sensitive financial instruments.  These financial instruments include corporate debt securities, mortgage-backed and asset-backed securities, government securities and government agency securities.  In connection with trading activities, the Company exposes itself to interest rate risk, arising from changes in the level or volatility of interest rates or the shape and slope of the yield curve. The Company's fixed income activities also expose it to the risk of loss related to changes in credit spreads.

A sensitivity analysis has been prepared to estimate the Company's exposure to interest rate risk of its net inventory positions.  The fair market value of these securities included in the Company's inventory at December 31, 2007 was $111.2 million and $153.9 million at December 31, 2006 (December 31, 2006 are net of municipal futures positions).  Interest rate risk is estimated as the potential loss in fair value resulting from a hypothetical one-half percent change in interest rates.  At December 31, 2007, the potential change in fair value using a yield to maturity calculation and assuming this hypothetical change, was $5.8 million and at December 31, 2006 it was $8.3 million.  The actual risks and results of such adverse effects may differ substantially.

Equity Price Risk

The Company is exposed to equity price risk as a consequence of making markets in equity securities.  Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock.  The Company attempts to reduce the risk of loss inherent in its inventory of equity securities by monitoring those security positions throughout each day.

Marketable equity securities included in the Company's inventory, which were recorded at a fair value of $4.1 million in securities owned at December 31, 2007 and $13.4 million in securities owned at December 31, 2006, have exposure to equity price risk.  This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices quoted by stock exchanges and amounts to $0.4 million at December 31, 2007 and $1.3 million at December 31, 2006.  The Company's investment portfolio excluding the consolidation of the Employee Investment Fund (see Note 6 to the Consolidated Financial Statements) at December 31, 2007 and 2006, had a fair market value of $15.4 million and $10.9 million, respectively. Equity price risk is also estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in equity security prices or valuations and for the Company’s investment portfolio excluding the consolidation of the Employee Investment Funds amounted to $1.5 million at year-end 2007 and $1.1 million at year-end 2006.  There can be no assurance that the Company’s actual losses due to its equity price risk will not exceed the amounts indicated above.  The actual risks and results of such adverse effects may differ substantially.

 

 

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BROADPOINT SECURITIES GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CREDIT RISK

The Company is engaged in various trading and brokerage activities whose counter parties primarily include broker-dealers, banks, and other financial institutions.  In the event counter parties do not fulfill their obligations, the Company may be exposed to risk.  The risk of default depends on the credit worthiness of the counter party or issuer of the instrument.  The Company seeks to control credit risk by following an established credit approval process, monitoring credit limits, and requiring collateral where it deems appropriate.

The Company purchases debt securities and may have significant positions in its inventory subject to market and credit risk.  In order to control these risks, security positions are monitored on at least a daily basis.  Should the Company find it necessary to sell such a security, it may not be able to realize the full carrying value of the security due to the size of the position sold.

One of the Company’s wholly-owned subsidiaries, Broadpoint Securities, clears customers’ securities transactions through a third party under a clearing agreement.  Under this agreement, the clearing agent executes and settles customer securities transactions, collects margin receivables related to these transactions, monitors the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, requires the customer to deposit additional collateral with them or to reduce positions, if necessary.

In the normal course of business Broadpoint Securities guarantees certain service providers, such as clearing and custody agents, trustees, and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates.  The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including subcustodians and third-party transactions.  The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated.  However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

OPERATING RISK

Operating risk is the potential for loss arising from limitations in the Company's financial systems and controls, deficiencies in legal documentation and the execution of legal and fiduciary responsibilities, deficiencies in technology and the risk of loss attributable to operational problems.  These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes.  In order to reduce or mitigate these risks, the Company has established and maintains an internal control environment that incorporates various control mechanisms at different levels throughout the organization and within such departments as Finance, Accounting, Operations, Legal, Compliance and Internal Audit.  These control mechanisms attempt to ensure that operational policies and procedures are being followed and that the Company's various businesses are operating within established corporate policies and limits.

OTHER RISKS

Other risks encountered by the Company include political, regulatory and tax risks.  These risks reflect the potential impact that changes in local laws, regulatory requirements or tax statutes have on the economics and viability of current or future transactions.  In an effort to mitigate these risks, the Company seeks to review new and pending regulations and legislation and their potential impact on its business.  Refer to Item 1A for other risk factors.

 

 

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Item 8.  Financial Statements and Supplementary Data

Index to Financial Statements and Supplementary Data	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			43-44
FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005			45
Consolidated Statements of Financial Condition as of December 31, 2007 and 2006			46
Consolidated Statements of Changes in Stockholders’ Equity and Temporary Capital for the Years Ended December 31, 2007, 2006, and 2005			47
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005			48-49
Notes to Consolidated Financial Statements			50-78
SUPPLEMENTARY DATA:
Selected Quarterly Financial Data (Unaudited)			79-80

 

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Broadpoint Securities Group, Inc.

 

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of Broadpoint Securities Group, Inc. at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting for its assessment of the effectiveness of internal control over financial reporting, included in item 9a.  Our responsiblility is to express opinions on these financial statements, on the finanical statement schedule, and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in acordance with the standards of Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain resonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of financial statements included examining, on a test basis, evidence supporting the amounts of disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

 

As disclosed in footnote 15 to the consolidated financial statements, in 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 - Accounting for Uncertainty in Income Taxes.

 

As disclosed in footnote 16 to the consolidated financial statements, in 2006, the Company adopted Financial Accounting Standards Board Statement No. 123(R) - Share Based Payments.

 

A company's internal control over financial reporting is a process designed to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with procedures may deteriorate.

 

 

 

Albany, New York

March 24, 2008

 

 

 

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BROADPOINT SECURITIES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of dollars, except per share amounts)

		Years ended December 31
		2007				2006				2005
Revenues
Commissions		$	4,666			$	11,386			$	17,254
Principal transactions			21,229				40,605				40,209
Investment banking			8,127				26,643				19,309
Investment gains (losses)			2,594				(7,602	)			21,591
Interest income			8,639				8,295				9,750
Fees and others			1,856				1,978				3,561
Total revenues			47,111				81,305				111,674
Interest expense			7,027				8,417				6,423
Net revenues			40,084				72,888				105,251
Expenses (excluding interest)
Compensation and benefits			41,286				76,351				73,241
Clearing, settlement and brokerage costs			3,127				5,833				8,310
Communications and data processing			7,827				9,273				9,855
Occupancy and depreciation			6,559				9,154				9,178
Selling			4,157				4,013				4,981
Impairment			-				7,886				-
Restructuring			2,698				-				-
Other			6,055				7,819				5,636
Total expenses (excluding interest)			71,709				120,329				111,201
Loss before income taxes, discontinued operations and cumulative effect of an accounting change			(31,625	)			(47,441	)			(5,950	)
Income tax (benefit) expense			(4,703	)			(828	)			7,512
Loss from continuing operations			(26,922	)			(46,613	)			(13,462	)
Income from discontinued operations (including a pre-tax gain on sale of $7,944) (net of taxes) (see Note 22)			7,460				2,205				3,245
Loss before cumulative effect of an accounting change			(19,462	)			(44,408	)			(10,217	)
Cumulative effect of an accounting change (net of taxes $0 in 2006) (see “Benefit Plans” note)			-				427				-
Net loss		$	(19,462	)		$	(43,981	)		$	(10,217	)
Basic earnings per share:
Continuing operations		$	(0.98	)		$	(3.08	)		$	(0.97	)
Discontinued operations			0.27				0.15				0.23
Cumulative effect of an accounting change			-				0.03				-
Loss per share		$	(0.71	)		$	(2.90	)		$	(0.74	)
Diluted earnings per share:
Continuing operations		$	(0.98	)		$	(3.08	)		$	(0.97	)
Discontinued operations			0.27				0.15				0.23
Cumulative effect of an accounting change			-				0.03				-
Loss per share		$	(0.71	)		$	(2.90	)		$	(0.74	)

The accompanying notes are an integral part

of these consolidated financial statements.

 

 

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BROADPOINT SECURITIES GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands of dollars, except shares and per share amounts)

		December 31				December 31
As of		2007				2006
Assets
Cash and cash equivalents		$	31,747			$	4,192
Cash and securities segregated under federal regulations			1,650				5,200
Securities purchased under agreement to resell			-				14,083
Receivables from:
Brokers, dealers and clearing agencies			2,921				10,626
Customers, net			3,239				2,898
Others			4,917				6,933
Securities owned			190,456				276,167
Investments			16,913				12,250
Office equipment and leasehold improvements, net			2,292				4,516
Intangible assets			17,809				17,862
Other assets			2,239				2,391
Total Assets		$	274,183			$	357,118
Liabilities and Stockholders’ Equity
Liabilities
Short-term bank loans		$	-			$	128,525
Payables to:
Brokers, dealers and clearing agencies			88,565				49,065
Customers			23				1,151
Others			2,937				8,996
Securities sold, but not yet purchased			75,180				52,120
Accounts payable			2,918				4,118
Accrued compensation			13,214				32,445
Accrued expenses			5,882				8,273
Income taxes payable			131				131
Notes payable			-				12,667
Obligations under capitalized leases			-				3,522
Total Liabilities			188,850				301,013
Temporary capital			104				104
Subordinated debt			2,962				4,424
Commitments and Contingencies
Stockholders’ Equity
Preferred stock; $1.00 par value; authorized 1,500,000 shares as of December 31, 2007; none issued
Common stock; $.01 par value; authorized 100,000,000 shares as of December 31, 2007, 50,000,000 shares as of December 31, 2006; issued 59,655,940 and 17,613,827 shares, respectively			596				176
Additional paid-in capital			203,653				152,573
Deferred compensation			1,583				2,647
Accumulated deficit			(120,700	)			(100,605	)
Treasury stock, at cost (1,757,681 shares as of December 31, 2007 and 1,168,748 as of December 31, 2006)			(2,865	)			(3,214	)
Total Stockholders’ Equity			82,267				51,577
Total Liabilities and Stockholders’ Equity		$	274,183			$	357,118

The accompanying notes are an integral part

of these consolidated financial statements.

 

 

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BROADPOINT SECURITIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND TEMPORARY CAPITAL

For the Years Ended December 31, 2007, 2006 and 2005

(In thousands of dollars except for number of shares)

		Temporary				Common Stock								Additional Paid-In				Unearned				Deferred				Accumulated				Accumulated Other Comprehensive				Treasury Stock
		Capital				Shares				Amount				Capital				Compensation				Compensation				Deficit				Income, Net				Shares				Amount
Balance December 31, 2004		$	3,374				15,467,181			$	155			$	147,059			$	(15,061	)		$	3,704			$	(45,575	)			-				(619,883	)		$	(4,197	)
Amortization of unearned compensation			-				-				-				-				9,894				-				-				-				-				-
Issuance of restricted stock, net of forfeitures			-				1,289,592				13				9,039				(8,715	)			-				-				-				(274,640	)			66
Cash dividends paid			-				-				-				-				-				-				(832	)			-				-				-
Options exercised			-				33,988				-				213				-				-				-				-				57,103				122
Options expense recognized			-				-				-				263				-				-				-				-				-				-
Treasury stock purchased			-				-				-				-				-				-				-				-				(20,300	)			(186	)
Employee stock trust			-				34,449				-				283				-				(256	)			-				-				48,900				334
Issuance of shares, Descap acquisition			-				304,439				3				1,613				-				-				-				-				-				-
Net loss			-				-				-				-				-				-				(10,217	)			-				-				-
Balance December 31, 2005		$	3,374				17,129,649			$	171			$	158,470			$	(13,882	)		$	3,448			$	(56,624	)			-				(808,820	)		$	(3,861	)
Amortization of unearned compensation			-				-				-				-				7,821				-				-				-				-				-
Issuance of restricted stock, net of forfeitures			-				446,472				5				745				(968	)			-				-				-				110,751				184
Cash dividends paid			-				-				-				-				-				-				-				-				-				-
Options exercised			-				4,668				-				49				-				-				-				-				4,800				5
Options expense recognized			-				-				-				118				-				-				-				-				-				-
Treasury stock purchased			-				-				-				-				-				-				-				-				(83,086	)			(368	)
Employee stock trust			-				33,038				-				220				-				(801	)			-				-				140,091				826
Repurchase of shares, Descap acquisition			(3,270	)			-				-				-				-				-				-				-				(532,484	)			-
Reclass unearned compensation			-				-				-				(7,029	)			7,029				-				-				-				-				-
Net loss			-				-				-				-				-				-				(43,981	)			-				-				-
Balance December 31, 2006		$	104				17,613,827			$	176			$	152,573			$	-			$	2,647			$	(100,605	)		$	-				(1,168,748	)		$	(3,214	)
Amortization of unearned compensation			-				-				-				-				5,933				-				-				-				-				-
Restricted stock forfeitures			-				-				-				(2,579	)			2,278				-				-				-				(552,442	)			(601	)
Issuance of restricted stock units			-				-				-				8,894				(8,894	)			-				-				-				-				-
Issuance of common stock			-				41,986,303				420				45,382				-				-				-				-				-				-
Cash dividends paid			-				-				-				-				-				-				-				-				-				-
Options exercised			-				-				-				122				-				-				-				-				-				-
Options expense recognized			-				-				-				16				-				-				-				-				-				-
Treasury stock purchased			-				-				-				(94	)			-				-				-				-				(95,931	)			(94	)
Employee stock trust			-				55,810				-				22				-				(1,064	)			-				-				59,440				1,044
FIN 48 adoption			-				-				-				-				-				-				(633	)			-				-				-
Reclass unearned compensation			-				-				-				(683	)			683				-				-				-				-				-
Net loss			-				-				-				-				-				-				(19,462	)			-				-				-
Balance December 31, 2007		$	104				59,655,940			$	596			$	203,653			$	-			$	1,583			$	(120,700	)		$	-				(1,757,681	)		$	(2,865	)

The accompanying notes are an integral part

of these consolidated financial statements.

