** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

** **

**WASHINGTON, D.C.  20549**

** **

**FORM10-Q**

 

**(Mark One)**

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT of 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT 1934**

 

**FOR THE TRANSITION PERIOD FROM                 TO                   **

 

**Commission File No: 000-51103**

 

**GFIGROUP INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **80-0006224**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S .Employer  Identification No.) |
|                                                            |       |                                  |
| **100 Wall Street, New York, NY**                               | ** ** | **10005**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number, including areacode:  **(212)968-4100**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

** **

**YES****ý****   NO****o**

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act.

 

**YES ****o****   NO****ý**

 

Thenumber of shares of registrant’s common stock outstanding on April 29, 2005 was26,758,825.

 

 

----

 

**Table of Contents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |   |   |
| Item 1.                                 | Financial Statements |   |
|                                    | Condensed Consolidated Statements of  Financial Condition as of March 31, 2005 (unaudited) and December 31, 2004 |   |
|                                    | Condensed Consolidated Statements of Income  for the three months ended March 31, 2005 (unaudited) and March 31, 2004  (unaudited) |   |
|                                    | Condensed Consolidated Statements of  Comprehensive Income for the three months ended March 31, 2005 (unaudited)  and March 31, 2004 (unaudited) |   |
|                                    | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2005 (unaudited) and March 31,  2004 (unaudited) |   |
|                                    | Notes to Condensed Consolidated Financial  Statements |   |
|                                    |   |   |
| Item 2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                    |   |   |
| Item 3.                                 | Quantitative and Qualitative Disclosures  About Market Risk |   |
|                                    |   |   |
| Item 4.                                 | Controls and Procedures |   |
|                                    |   |   |
| **Part II – Other Information**    |
|                                    |   |   |
| Item 1.                                 | Legal Proceedings |   |
|                                    |   |   |
| Item 2.                                 | Unregistered Sales of Equity Securities and  Use of Proceeds |   |
|                                    |   |   |
| Item 6.                                 | Exhibits and Reports on Form 8-K |   |

 

2

----

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM1.****     FINANCIAL STATEMENTS**

 

**Available Information**

 

Our Internetwebsite address is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the Securities and Exchange Commission (the “SEC”):our annual report on Form 10-K; our quarterly reports on Form 10-Q; our currentreports on Form 8-K; Forms 3, 4 and 5 filed on behalf of directors andexecutive officers; and amendments to those reports filed or furnished pursuantto Section 13(a) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Our Proxy Statements for our Annual Meetings will also be availablethrough our Internet website.

 

Informationrelating to corporate governance of the Company is also available on ourwebsite, including information concerning our directors, board committees,including committee charters, our Code of Business Conduct and Ethics for allemployees and for senior financial officers and our compliance procedures foraccounting and auditing matters.

 

Our Internetwebsite and the information contained therein or connected thereto are notintended to be incorporated into this Quarterly Report on Form 10-Q.

 

3

----

 

**GFI GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(In thousands except share and per shareamounts)**

 
| ** **                                                                                                                                                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                           | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                           |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                                            |       | $                   | 104,095    |                   | $          | 105,161 |   |
| Deposits with clearing organizations                                                                                                                                                                                                                                 |       | 9,707               |       | 8,833                  |       |
| Accrued commissions receivable, net of  allowance for doubtful accounts                                                                                                                                                                                              |       | 65,733              |       | 50,665                 |       |
| Receivables from brokers, dealers and  clearing organizations                                                                                                                                                                                                        |       | 503,370             |       | 408,241                |       |
| Property, equipment and leasehold  improvements, net                                                                                                                                                                                                                 |       | 22,994              |       | 25,449                 |       |
| Software inventory, net                                                                                                                                                                                                                                              |       | 4,003               |       | 3,495                  |       |
| Goodwill                                                                                                                                                                                                                                                             |       | 11,482              |       | 11,482                 |       |
| Intangible assets, net                                                                                                                                                                                                                                               |       | 1,238               |       | 1,439                  |       |
| Other assets                                                                                                                                                                                                                                                         |       | 30,692              |       | 25,458                 |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                         |       | $                   | 753,314    |                   | $          | 640,223 |   |
|                                                                                                                                                                                                                                                                 |       |                |       |                   |       |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                               |       |                |       |                   |       |
| LIABILITIES                                                                                                                                                                                                                                                          |       |                |       |                   |       |
| Accrued compensation                                                                                                                                                                                                                                                 |       | $                   | 59,889     |                   | $          | 64,097 |   |
| Accounts payable and accrued expense                                                                                                                                                                                                                                 |       | 16,035              |       | 21,560                 |       |
| Payables to brokers, dealers and clearing  organizations                                                                                                                                                                                                             |       | 465,759             |       | 376,065                |       |
| Notes  payable, net                                                                                                                                                                                                                                                  |       | —              |       | 49,591                 |       |
| Loan note payable                                                                                                                                                                                                                                                    |       | —              |       | 9,250                  |       |
| Income taxes payable                                                                                                                                                                                                                                                 |       | 13,577              |       | 10,336                 |       |
| Other liabilities                                                                                                                                                                                                                                                    |       | 28,831              |       | 23,041                 |       |
| Lease termination costs payable to  affiliate                                                                                                                                                                                                                        |       | 2,832               |       | 2,871                  |       |
| Total Liabilities                                                                                                                                                                                                                                                    |       | $                   | 586,923    |                   | $          | 556,811 |   |
| Commitments and contingencies                                                                                                                                                                                                                                        |       |                |       |                   |       |
| Series C redeemable convertible preferred  stock, $0.01 par value; none authorized and outstanding at March 31, 2005;  35,373,704 shares authorized and 3,723,545 shares outstanding at December 31,  2004 (liquidation value of $41.5 million at December 31, 2004) |       | —              |       | 30,043                 |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                            |       |                |       |                   |       |
| Convertible preferred stock (liquidation  value of $29.6 million at December 31, 2004)                                                                                                                                                                               |       | —              |       | 29,069                 |       |
| Preferred Stock, $0.01 par value; 5,000,000  shares authorized at March 31, 2005, none outstanding                                                                                                                                                                   |       | —              |       | —                 |       |
| Class A common stock, $0.01 par value; none  authorized and outstanding at March 31, 2005; 100,000,000 shares authorized  and 5,893,846 outstanding at December 31, 2004                                                                                             |       | —              |       | 59                     |       |
| Common stock, $0.01 par value; 100,000,000  shares authorized and 26,758,825 shares outstanding at March 31, 2005;  300,000,000 shares authorized and 10,155,809 shares outstanding at December  31, 2004                                                            |       | 268                 |       | 102                    |       |
| Additional paid in capital                                                                                                                                                                                                                                           |       | 169,324             |       | 35,162                 |       |
| Retained earnings (accumulated deficit)                                                                                                                                                                                                                              |       | 5,841               |       | (3,313                 | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                 |       | (9,042              | )          | (7,710                 | )          |
| Total Stockholders’ Equity                                                                                                                                                                                                                                      |       | 166,391             |       | 53,369                 |       |
| TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE  PREFERRED STOCK AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       | $                   | 753,314    |                   | $          | 640,223 |   |