 

 

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BROADPOINT SECURITIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

		For the years ended December 31,
		2007				2006				2005
Cash flows from operating activities:
Net loss		$	(19,462	)		$	(43,981	)		$	(10,217	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			2,224				2,475				3,666
Amortization of warrants			-				498				199
Intangible asset impairment (see “Intangible Asset” note)			-				9,485				-
Deferred compensation			(22	)			245				362
Deferred income taxes			-				-				8,510
Unrealized investment (gains) loss			(2,715	)			36,674				(15,924	)
Realized (gains) losses on sale of investments			121				(29,072	)			(5,667	)
(Gain) loss on fixed assets			-				(21	)			(70	)
Services provided in exchange for common stock			4,969				7,905				10,371
Changes in operating assets and liabilities:
Cash and securities segregated under federal regulations			3,550				1,900				(7,100	)
Securities purchased under agreement to resell			14,083				13,741				7,204
Net receivable/payable from customers			(1,469	)			336				(375	)
Securities owned, net			108,824				(10,698	)			(51,087	)
Other assets			152				1,134				1,003
Net payable to brokers, dealers, and clearing agencies			47,205				24,065				43,868
Net payable to others			1,904				1,136				1,840
Accounts payable and accrued expenses			(23,384	)			4,003				(10,131	)
Income taxes payable, net			-				131				-
Net cash provided by (used in) operating activities			135,980				19,956				(23,548	)
Cash flows from investing activities:
Purchases of office equipment and leasehold improvements			(388	)			(2,897	)			(1,216	)
Sales of office equipment and leasehold improvements			500				5,051				118
Purchase of Broadpoint Securities, Inc., net of cash acquired			-				(3,720	)			(538	)
Purchase of Noddings, net of cash acquired			-				-				(125	)
Purchases of investments			(2,512	)			(4,819	)			(4,478	)
Proceeds from sale of investments			212				35,803				16,199
Net cash (used in) provided by investing activities			(2,188	)			29,418				9,960
Cash flows from financing activities:
(Payments) proceeds of short-term bank loans, net			(128,525	)			(21,550	)			10,200
Proceeds of notes payable			-				9,025				5,164
Payments of notes payable			(12,667	)			(26,883	)			(7,564	)
Payments of obligations under capitalized leases			(3,522	)			(2,239	)			(1,509	)
Proceeds from obligations under capitalized leases			-				-				219
Purchases of common stock			-				(367	)			(186	)
Proceeds from subordinated debt			-				160				-
Payments on subordinated debt			(1,462	)			(1,288	)			-
Proceeds from issuance of  common stock under stock option plans			-				55				522
Proceeds from issuance of common stock			50,000				-				-
Payments of expenses related to issuance of common stock			(4,198	)			-				-
Purchase of treasury stock			(94	)			-				-
Net (decrease) increase in drafts payable			(5,769	)			(4,021	)			8,215
Dividends paid			-				-				(832	)
Net cash (used in) provided by financing activities		$	(106,237	)		$	(47,108	)		$	14,229

The accompanying notes are an integral part

of these consolidated financial statements.

 

 

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BROADPOINT SECURITIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(continued)

		For the years ended December 31,
		2007				2006				2005
Increase in cash and cash equivalents		$	27,555			$	2,266			$	641
Cash and cash equivalents at beginning of the year			4,192				1,926				1,285
Cash and cash equivalents at the end of the year		$	31,747			$	4,192			$	1,926
SUPPLEMENTAL CASH FLOW DISCLOSURES Income tax payments		$	319			$	144			$	950
Interest payments		$	14,470			$	16,057			$	12,491

NON CASH INVESTING AND FINANCING ACTIVITIES

In 2007, 2006 and 2005, the Company entered into capital leases for office and computer equipment totaling approximately $0.0 million, $0.2 million and $4.0 million, respectively.

During the years ended December 31, 2007, 2006 and 2005, the Company converted $0.0 million, $0.2 and $1.6 million, respectively of accrued compensation to subordinated debt.

During the years ended December 31, 2006 and 2005, Intangible assets increased $1.0 million and $2.2 million, respectively, due to additional consideration payable at December 31, 2006 and December 31, 2005 to the sellers of Descap Securities, Inc.  Up to 75% of this payable may be satisfied with the Company’s stock.

As of December 31, 2007, 2006 and 2005, the Company acquired $0.1 million, $0.0 million and $3.1 million in office equipment and leasehold improvements where the obligation related to this acquisition is included in accounts payable.

During the years ended December 31, 2007, 2006 and 2005, the Company distributed $1.0 million, $1.0 million and $0.6 million, respectively, of the Company’s stock from the employee stock trust to satisfy deferred compensation liabilities payable to employees (see Note 14).

During the year ended December 31, 2006, the Company reversed a $1.5 million rent accrual related to the surrender of one of its office leases.

Refer to Note 16 for non-cash financing activities related to restricted stock.

Refer to Note 6 for non-cash investing activities related to the Employee Investment Fund.

The accompanying notes are an integral part

of these consolidated financial statements.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 1.       Significant Accounting Policies

Organization and Nature of Business

 

The consolidated financial statements include the accounts of Broadpoint Securities Group, Inc., its wholly owned subsidiaries (the “Company”), and Employee Investment Funds (see Note 6). Broadpoint Capital Inc. (“Broadpoint Capital”) is registered with the Securities and Exchange Commission (“SEC”) and is a member of various exchanges and the Financial Industry Regulatory Authority. Broadpoint Securities, Inc. (“Broadpoint Securities”), which was acquired by the Company in 2004, is a broker-dealer registered with the SEC and is a member of the Financial Industry Regulatory Authority. The Company’s primary business is investment banking and securities brokerage for institutional customers primarily in the United States. The Company also provides investment-banking services to corporate and public clients, and engages in market making and trading of corporate, government and asset backed securities primarily in the United States.  Another of the Company’s subsidiaries is FA Technology Ventures Corporation (“FATV”) which manages private equity funds, which provides venture financing to emerging growth companies primarily in the United States. All significant inter-company balances and transactions have been eliminated in consolidation.

Liquidity and Net Capital

On September 14, 2007, the Company completed the asset sale to DEPFA Bank Plc (“DEPFA”) pursuant to which DEPFA acquired the Municipal Capital Markets Group of the Company’s subsidiary, Broadpoint Capital, in connection with which the Company recognized a pre-tax gain on sale in the amount of $7.9 million.  At December 31, 2007 the Municipal Capital Markets Group is included in discontinued operations. (see Note 22)  On September 21, 2007, the Company also closed the investment from an affiliate of MatlinPatterson Global Opportunities Partners II, L.P. (“MatlinPatterson”) in which the Company received net proceeds from the sale of the Company’s common stock of $45.8 million.  Pursuant to the Investment Agreement, MatlinPatterson purchased 41.5 million newly issued shares and two co-investors received a total of 0.5 million newly issued shares which represented approximately 71.7 percent and 0.8 percent, respectively, of the issued and outstanding voting power of the Company immediately following the closing on the investment transaction.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Securities Transactions

Proprietary securities transactions in regular-way trades are recorded on the trade date, as if they had settled.  Profit and loss arising from all securities transactions entered into for the account and risk of the Company are recorded on a trade date basis.  Customers’ securities transactions are reported on a settlement date basis with related commission income and expenses reported on a trade date basis.

Equity securities owned and equity securities sold, buy not yet purchased are comprised of United States equity securities and are valued at market value based on quoted market prices.

Fixed Income securities owned and fixed income securities sold, but not yet purchased, generally are valued on the basis of prices furnished by a pricing service when the Company believes such prices accurately reflect the fair value of such securities.  A pricing service utilizes electronic data processing techniques based on yield spreads relating to securities with similar characteristics to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices.  If the Company decides that a price provided by the pricing service does not accurately reflect the fair value of the securities, when prices are not readily available from a pricing service, or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Company.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment Banking

Investment banking revenues include gains, losses and fees, net of transaction related expenses, arising from securities offerings in which the Company acts as an underwriter.  Investment banking management fees are recorded on offering date, sales concessions on trade date, and underwriting fees at the time the income is reasonably determinable. Investment banking revenues also include fees earned from providing merger, acquisition and financial advisory services and are recognized as services are provided.

Resale and Repurchase Agreements

Transactions involving purchases of securities under agreements to resell or sales of securities under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest.  It is the policy of the Company to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements.  Collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate.  The Company no longer engages in these transactions.

At December 31, 2007, the Company had no resale agreements.  At December 31, 2006, resale agreements were carried at $14.1 million.  For the year ended December 31, 2006, the collateral held by the Company consisted of government bonds and was equal to the approximate principal amount loaned to Mizuho Securities USA and First Tennessee.

Securities-Borrowing Activities

Securities borrowed are generally reported as collateralized financings and are recorded at the amount of cash collateral advanced.  Securities borrowed transactions require the Company to deposit cash or other collateral with the lender.  The Company monitors the market value of securities borrowed on a daily basis, with additional collateral obtained or refunded as necessary.  The Company no longer engages in securities borrowing transactions.

Collateral

The Company receives collateral in connection with resale agreements and securities borrowed transactions.  Under many agreements, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements or to deliver to counterparties to cover short positions.  The Company continues to report assets it has pledged as collateral in secured borrowing transactions and other arrangements when the secured party cannot sell or repledge the assets and does not report assets received as collateral in secured lending transactions and other arrangements because the debtor typically has the right to redeem the collateral on short notice.

Intangible Assets

The Company amortizes customer related intangible assets over their estimate useful life, which is the period over which the assets are expect to contribute directly or indirectly to the future cash flows of the Company.  Goodwill is not amortized; instead, it is reviewed on an annual basis for impairment.  Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit.  A reporting unit is defined by the Company as an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.  In addition to annual testing, Goodwill is also tested for impairment at the time of a triggering event requiring a re-evaluation, if one were to occur.

Drafts Payable

The Company maintains a group of “zero-balance” bank accounts which are included in payables to others on the Statements of Financial Condition.  The balances in the “zero-balance” accounts represent outstanding checks that have not yet been presented for payment at the bank.  The Company has sufficient funds on deposit to clear these checks, and these funds will be transferred to the “zero-balance” accounts upon presentment. 

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Statement of Cash Flows

For purposes of the Statement of Cash Flows, the Company has defined cash equivalents as highly liquid investments, with original maturities of less than 90 days that are not segregated under federal regulations or held for sale in the ordinary course of business.

Comprehensive Income

The Company has no components of other comprehensive income; therefore, comprehensive income equals net income.

Fair Value of Financial Instruments

The financial instruments of the Company are reported on the Statements of Financial Condition at market or fair value, or at carrying amounts that approximate fair values, because of the short maturity of the instruments, except subordinated debt.  The estimated fair value of subordinated debt at December 31, 2007, approximates its carrying value based on current rates available (see Note 11).

Office Equipment and Leasehold Improvements

Office equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization of $27.0 million at December 31, 2007 and $26.7 million at December 31, 2006.  Depreciation and amortization is provided on a straight-line basis over the shorter of the estimated useful life of the asset (2 to 5 years) or the initial term of the lease.  Depreciation and amortization expense for the years ended December 31, 2007, 2006 and 2005 was $2.2 million, $2.5 million and $3.7 million, respectively.

Securities Issued for Services

On January 1, 2006, the Company adopted FAS 123(R) “Share Based Payments”.  In adopting FAS 123(R), the Company applied the modified prospective application transition method. Under the modified prospective application method, prior period financial statements are not adjusted. Instead, the Company will apply FAS 123(R) for new awards granted after December 31, 2005, any portion of awards that were granted after January 1, 1995 and have not vested by December 31, 2005 and any outstanding liability awards.  The impact of applying the nominal vesting period approach for awards with vesting upon retirement eligibility and the non-substantive approach was immaterial. Upon adoption of FAS 123(R) on January 1, 2006, the Company recognized an after-tax gain of approximately $0.4 million as the cumulative effect of a change in accounting principle, primarily attributable to the requirement to estimate forfeitures at the date of grant instead of as incurred.  The estimated forfeiture rate for 2007 was 4% (see Note 16).

Legal Fees

The Company accrues legal fees as they are incurred.

Income Taxes

Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to differences between the financial statement basis and tax basis of existing assets and liabilities.  The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date.

On January 1, 2007, the Company adopted FASB Interpretation (“FIN”) No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”). The Company recognizes tax benefits from uncertain tax positions only when tax positions meet the minimum probability threshold, as defined by FIN 48, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reclassification

Certain 2006 and 2005 amounts on the Consolidated Statements of Operations have been reclassified to conform to the 2007 presentation due to the Company discontinuing its Fixed Income Middle Markets and Municipal Capital Markets Groups (see Note 22).

Certain amounts in the Consolidated Statements of Cash Flows have been reclassified related to deferred compensation, $0.6 million was reclassified in 2005 to deferred compensation from services provided in exchange for common stock.

Earnings per Common Share

The Company calculates its basic and diluted earnings per shares in accordance with Statement of Financial Accounting Standards No. 128, Earnings per share.  Basic earnings per share are computed based upon weighted-average shares outstanding.  Dilutive earnings per share is computed consistently with basic while giving effect to all dilutive potential common shares that were outstanding during the period.  The Company uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards, warrants, unexercised options and any contingently issued shares (see Note 13).  The weighted-average shares outstanding were calculated as follows at December 31:

(In thousands of shares)		2007				2006				2005
Weighted average shares for basic earnings per share			27,555				15,155				13,824
Effect of dilutive common equivalent shares			-				-				-
Weighted average shares and dilutive common equivalent shares for dilutive earnings per share			27,555				15,155				13,824

As a result of net losses in 2007, 2006, and 2005, the Company excluded approximately 0.3 million, 0.3 million, and 0.9 million common equivalent shares in 2007, 2006 and 2005 respectively, in its computation of dilutive earnings per share because they were anti-dilutive.  In addition, at December 31, 2007, approximately 0.1 million shares of restricted stock awards, (see Note 16) which are included in shares outstanding, are not included in the basic earnings per share computation because they are not vested as of December 31, 2007.

On September 21, 2007, the Company closed the investment from an affiliate of MatlinPatterson Global Opportunities Partners II, L.P. (“MatlinPatterson”) in which the Company received net proceeds from the sale of common stock of $45.8 million. Pursuant to the Investment Agreement, MatlinPatterson, received 41.5 million newly issued shares and two co-investors received a total of 0.5 million newly issued shares which represent approximately 71.7 percent and 0.8 percent, respectively, of the issued and outstanding voting power of the Company immediately following the closing on the investment transactions. The number of shares issued to MatlinPatterson and its co-investors were subject to upward  adjustment within 60 days of the Closing in accordance with the terms of the Investment Agreement based on final calculations of the Company’s net tangible book value per share. Additional shares of common stock of the  Company were issued pursuant to the upward adjustment in the amount of 3.6 million, of which approximately 3.59 million shares are allocated to Matlin Patterson  and approximately 0.04 million shares are allocated to the co-investors.

  NOTE 2.       Cash and Securities Segregated under Federal Regulations

At December 31, 2007 and 2006, the Company segregated cash of $1.7 million and $5.2 million respectively, in a special reserve bank account for the exclusive benefit of customers under Rule 15c3-3 of the Securities and Exchange Commission.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 3.       Receivables From and Payables To Brokers, Dealers, and Clearing Agencies

Amounts receivable from and payable to brokers, dealers and clearing agencies consists of the following at December 31:

(In thousands of dollars)		2007				2006
Adjustment to record securities owned on a trade date basis, net		$	88			$	-
Securities borrowed			-				455
Commissions receivable			939				2,146
Securities failed to deliver			142				3,841
Good faith deposits			-				225
Receivable from clearing organizations			1,752				3,959
Total receivables		$	2,921			$	10,626
Adjustment to record securities owned on a trade date basis, net		$	-			$	2,173
Payable to clearing organizations			84,696				43,807
Securities failed to receive			3,869				3,085
Total payables		$	88,565			$	49,065

Proprietary securities transactions are recorded on a trade date, as if they had settled.  The related amounts receivable and payable for unsettled securities transactions are recorded net in receivables or payables to brokers, dealers and clearing agencies on the Statements of Financial Condition.