 

See notes to condensed consolidated financial statements

 

4

----

 

**GFI GROUP INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**

**(In thousands except share and per shareamounts)**

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| REVENUES:                                   |       |                             |       |   |   |
| Brokerage revenues:                         |       |                             |       |   |   |
| Agency commissions                          |       | $                                | 89,479     |   | $ | 58,379 |   |
| Principal transactions                      |       | 26,604                           |       | 23,757 |   |
| Total brokerage revenues                    |       | 116,083                          |       | 82,136 |   |
| Analytics and market data                   |       | 5,402                            |       | 4,673 |   |
| Interest income                             |       | 1,060                            |       | 276 |   |
| Other income (loss)                         |       | (251                             | )          | 608 |   |
|                                        |       |                             |       |   |   |
| Total revenues                              |       | 122,294                          |       | 87,693 |   |
|                                        |       |                             |       |   |   |
| EXPENSES:                                   |       |                             |       |   |   |
| Compensation and employee benefits          |       | 75,477                           |       | 55,086 |   |
| Communications and quotes                   |       | 5,799                            |       | 4,674 |   |
| Travel and promotion                        |       | 5,761                            |       | 3,948 |   |
| Rent and occupancy                          |       | 3,428                            |       | 2,573 |   |
| Depreciation and amortization               |       | 4,092                            |       | 3,142 |   |
| Professional fees                           |       | 2,469                            |       | 1,766 |   |
| Clearing fees                               |       | 3,371                            |       | 1,065 |   |
| Interest expenses                           |       | 1,244                            |       | 579 |   |
| Other expenses                              |       | 4,009                            |       | 2,025 |   |
| Total Expenses                              |       | 105,650                          |       | 74,858 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES    |       | 16,644                           |       | 12,835 |   |
| PROVISION FOR INCOME TAXES                  |       | 7,490                            |       | 6,032 |   |
| NET INCOME                                  |       | $                                | 9,154      |   | $ | 6,803 |   |
| EARNINGS PER SHARE                          |       |                             |       |   |   |
| Basic                                       |       | $                                | 0.36       |   | $ | 0.30 |   |
| Diluted                                     |       | $                                | 0.35       |   | $ | 0.28 |   |
| WEIGHTED AVERAGE SHARES OUSTANDING BASIC    |       |                             |       |   |   |
| Class A common stock                        |       | 1,964,615                        |       | 5,893,846 |   |
| Common stock                                |       | 21,221,199                       |       | 10,155,809 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED |       | 26,268,828                       |       | 24,236,382 |   |

 

Seenotes to condensed consolidated financial statements

 

5

----

 

**GFI GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVE INCOME (UNAUDITED)**

**(In thousands)**

 
|                                                                         | ** ** | **For the Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| NET INCOME                                                                   |       | $                                        | 9,154      |   | $ | 6,803 |   |
|                                                                         |       |                                     |       |   |   |
| OTHER COMPREHENSIVE INCOME (LOSS):                                           |       |                                     |       |   |   |
| Unrealized (loss) gain on foreign exchange  derivative contracts, net of tax |       | $                                        | (1,238     | ) | $ | 1,013 |   |
| Foreign currency translation adjustment,  net of tax                         |       | (94                                      | )          | 98 |   |
| COMPREHENSIVE INCOME                                                         |       | $                                        | 7,822      |   | $ | 7,914 |   |

 

See notes to condensed consolidated financialstatements

 

6

----

 

**GFI GROUP INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 9,154      |   | $ | 6,803 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 4,092                            |       | 3,142 |   |
| Amortization of loan fees                                                      |       | 74                               |       | 46 |   |
| Provision for allowance for doubtful  accounts                                 |       | 97                               |       | 62 |   |
| Deferred compensation                                                          |       | 1,141                            |       | 18 |   |
| Benefit from deferred taxes                                                    |       | (2,230                           | )          | (417 | ) |
| Loss on Fenics purchase obligation                                             |       | 2,030                            |       | 128 |   |
| (Increase) decrease in operating assets:                                       |       |                             |       |   |   |
| Deposits with clearing organizations                                           |       | (875                             | )          | 17 |   |
| Accrued commissions receivable                                                 |       | (15,417                          | )          | (9,162 | ) |
| Receivables from brokers, dealers and  clearing organizations                  |       | (95,129                          | )          | (73,094 | ) |
| Software inventory                                                             |       | (645                             | )          | (546 | ) |
| Other assets                                                                   |       | (1,747                           | )          | (4,079 | ) |
| Increase (decrease) in operating  liabilities:                                 |       |                             |       |   |   |
| Accrued compensation                                                           |       | (4,208                           | )          | (10,435 | ) |
| Accounts payable and accrued expenses                                          |       | (5,525                           | )          | (4,124 | ) |
| Payables to brokers, dealers and clearing  organizations                       |       | 89,695                           |       | 73,189 |   |
| Income taxes payable – current                                       |       | 3,241                            |       | 2,370 |   |
| Other liabilities                                                              |       | 2,312                            |       | 3,811 |   |
| Cash used in operating activities                                              |       | (13,940                          | )          | (12,271 | ) |
|                                                                           |       |                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                             |       |   |   |
| Purchase of property, equipment and  leasehold improvements                    |       | (1,299                           | )          | (1,667 | ) |
| Cash used in investing activities                                              |       | (1,299                           | )          | (1,667 | ) |
|                                                                           |       |                             |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |                             |       |   |   |
| Repayment of notes payable                                                     |       | (54,500                          | )          | — |   |
| Proceeds from notes payable                                                    |       | 4,000                            |       | — |   |
| Repayment of loan notes payable                                                |       | (9,250                           | )          | — |   |
| Issuance of common stock                                                       |       | 73,937                           |       | — |   |
| Proceeds from exercise of stock options                                        |       | 80                               |       | — |   |
| Cash provided by financing activities                                          |       | 14,267                           |       | — |   |
| Effects of foreign currency translation  adjustment                            |       | (94                              | )          | 98 |   |
|                                                                           |       |                             |       |   |   |
| DECREASE IN CASH AND CASH EQUIVALENTS                                          |       | (1,066                           | )          | (13,840 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                |       | 105,161                          |       | 87,299 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                       |       | $                                | 104,095    |   | $ | 73,459 |   |
| SUPPLEMENTAL DISLCOSURE:                                                       |       |                             |       |   |   |
| Interest paid                                                                  |       | $                                | 1,560      |   | $ | 545 |   |
| Income taxes paid, net of refunds                                              |       | $                                | 6,471      |   | $ | 3,575 |   |

 

See notes to condensed consolidated financial statements

 

7

----

 

**GFI GROUP INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED****CONSOLIDATEDFINANCIAL STATEMENTS(UNAUDITED)**

**(In thousands except share and per shareamounts)**

 

**1. ORGANIZATION AND BUSINESS**

 

The condensed consolidated financial statements include the accounts ofGFI Group Inc. and its subsidiaries (collectively the “Company”). TheCompany, through its subsidiaries, provides brokerage services to institutionalclients in markets for a range of credit, financial, equity and commodityinstruments.  The Company complements itsbrokerage services with decision-support services such as value-added data andanalytics software products, which it licenses to participants in the financialservices industry, including investment and commercial banks, largecorporations, insurance companies and large hedge funds.  The Company’s principal operatingsubsidiaries include: GFInet inc., GFI Securities LLC, GFI Brokers LLC, GFIGroup LLC, GFI Securities Limited, GFI Brokers Limited, GFInet U.K. Limited,GFI (HK) Securities LLC, GFI Group Pte. Ltd. and Fenics Limited andsubsidiaries.  The Company is majorityowned by Jersey Partners, Inc. (“JPI”).

 

On January 31, 2005, the Company completed its initial public offering(“IPO”), selling 3,947,369 shares of common stock at $21.00 per share.  Net proceeds to the Company from the IPOafter deducting underwriters’ discounts and expenses were $73,937.

 

In connection with the IPO, all shares of the Company’s Class A commonstock, Series A convertible preferred stock, Series B convertible preferredstock and Series C redeemable convertible preferred stock were automaticallyconverted into Class B common stock. Each share of Class A common stock, Series A convertible preferred stockand Series C redeemable convertible preferred stock was converted into oneshare of Class B common stock.  Eachshare of Series B convertible preferred stock was converted into approximately1.0017 shares of Class B common stock resulting in the issuance of anadditional 9,852 shares of common stock upon conversion.  Upon the completion of the IPO, the Class Bcommon stock was renamed “common stock.”

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis ofPresentation*** - The Company’s condensedconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, revenues and expenses, and the disclosure ofcontingencies in the condensed consolidated financial statements. Managementbelieves that the estimates utilized in the preparation of the condensedconsolidated financial statements are reasonable and prudent. Actual resultscould differ materially from these estimates.

 

All material intercompany transactions and balances have beeneliminated.

 

The condensed consolidated financial statements should be read inconjunction with the Company’s consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004 (the “2004 Form 10-K”). The condensed consolidated financialstatements reflect all adjustments that are, in the opinion of management,necessary for the fair statement of the results for the interim period. Theresults of operations for interim periods are not necessarily indicative ofresults for the entire year.

 

8

----

 

***Cash and CashEquivalent*–**Cash and cash equivalents consist of cash and highly liquid investments withmaturities, when purchased, of three months or less.

 

***Receivables from andPayables to Brokers and Dealers*** - Receivablesfrom and payables to brokers and dealers primarily represent securitiestransactions which have not settled as of their stated settlement dates. Thesetransactions relate primarily to the simultaneous purchase and sale ofsecurities by GFI Securities Limited to facilitate principal brokeragetransactions.

 

***Accrued CommissionsReceivable –*** Accrued commissions receivablerepresents amounts due from brokers, dealers, banks and other financial andnonfinancial institutions for the execution of securities, commodities, foreignexchange and derivative brokerage transactions. Accrued commissions receivable are presented net of allowance fordoubtful accounts of approximately $2,948 and $2,879 as of March 31, 2005 andDecember 31, 2004, respectively.  Theallowance is based on management’s estimate and is reviewed on a periodic basisbased on the aging of outstanding receivables and counterparty exposure.

 

***BrokerageTransactions*** - The Company provides brokerageservices to its clients in the form of either agency or principal transactions.

 

***Agency Commissions***- In agency transactions, the Company charges commissions for executingtransactions between buyers and sellers. Agency commissions revenues andrelated expenses are recognized on a trade date basis.

 

***PrincipalTransactions*** - Principal transaction revenue isprimarily derived from matched principal transactions. In matched principaltransactions, the Company simultaneously agrees to buy instruments from onecustomer and sell them to another customer. A very limited number of brokeragedesks are allowed to enter into unmatched principal transactions to facilitatea customer’s execution needs for transactions initiated by such customers.These unmatched positions are intended to be held short term and in liquidmarkets. The Company does not enter into unmatched principal transactions forpurposes of speculating on movements in the markets. The Company earns revenuefrom principal transactions on the spread between the buy and sell price of thesecurity that is brokered.

 

Additionally, from time to time, for the purpose of facilitatingcustomers’ execution needs or if a transaction fails to settle on a timelybasis, the Company holds securities positions. These positions are marked tomarket on a daily basis. Principal transactions revenues and related expensesare recognized on a trade date basis.

 

***Analytics and MarketData Revenue Recognition***- Analytics revenueconsists mostly of fees for licenses of analytical software products as well asmaintenance, installation, customer training and technical support of thoseproducts. Market data revenue primarily consists of subscription fees.  Analytics revenue is recognized when all ofthe following criteria are met: persuasive evidence of an arrangement exists,delivery of the product has occurred and no significant implementationobligations remain, the fee is fixed and determinable, and collectibility isprobable. Fees for future updates of software products are considered separatearrangements and related revenues are recognized when the customer acknowledgesparticipation

 

9

----

 

in the update and deliveryoccurs.  Market data revenue isrecognized over the term of the subscription period.

 

The Company markets its analytics and market data products through itsdirect sales force and indirectly through resellers. The Company’s licenseagreements for such products do not provide for a right of return.

 

***Goodwill andIntangible Assets***- In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142 *Goodwill andIntangible Assets* (“SFAS 142”), goodwill and intangible assetswith indefinite lives are no longer amortized, but instead are tested forimpairment annually or more frequently if circumstances indicate impairment mayhave occurred. The Company has selected January 1st as the dateto perform the annual impairment test. Intangible assets with definite livesare amortized on a straight-line basis over their estimated useful lives.