One of the Company’s affiliate’s, Broadpoint Securities, customers’ securities transactions are cleared through a third party under a clearing agreement. Under this agreement, the clearing agent executes and settles customer securities transactions, collects margin receivables related to these transactions, monitors the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, requires the customer to deposit additional collateral with them or to reduce positions, if necessary.

  NOTE 4.       Receivables From and Payables To Customers

At December 31, 2007, receivables from customers are mainly comprised of the purchase of securities by institutional clients. Delivery of these securities is made simultaneously with the receipt of the funds from the institutional clients.

The majority of the Company’s non-institutional customers securities transactions, including those of officers, directors, employees and related individuals, are cleared through a third party under a clearing agreement.  Under this agreement, the clearing agent executes and settles customer securities transactions, collects margin receivables related to these transactions, monitors the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, requires the customer to deposit additional collateral with them or to reduce positions, if necessary.  In the event the customer is unable to fulfill its contractual obligations, the clearing agent may purchase or sell the financial instrument underlying the contract, and as a result may incur a loss.

If the clearing agent incurs a loss, it has the right to pass the loss through to the Company which exposes the Company to off-balance-sheet risk.  The Company has retained the right to pursue collection or performance from customers who do not perform under their contractual obligations and monitors customer balances on a daily basis along with the credit standing of the clearing agent.  As the potential amount of losses during the term of this contract has no maximum, the Company believes there is no maximum amount assignable to this indemnification.  At December 31, 2007, substantially all customer obligations were fully collateralized and the Company has not recorded a liability related to the clearing agent’s right to pass losses through to the Company.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 5.       Securities Owned and Sold, but Not Yet Purchased

Securities owned and sold, but not yet purchased consisted of the following at December 31:

		2007								2006
(In thousands of dollars)		Owned				Sold, but not yet Purchased				Owned				Sold, but not yet Purchased
Marketable Securities
U.S. Government and federal agency obligations		$	137,771			$	75,081			$	90,652			$	51,393
State and municipal bonds			6				1				139,811				26
Corporate obligations			48,481				-				31,146				84
Corporate stocks			3,249				98				12,989				456
Options			-				-				258				161
Not Readily Marketable Securities
Investment securities with no publicly quoted market			659				-				1,008				-
Investment securities subject to restrictions			290				-				303				-
Total		$	190,456			$	75,180			$	276,167			$	52,120

Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions or conditions applicable to the securities or to the Company.

  NOTE 6.       Investments

The Company’s investment portfolio includes interests in publicly and privately held companies. Information regarding these investments has been aggregated and is presented below as of and for the years ended December 31:

(In thousands of dollars)		2007				2006				2005
Carrying Value
Public		$	-			$	-			$	40,375
Private			15,436				10,866				9,492
Consolidation of Employee Investment Funds net of Company’s ownership interest, classified as Private Investment			1,477				1,384				2,630
Total carrying value		$	16,913			$	12,250			$	52,497

Investment gains and losses were comprised of the following:

(In thousands of dollars)		2007				2006				2005
Public (realized and unrealized gains and losses)		$	-			$	(12,865	)		$	22,424
Private (realized and unrealized gains and   losses)			2,594				5,263				(833	)
Investment gains (losses)		$	2,594			$	(7,602	)		$	21,591

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

iRobot (“IRBT”) and Mechanical Technology Incorporated (“MKTY”) accounted for the entire balance of public investments owned by the Company as of December 31, 2005.  During the year ended December 31, 2006, the Company sold its remaining 1,116,040 shares of MKTY for proceeds of approximately $3.3 million.  Also during the year ended December 31, 2006, the Company sold its remaining 1,116,290 shares of IRBT for proceeds of approximately $24.2 million.

Privately held investments include an investment of $15.0 million in FA Technology Ventures Inc., L.P. (the “Partnership”), which represented the Company’s maximum exposure to loss in the Partnership at December 31, 2007.  The Partnership’s primary purpose is to provide investment returns consistent with the risk of investing in venture capital.  At December 31, 2007 total Partnership capital for all investors in the Partnership equaled $59.1 million.  The Partnership is considered a variable interest entity.   The Company is not the primary beneficiary, due to other investors’ level of investment in the Partnership.  Accordingly, the Company has not consolidated the Partnership in these financial statements, but has recorded the value of its investment.  FA Technology Ventures Corp. (“FATV”), a wholly-owned subsidiary of the Company, is the investment advisor for the Partnership.  With respect to the Partnership and any parallel funds revenues derived from the management of this investment and the Employee Investment Funds for the year ended December 31, 2007 were $0.9 million in consolidation.    For the year ended December 31, 2007, there was a $0.1 million net realized loss for private investments compared to a $6.0 million net realized gain in 2006, which was driven by distributions of the gains from these investments to the Company.

The Company has consolidated its Employee Investment Fund (EIF). The EIF is a  limited liability company, established by the Company for the purpose of having select employees invest in private equity placements. The EIF is managed by FA Management Corp., a wholly-owned subsidiary of the Company, which has contracted with FATV to act as an investment advisor with respect to funds invested in parallel with the Partnership.  The Company’s carrying value of this EIF is $0.2 million excluding the effects of consolidation.  The Company has outstanding loans of $0.3 million to the EIF and is also committed to loan an additional $0.2 million to the EIF. The effect of consolidation was to increase Investments by $1.5 million, decrease Receivable from Others by $0.3 million and increase Payable to Others by $1.2 million.  The amounts in Payable to Others relates to the value of the EIF owned by employees.

  NOTE 7.       Intangible Assets

(In thousands of dollars)		Gross Carrying Amount				Accumulated Amortization				Impairment Loss				Net Carrying Value
Intangible assets
Customer related (amortizable):
Broadpoint Securities, Inc. - Acquisition		$	641			$	(196	)		$	-			$	445
Institutional convertible bond arbitrage group -Acquisition			1,017				(382	)			(635	)			-
			1,658				(578	)			(635	)			445
Goodwill (unamortizable):
Broadpoint Securities, Inc. - Acquisition			25,250				-				(7,886	)			17,364
Institutional convertible bond arbitrage group - Acquisition			964				-				(964	)			-
			26,214				-				(8,850	)			17,364
Total Intangible Assets		$	27,872			$	(578	)		$	(9,485	)		$	17,809

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Customer related intangible assets are being amortized over 12 years.  Amortization expense for the customer related intangible assets, including the impairment discussed below, for the years ended December 31, 2007, 2006, and 2005 was $0.1 million, $0.8 million, and $0.1 million, respectively.  Future amortization expense is estimated as follows:

(in thousands of dollars)
Estimated Amortization Expense (year ended December 31)
2008		$	53
2009			53
2010			53
2011			53
2012			53
Thereafter			180
Total		$	445

The carrying amount of goodwill for the Broadpoint Securities, Inc. - Acquisition increased by $1.5 million during the year ended December 31, 2006, related primarily to additional consideration pursuant to the acquisition agreement (see Note 12).

As a result of annual impairment testing, the goodwill related to the acquisition of Broadpoint Securities was determined to be impaired as of December 31, 2006.  Fair value of the Broadpoint Securities reporting unit was determined using both the income and market approaches.  The income approach determines fair value using a discounted cash flow analysis based on management’s projections.  The market approach analyzes and compares the operations performance and financial conditions of the reporting unit with those of a group of selected publicly-traded companies that can be used for comparison.  The valuation gives equal weight to the two approaches to arrive at the fair value of the reporting unit.  As a result of the valuation, as of December 31, 2006, the carrying value of goodwill was greater than its implied value resulting in a goodwill impairment loss of $7.9 million recognized in the caption “Impairment” on the Statements of Operations for the year ended December 31, 2006.  The Company performed its annual impairment testing and as a result determined the fair value of the unit exceeded the carrying value of the unit resulting in no impairment charge in 2007.

A plan approved by the Board of Directors on September 28, 2006 to discontinue operations of the Institutional Convertible Bond Arbitrage Advisory Group (the “Group”) triggered an impairment test in the third quarter of 2006 in accordance with SFAS No. 142 Goodwill and Other Intangible Assets.  The value of the Group was more dependent on their ability to generate earnings than on the value of the assets used in operations, therefore fair value of the Group was determined using the income approach.  The income approach determines fair value using a discounted cash flow analysis based on management’s projections.  Based on the impairment test, a goodwill impairment loss of $1.0 million was recognized in discontinued operations for the year ended December 31, 2006.  As a result of impairment testing of the disposal group in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, it was determined that amortizable customer related intangibles were also impaired.  An impairment loss of $0.6 million was recognized related to amortizable intangible assets in discontinued operations for the year ended December 31, 2006.  The Group ceased operations in April 2007.

  NOTE 8.      Short-Term Bank Loans and Notes Payables

At December 31, 2006, short-term bank loans were made under a variety of bank lines of credit totaling $210 million of which approximately $129 million was outstanding. The weighted average interest rate on these loans was 5.74% at December 31, 2006. These loans bore interest at variable rate based primarily on the Federal Funds interest rate.  At December 31, 2007, the Company had no outstanding short-term bank loans. 

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2007, the Company paid the remaining balance of the term loan of $12.7 million related to the acquisition of Broadpoint Securities pursuant to an agreement (the “Agreement”) entered into on August 6, 2007, with the Company’s lender and lessor (also see Note 9).  The Agreement stated that the lender and the Company acknowledged that they did not agree on the interpretation and /or enforcement of each of the parties respective rights under the Loan Agreement and/or the Lease, therefore, the parties acknowledged and agreed that neither the lender nor the Company had waived or was waiving any of its rights under the Loan Agreement and or the Lease except for the waivers and or modifications.  The Agreement also amended the Company’s obligations under the Loan Agreement with respect to the DEPFA transaction and MatlinPatterson investment transaction.  The Company agreed to repay, upon closing of the DEPFA transaction, Loan Agreement obligations equal to 75 percent of the net proceeds received by the Company and upon closing of the MatlinPatterson investment transaction to pay in full the remaining balance of the loan.  On September 14, 2007, upon the close of the DEPFA transaction, the Company made a principal payment of $0.8 million pursuant to the Agreement.  On September 21, 2007, upon the close of the MatlinPatterson investment transaction, the Company paid the remaining $9.8 million balance of the term loan.

  NOTE 9.       Obligations Under Capitalized Leases

Pursuant to the Agreement entered into between the Company and its lessor on August 6, 2007, the Company amended its lease obligations under the lease agreements with respect to the MatlinPatterson investment transaction.  On September 21, 2007, the MatlinPatterson investment transaction closed and pursuant to the Agreement all capital leases with the lender were paid in full.

  NOTE 10.       Payables To Others

Amounts payable to others consisted of the following at December 31:

(In thousands of dollars)		2007				2006
Draft payables		$	173			$	5,942
Net Payable to Employees for the Employee Investment Fund (see “Investments” note)			1,158				1,039
Payable to Sellers of Descap Securities, Inc. (see “Commitments and Contingencies” footnote)			1,036				1,036
Others			570				979
Total		$	2,937			$	8,996

The Company maintains a group of “zero balance” bank accounts which are included in payable to others on the Statement of Financial Condition.  Drafts payable represent the balance in these accounts related to outstanding checks that have not yet been presented for payment at the bank.  The Company has sufficient funds on deposit to clear these checks, and these funds will be transferred to the “zero-balance” accounts upon presentment.  The Company maintained one “zero balance” account which was used as a cash management technique, permitted under Rule 15c3-3 of the Securities and Exchange Commission, to obtain federal funds for a fee, which is lower than prevailing interest rates, in amounts equivalent to amounts in customers’ segregated funds accounts with a bank.  This cash management technique was discontinued in September 2007.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 11.       Subordinated Debt

A select group of management and highly compensated employees are eligible to participate in the Broadpoint Securities Group, Inc. Deferred Compensation Plan for Key Employees (the “Plan”).  The employees enter into subordinated loans with Broadpoint Capital to provide for the deferral of compensation and employer allocations under the Plan.  The New York Stock Exchange has approved Broadpoint Capital’s subordinated debt agreements related to the Plan.  Pursuant to these approvals, these amounts are allowable in Broadpoint Capital’s computation of net capital.  The accounts of the participants of the Plan are credited with earnings and/or losses based on the performance of various investment benchmarks selected by the participants.  Maturities of the subordinated debt are based on the distribution election made by each participant, which may be deferred to a later date by the participant.  As of February 28, 2007, the Company no longer permits any new amounts to be deferred under this Plan.  Principal debt repayment requirements, which occur on about April 15th of each year, as of December 31, 2007, are as follows:

(In thousands of dollars)
2008		$	1,299
2009			465
2010			287
2011			108
2012			208
2013 to 2016			595
Total		$	2,962

  NOTE 12.       Commitments and Contingencies

Commitments:  As of December 31, 2007, the Company had a commitment to invest up to an additional $1.3 million in FA Technology Ventures, LP (the “Partnership”). The investment period expired in July 2006, however, the General Partner may continue to make capital calls up through July 2011 for additional investments in portfolio companies and for the payment of management fees.  The Company intends to fund this commitment from operating cash flow. The Partnership’s primary purpose is to provide investment returns consistent with risks of investing in venture capital. In addition to the Company, certain other limited partners of the Partnership are officers or directors of the Company. The majority of the commitments to the Partnership are from non-affiliates of the Company.

The General Partner for the Partnership is FATV GP LLC. The General Partner is responsible for the management of the Partnership, including among other things, making investments for the Partnership. The members of the General Partner are George McNamee, a Director of the Company, Broadpoint Enterprise Funding, Inc., a wholly owned subsidiary of the Company, and other employees of the Company or its subsidiaries. Mr. McNamee is required under the partnership agreement to devote a majority of his business time to the conduct of the affairs of the Partnership and any parallel funds. Subject to the terms of the partnership agreement, under certain conditions, the General Partner is entitled to share in the gains received by the Partnership in respect of its investment in a portfolio company. The General Partner has contracted with FATV to act as its investment advisor.

As of December 31, 2007, the Company had an additional commitment to invest up to $0.2 million in funds that invest in parallel with the Partnership, which it intends to fund, at least in part, through current and future Employee Investment Funds (EIF). The investment period expired in July 2006, but the General Partner may continue to make capital calls up through July 2011 for additional investments in portfolio companies and for the payment of management fees.  The Company anticipates that the portion of the commitment that is not funded by employees through the EIF will be funded by the Company through operating cash flow.

As of December 31, 2007, the Company has guaranteed compensation payments of $4.9 million payable over the next two years related to various compensation arrangements with its employees. The Company also has $1.4 million in restructuring payments over the next year in connection with the plan announced October 17, 2007 in which the Company determined that it will outsource certain of its administrative functions, consolidate certain of such functions

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in its New York City location, and reduce staff in order to properly size its business consistent with its current levels of activity.

Contingent Consideration:  On May 14, 2004, the Company acquired 100 percent of the outstanding common shares of Descap Securities Inc., now known as Broadpoint Securities Inc., a New York-based broker-dealer and investment bank.  Per the acquisition agreement, the sellers can receive future contingent consideration based on the following: For each of the three years from the acquisition date ending June 1, 2007, if Broadpoint Securities’ Pre-Tax Net Income (exclusive of certain intercompany charges, as defined) (i) is greater than $10 million, The Company shall pay to the sellers’ former shareholders an aggregate amount equal to fifty percent (50%) of Broadpoint Securities’ Pre-Tax Net Income for such period or (ii) is equal to or less than $10 million, the Company shall pay them an aggregate amount equal to forty percent (40%) of Broadpoint Securities’ Pre-Tax Net Income for such period.