 

***Derivative FinancialInstruments*** – The Company uses foreign exchange derivative contracts to reduce theeffects of fluctuations in certain receivables and payables denominated inforeign currencies. Certain of these foreign exchange derivative contracts aredesignated and qualify as foreign currency cash flow hedges under SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended (“SFAS 133”).The Company reclassifies gains and losses on the designated foreign exchangederivative contracts included in other comprehensive income into earnings atthe time the hedged transactions are recognized. The Company measureseffectiveness by assessing the changes in the expected future cash flows of thehedged items. The ineffective portion of the hedges, if any, is included inother expenses. There is no portion of the derivative instruments’ gains orlosses that has been excluded from the assessment of effectiveness.

 

In March 2005, the Company discontinued hedgeaccounting for a derivative contract that was previously designated andqualified as a hedge under SFAS 133. Subsequent to such de-designation, the net unrealized gains and losses,at the date of de-designation, associated with this contract will remain inaccumulated other comprehensive loss and will be reclassified into earningsover the original term of the contract. Additionally, certain foreign exchange derivative contracts are notdesignated as hedges under SFAS 133. These foreign exchange derivative contracts are recorded at their fairvalue and all realized and unrealized gains and losses under such derivativecontracts are included in earnings.

 

***Foreign CurrencyTranslation Adjustments and Transactions*** –Assets and liabilities of foreign subsidiaries having non-U.S. dollarfunctional currencies are translated at period end rates of exchange, andrevenue and expenses are translated at the average rates of exchange. Gains orlosses resulting from translating foreign currency financial statements arereflected in foreign currency translation adjustments and are reported as aseparate component of comprehensive income and stockholders’ equity. Gains orlosses resulting from foreign currency transactions are included in net incomeas other income.

 

***Segment andGeographic Information*** - The Company’s onlyoperating segment, brokerage and data and analytics operations, operates acrossdomestic and international markets. Substantially all of the Company’sidentifiable assets are in the United States and the United Kingdom.

 

10

----

 

***Share-BasedCompensation*** – Our share-based compensationconsists of stock options and restricted stock units (the “RSUs”).  Effective January 1, 2003, the Companyadopted the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-based Compensation* (“SFAS 123”),as amended by SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure*, prospectivelyto all awards granted, modified, or settled after January 1, 2003.Pursuant to this method, the Company expenses the grant-date fair value ofoptions issued to employees on or after January 1, 2003 over the relatedvesting period and the compensation expense related to modifications ofoutstanding options is calculated as the difference between fair value of theexisting and modified options on the date of modification. Prior to January 1,2003, the Company used the intrinsic method as prescribed by AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”), as permitted bySFAS 123.   For the RSUs, theaggregate fair value at the date of grant is recorded as deferred compensationand is amortized to compensation expense over the three-year vesting period ofthe grants.

 

The following pro forma financial information shows the effect, net oftax, on net income had the fair value method been applied for all periodspresented.

 
| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income- as reported                                                                  |       | $                                | 9,154      |   | $ | 6,803 |   |
| Add:                                                                                     |       |                             |       |   |   |
| Effect of stock-based employee compensation  included in reported net income, net of tax |       | 682                              |       | 18 |   |
| Deduct:                                                                                  |       |                             |       |   |   |
| Total stock-based employee compensation  determined under fair value method, net of tax  |       | (811                             | )          | (96 | ) |
| Net income- pro forma                                                                    |       | $                                | 9,025      |   | $ | 6,725 |   |
|                                                                                     |       |                             |       |   |   |
| Basic earnings per share – as reported                                         |       | $                                | 0.36       |   | $ | 0.30 |   |
| Basic earnings per share - pro forma                                                |       | $                                | 0.35       |   | $ | 0.30 |   |
| Diluted earnings per share - as  reported                                           |       | $                                | 0.35       |   | $ | 0.28 |   |
| Diluted earnings per share – pro forma                                         |       | $                                | 0.34       |   | $ | 0.28 |   |

 

***Recent AccountingPronouncement –*** In March 2005, the SEC staffissued Staff Accounting Bulletin No. 107 (“SAB No. 107”) to provide guidance onSFAS No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”), which is a revision of SFAS No. 123.  SAB No. 107 provides the staff’s viewregarding the valuation of share-based payment arrangements for publiccompanies.  In particular, this SABprovides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods (including assumptions such as expected volatility and expected term),the accounting for certain redeemable financial instruments issued undershare-based payment arrangements, the classification of compensation expense,non-GAAP financial measures, first time adoption of SFAS No. 123(R), themodification of employee share options prior to the adoption of SFAS No. 123(R)and disclosure in Management’s Discussion and Analysis subsequent to theadoption of SFAS No. 123(R). SAB No. 107 is effective March 29, 2005.  In April 2005, the SEC modified

 

11

----

 

the effective date of SFAS No.123(R) to be as of the first reporting period of the first fiscal yearbeginning after June 15, 2005.  The SEC’smodification of the effective date did not change the accounting required bySFAS No. 123(R).  The impact of SFAS No.123(R) and SAB No. 107 on the Company’s consolidated financial statements iscurrently being evaluated and is not anticipated to be material.

 

**3.  RECEIVABLES FROM AND PAYABLESTO BROKERS, DEALERS AND CLEARING ORGANIZATIONS**

 
| ** **                                                     | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
|                                                           |       |               |       |                  |       |
| Receivables from brokers, dealers and  clearing organizations: |       |               |       |                  |       |
| Contract value of fails to deliver                             |       | $                  | 478,083    |                  | $          | 376,452 |   |
| Balance receivable from clearing  organizations                |       | 25,287             |       | 31,789                |       |
| Total                                                          |       | $                  | 503,370    |                  | $          | 408,241 |   |
|                                                           |       |               |       |                  |       |
| Payables to brokers, dealers and clearing  organizations:      |       |               |       |                  |       |
| Contract value of fails to receive                             |       | $                  | 454,108    |                  | $          | 357,349 |   |
| Balance payable to clearing organizations                      |       | 2,708              |       | 11,643                |       |
| Payable to financial institutions                              |       | 8,943              |       | 7,073                 |       |
| Total                                                          |       | $                  | 465,759    |                  | $          | 376,065 |   |

 

Substantially all open fail to deliver and fail to receive transactionsat December 31, 2004 have subsequently settled at the contracted amounts.

 

Payable to clearing organizations of $2,708 and $11,643 at March 31,2005 and December 31, 2004, respectively, represents amounts owed to clearingorganizations in the normal course of operations.

 

**4. GOODWILL AND INTANGIBLE ASSETS**

 

During the first quarter of 2005, the Company completed the annualgoodwill impairment test that is required by SFAS No. 142, *Goodwill and Other Intangible Assets.*  The results of Company’s testing did notindicate any goodwill impairment.

 

The change in the carrying amount of intangible assets for the threemonths ended March 31, 2005 was amortization expense of $201.

 

**5. NOTES PAYABLE**

 

In February2005, the Company used a portion of the proceeds from the IPO to pay down allbalances (approximately $52,500) plus accrued interest outstanding under itscredit facility agreement with Bank of America N.A. and certain other lendersdated August 23, 2004 (the “Credit Facility”). At March 31, 2005, there was $6,500 in outstanding letters of creditunder the

 

12

----

 

the Credit Facility and theamount available to the Company for borrowing under the Credit Facility was$73,500, including up to $23,500 for additional letters of credit.

 

**6. LOAN NOTE PAYABLE**

 

In January 2005, the Company used a portion of theproceeds from the IPO to repay the entire $9,250 outstanding principal amountplus accrued interest of $428 of the loan note payable to JPI.

 

**7. EARNINGS PER SHARE**

 

Basic anddiluted earnings per share for the three months ended March 31, 2005 and 2004were as follows:

 
| ** **                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Basic  earnings per share**                                                         |       |                             |       |   |   |
| Net income applicable to stockholders                                                 |       | $                                | 9,154      |   | $ | 6,803 |   |
| Income allocated to participating preferred  stockholders                             |       | (903                             | )          | (2,013 | ) |
|                                                                                  |       |                             |       |   |   |
| Income available to common stockholders                                               |       | $                                | 8,251      |   | $ | 4,790 |   |
| Weighted average common shares outstanding:                                           |       |                             |       |   |   |
| Class A common stock                                                             |       | 1,964,615                        |       | 5,893,846 |   |
| Common stock                                                                          |       | 21,221,199                       |       | 10,155,809 |   |
|                                                                                  |       |                             |       |   |   |
| Weighted average common shares outstanding                                            |       | 23,185,814                       |       | 16,049,655 |   |
| Basic earnings per share – Class A common  stock and Common stock                |       | $                                | 0.36       |   | $ | 0.30 |   |
|                                                                                  |       |                             |       |   |   |
| **Diluted  earnings per share**                                                       |       |                             |       |   |   |
| ** **                                                                            |       |                             |       |   |   |
| Net income applicable to stockholders                                                 |       | $                                | 9,154      |   | $ | 6,803 |   |
|                                                                                  |       |                             |       |   |   |
| Weighted average common shares outstanding                                            |       | 23,185,814                       |       | 16,049,655 |   |
| Effect of dilutive shares:                                                            |       |                             |       |   |   |
| Options and warrant                                                                   |       | 834,821                          |       | 93,372 |   |
| Convertible preferred shares                                                          |       | 1,007,011                        |       | 3,021,034 |   |
| Redeemable convertible preferred shares                                               |       | 1,241,182                        |       | 3,723,545 |   |
| Effect of contingently issuable shares  subject to Series C purchase price adjustment |       | —                           |       | 1,348,776 |   |
| Weighted average shares outstanding and  common stock equivalents                     |       | 26,268,828                       |       | 24,236,382 |   |
| Diluted earnings per share                                                            |       | $                                | 0.35       |   | $ | 0.28 |   |

 

13

----

 

Options to purchase 100,000 and 482,947shares were outstanding at March 31, 2005 and 2004, respectively and wereexcluded from the respective computation of diluted earnings per share becausetheir effect would be anti-dilutive.  Inaddition, 143,488 RSUs were also excluded from the computation of dilutedearnings per share for the three months ended March 31, 2005 because they wereanti-dilutive.

 

Options to purchase 1,101,973 shares underthe GFI Group Inc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) wereoutstanding at March 31, 2004 and were excluded from the computation of dilutedearnings per share because the exercisability of the options was contingentupon the completion of an IPO.  Once thiscontingency was met in January 2005, options issued under this plan wereincluded in diluted earnings per share to the extent they were dilutive.

 

**8. STOCKHOLDERS’ EQUITY**

 

On January 31, 2005, the Company completedits IPO, selling 3,947,369 shares of common stock at $21.00 per share.  Net proceeds to the Company from the IPOafter deducting underwriters’ discounts and expenses were $73,937.

 

Prior to the closing of the Company’s IPO,5,893,846, 2,842,093, 178,941 and 3,723,545 shares of Class A common stock,Series A and B convertible preferred stock, and Series C redeemable convertiblepreferred stock, respectively, were outstanding.  Outstanding shares of Class A common stockand all series of preferred stock were automatically converted into anequivalent number of shares of Class B common stock upon the closing of theIPO, except that each share of Series B convertible preferred stock wasconverted into approximately 1.0017 shares of Class B common stock.  Upon the completion of the IPO, the Class Bcommon stock was renamed “common stock.”

 

**9.  SHARE-BASED COMPENSATION**

 

In addition to vesting requirements, theexercisability of options issued under the GFI Group 2002 Plan was contingentupon the Company completing an IPO, which occurred in January 2005.  For options issued on or modified afterJanuary 1, 2003 under the GFI Group 2002 Plan, compensation expense measured onthe date of grant or modification was recorded upon the IPO in January 2005, tothe extent these options were vested, with the remaining compensation expenseto be recorded over the remaining vesting period.  For the three months ended March 31, 2005,compensation expense of $891 was recognized in connection with theseoptions.  In addition, for the threemonths ended March 31, 2005, compensation expense of $64 was recognized relatedto certain options issued under the GFInet inc. 2000 Stock Option Plan (the“GFInet 2000 Plan”) that were modified in2004.