Pursuant to the asset purchase agreement with DEPFA, the Company was required to deliver an estimate of the accrued bonuses at closing and a final accrued bonus calculation thirty days following closing.  The Company accrued the bonus consistent with the asset purchase agreement. All items arising from the sale of the Municipal Capital Markets Group were reflected in the Gain on Sale of Discontinued Operations.  This includes the closing bonuses paid to employees and the reversal of restricted stock and deferred cash amortization as a result of the employees’ termination of employment.  On October 30, 2007, DEPFA provided the Company notice that it was exercising its option pursuant to the agreement to appoint an independent accounting firm to conduct a special audit of the final accrued bonus amount.  Although there can be no assurance as to the eventual outcome of this special audit, the Company believes that it has appropriately calculated and accounted for the accrued bonus.

Leases:  The Company's headquarters and sales offices, and certain office and communication equipment, are leased under non-cancelable operating leases, certain of which contain renewal options and escalation clauses, and which expire at various times through 2015. To the extent the Company is provided tenant improvement allowances funded by the lessor, they are amortized over the initial lease period and serve to reduce rent expense.  To the extent the Company is provided free rent periods, the Company recognizes the rent expense over the entire lease term on a straightline basis.

On November 2, 2007, the Company entered into a Fifth Amendment to Sub-Lease Agreement (the “Amendment”) with Columbia 677, L.L.C. (the “Landlord”) pursuant to which the Company’s Sub-lease-Agreement with the Landlord dated August 12, 2003 concerning the lease of certain space in the building located at 677 Broadway, Albany, New York (the “Albany Premises”) was amended.  The Amendment provides that the Company will surrender a total of 15,358 square feet (the “Surrender Premises”) of the Albany Premises, a portion at a time, on or before three surrender dates:  November 15, 2007, December 15, 2007 and April 1, 2008.  If the Company fails to vacate the portion of the Surrender Premises on the applicable surrender dates, it will owe the Landlord $1,667 for each day of such failure.  The Company will fail to vacate 1,398 square feet of the surrender premises by April 1, 2008 and as a result will begin to incur the daily fee on such date.  The Company currently expects it will vacate such portion of the surrender premises by June 30, 2008.  In consideration of the Landlord agreeing to the surrender of the Surrender Premises, the Amendment provides that the Company shall pay the Landlord a surrender fee equal to $1,050,000 payable in three installments.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future minimum annual lease payments, and sublease rental income, are as follows:

(In thousands of dollars)		Future Minimum Lease Payments				Sublease Rental Income				Net Lease Payments
2008		$	5,110			$	1,307			$	3,803
2009			1,860				167				1,693
2010			1,779				158				1,621
2011			1,699				100				1,599
2012			1,678				100				1,578
Thereafter			2,899				92				2,807
Total		$	15,025			$	1,924			$	13,101

Annual rental expense, net of sublease rental income, for the years ended December 31, 2007, 2006 and 2005 approximated $4.9 million, $4.8 million, and $7.2 million, respectively.

In 2007, rental expense decreased $2.4 million due to one-time expenses incurred as part of the Company’s 2005 real estate strategy in New York City and San Francisco and the reversal of rent accruals relating to the surrender of the Company’s 1301 Avenue of the Americas lease.

Litigation

In early 2008, Broadpoint Capital hired Tim O’Connor, and 9 other individuals to form a new capitalization and restructuring group within Broadpoint Capital’s Investment Banking division.  Mr. O’Connor, the new Head of Broadpoint's Investment Banking Division and each of the other employees are former employees of Imperial Capital, LLC (“Imperial”).  Upon Broadpoint Capital’s hiring of these employees, Imperial commenced an arbitration proceeding against Broadpoint Capital, Mr. O’Connor, another employee hired by Broapdoint, and a former employee of Imperial who is not employed by Broadpoint before the Financial Industry Regulatory Authority (“FINRA”).  In the arbitration, Imperial alleges various causes of action against Broadpoint Capital as well as the individuals based upon alleged violations of restrictive covenants in employee contracts relating to the non-solicitation of employees and clients.  Imperial claims damages in excess of $100 million.   Concurrently with the filing of the arbitration proceeding, Imperial sought and obtained a temporary restraining order in New York State Supreme Court, pending the conclusion of the FINRA arbitration hearing, enjoining Broadpoint from disclosing or making use of any confidential information of Imperial, recruiting or hiring any employees of Imperial and seeking or accepting as a client any client of Imperial, except those clients for whom any of the hired individuals had provided services as a registered representative while employed by Imperial. Broadpoint Capital believes that it has strong defenses to and intends to vigorously defend itself against Imperial’s claims. However, an unfavorable resolution could have a material adverse effect on the Company’s financial position, results of operations and cash flows in the period resolved.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Due to the nature of our business, we are now, and likely in the future will be, involved in a variety of legal proceedings, including the matters described above.  These include litigation, arbitrations and other proceedings initiated by private parties and arising from our underwriting, financial advisory or other transactional activities, client account activities and employment matters.  Third parties who assert claims may do so for monetary damages that are substantial, particularly relative to our financial position.  In addition, the securities industry is highly regulated.  We are subject to both routine and unscheduled regulatory examinations of our business and investigations of securities industry practices by governmental agencies and self-regulatory organizations.  In recent years securities firms have been subject to increased scrutiny and regulatory enforcement activity.  Regulatory investigations can result in substantial fines being imposed on us.  Periodically we receive inquiries and subpoenas from the SEC, state securities regulators and self-regulatory organizations.  We do not always know the purpose behind these communications or the status or target of any related investigation.  Our responses to these communications have in the past resulted in our being cited for regulatory deficiencies, although to date these communications have not had a material adverse effect on our business.

We have taken reserves in our financial statements with respect to legal proceedings to the extent we believe appropriate.  However, accurately predicting the timing and outcome of legal proceedings, including the amounts of any settlements, judgments or fines, is inherently difficult insofar as it depends on obtaining all of the relevant facts (which is sometimes not feasible) and applying to them often-complex legal principles.  Based on currently available information, we do not believe that any litigation, proceeding or other matter to which we are a party or otherwise involved will have a material adverse effect on our financial position, results of operations and cash flows although an adverse development, or an increase in associated legal fees, could be material in a particular period, depending in part on our operating results in that period.

Collateral

The fair value of securities received as collateral, where the Company is permitted to sell or repledge the securities at December 31, 2006 consisted of securities purchased under agreements to resell, $14.1 million and securities borrowed of $0.4 million.  At December 31, 2006, a substantial portion of the collateral received by the Company had been sold or repledged.  As of December 31, 2007, the Company has not received securities as collateral.

Letters of Credit

The Company is contingently liable under bank stand-by letter of credit agreements, executed in connection with office leases, totaling $0.2 million at December 31, 2007.  The letter of credit agreements were collateralized by Cash of $0.2 million at December 31, 2007.

Other

The Company enters into underwriting commitments to purchase securities as part of its investment banking business. Also, the Company may purchase and sell securities on a when-issued basis.  As of December 31, 2007, the Company had no outstanding underwriting commitments and had purchased $9.9 million and sold $65.0 million securities on a when-issued basis.

  NOTE 13.       Temporary Capital

In connection with the Company’s acquisition of Broadpoint Securities, the Company issued 549,476 shares of stock which provide the Sellers the right (the “put right”) to require the Company to purchase back the shares issued, at a price of $6.14 per share.  Accordingly, the Company has recognized as temporary capital the amount that it may be required to pay under the agreement.  If the put right is not exercised by the time it expires, the Company will reclassify the temporary capital to stockholders’ equity. The Company also has the right to purchase back these shares from the Sellers at a price of $14.46.  The earnout period ended on May 31, 2007. The earnout payment has not yet been made. The put and call rights expire on the date upon which the final earnout payment is required to be made.  In June 2006, certain of

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Sellers of Broadpoint Securities exercised their put rights and the Company repurchased 532,484 shares at $6.14 per share for the total amount of $3.3 million.

  NOTE 14.       Stockholders’ Equity

MatlinPatterson Transaction

On September 21, 2007, the Company closed the investment from an affiliate of MatlinPatterson Global Opportunities Partners II, L.P. (“MatlinPatterson”) in which the Company received net proceeds from the sale of common stock of $45.8 million. Pursuant to the Investment Agreement, MatlinPatterson, received 41.5 million newly issued shares and two co-investors received a total of 0.5 million newly issued shares which represent approximately 71.7 percent and 0.8 percent, respectively, of the issued and outstanding voting power of the Company immediately following the closing on the investment transactions. The number of shares issued to MatlinPatterson and its co-investors were subject to upward adjustment within 60 days of the Closing in accordance with the terms of the Investment Agreement based on final calculations of the Company’s net tangible book value per share. Additional shares of common stock of the Company were issued pursuant to the upward adjustment in the amount 3.6 million, of which approximately 3.59 million shares are allocated to MatlinPatterson and approximately 0.04 million shares are allocated to the co-investors.

Dividends

 In February 2005, the Board of Directors declared a quarterly cash dividend of $0.05 per share payable on March 10, 2005, to shareholders of record on February 24, 2005.  In May 2005, the Board of Directors suspended the $0.05 per share dividend.

Acquisition – Broadpoint Securities, Inc.

The shares issued to the sellers of Broadpoint Securities provide the sellers the right to require the Company to purchase back these shares at a price of $6.14 per share.  The Company also has the right to purchase back these shares from the sellers at a price of $14.46.  The earnout period ended on May 31, 2007. The put and call rights expire on the date upon which the final earnout payment is required to be made. The value assigned to the shares of common stock issued ($10.39 per share) approximated the market value of the stock on the date Broadpoint Securities was acquired ($10.30 per share).  The difference in the value assigned and the market value was due to the put and call features attached to the stock.  In June 2006, certain of the sellers of Broadpoint Securities, Inc. exercised their put rights and the Company purchased 532,484 shares at $6.14 per share for a total amount of $3.3 million.

Rights Plan

 On March 27, 1998, the Board of Directors adopted a Shareholder Rights Plan.  The rights were distributed as a dividend of one right for each share of Broadpoint Securities Group, Inc common stock outstanding, with a record date of March 30, 1998.  Management believes the Shareholder Rights Plan is intended to deter coercive takeover tactics and strengthen the Company's ability to deal with an unsolicited takeover proposal.

The rights will expire on March 30, 2008.  Each right will entitle the holder to buy one one-hundredth of a newly issued share of preferred stock at an exercise price of $56.00.  The rights will become exercisable at such time as any person or group acquires more than 15% of the outstanding shares of common stock of the Company (subject to certain exceptions) or within 10 days following the commencement of a tender offer that will result in any person or group owning such percentage of the outstanding voting shares.

Upon any person or group acquiring 15% of the outstanding shares of voting stock, each right will entitle its holders to buy shares of Broadpoint Securities Group, Inc. common stock (or of the stock of the acquiring company if it is the surviving entity in a business combination) having a market value equal to twice the exercise price of each right.  The rights are redeemable at any time prior to their becoming exercisable.

On May 14th, 2007, in connection with the MatlinPatterson investment transaction, the Company amended the Rights Agreement. Pursuant to the Rights Amendment, the definition of an “Acquiring Person”, as defined in the Rights

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Agreement, was amended to provide that MatlinPatterson, its affiliates or any group (as defined in Section 13(d) of the Exchange Act) in which it is a member would not become an Acquiring Person as a result of the execution and delivery of the Voting Agreements (as defined in the Investment Agreement) and the consummation of the transactions contemplated by the Investment Agreement. In addition, the definitions of “Distribution Date” and “Shares Acquisition Date”, as defined in the Rights Agreement, were amended to provide that the execution and delivery of the Voting Agreements and the Investment Agreement and the consummation of the investment transaction contemplated by the Investment Agreement would not result in the occurrence of a Distribution Date or a Shares Acquisition Date.

Warrants

In 2003, the Company issued a Senior Note dated June 13, 2003 for $10 million with a fixed interest rate of 8.5%, payable semiannually and maturing on June 30, 2010.  After adjustments related to anti-dilutive provisions stemming from the MatlinPatterson investment there were 511,094 warrants issued to the purchasers of the Senior Note, which are exercisable between $8.61 and $9.86 per share through June 13, 2010.  The Senior Note was paid in full in March 2006, while the warrants are still outstanding.

Deferred Compensation and Employee Stock Trust

The Company has adopted or may hereafter adopt various nonqualified deferred compensation plans (the "Plans") for the benefit of a select group of highly compensated employees who contribute significantly to the continued growth and development and future business success of the Company.  Plan participants may elect under the Plans to have the value of their Plans Accounts track the performance of one or more investment benchmarks available under the Plans, including Broadpoint Securities Group Common Stock Investment Benchmark, which tracks the performance of Broadpoint Securities Group, Inc. common stock ("Company Stock").  With respect to the Broadpoint Securities Group Common Stock Investment Benchmark, the Company contributes Company Stock to a rabbi trust (the "Trust") it has established in connection with meeting its related liability under the Plans.  As of February 28, 2007, the Company no longer permits any new amounts to be deferred under its current Plans.

Assets of the Trust have been consolidated with those of the Company.  The value of the Company's stock at the time contributed to the Trust has been classified in stockholders’ equity and generally accounted for in a manner similar to treasury stock.

The deferred compensation arrangement requires the related liability to be settled by delivery of a fixed number of shares of Company stock.  Accordingly, the related liability is classified in equity under deferred compensation and changes in the fair market value of the amount owed to the participant in the Plan is not recognized.

  NOTE 15.       Income Taxes

Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to differences between the financial statement basis and tax basis of existing assets and liabilities.  The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date.

The income tax provision was allocated as follows for the years ended December 31:

(In thousands of dollars)		2007				2006				2005
Loss from continuing operation		$	(4,703	)		$	(828	)		$	7,512
Income from discontinued operations			4,747				959				720
Stockholders’ equity (additional paid-in capital)			(122	)			-				(213	)
Total		$	(78	)		$	131			$	8,019

The Company reported a benefit for federal and state income taxes on continuing operations in 2007 and 2006 despite having a valuation allowance. The Company recognized a gain in discontinued operations for the years ended December 31, 2007 and 2006 due to the sale and related discontinuance of the Municipal Capital Markets division in

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2007.  The Company had losses from continuing operations. Under the accounting for income tax rules described in FASB Statement No. 109, the Company records a benefit in continuing operations to offset tax expense recorded in discontinued operations.

The components of income taxes attributable to loss from continuing operations, net of valuation allowance, consisted of the following for the years ended December 31:

(In thousands of dollars)		2007				2006				2005
Federal
Current		$	(3,524	)		$	(501	)		$	(454	)
Deferred			-				-				6,496
State and local
Current			(861	)			(327	)			(587	)
Deferred			(318	)			-				2,057
Total income tax expense (benefit)		$	(4,703	)		$	(828	)		$	7,512

The expected income tax expense (benefit) using the federal statutory rate differs from income tax benefit pertaining to pretax loss from continuing operations as a result of the following for the years ended December 31:

(In thousands of dollars)		2007				2006				2005
Income taxes at federal statutory rate @ 35%		$	(11,069	)		$	(16,604	)		$	(2,083	)
Graduated tax rates			316				475				60
State and local income taxes, net of federal    income taxes and state valuation allowance			(756	)			(201	)			971
Meals and entertainment			106				134				166
Other compensation			883				365				-
Goodwill impairment			-				2,682				-
Appreciated stock contribution			-				-				(123	)
Other, including reserve adjustments			1				436				(72	)
Alternative minimum tax			47				21
Change in federal and foreign valuation allowance			5,769				11,864				8,593
Total income tax expense (benefit)		$	(4,703	)		$	(828	)		$	7,512

The temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following at December 31:

(In thousands of dollars)		2007				2006
Securities held for investment		$	(1,550	)		$	(209	)
Fixed assets			1,685				1,540
Deferred compensation			4,460				8,700
Accrued liabilities			639				1,306
Deferred revenue			(430	)			(442	)
Net operating loss carryforwards			21,342				9,885
Intangible assets			83				654
Deferred tax assets under FIN 48			366				-
Other			726				332
Total net deferred tax asset before valuation allowance			27,321				21,766
Less valuation allowance			27,003				21,766
Total net deferred tax asset		$	318			$	-

The Company maintains  a valuation allowance at December 31, 2007 and 2006 as a result of uncertainties related to the realization of its net deferred tax asset.  The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s history of cumulative losses over the past three years and the difficulty of forecasting future taxable income.  The valuation allowance reflects the conclusion of management that is

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

more likely than not that the benefit of the deferred tax assets will not be realized.  The Company recorded a net change in its deferred tax valuation allowance in 2007 of $5.2 million  and in 2006 of $12.5 million

At December 31, 2007, the Company had federal net operating loss carryforwards of $51.8 million, which expire between 2023 and 2027.  At December 31, 2007, the Company had state net operating loss carryforwards for tax purposes approximating $47.0 million, which expire between 2008 and 2027.  These net operating loss carryforwards are subject to an annual limitation on their use pursuant to IRC Section 382 discussed below.

As a result of the closing of the MatlinPatterson investment transaction on September 21, 2007 the Company underwent a change in ownership within the meaning of Section 382 of the Internal Revenue Code (“IRC Section 382”). In general, IRC Section 382 places an annual limitation on the use of certain tax attributes such as net operating losses and tax credit carryovers in existence at the ownership change date. The Company has determined that the annual limitation on the use of its net operating loss carryforwards is approximately $1.1 million per year.  As a result, the Company has determined that a significant portion of its net operating loss carryforwards will expire unutilized.

The Company applies the “with and without” intra-period tax allocation approach described in the Emerging Issues Task Force (EITF) release Topic D-32 in determining the order in which tax attributes are considered.  Under this approach a windfall benefit is recognized in additional paid-in capital only if an incremental benefit is provided after considering all other tax attributes presently available to the Company.  The Company measures windfall tax benefits considering only the direct effects of the stock option deduction.  In the current year there was no windfall tax benefits, only tax shortfalls, the tax impact of which was offset by the change in the valuation allowance.

The Company has elected to apply the alternative transition method to calculate the historical pool of windfall tax benefits available as of the date of adoption of FAS 123(R) as described in FASB Staff Position No. FAS 123(R)-3.

As of January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  As a result of the implementation of FIN 48, the Company recorded an increase in tax reserves of $0.7 million.  The increase in tax reserves had two components, $0.6 million of which was accounted for as a reduction to the January 1, 2007 balance of retained earnings and $0.1 million which was accounted for as a reduction to the valuation allowance.  Upon adoption and at December 31, 2007,  the liability for unrecognized tax benefits, including applicable interest and penalties, was $1.0 million and $1.1 million, respectively.

The following table summarizes the activity related to our unrecognized tax benefits:

(In thousands of dollars)
Balance January 1, 2007		$	974
Gross increases related to current year tax positions			-
Gross increases related to prior years tax positions			384
Gross decreases related to prior years tax positions			-
Expiration of the statute of limitations for the assessment of taxes			(214	)
Decrease related to settlements with Tax Authorities			-
Balance December 31, 2007		$	1,144

At adoption, the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate totals $0.6 million when the Company maintains a full valuation allowance and $0.5 million with no valuation allowance. The corresponding amounts at December 31, 2007 are $0.7 million with a valuation allowance and $0.8 million without.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions.   As of January 1, 2007 and December 31, 2007, with few exceptions, the Company and its subsidiaries were no longer subject to U.S. federal tax or state and local income tax examinations for years before 2003 and 2004, respectively.  There are no returns currently under examination.  However, net operating loss carryforwards existing at January 1, 2007 and December 31, 2007 could potentially be adjusted when utilized.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s continuing practice is to recognize interest and penalties related to income tax matters as a component of income tax.  As of January 1, 2007 and December 31, 2007, the Company had accrued approximately $0.1 million and $0.2 million, respectively, of interest and penalties included as a component of the unrecognized tax benefit.  During the year ended December 31, 2007, $0.1 million of interest and penalties has been recognized as a component of income tax.

The unrecognized tax benefits of the Company could significantly change over the next twelve months due to the expiration of the statute of limitations on approximately $0.8 million of unrecognized tax benefits.

NOTE 16.      Benefit Plans

The Company has established several stock incentive plans through which employees of the Company may be awarded stock options, stock appreciation rights, restricted stock/restricted stock units, which expire at various times through April 25, 2017.  The following is a recap of all plans as of December 31, 2007:

Shares authorized for issuance			13,566,561
Share awards used:
Stock options granted and outstanding			1,035,962
Restricted stock awards granted and unvested			87,882
Restricted stock units granted and unvested			4,455,000
Restricted stock units granted and vested			570,000
Restricted stock units committed not yet granted			1,500,000
Total share awards used			7,648,844
Shares available for future awards			5,917,717

For the twelve-month period ended December 31, 2007 and December 31, 2006, total compensation expense for share based payment arrangements was $5.6  million and $7.9 million, respectively and the related tax benefit was $0.0 for both periods.  At December 31, 2007, the total compensation expense related to non-vested awards, which are expected to vest, not yet recognized is $7.8 million, which is expected to be recognized over the remaining weighted average vesting period of 2.7 years.  At December 31, 2006, the total compensation expense related to non-vested awards not yet recognized was $7.1 million.  The amount of cash used to settle equity instruments granted under share based payment arrangements during the twelve-month period ended December 31, 2007 was $0.0.

The Incentive Plan pursuant to which 13.6 million shares are authorized to be issued allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), nonqualified stock options, stock appreciation rights, performance awards, or other stock based awards. The plan imposes a limit on the number of shares of our common stock that may be subject to awards. An award relating to shares may be granted if the aggregate number of shares subject to then-outstanding awards plus the number of shares subject to the award being granted do not exceed 25% of the number of shares issued and outstanding immediately prior to the grant. The number of shares issued to MatlinPatterson and its co-investors was subject to upward adjustment within 60 days of the Closing in accordance with the terms of the Investment Agreement based on final calculations of the Company’s net tangible book value per share. The Company issued 3.6 million additional shares of common stock pursuant to the upward adjustment.  This adjustment would increase the shares authorized for issuance under the plan based on the formula referenced above.

 

The restricted stock units committed but not yet granted are based on employment agreements for the Chairman and Chief Executive Officer and the President and Chief Operating Officer.  The employment agreements include a set vesting schedule and performance targets yet to be determined. On February 6, 2008, the Company’s Board of Directors authorized, subject to the approval of the Company’s stockholders, an additional 10,675,000 shares for issuance pursuant to the Plan.

Cumulative Effect of Accounting Change:  Upon adoption of FAS 123(R) Share-Based Payment on January 1, 2006, the Company recognized an after-tax gain of approximately $0.4 million as the cumulative effect of a change in

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accounting principle, primarily attributable to the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred.

The following table reflects the effect on net income if the fair value based method had been applied to all outstanding and unvested stock options for year ended December 31, 2005.

(In thousands of dollars)		2005
Loss, as reported		$	(10,217	)
Add: Stock-based employee compensation expense included in reported net loss, net of tax			194
Less: Total stock-based employee compensation expense determined under fair value based method for all stock options, net of tax			(703	)
Pro forma net loss		$	(10,726	)
Earnings per share
As reported
Basic		$	(0.74	)
Diluted		$	(0.74	)
Pro forma
Basic		$	(0.78	)
Diluted		$	(0.78	)

Options:  Options granted under the plans established by the Parent have been granted at not less than fair market value, vest over a maximum of five years, and expire ten years after grant date.  Unvested options are typically forfeited upon termination.  Option transactions for the two year  period ended December 31, 2007, under the plans were as follows:

		Shares Subject to Option				Weighted Average Exercise Price
Balance at December 31, 2005			2,492,809			$	8.40
Options granted			-				-
Options exercised			(9,468	)			5.77
Options forfeited			(656,515	)			8.31
Balance at December 31, 2006			1,826,826				8.45
Options granted			100,000				1.64
Options exercised			-				-
Options terminated			(890,864	)			7.93
Balance at December 31, 2007			1,035,962			$	8.24

At December 31, 2007, the stock options that were exercisable had a remaining average contractual term of 3.1 years.  At December 31, 2007, 1,035,962 options outstanding had an intrinsic value of $0. At December 31, 2007, 100,000 unvested options, which are expected to vest, had an intrinsic value of $0.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options outstanding under the plans at December 31, 2007:

		Outstanding					Exercisable
Exercise Price Range	Shares	Average Life (years)		Average Exercise Price		Shares		Average Exercise Price
$1.64 - $6.44	247,565	5.42	$	4.03		147,564	$	5.66
$6.53 - $9.14	621,188	1.97		8.32		621,188		8.32
$9.47 - $13.26	10,000	5.69		13.05		10,000		13.05
$13.35 - $14.64	157,209	3.47		14.23		157,209		14.23
	1,035,962	3.06	$	8.24		935,961	$	8.95

At December 31, 2006, 1,804,056 options with an average exercise price of $8.40 were exercisable; and at December 31, 2005, 2,329,671 options with an average exercise price of $8.25 were exercisable.

The Black-Scholes option pricing model is used to determine the fair value of options granted. For the twelve-month period ended December 31, 2007, significant assumptions used to estimate the fair value of share based compensation awards include the following:

		2007				2006				2005
Expected term-option			6.00				-				5.34
Expected volatility			44	%			-				41	%
Expected dividends			-				-				2.97	%
Risk-free interest rate			4.9	%			-				3.8	%

Since no options were granted during 2006, the above assumptions were not established for 2006.

Restricted Stock Awards/Restricted Stock Units:  Restricted stock awards under the plans have been valued at the market value of the Company’s common stock as of the grant date and are amortized over the period in which the restrictions are outstanding, which is typically 2-3 years.  The Incentive Plan also allows for grants of restricted stock units. Restricted stock units give a participant the right to receive fully vested shares at the end of a specified deferral period. Restricted stock units are generally subject to forfeiture conditions similar to those of the Company’s restricted stock awards granted under its other stock incentive plans historically. One advantage of restricted stock units, as compared to restricted stock, is that the period during which the award is deferred as to settlement can be extended past the date the award becomes non-forfeitable, allowing a participant to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, restricted stock units carry no voting or dividend rights associated with the stock ownership.  On September 21, 2007, the Company granted 5.0 million restricted stock units valued at the market value of the company’s common stock as of the grant date.  Restricted stock awards/Restricted stock units for the year ended December 31, 2007, under the plans were as follows:

		Unvested Restricted Stock Awards				Weighted Average Grant-Date  Restricted Stock				Unvested Restricted Stock Units				Weighted Average Grant Date Fair Value Restricted Stock Unit
Balance at December 31, 2005			2,234,325			$	10.43				-				-
Granted			932,212				4.58				-				-
Vested			(1,011,993	)			10.37				-				-
Forfeited			(366,480	)			8.91				-				-
Balance at December 31, 2006			1,788,064			$	7.73				-			$	-
Granted							-				5,025,000				1.54
Vested			(1,051,804	)			9.38				(570,000	)			1.54
Forfeited			(648,378	)			6.04				-				-
Balance at December 31, 2007			87,882			$	4.96				4,455,000			$	1.54

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total fair value of awards vested, based on the market value of the stock on the vest date, during the twelve-month periods ending December 31, 2007 and 2006 was $1.9 million and $5.8 million, respectively.

Stock Based Compensation Awards:  On January 20, 2007, the Company announced an offer to eligible employees of the opportunity to rescind certain restricted stock award agreements held by such eligible employees in return for an award of stock appreciation rights.  On May 17, 2007, the Company announced its determination to amend and terminate this offer.  Such actions, together with the termination of the Company’s previously announced plan to reprice outstanding employee stock options, had been agreed to by the Company as part of the Company’s agreement with MatlinPatterson FA Acquisition LLC (refer to the Note 14) pursuant to which the Company agreed to terminate the offer and its previously announced plans to reprice outstanding employee stock options.  The offer terminated at 11:59 p.m. EDT, May 23, 2007.  As a result of this termination, the Company did not accept any tendered eligible restricted shares and all such shares remained outstanding pursuant to their original terms and conditions, including their vesting schedule.

Other

The Company also maintains a tax deferred profit sharing plan (Internal Revenue Code Section 401(k) Plan), which permits eligible employees to defer a percentage of their compensation.  Company contributions to eligible participants may be made at the discretion of the Board of Directors.  The Company expensed $0.1 million, $0.2 million, and $0.2 million in each of the years ended December 31, 2007, 2006, and 2005 respectively.

The Company has various other cash and benefit programs that are offered to eligible employees.  Amounts awarded vest over periods ranging up to five years.  Costs are amortized over the vesting period, and approximated to be $0.6 million in 2007, $2.6 million in 2006, and $2.5 million in 2005.  In conjunction with the sale of the Municipal Capital Markets Group, approximately $0.01 million in deferred compensation was forfeited.  Also, due to the changes in control which occurred on September 21, 2007 as a result of the MatlinPatterson investment transaction, $0.04 million in expense was recognized as accelerated vesting under the Plans.

At December 31, 2007 and December 31, 2006, there was approximately $2.9 million and $4.5 million, respectively, of accrued compensation on the Statements of Financial Condition related to deferred compensation plans provided by the Company, which will be paid out between 2008 and 2016.  As of February 28, 2007, the Company no longer permits any new amounts to be deferred under these plans.

  NOTE 17.       Net Capital Requirements

Broadpoint Capital is subject to the net capital requirements of Rule 15c3-1 Securities and Exchange Act (the “Net Capital Rule”) which requires the maintenance of a minimum net capital.  Broadpoint Capital has elected to use the alternative method permitted by the rule, which requires it to maintain a minimum net capital amount of 2% of aggregate debit balances arising from customer transactions as defined or $1 million, whichever is greater.  As of December 31, 2007, Broadpoint Capital had aggregate net capital, as defined, of $9.1 million, which equaled 278.92% of aggregate debit balances and $8.1 million in excess of required minimum net capital.