 

The following isa summary of stock option transactions:

 
| ** **                    | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**                  | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Options**             | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding December 31, 2004 |       | 1,248,191               |       | 13.55                                 |       | 1,457,282 |   | 11.71 |   |
| Exercised                     |       | (4,212                  | )          | 11.88                                 |       | (3,158 | ) | 9.50 |   |
| Terminated                    |       | (526                    | )          | 11.88                                 |       | (1,052 | ) | 9.50 |   |
| Outstanding March 31, 2005    |       | 1,243,453               |       | 13.56                                 |       | 1,453,072 |   | 11.72 |   |

 

14

----

 

The followingtable summarizes information about the GFI Group 2002 Plan options as of March31, 2005:

 
| ** **         | ** ** | **Stock Options Outstanding**                         | ** ** | **Stock Options Exercisable**                  | ** ** |
|--------------------|------------|-------------------------------------------------------|------------|------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Options****Outstanding as of  March 31, 2005** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable as of  March 31, 2005** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                  | 11.88      |                                                  | 1,014,715  |                                           | 8.96       |   | $ | 11.88 |   | 574,421 |   | 11.88 |   |
| 21.00              |       | 228,738                                               |       | 9.26                                           |       | $ | 21.00 |   | 5,054 |   | 21.00 |   |
|                    |            |                                                       |            |                                                |            |  |  |  |  |  |  |  |  |

 

The followingtable summarizes information about the GFInet 2000 Plan options as ofMarch 31, 2005:

 
| ** **         | ** ** | **Stock Options Outstanding**                  | ** ** | **Stock Options Exercisable**                  | ** ** |
|--------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Options  Outstanding as of  March 31, 2005** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable as of  March 31, 2005** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                  | 9.50       |                                           | 1,019,418  |                                           | 4.86       |   | $ | 9.50 |   | 1,019,418 |   | $ | 9.50 |   |
| 11.88              |       | 137,896                                        |       | 7.49                                           |       | 11.88 |   | 126,054 |   | 11.88 |   |
| 14.25              |       | 32,679                                         |       | 5.76                                           |       | 14.25 |   | 32,679 |   | 14.25 |   |
| 19.00              |       | 212,983                                        |       | 5.94                                           |       | 19.00 |   | 206,142 |   | 19.00 |   |
| 21.38              |       | 526                                            |       | 5.76                                           |       | 21.38 |   | 526 |   | 21.38 |   |
| 23.75              |       | 49,570                                         |       | 5.36                                           |       | 23.75 |   | 49,570 |   | 23.75 |   |
|                    |            |                                                |            |                                                |            |  |  |  |  |  |  |  |  |  |

 

In January 2005, the Company granted 143,488RSUs under the GFI Group Inc. 2004 Equity Incentive Plan with a weightedaverage grant date fair value of $21.00. The RSUs will be forfeited if a participant leaves the Company forreasons other than retirement, disability or death prior to the vesting dates.  The RSUs vest over three years and areconverted to an equal number of unrestricted shares of common stock uponvesting.  For the three months endedMarch 31, 2005, compensation expense of $186 was recognized in connection withthe grant of the RSUs.

 

**10.  COMMITMENTS AND CONTINGENCIES**

 

*Operating leases –*In January 2005, the Company entered into an amendment to the lease of itsexecutive headquarters located at 100 Wall Street, New York, NY, to provide foradditional office space.  The lease forthe additional space is scheduled to expire in September 2013.  The future minimum rental commitments forthis additional space are as follows: $366 in 2005, $401 in 2006, $453 in 2007, $453 in 2008, $453 in 2009 and$1,699 thereafter.

 

In April 2005, the Company entered into a ten-year lease for premisesin London. See Note 17 for more details.

 

15

----

 

*Contingencies –* Inthe normal course of business, the Company and certain subsidiaries included inthe consolidated financial statements have been named as defendants in variouslawsuits and proceedings and have been involved in certain regulatoryexaminations. Additional actions, investigations or proceedings may be broughtfrom time to time in the future. We are subject to the possibility of lossesfrom these various contingencies. Considerable judgment is necessary toestimate the probability and amount of any loss from such contingencies. Anaccrual is made when it is probable that a liability has been incurred or anasset has been impaired and the amount of loss can be reasonably estimated. TheCompany accrues a liability for the estimated costs of adjudication orsettlement of asserted and unasserted claims existing as of the end of thereporting period.

 

The Company has recorded reserves for certain contingencies to which wemay have exposure, such as reserves for certain income tax and litigationcontingencies and contingencies related to the employer portion of NationalInsurance Contributions in the U.K.

 

The Company is subject to regular examinations by various tax authoritiesin jurisdictions in which the Company has significant business operations.  The Company regularly assesses the likelihoodof additional assessments in each of the tax jurisdictions resulting from theseexaminations.  Tax reserves have beenestablished, which the Company believes to be adequate in relation to thepotential for additional assessments. Once established, reserves are adjusted as information becomes availableor when an event occurs requiring a change to the reserve.  The resolution of these tax matters couldhave a material impact on the Company’s effective tax rate.

 

It is not presently possible to determine the Company’s ultimateexposure to these matters and there is no assurance that the resolution ofthese matters will not significantly exceed the reserves accrued by theCompany. It is the opinion of the Company’s management, after consultation withcounsel, that the ultimate resolution of these matters, while not likely tohave a material adverse effect on the consolidated financial condition of theCompany, could be material to the Company’s operating results for anyparticular period.

 

*Commitment –* Aspreviously reported in the 2004 Form 10-K, on March 9, 2005, the Company madean offer to purchase for $8.37 per share all of the ordinary shares in FenicsLimited that were not owned by GFI for a total purchase price of $4,454.  As of April 7, 2005, the offer had beenaccepted by a majority of the minority shareholders of Fenics Limited and theCompany, pursuant to the Fenics Limited Articles of Association, will thereforebe entitled to purchase all of the remaining outstanding shares of Fenics onthe same terms.  The Company is currentlyin the process of completing the purchase of all remaining shares.  Once these purchases are complete, theCompany will be the sole shareholder of Fenics Limited.

 

*Risks and Uncertainties*—TheCompany primarily generates its revenues by executing and facilitatingtransactions for its customers. Revenues for these services are transactionbased. As a result, the Company’s revenues could vary based upon thetransaction volume of securities, commodities, foreign exchange and derivativemarkets.

 

*Guarantees*—TheCompany, through its subsidiaries, is a member of certain exchanges andclearinghouses. Under the membership agreements, members are generally requiredto guarantee certain obligations. Additionally, if a member becomes unable tosatisfy its obligations to the clearinghouse, other members may be required tomeet shortfalls. To mitigate these performance risks, the exchanges andclearinghouses often require members to post collateral as well as meet certainminimum financial standards. The Company’s maximum potential liability underthese arrangements cannot be quantified. However, management believes that thepotential for the Company to be required to make payments under thesearrangements is unlikely.

 

16

----

 

Accordingly, no contingentliability is recorded in the Condensed Consolidated Statements of Financial Conditionfor these arrangements.

 

**11.   FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEETRISK**

 

Our financial instruments with off-balance sheet risk are described in “Note18 - Financial Instruments with Off-Balance Sheet Risk” contained in the 2004Form 10-K.  There have been no materialchanges to our off-balance sheet risk during the three months ended March 31,2005.