Broadpoint Securities is also subject to the Net Capital Rule which requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to the net capital, both as defined, shall not exceed 15:1. The rule also provided that capital may not be withdrawn or cash dividends paid, if the resulting net capital ratio would exceed 10:1. At December 31, 2007, Broadpoint Securities had net capital of $21.1 million, which was $20.8 million in excess of its required minimum net capital of $0.3 million. Broadpoint Securities ratio of aggregate indebtedness to net capital was 0.24:1.

  NOTE 18.       Trading Activities

As part of its trading activities, the Company provides brokerage and underwriting services to institutional clients.  While trading activities are primarily generated by client order flow, the Company also takes proprietary positions based on expectations of future market movements and conditions and to facilitate institutional client transactions.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest revenue and expense are integral components of trading activities.  In assessing the profitability of trading activities, the Company views net interest and principal transactions revenues in the aggregate.  Certain trading activities expose the Company to market and credit risks.

Market Risk

Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates, equity prices, or other risks.  The level of market risk is influenced by the volatility and the liquidity in the markets in which financial instruments are traded.

As of December 31, 2007, the Company had approximately $0.1 million of securities owned which were considered non-investment grade. Non-investment grade securities are defined as debt and preferred equity securities rated as BB+ or lower or equivalent ratings by recognized credit rating agencies. These securities have different risks than

investment grade rated investments because the companies are typically more highly leveraged and therefore more sensitive to adverse economic conditions and the securities may be more thinly traded or not traded at all.

The following describes the types of market risk faced by the Company:

Interest Rate Risk: Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments.

Equity Price Risk: Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities.

The Company also has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the financial statements at December 31, 2007 at market values of the related securities and will incur a loss if the market value of the securities increases subsequent to December 31, 2007.

Concentrations of Credit Risk

The Company’s exposure to credit risk associated with its trading and other activities is measured on an individual counter party basis, as well as by groups of counter parties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. The Company’s most significant industry credit concentration is with financial institutions. Financial institutions include other brokers and dealers, commercial banks, finance companies, insurance companies and investment companies. This concentration arises in the normal course of the Company’s brokerage, trading, financing, and underwriting activities. To reduce the potential for concentration of risk, credit limits are established and monitored in light of changing counter party and market conditions. The Company also purchases securities and may have significant positions in its inventory subject to market and credit risk. Should the Company find it necessary to sell such a security, it may not be able to realize the full carrying value of the security due to the significance of the position sold.

One of the Company’s affiliate’s, Broadpoint Securities, customers’ securities transactions are cleared through a third party under a clearing agreement.  Under this agreement, the clearing agent executes and settles customer securities transactions, collects margin receivables related to these transactions, monitors the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, requires the customer to deposit additional collateral with them or to reduce positions, if necessary.

In the normal course of business Broadpoint Securities guarantees certain service providers, such as clearing and custody agents, trustees, and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates.  The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including subcustodians and third-party transactions.  The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated.  However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 19.       Derivative Financial Instruments

The Company does not engage in the proprietary trading of derivative securities.  In 2006, the Company traded in highly liquid treasury and municipal index futures contracts and options.  These index futures contracts and options were used primarily to hedge securities positions in the Municipal Capital Markets and Fixed Income Middle Markets  inventory which was discontinued in September and June of 2007, respectively.

Open equity in the futures contracts in the amount of $0.0 million and $2.4 million at December 31, 2007 and 2006, respectively, are recorded as other assets.

  NOTE 20.       Segment Analysis

The Company is organized around products and operates through three segments:  Equities, Fixed Income  and Other.  The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.

The Company’s Equities business is comprised of equity sales and trading and equities investment banking services.  Equities sales and trading provides equity trade execution to institutional investors and generates revenues primarily through commissions and sales credits earned on executing equity transactions. Equities investment banking generates revenues by providing financial advisory, capital raising, mergers and acquisitions, and restructuring services to small and mid-cap companies.

The Fixed Income business consists of fixed income sales and trading and fixed income investment banking.  Fixed Income sales and trading provides trade execution to institutional investors and generates revenues primarily through commissions and sales credits earned on executing fixed income transactions in the following products:

·               Mortgage-Backed and Asset-Backed Securities

·               High Grade Bonds (Investment Grade and Government Bonds)

Fixed Income investment banking generates revenues by providing financial advisory and capital raising services in structuring asset-backed securities.

The Company’s Other segment includes the results from the Company’s investment portfolio, venture capital, and costs related to corporate overhead and support.  The Company’s investment portfolio generates revenue from unrealized gains and losses as a result of changes in value of the firm’s investments and realized gains and losses as a result of sales of equity holdings.  The Company’s venture capital business generates revenue through the management of and investment in FA Technology Ventures Inc. and other venture capital funds.  Restructuring expenses result from the Company’s plan announced on October 17, 2007 whereby the Company determined that it will outsource certain of its administrative functions, consolidate certain of such functions in its New York City location, and reduce staff in order to properly size its business consistent with its current level of activity.

During 2007, the Company discontinued its Municipal Capital Markets and Taxable Municipal groups, which were previously included in the fixed income segment.  Also in 2007 the Company discontinued the Fixed Income Middle Markets group, which was previously included in the Fixed Income Other segment.

During 2006, the Company discontinued its Taxable Fixed Income corporate bond segment and its Institutional Convertible Bond Arbitrage Advisory Group subsidiary which was previously included in the “Other” segment (see Note 22).  2006 and 2005 amounts have been reclassified to conform to the 2007 presentation.

Intersegment revenue has been eliminated for purposes of presenting net revenue so that all net revenue presented is from external sources.  Interest Income is allocated to the operating segments and is presented net of interest expense for purposes of assessing the performance of the segment.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information concerning operations in these segments is as follows for the years ended December 31:

(In thousands of dollars)		2007				2006				2005
Net revenue (including net interest income)
Equities		$	19,324			$	60,472			$	60,936
Fixed Income			15,263				17,560				18,198
Other			5,497				(5,144	)			26,117
Total Net Revenue		$	40,084			$	72,888			$	105,251
Net interest income (included in total net revenue)
Equities		$	3			$	(7	)		$	13
Fixed Income			136				(794	)			1,972
Other			1,473				679				1,342
Total Net Interest Income		$	1,612			$	(122	)		$	3,327
Income/(loss) before income taxes, discontinued operations and cumulative effect of an accounting change
Equities		$	(13,677	)		$	3,559			$	(957	)
Fixed Income			2,757				(922	)			(3,097	)
Other			(20,705	)			(50,078	)			(1,896	)
Income/loss before income taxes, discontinued operations and cumulative effect of an accounting change		$	(31,625	)		$	(47,441	)		$	(5,950	)

For presentation purposes, net revenue within each of the businesses is classified as sales and trading, investment banking, or net interest / other.  Sales and trading net revenue includes commissions and principal transactions.  Investment banking includes revenue related to underwritings and other investment banking transactions. Investment gains (losses) reflects gains and losses on the Company’s investment portfolio.  Net interest / other includes interest income, interest expense, fees and other revenue. Net revenue presented within each category may differ from that presented in the financial statements as a result of differences in categorizing revenue within each of the revenue line items listed below for purposes of reviewing key business performance.

The following table reflects revenues for the Company’s major products and services:

(In thousands of dollars)		2007				2006				2005
Net revenues:
Institutional Sales & Trading
Equities		$	11,285			$	32,994			$	40,749
Fixed Income			14,373				18,145				15,868
Total Institutional Sales & Trading			25,658				51,139				56,617
Investment Banking
Equities			7,427				27,065				19,899
Fixed Income			730				223				369
Total Investment Banking			8,157				27,288				20,268
Net Interest/Other			772				(395	)			2,248
Total Net Revenues		$	34,587			$	78,032			$	79,133

The Company’s segments financial policies are the same as those described in Note 21.  Asset information by segment is not reported since the Company does not produce such information.  All assets are located in the United States of America.  Prior periods’ financial information has been reclassified to conform to the current presentation.

  NOTE 21.       New Accounting Standards

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Company’s consolidated statement of financial condition or results of operations.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common

   definition for fair value to be applied to GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. 

   SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.

In February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS No. 157-2 on the Company’s consolidated statement of financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No.159 on the Company’s consolidated statement of financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company is currently assessing the impact of SFAS No. 160 on the consolidated statement of financial condition and results of operations.

  NOTE 22.       Discontinued Operations

On September 14, 2007, the Company completed the asset sale agreement with DEPFA Bank plc (“DEPFA”) for the sale of the Municipal Capital Markets Group of the Company’s subsidiary, Broadpoint Capital in connection with which the Company recognized a pre-tax gain on sale in the amount of $7.9 million. In June 2007, the Company closed its Fixed Income Middle Markets group following the departure of the employees of the group. In April 2007, the Company closed its Institutional Convertible Bond Arbitrage Advisory Group after committing to a plan to dispose of the group in September 2006.

 

Additionally, in May 2006, the Company closed its Taxable Fixed Income corporate bond division. In February 2005, the Company sold its asset management operations, other than its institutional convertible arbitrage group, and, in 2000 sold its Private Client Group. The Company continues to report the receipt and settlement of pending contractual obligations related to these transactions as discontinued operations.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts reflected in the Consolidated Statements of Operations are presented in the following table:

		Years Ended December 31
(In thousands of dollars)		2007				2006				2005
Net revenues
Municipal Capital Markets		$	22,259			$	36,724			$	41,546
Gain on Sale of Municipal Capital Markets			7,944				-				-
Fixed Income Middle Markets			1,160				5,175				4,734
Convertible Bond Arbitrage			128				444				589
Taxable Fixed Income			94				3,083				14,029
Asset Management Business			-				-				162
Private Client Group			-				-				49
Total net revenues			31,585				45,426				61,109
Expenses
Municipal Capital Markets			17,717				30,837				32,050
Fixed Income Middle Markets			955				2,892				2,578
Convertible Bond Arbitrage			523				1,315				1,237
Convertible Bond Arbitrage-Impairment Loss			-				1,534				-
Taxable Fixed Income			103				5,586				20,031
Asset Management Business			-				14				499
Private Client Group			80				84				749
Total expenses			19,378				42,262				57,144
Income before income taxes			12,207				3,164				3,965
Income tax expense			4,747				959				720
Net Income		$	7,460			$	2,205			$	3,245

Municipal Capital Markets

 

The revenue and expenses for the Municipal Capital Markets division of the periods above reflect the activity of that operation thru September 14, 2007. On September 14, 2007, the Municipal Bond Inventory Purchase Price was approximately $48.0 million. The carrying value of assets of the division at December 31, 2006 and 2005 were approximately $156 million and $169 million respectively.  The Company allocated interest expense to the division for the years ended December 31, 2007, 2006, and 2005, based on the level of securities owned, attributable to this division. The Company had allocated interest expense to this division in the amounts of $5.5 million, $7.5 million and $6.2 million for the years ended December 31, 2007, 2006, and 2005, respectively based on the debt identified as being specifically attributed to these operations.

 

Fixed Income Middle Markets

 

The revenues and expenses for the Fixed Income Middle Market division reflect the activity of that operation through June 22, 2007. The Company allocated interest expense to the division for the years  ended December 31, 2007, 2006 and 2005, based on the level of securities owned, attributable to this division. The Company had allocated interest expense to this division in the amounts of $1.3 million, $2.9 million and $2.2 million for the years ended December 31, 2007, 2006 and 2005, respectively, based on debt identified as being specifically attributed to those operations. Such amounts are included net of interest income and included in total net revenues.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Convertible Bond Arbitrage Advisory Group

The revenues and expenses for the Institutional Convertible Bond Arbitrage Advisory Group (the “Group”) reflect the activity of that operation prior to being disposed of in April 2007.  The Company had allocated interest expense to the Group operation in the amounts of $0.0 million, $0.1 million and $0.2 million for the years ended December 31, 2007,  2006 and 2005, respectively, based on debt identified as being specifically attributed to those operations.  For information on the impairment loss for the year ended December 31, 2006 related to the disposition of the group, see the Note 7.  Interest is allocated primarily based on intercompany receivable/payables.

Taxable Fixed Income

The revenue and expense of the Taxable Fixed Income Corporate Bond division for the year ended December 31, 2005, represents the activity of the operations during that time period.  The revenues and expenses of the Taxable Fixed Income Corporate Bond division for the year ended December 31, 2007 and 2006, include the activity of the operation, including $1.7 million of costs related to closing of this division, all of which was paid prior to December 31, 2006, as well as other various residual activity in 2007 and 2006.  No interest has been allocated to Taxable Fixed Income since this division was closed.  Prior to closing this division, interest was allocated primarily based on the level of securities owned attributable to this division.

Asset Management Operations

The revenue and expense of the Asset Management operations reflect the activity of that operation through February 2005, when it was sold, while the 2007 and 2006 activity reflects write-downs of receivables related to this operation following its sale.  The Company had allocated interest expense to the asset management.  Interest is allocated primarily based on intercompany receivables/payables.

Private Client Group

The Private Client Group’s expense for the year ended December 31, 2007 and 2006 relates primarily to legal matters which were related to the operations prior to its disposal offset by the reversal of $0.3 million in costs related to previously impaired space which was put into service.  The revenue and expense of the Private Client Group for the year ended December 31, 2005, related primarily to certain legal matters which were related to the operation prior to its disposal.  For the periods presented, interest was not allocated to the Private Client Group.

    NOTE 23.       Restructuring

On October 17, 2007, the Company announced a plan whereby the Company determined that it will outsource certain of its administrative functions, consolidate certain of such functions in its New York City location, and reduce staff in order to properly size its business consistent with its current levels of activity.  In connection with the plan, the Company recognized approximately $2.7 million in 2007 of which $1.1 million relates to termination benefits and $1.6 million is related to occupancy and other expenses.  The Company currently expects to complete the plan in the second quarter 2008 and expects to incur $1.9 million to $2.1 million in additional restructuring costs.

This plan will result in the termination of certain employees, the possible relocation of other employees and the closure of the Company’s Albany, New York office.  The Company currently expects to complete the plan by the second quarter, 2008.   Approximately thirty percent of the workforce of the Company will be affected by the plan, with the majority of the affected employees employed by one of the Company’s principal operating subsidiaries, Broadpoint Capital.

 

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of restructuring charges incurred as part of the Plan for the year ended December 31, 2007 follows:

(In thousands of dollars)
Severance		$	1,108
Exit Costs			1,019
Asset Impairments			538
Other			33
Total  Restructuring Charges		$	2,698

  NOTE 24.       Subsequent Events

On January 11, 2008, each of our broker-dealer subsidies, Broadpoint Capital, Inc. (“Broadpoint Capital”) and Broadpoint Securities, Inc. (“Broadpoint Securities” and together with Broadpoint Capital, our “Subsidiaries”), entered into a Fully Disclosed Clearing Agreement with Ridge Clearing & Outsourcing Solutions, Inc. (“Ridge”) whereby Ridge agreed to provide certain execution and clearing services, on a fully disclosed basis, to our Subsidiaries and their customers.  The initial term of Broadpoint Capital’s agreement commences upon approval of the Financial Industry Regulatory Authority and continues for three (3) years from the date of the first trade at Broadpoint Capital, which has not yet occurred.  The initial term of Broadpoint Securities’ agreement commenced on January 11, 2008 and continues through January 11, 2011.

On February 26, 2008, Broadpoint Capital entered into a Fully Disclosed Clearing Agreement (“the Pershing Clearing Agreement) with Pershing LLC (“Pershing”) whereby Pershing agreed to provide certain execution and clearing services to Broadpoint Capital and its customers. The initial term of the Pershing Clearing Agreement commenced on February 29, 2008.  The Pershing Clearing Agreement may be terminated by either party without cause upon ninety days prior notice.

On February 29, 2008, the Company and MatlinPatterson entered into a Voting Agreement (the “Voting Agreement”) whereby MatlinPatterson agreed to vote its shares in the Company in favor of an increase in the number of authorized shares under the Company’s 2007 Incentive Compensation Plan (the “Plan”) to be submitted to shareholders at the Company’s 2008 Annual Meeting. The Voting Agreement was entered into in connection with the transaction discussed in the next paragraph for the purpose of allowing certain new employees to be awarded restricted stock units and/or shares of restricted stock under the Plan.

In March 2008, the Company and Broadpoint Capital completed its hiring of 47 employees of the New Jersey-based Fixed Income division of BNY Capital Markets, Inc. and the acquisition of certain related assets.  The Company has formed a new Debt Capital Markets group within our Fixed Income segment with the new employers that operates a comprehensive sales and trading platform that specializes in high yield, distressed, investment grade corporate, treasury, government agency, convertible bond, and equity securities.

On March 4, 2008 the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with MatlinPatterson, Mast Credit Opportunities I Master Fund Limited, a Cayman Islands corporation (“Mast”) and certain Individual Investors listed on the signature pages to the Stock Purchase Agreement (the “Individual Investors”, and together with the MatlinPatterson and Mast, the “Investors”) for the issuance and sale of 11,579,592 newly-issued unregistered shares of common stock of the Company, par value $0.01 per share (the “Common Stock”), for an aggregate cash purchase price of approximately $19.7 million (the “Private Placement”).

In connection with the Private Placement, the Company entered into the following material agreements effective on March 4, 2008.

 

 

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Broadpoint Securities Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Purchase Agreement

Pursuant to the terms of the Stock Purchase Agreement, the Company issued and sold 11,579,592 shares of common stock of the Company (the “Shares”) to the Investors, with 7,058,824 shares being issued to Mast, 1,594,000 shares being issued to the MatlinPatterson and 2,926,768 shares issued to the Individual Investors.  The Shares were sold for an aggregate purchase price of approximately $19.7 million, with the proceeds from the sale to be used for working capital.

Registration Rights Agreement

Concurrently with the execution of the Stock Purchase Agreement, the Company entered into a Registration Rights Agreement, dated as of March 4, 2008 (the “Mast Registration Rights Agreement”), with Mast with respect to the shares that Mast purchased in the Private Placement (the “Mast Shares”). Pursuant to the Mast Registration Rights Agreement, the Company is required to file within 30 days following March 4, 2008 a registration statement with the Securities and Exchange Commission for the registration resale of the Mast Shares in an offering on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (the “Mast Shelf Registration”).  The Company is required to have the registration statement declared effective as promptly as possible but in any event within 120 days after the filing thereof.  The Company will bear all of the costs of the Mast Shelf Registration other than underwriting discounts and commissions and certain other expenses.

 

The Mast Registration Rights Agreement also contains customary indemnification provisions that obligate the Company to indemnify and hold harmless Mast, and if applicable, their controlling persons and their officers, directors, partners and employees and any underwriter for losses caused by (i) any untrue statement of material fact or omission of a material fact in the Mast Shelf Registration statement or any prospectus included therein, (ii) the violation by the Company of the Securities Act or the Exchange Act of 1934, as amended, or any rule or regulation thereunder relating to the Company’s acts or omissions in connection with the Mast Shelf Registration Statement. The Mast Registration Rights Agreement also contains other customary terms found in such agreements, including provisions concerning registration procedures and payments to Mast in the event the registration statement is not filed and declared effective by the respective dates set forth in the Mast Registration Rights Agreement.

Amendment No.1 to the Registration Rights Agreement

Concurrently with the execution of the Stock Purchase Agreement, the Company also entered into an Amendment No.1 to the Registration Rights Agreement, dated as of March 4, 2008 (“Amendment No.1”), by and among the Company, MatlinPatterson, Mr. Fine and Mr. Tirschwell (Messrs. Fine and Tirschwell collectively, the “Other Investors”) which amended the terms of the Registration Rights Agreement, dated as of September 21, 2007 (the “MatlinPatterson Registration Rights Agreement”) by and among the Company, MatlinPatterson and the Other Investors.  Prior to the execution of the Stock Purchase Agreement, MatlinPatterson owned approximately 71.7% of the outstanding Common Stock of the Company.  Each of the Other Investors are senior officers of Broadpoint Securities, Inc.

On March 14, 2008, the Board of Directors of the Company appointed Mr. Robert I. Turner Chief Financial Officer effective March 31, 2008.  C. Brian Coad, the Company’s current Chief Financial Officer, will continue as the Company’s Chief Financial Officer until that time, at which point Mr. Coad has informed the Company that he will leave the Company.

In connection with Mr. Turner’s appointment, the Company entered into a letter agreement and a non-compete and non-solicit agreement with him.

On March 14, 2008, the Company entered into a severance agreement with Mr. Coad that provides for the termination of Mr. Coad’s employment with the Company on March 31, 2008.  

 

 

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Broadpoint Securities Group, Inc.

SUPPLEMENTARY DATA

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

(In thousands of dollars, except per share data)

		2007 Quarters Ended
		Mar 31				Jun 30				Sep 30				Dec 31
Total revenues		$	12,084			$	11,411			$	10,453			$	13,163
Interest expense			1,062				1,610				1,770				2,585
Net revenues			11,022				9,801				8,683				10,578
Total expenses (excluding interest)			17,437				15,578				18,548				20,146
Loss before income taxes			(6,415	)			(5,777	)			(9,865	)			(9,568	)
Income tax expense (benefit)			(357	)			(146	)			(2,966	)			(1,234	)
Loss from continuing operations			(6,058	)			(5,631	)			(6,899	)			(8,334	)
Income (loss) from discontinued operations, net of taxes			1,596				654				5,224				(14	)
Loss before cumulative effect of an accounting change			(4,462	)			(4,977	)			(1,675	)			(8,348	)
Cumulative effect of an accounting change, net of taxes			-				-				-				-
Net loss		$	(4,462	)		$	(4,977	)		$	(1,675	)		$	(8,348	)
Net income (loss) per common and      common equivalent share
Basic
Continuing operations		$	(0.39	)		$	(0.36	)		$	(0.34	)		$	(0.14	)
Discontinued operations			0.10				0.04				0.26				0.00
Cumulative effect of an accounting change			-				-				-				-
Net income (loss)		$	(0.29	)		$	(0.32	)		$	(0.08	)		$	(0.14	)
Dilutive
Continuing operations		$	(0.39	)		$	(0.36	)		$	(0.34	)		$	(0.14	)
Discontinued operations			0.10				0.04				0.26				0.00
Cumulative effect of an accounting change			-				-				-				-
Net income (loss)		$	(0.29	)		$	(0.32	)		$	(0.08	)		$	(0.14	)

The sum of the quarter earnings per share amount does not always equal the full fiscal year's amount due to the effect of averaging the number of shares of common stock and common stock equivalents throughout the year.

 

 

 

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Broadpoint Securities Group, Inc.

SUPPLEMENTARY DATA

SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)

(In thousands of dollars, except per share data)

		2006 Quarters Ended
		Mar 31				Jun 30				Sep 30				Dec 31
Total revenues		$	19,019			$	32,329			$	12,572			$	17,386
Interest expense			2,609				2,196				1,687				1,925
Net revenues			16,410				30,133				10,885				15,461
Total expenses (excluding interest)			29,763				35,532				24,184				30,850
Loss before income taxes			(13,353	)			(5,399	)			(13,299	)			(15,389	)
Income tax expense			(55	)			53				(71	)			(755	)
Loss from continuing operations			(13,298	)			(5,452	)			(13,228	)			(14,634	)
Income (loss) from discontinued operations, net of taxes			653				(722	)			802				1,471
Loss before cumulative effect of an accounting change			(12,645	)			(6,174	)			(12,426	)			(13,163	)
Cumulative effect of an accounting change, net of taxes			427				-				-				-
Net loss		$	(12,218	)		$	(6,174	)		$	(12,426	)		$	(13,163	)
Net income (loss) per common and common equivalent share
Basic
Continuing operations		$	(0.86	)		$	(0.35	)		$	(0.89	)		$	(0.98	)
Discontinued operations			0.04				(0.05	)			0.06				0.10
Cumulative effect of an accounting change			0.03				-				-				-
Net income (loss)		$	(0.79	)		$	(0.40	)		$	(0.83	)		$	(0.88	)
Dilutive
Continuing operations		$	(0.86	)		$	(0.35	)		$	(0.89	)		$	(0.98	)
Discontinued operations			0.04				(0.05	)			0.06				0.10
Cumulative effect of an accounting change			0.03				-				-				-
Net income (loss)		$	(0.79	)		$	(0.40	)		$	(0.83	)		$	(0.88	)

The sum of the quarter earnings per share amount does not always equal the full fiscal year's amount due to the effect of averaging the number of shares of common stock and common stock equivalents throughout the year.

 

 

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, the Company’s management, with the participation of the Chief Executive Officer and the Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.  In addition, no changes in the Company’s internal control over financial reporting occurred during the fourth quarter of the Company’s fiscal year ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of Broadpoint Securities Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2007 based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation we have concluded that Broadpoint Securities Group, Inc.’s internal control over financial reporting was effective as of December 31, 2007.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited Broadpoint Securities Group, Inc.’s consolidated financial statements included herein, expresses an opinion on the Company’s internal control over financial reporting as of December 31, 2007, as stated in their report which is set forth in Part II, Item 8 hereof.

Item 9B.  Other Information

None

 

 

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PART III

Item 10.  Directors and Executive Officers of the Registrant

The information required by this item with respect to our directors, our executive officers, our Audit Committee and Audit Committee financial expert, our compliance with Section 16(a) of the Securities Exchange Act of 1934 and our code of ethics for senior officers will be contained in the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held in 2008. Such information is incorporated herein by reference.

Our Code of Business Conduct and Ethics applies to all directors, officers and employees, including our Chief Executive Officer, our Chief Financial Officer and Principal Accounting Officer. You can find our Code of Business Conduct and Ethics on our internet site, www.broadpointsecurities.com. We will post any amendments to the Code of Business Conduct and Ethics and waivers that are required to be disclosed by the rules of either the SEC or The NASDAQ Global Market on our internet site.

Item 11.  Executive Compensation

The information required by this item will be contained under the caption "Compensation of Executive Officers", "Director Compensation for Fiscal Year 2007", "Compensation Committee Interlocks and Insider Participation" and "Executive Compensation Committee Report" in the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held in 2008.  Such information is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be contained under the caption "Stock Ownership of Principal Owners and Management" and “Equity Compensation Plan Information” in the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held in 2008.  Such information is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

The information required by this item will be contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held in 2008.  Such information is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services

Information with respect to fees and services related to the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, and the disclosure of the Audit Committee’s pre-approved policies and procedures are contained in the definitive Proxy Statement for the Annual Meeting of Shareholders of Broadpoint Securities Group, Inc. to be held in 2008, and are incorporated herein by reference.

 

 

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Part IV

Item 15.  Exhibits, Financial Statement Schedule

(a) (1) The following financial statements are included in Part II, Item 8:
	Report of Independent Registered Public Accounting Firm
	Financial Statements:
	Consolidated Statements of Operations for the Years
		Ended December 31, 2007, 2006 and 2005
	Consolidated Statements of Financial Condition
	as of December 31, 2007 and 2006
	Consolidated Statements of Changes in Stockholders’ Equity
	and Temporary Capital for the Years Ended December 31, 2007, 2006 and 2005
	Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2007, 2006 and 2005
	Notes to Consolidated Financial Statements
(a) (2) The following financial statement schedule for the periods 2007, 2006 and 2005 are submitted herewith:
	Schedule II-Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(a)	(3) Exhibits included herein

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation as Amended to date, furnished herewith.
3.2		Amended and Restated Bylaws, furnished herewith.
4.1		Specimen Certificate of Common Stock, par value $.01 per share (filed as Exhibit No. 4 to Registration Statement No. 33-1353).
4.2		Rights Agreement dated as of March 30, 1998 between First Albany Companies Inc. and American Stock Transfer & Trust Company (filed as Exhibit 1 to the Company’s Registration Statement on Form 8-A12G filed March 30, 1998 and incorporated herein by reference thereto).

4.3		Amendment No. 1 to the Rights Agreement dated as of May 14, 2007 by and between First Albany Companies Inc. and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed May 18, 2007 and incorporated herein by reference thereto).
4.4		Registration Rights Agreement, dated as of September 21, 2007, by and among First Albany Companies Inc., MatlinPatterson FA Acquisition LLC, Robert M. Tirschwell and Robert M. Fine.  (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 27, 2007 and  incorporated herein by reference thereto).
4.5		Amendment no. 1 to Registration Rights Agreement dated as of March 4, 2008 by and among the Company, MatlinPatterson FA Acquisition LLC, Robert M. Tirschwell and Robert M. Fine (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference thereto).
4.6		Registration Rights Agreement dated March 4, 2008 by and among the Company, Mast Credit Opportunities Master Fund Limited and each person or entity that subsequently becomes party to the agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference thereto).
10.1†		First Albany Companies Inc. 2005 Deferred Compensation Plan for Key Employees effective January 1, 2005 (filed as Exhibit 10.01 to the Company’s Current Report on Form 8-K filed January 5, 2005 and incorporated herein by reference thereto).
10.2		Master Equipment Lease Agreement dated September 25, 1996, between First Albany Companies Inc. and KeyCorp Leasing Ltd. (filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed March 27, 1997 and incorporated herein by reference thereto.)
10.3†		First Albany Companies Inc. 1999 Long-Term Incentive Plan, as amended (filed as Appendix A to the Company’s Proxy Statement on Schedule 14A filed March 24, 2005 and incorporated herein by reference thereto).
10.4†		First Albany Companies Inc. Senior Management Bonus Plan effective January 1, 2003 (filed as Exhibit B to the Company’s Proxy Statement on Schedule 14A filed March 28, 2003 and incorporated herein by reference thereto)
10.5†		First Albany Companies Inc. 2001 Long Term Incentive Plan dated October 18, 2001 (filed as Exhibit 99.A to the Company’s Registration Statement on form S-8 filed July 31, 2002 (File No. 333-97467) and incorporated herein by reference thereto).
10.6†		First Albany Companies Inc. 2003 Non-Employee Directors Stock Plan effective March 10, 2003 (filed as Exhibit 10 to the Company’s Registration Statement on Form S-8 filed June 2, 2003 (File No. 333-105772) to Form S-8) and incorporated herein by reference thereto).
10.7		First Albany Companies Inc. $10,000,000 8.5% Senior Notes, due 2010 Note Purchase Agreement, dated June 13, 2003 (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed March 12, 2004 and incorporated herein by reference thereto).
10.8		Stock Purchase Agreement by and among certain Shareholders of Descap Securities, Inc. and First Albany Companies Inc. dated February 18, 2004 (filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2004 and incorporated herein by reference thereto).
10.9		Loan Agreement dated February 18, 2004 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2004 and incorporated herein by reference thereto).