 

**12.  FINANCIAL INSTRUMENTS**

 

We are exposed tomarket risk associated with movements in foreign currency exchange rates.  There have been no material changes to ourrisk management policy as described in “Note 19 - FinancialInstruments” contained in the 2004 Form 10-K.

 

For the threemonths ended March 31, 2005 and 2004, there was no hedge ineffectiveness. Forthe three months ended March 31, 2005 and 2004, unrealized gains (losses)before tax totaling ($1,659) and $1,739, respectively, were recorded as othercomprehensive income (loss). There has been no discontinuance of cash flowhedges that would require a reclassification of gains into earnings. Managementdoes not anticipate any events or transactions that would result in thereclassification into earnings of gains and losses that are reported inaccumulated other comprehensive income due to hedge discontinuance.

 

The fair value of the Company’s debt obligations was estimated usingmarket rates of interest available to the Company for debt obligations ofsimilar types and approximates the carrying value at March 31, 2005 andDecember 31, 2004. The Company’s derivatives are summarized below showing thefair value of the related assets and liabilities that are included in otherassets or other liabilities in the Condensed Consolidated Statements ofFinancial Condition as of March 31, 2005 and December 31, 2004 as follows:

 

| **Asset/(Liabilities)**                | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Foreign exchange derivative contracts: |       |               |       |                  |       |   |   |
| Liabilities                            |       | $                  | (12,220    | )                     | $          | (10,812 | ) |
| Asset                                  |       |               | 201        |                  |       | — |   |
| Fenics purchase obligation             |       | (3,052             | )          | (1,022                | )          |

 

In March 2005,the Company discontinued hedge accounting for a derivative contract that waspreviously designated and qualified as a hedge under SFAS 133 because thecontract was terminated.  Subsequent tosuch de-designation, the Company discontinued prospectively hedge accounting,however, continues to carry the derivative contract on the Statement ofFinancial Condition at its fair value. The net unrealized gains and losses, at the date of de-designation,associated with this contract will remain in accumulated other comprehensiveloss and will be reclassified into earnings over the term of the originalcontract.

 

The fair value offoreign exchange derivative contracts was estimated based on quoted marketprices of comparable instruments.  Thefair value of the Fenics purchase obligation was estimated using an exchange optionmodel that included assumptions of management’s estimate of the fair value ofthe common stock of the Company and the common stock of Fenics, volatility,correlation and the expected life of the obligation.

 

Included in otherassets in the Condensed Consolidated Statement of Financial Condition as ofMarch 31, 2005 is $2,621 of floating rate notes held by the Company andrecorded at current market value.

 

17

----

 

**13.  REGULATORY REQUIREMENTS**

 

GFI Securities LLCis a registered broker-dealer with the SEC and the National Association ofSecurities Dealers, Inc. GFI Securities LLC is also a registeredintroducing broker with the National Futures Association and the CommodityFutures Trading Commission. Accordingly, GFI Securities LLC is subject to thenet capital rules under the Securities Exchange Act of 1934 and the CommodityExchange Act. Under these rules, GFI Securities LLC is required to maintainminimum Net Capital, as defined, of not less than the greater of $250 or 2% ofaggregate debits, as defined.

 

At March 31,2005, GFI Securities LLC had Net Capital and Excess Net Capital as follows:

 
| Net Capital at March 31, 2005 |   | $   | 23,660 |   |
|-------------------------------|--------|-----|--------|--------|
| Minimum Net Capital           |   | 250 |   |
| Excess Net Capital            |   | $   | 23,410 |   |

 

GFI Brokers Limitedand GFI Securities Limited are subject to the capital requirements of theFinancial Services Authority in the United Kingdom. Under these requirements,minimum capital, as defined, must be maintained as follows:

 
| ** **                    | ** ** | **GFI Brokers Limited** | ** ** | **GFI Securities Limited** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                          |       |                    |       |                       |       |
| Net Capital at March 31, 2005 |       | $                       | 14,602     |                       | $          | 21,767 |   |
| Minimum Net Capital required  |       | 7,531                   |       | 7,879                      |       |
| Excess Net Capital            |       | $                       | 7,071      |                       | $          | 13,888 |   |

 

GFI (HK)Securities LLC is subject to the capital requirements of the Securities andFutures Commission in Hong Kong, which require that GFI (HK) Securities LLCmaintain minimum capital, as defined, of approximately $386. At March 31,2005, GFI (HK) Securities LLC had capital of approximately $999, which exceededthe minimum requirement by approximately $613.

 

GFI Group Pte.Ltd. is subject to the compliance requirements of the Monetary Authority ofSingapore, which require that GFI Group Pte. Ltd., maintain stockholders’equity of 3,000 Singapore dollars.  AtDecember 31, 2004, GFI Group Pte. Ltd. had stockholders’ equity of 3,796Singapore dollars (or approximately $2,326), which exceeded the minimumrequirement by approximately 796 Singapore dollars (or approximately $487).

 

Regulatory rulesmay restrict the Company’s ability to withdraw capital from its regulatedsubsidiaries. The Company’s regulated subsidiaries were in compliance with allminimum net capital requirements as of March 31, 2005.

 

**14.  GEOGRAPHIC INFORMATION**

 

The Companyoffers its products and services globally from offices in the United States,the United Kingdom and the Asia-Pacific region.

 

18

----

 

Informationregarding revenue for the three months ended March 31, 2005 and 2004, andinformation regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in geographic areas as of March31, 2005 and December 31, 2004 is as follows:

 

| ** **     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues:      |       |                             |       |   |   |
| United States  |       | $                                | 58,049     |   | $ | 35,510 |   |
| United Kingdom |       | 55,307                           |       | 46,313 |   |
| Asia-Pacific   |       | 8,938                            |       | 5,870 |   |
| Total          |       | $                                | 122,294    |   | $ | 87,693 |   |

 

| ** **                     | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| Long-lived Assets, as defined: |       |               |       |                  |       |
| United States                  |       | $                  | 23,441     |                  | $          | 24,686 |   |
| United Kingdom                 |       | 2,484              |       | 3,304                 |       |
| Asia-Pacific                   |       | 1,072              |       | 954                   |       |
| Total                          |       | $                  | 26,997     |                  | $          | 28,944 |   |

 

Revenues areattributed to geographic areas based on the location of the Company’s brokers.