10.10		First Amendment to Loan Agreement dated May 14, 2004 between First Albany Companies Inc. and Key Bank National Association  (filed as Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q filed November 9, 2004 and incorporated herein by reference thereto).
10.11		Second Amendment to Loan Agreement dated November 2, 2004 between First Albany Companies Inc. and Key Bank National Association  (filed as Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q filed November 9, 2004 and incorporated herein by reference thereto).
10.12		Third Amendment to Loan Agreement dated June 30, 2005 between First Albany Companies Inc. and Key Bank National Association (filed as Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2005 and incorporated herein by reference thereto)
10.13		Loan Agreement dated December 30, 2005, between First Albany Companies, Inc. and KeyBank National Association (filed as Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.14		Promissory Note dated December 30, 2005, between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.15		Loan Agreement dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.16		Promissory Note dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.17		Acceptable Securities Pledge and Security Agreement dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.36 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.18		Negative Pledge agreement dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.19		Pledge Agreement-Deposit Account dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.38 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).
10.20		Springing Pledge and Security Agreement dated March 14, 2006 between First Albany Companies Inc. and KeyBank National Association (filed as Exhibit 10.39 to the Company’s Annual Report on Form 10-K filed March 16, 2006 and incorporated herein by reference thereto).

10.21		Stock Purchase Agreement by and among First Albany Companies Inc. and certain purchasers in a private placement, dated February 29, 2004 (filed as Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2004 and incorporated herein by reference thereto).
10.22†		Form of Restricted Stock Agreement – Cliff Vesting - pursuant to the First Albany Companies Inc. 1999 Long-Term Incentive Plan (filed as Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q filed November 09, 2004 and incorporated herein by reference thereto).
10.23†		Form of Restricted Stock Agreement – 3 Year Vesting - pursuant to the First Albany Companies Inc. 1999 Long-Term Incentive Plan (filed as Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q filed November 09, 2004 and incorporated herein by reference thereto).
10.24†		Form of Restricted Stock Agreement pursuant to the First Albany Companies Inc. 1999 Long-Term Incentive Plan (filed as Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2006 and incorporated herein by reference thereto).
10.25		Sub-Lease Agreement, dated August 12, 2007 by and between Columbia 677, L.L.C. and First Albany Companies Inc. (filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed March 15, 2005 and incorporated herein by reference thereto).
10.26		Amendment to Sub-Lease Agreement dated October 11, 2004 by and between Columbia 677, L.L.C. and First Albany Companies Inc. (filed as Exhibit 10.25a to the Company’s Annual Report on Form 10-K filed March 15, 2005 and incorporated herein by reference thereto).
10.27		Third Amendment to Sub-lease Agreement dated September 29, 2006 by and between Columbia 677, L.L.C. and First Albany Companies Inc. (filed as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q filed October 31, 2006 and incorporated herein by reference thereto).
10.28†		First Albany Companies Inc. 2005 Deferred Compensation Plan for Professional and Other Highly Compensated Employees effective January 1, 2005 (filed as Exhibit 4(f) to the Company’s Registration Statement on Form S-8 filed January 10, 2005 (File No. 333-121928) and incorporated herein by reference thereto).
10.29†		First Albany Companies Inc. Restricted Stock Inducement Plan for Descap Employees dated April 27, 2004 (filed as Exhibit 99.A to the Company’s Registration Statement on Form S-8 filed May 05, 2005 (File No. 333-124648) and incorporated herein by reference thereto).
10.30		Agreement of Sublease dated April 6, 2005 between Deutsche Bank AG, New York Branch and First Albany Capital Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 23, 2005 and incorporated herein by reference thereto).
10.31		Amendment to Agreement of Sublease dated May 18, 2005 between Deutsche Bank AG, New York Branch and First Albany Capital Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 23, 2005 and incorporated herein by reference thereto).
10.32		Agreement dated April 28, 2006 between First Albany Companies Inc. and Lehman Brothers Holdings Inc. (filed as Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2006 and incorporated herein by reference thereto).

10.33		Surrender of Sublease Agreement dated April 28, 2006 between First Albany Companies Inc.  and Deutsche Bank AG. (filed as Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2006 and incorporated herein by reference thereto).
10.34†		Employment Agreement dated June 30, 2006 between First Albany Companies Inc. and Peter McNierney (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed June 30, 2006 and incorporated herein by reference thereto).
10.35†		Restricted Share Award Agreement dated June 30, 2006 between First Albany Companies Inc. and Peter McNierney (filed as an Exhibit 99.4 to the Company’s Current Report on Form 8-K filed June 30, 2006 and incorporated herein by reference thereto).
10.36†		Employment Agreement dated as of June 30, 2006 between First Albany Companies Inc. and Allan P. Goldberg (filed as Exhibit 99.5 to the Company’s Current Report on Form 8-K filed June 30, 2006 and incorporated herein by reference thereto)
10.37†		Employment Agreement dated as of June 30, 2006 between First Albany Companies Inc. and Brian Coad (filed as Exhibit 99.6 to the Company’s Current Report on Form 8-K filed June 30, 2006 and incorporated herein by reference thereto).
10.38†		Restricted Share Award Agreement dated June 30, 2006 between First Albany Companies Inc. and Brian Coad (filed as Exhibit 99.7 to the Company’s Current Report on Form 8-K filed June 30, 2006 and incorporated herein by reference thereto).
10.39†		Form of Employee Retention Agreement (filed as Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2006 and incorporated herein by reference thereto).
10.40†		Form of Restricted Stock Agreement pursuant to the First Albany Companies Inc. 2003 Non-Employee Directors’ Stock Plan (filed as Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2006 and incorporated herein by reference thereto.)
10.41		Asset Purchase Agreement dated as of March 6, 2007 among DEPFA BANK plc, First Albany Capital Inc., and First Albany Companies Inc. (filed as Exhibit 10.29 to the Company’s Current Report on Form 10-Q filed May 10, 2007 and incorporated herein by reference thereto).
10.42		Investment Agreement dated as of May 14, 2007 between First Albany Companies Inc. and MatlinPatterson FA Acquisition LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 15, 2007 and incorporated herein by reference thereto).
10.43		Notice and Waiver Letter Agreement dated as of July 25, 2007 by and among First Albany Companies Inc., First Albany Capital Inc. and DEPFA BANK plc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 31, 2007 and incorporated herein by reference thereto).
10.44		Notice and Waiver Letter Agreement dated as of July 25, 2007 by and among DEPFA BANK plc, First Albany Companies Inc. and First Albany Capital Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 31, 2007 and incorporated herein by reference thereto).
10.45		Letter Agreement dated as of August 6, 2007 by and among KeyBank National Association, Key Equipment Finance Inc. f/k/a KeyCorp Leasing Ltd. and First Albany Companies Inc. (filed as Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2007 and incorporated herein by reference thereto).

10.46†		Non-Compete and Non-Solicit Agreement dated May 12, 2007 between  First Albany Companies Inc. and C. Brian Coad (filed as exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2007 and incorporated herein by reference thereto).
10.47†		Addendum dated May 13, 2007 to the Letter Agreement dated May 12, 2007 between First Albany Companies Inc. and C. Brian Coad (filed as exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2007 and incorporated herein by reference thereto).
10.48†		Letter Agreement dated April 27, 2007 between MatlinPatterson Global Advisors LLC and an C. Brian Coad (filed as exhibit 10.37 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2007 and incorporated herein by reference thereto).
10.49†		Employment Agreement dated as of May 15, 2007 by and between First Albany Companies Inc. and Peter McNierney (filed as exhibit 10.38 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2007 and incorporated herein by reference thereto).
10.50†		First Albany Companies Inc. 2007 Incentive Compensation Plan (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed September 21, 2007 and incorporated herein by reference thereto).
10.51		Co-Investor Joinder Agreement dated as of September 21, 2007 by and among First Albany Companies, MatlinPatterson FA Acquisition LLC and Robert M. Tirschwell (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 27, 2007 and incorporated herein by reference thereto).
10.52		Co-Investor Joinder Agreement dated as of September 21, 2007 by and among First Albany Companies, MatlinPatterson FA Acquisition LLC and Robert M. Fine (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 27, 2007 and incorporated herein by reference thereto).
10.53†		Form of Restricted Stock Unit Agreement (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed September 27, 2007 and incorporated herein by reference thereto).
10.54†		Employment Agreement dated as of September 21, 2007 by and between First Albany Companies Inc. and Lee Fensterstock. (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed September 27, 2007 and incorporated herein by reference thereto).
10.55		License Agreement dated September 14, 2007 by and between DEPFA First Albany Securities LLC and First Albany Companies Inc. (filed as Appendix C to the Company’s Preliminary Proxy Statement on Schedule 14A filed on October 11, 2007 and incorporated herein by reference thereto).
10.56		Fifth Amendment to Sub-Lease Agreement dated November 2, 2007 by and between Columbia 677, L.L.C. and First Albany Companies Inc. (filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q filed October 31, 2007 and incorporated herein by reference thereto).
10.57		Fully Disclosed Clearing Agreement dated as of January 11, 2008 between Broadpoint Capital, Inc. and Ridge Clearing & Outsourcing Solutions, Inc., filed as an Exhibit herewith.
10.58		Fully Disclosed Clearing Agreement dated as of January 11, 2008, between Broadpoint Securities, Inc. and Ridge Clearing & Outsourcing Solutions, Inc., filed as an Exhibit herewith.

10.59		Asset Purchase Agreement, dated as of January 30, 2008 by and among the Company, Broadpoint Capital, Inc. and BNY Capital Markets, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 30, 2008 and incorporated herein by reference thereto).
10.60		Agreement, dated as of February 21, 2008 between Broadpoint Securities Group, Inc. and MatlinPatterson FA Acquisition LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 22, 2008 and incorporated herein by reference thereto).
10.61		Fully Disclosed Clearing Agreement dated February 26, 2008 by and between Broadpoint Capital, Inc. and Pershing LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 3, 2008 and incorporated herein by reference thereto).
10.62		Voting Agreement dated February 29, 2008 by and between the Company and MatlinPatterson FA Acquisition LLC (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 3, 2008 and incorporated herein by reference thereto).
10.63		Stock Purchase Agreement dated March 4, 2008 among the Company, MAST Credit Opportunities I Master Fund Limited, MatlinPatterson FA Acquisition LLC and MAST Capital Management LLC and certain individual investors (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference thereto).
10.64†		2007 Incentive Compensation Plan Restricted Stock Units Agreement dated as of March 4, 2008 between the Company and Lee Fensterstock (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference thereto).
10.65†		Employment Agreement dated as of March 14, 2008 by and between Broadpoint Securities Group, Inc. and Robert Turner. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 14, 2008 and incorporated herein by reference thereto).
10.66†		Non-Compete and Non-Solicit Agreement dated as of March 14, 2008 by and between Broadpoint Securities Group, Inc. and Robert Turner. (filed as exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 14, 2008 and incorporated herein by reference thereto).
10.67†		Form of Restricted Stock Unit Agreement between the Company and Robert Turner (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 14, 2008 and incorporated herein by reference thereto).
10.68†		Severance Agreement dated as of March 14, 2008 by and between Broadpoint Securities Group, Inc. and C. Brian Coad (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 14, 2008 and incorporated therein by reference thereto).
10.69†		Description of Non-Employee Director Compensation As Set By Board of Directors - Effective September 21, 2007, furnished herewith.
10.70†		Non-Compete and Non-Solicit Agreement dated as of September 21, 2007 by and between First Albany Companies Inc. and Patricia Arciero-Craig, furnished herewith.
10.71†		Addendum to Non-Compete and Non-Solicit Agreement dated as of September 21, 2007 by and between First Albany Companies Inc. and Patricia Arciero-Craig, furnished herewith.
11		Statement Re: Computation of Per Share Earnings (the calculation of per share earnings is in Part II, Item 8 and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).
14		Amended and Restated Code of Business Conduct and Ethics, filed as an Exhibit herewith.

21		Subsidiaries of the Registrant.
23   24		Consent of PriceWaterhouseCoopers LLP.   Power of Attorney (included in signature page).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
31.2		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
_________________________________________
†           Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(b)

 

 

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BROADPOINT SECURITIES GROUP, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

PERIODS ENDED DECEMBER 31, 2007, DECEMBER 31, 2006

AND DECEMBER 31, 2005

COL. A		COL. B				COL. C				COL. D				COL. E
Description		Balance at Beginning of Period				Additions				Deductions				Balance at End of Period
Allowance for doubtful accounts – deducted from receivables from customers and receivable from others
Calendar Year 2007		$	153,000			$	-			$	41,000			$	112,000
Calendar Year 2006		$	11,000			$	153,000			$	11,000			$	153,000
Calendar Year 2005		$	-			$	11,000			$	-			$	11,000
Net deferred tax asset valuation allowance
Calendar Year 2007		$	21,766,000			$	5,237,000			$	-			$	27,003,000
Calendar Year 2006		$	9,233,000			$	12,533,000			$	-			$	21,766,000
Calendar Year 2005		$	-			$	9,233,000			$	-			$	9,233,000

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			BROADPOINT SECURITIES GROUP, INC.
Date: March 25, 2008		By:	/s/ Lee Fensterstock
			LEE FENSTERSTOCK
			Chief Executive Officer

Power of Attorney

We, the undersigned, hereby severally constitute Lee Fensterstock and Peter McNierney, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature	TITLE		DATE
/s/ Lee Fensterstock	Chairman and		March 25, 2008
LEE FENSTERSTOCK	Chief Executive Officer
/s/ Peter J. McNierney	President and Director		March 25, 2008
PETER J. McNIERNEY
	Chief Financial Officer
/s/ C. Brian Coad	(Principal Accounting Officer		March 25, 2008
C. BRIAN COAD	and Principal Financial Officer)
/s/ Mark Patterson	Director		March 25, 2008
MARK PATTERSON
/s/ Christopher R. Pechock	Director		March 25, 2008
CHRISTOPHER R. PECHOCK
/s/ Frank Plimpton	Director		March 25, 2008
FRANK PLIMPTON
/s/ George C. McNamee	Director		March 25, 2008
GEORGE C. MCNAMEE
/s/ Wade Nesmith			March 25, 2008
WADE NESMITH	Director
/s/ Dale Kutnick			March 25, 2008
DALE KUTNICK	Director
/s/ Robert Yingling			March 25, 2008
ROBERT YINGLING	Director