 

**15.  Other Comprehensive Income (Loss)**

 

| ** **                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **Unrealized  gain (loss) on foreign exchange derivative contracts** |       |                             |       |   |   |
| Current Period Change:                                               |       |                             |       |   |   |
| Before Tax Amount                                                    |       | $                                | (1,659     | ) | $ | 1,739 |   |
| Tax (Expense) Benefit                                                |       | 421                              |       | (726 | ) |
| After Tax Amount                                                     |       | $                                | (1,238     | ) | $ | 1,013 |   |
|                                                                 |       |                             |       |   |   |
| **Foreign  currency translation adjustment**                         |       |                             |       |   |   |
| Before Tax Amount                                                    |       | $                                | (173       | ) | $ | 168 |   |
| Tax (Expense) Benefit                                                |       | 79                               |       | (70 | ) |
| After Tax Amount                                                     |       | $                                | (94        | ) | $ | 98 |   |

 

19

----

 

**16.  RELATED PARTY TRANSACTIONS**

 

**Loan NotePayable**

 

On January 31,2005, a portion of the proceeds from the IPO were used to repay the loan notepayable to JPI.  See Note 6 for moredetails.

 

**Office LeaseTermination with an Affiliate**

 

The Company,through its subsidiary GFI Holdings Ltd., is a tenant of its current primaryU.K. office space under a lease agreement with a wholly owned subsidiary ofJPI, which was due to expire in 2016.  InDecember 2004, the Company and the affiliate agreed to terminate this lease inSeptember 2005 (the “Lease Termination Agreement”) and to make certaintermination and other payments upon such termination.  The Company accrued £1,500(approximately $2,871) for the estimated cost to terminate the lease.  In April 2005, the Company and the affiliateamended the Lease Termination Agreement. See Note 17 for more details.

 

**17.  SUBSEQUENT EVENTS**

 

In April 2005, GFI Holdings Ltd. entered into a ten-year lease for newpremises that will become its primary London office. The future minimum rentalcommitments under this lease are as follows: $2,655 in 2008, $2,897 in 2009 and $18,311 thereafter.  In addition, GFI expects to incur increasedcharges related to the new lease for items such as utilities, service charges,real estate taxes, insurance and depreciation.

 

In April 2005, the Company entered into an amendment of the LeaseTermination Agreement.  The amendmentterminated the lease and provided that the Company pay a termination charge of£200 (approximately $381). In addition, GFI Holdings Ltd. executed a newsublease with the subsidiary of JPI for an eighteen-month term with rent of£500 (approximately $954) per annum plus related costs, such as utilities, realestate taxes and service charges. As a result of the amendment, in the secondquarter of 2005, the Company will reduce its lease termination liability byapproximately £1,200 (or $2,289). In addition, the Company anticipates that itwill cease using these premises in the fourth quarter and will accrue theremaining rent on the sub-lease at that time.

 

20

----

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

GFI Group Inc.

New York, New York

 

We have reviewed the accompanying condensed consolidated statement offinancial condition of GFI Group Inc. and subsidiaries (the “Company”) as ofMarch 31, 2005, and the related condensed consolidated statements of income,comprehensive income and cash flows for the three-month periods ended March 31,2005 and 2004.  These interim financialstatements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures and making inquiries ofpersons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed consolidated interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedstatement of financial condition of GFI Group Inc. and subsidiaries as ofDecember 31, 2004, and the related consolidated statements of income,comprehensive income, stockholders’ equity, and cash flows for the year then ended(not presented herein); and in our report dated March 30, 2005, we expressed anunqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated statement of financial condition as ofDecember 31, 2004 is fairly stated, in all material respects, in relation tothe consolidated statement of financial condition from which it has beenderived.

 

/s/ Deloitte & Touche LLP

 

New York, New York

May 13, 2005

 

21

----

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This QuarterlyReport on Form 10-Q contains “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements include, without limitation, any statement that may predict,forecast, indicate or imply future results, performance or achievements, andmay contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,”“will be,” “will likely continue,” “will likely result,” or words or phrases ofsimilar meaning. These forward-looking statements are based largely on theexpectations of management and are subject to a number of risks and uncertaintiesincluding, but not limited to, the following:

 

•                  expansionand growth of our operations generally or of specific products or services;

 

•                  ourability to attract and retain key personnel, including highly qualifiedbrokerage personnel;

 

•                  ourentrance into new brokerage markets or investments in establishing newbrokerage desks;

 

•                  competitionfrom current and new competitors;

 

•                  futureresults of operations and financial condition;

 

•                  thesuccess of our business strategies;

 

•                  economic,political and market factors affecting trading volumes, securities prices, ordemand for the Company’s brokerage services;

 

•                  financialdifficulties experienced by the Company’s customers or key participants in themarkets in which the Company focuses its brokerage services;

 

•                  risksassociated with potential acquisitions by us of businesses or technologies;

 

•                  ourability to manage our international operations;

 

•                  uncertaintiesassociated with currency fluctuations;

 

•                  ourfailure to protect or enforce our intellectual property rights;

 

•                  ourability to keep up with rapid technological change;

 

•                  changesin laws and regulations governing our business and operations or permissibleactivities;

 

•                  uncertaintiesrelating to litigation; and

 

•                  changesin the availability of capital.

 

The foregoingrisks and uncertainties, as well as those risks discussed under this “Item2—Management's Discussion and Analysis of Financial Condition and Results ofOperations” and “Item 3—Quantitative and Qualitative Disclosures About MarketRisk” and elsewhere in this Quarterly Report and in the Company's 2004 Form10-K, may cause actual results to differ materially from the forward-lookingstatements. The information included herein is given as of the filing date ofthis Form 10-Q with the SEC and future events or circumstances could differsignificantly from these forward-

 

22

----

 

looking statements. The Companydoes not undertake to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

# **Business Overview**

# ** **

We founded ourbusiness in 1987. GFI Group Inc. (the “Company”) was incorporated under thelaws of the State of Delaware in August 2001. Since November 2001, the Companyhas been a holding company that, through its subsidiaries, is a leadinginter-dealer broker specializing in over-the-counter derivatives products andrelated securities. We provide brokerage services and data and analyticsproducts to institutional clients in markets for a range of credit, financial,equity and commodity instruments. We function as an intermediary on behalf ofour brokerage clients by matching their trading needs with counterpartieshaving reciprocal interests. We focus on the more complex, and often lessliquid, markets for sophisticated financial instruments, primarily derivatives,that offer an opportunity for strong growth and higher commissions pertransaction than the markets for more standardized financial instruments.

 

We offer ahybrid brokerage approach to our clients, combining a range of telephonic andelectronic trade execution services, depending on the needs of the individualmarkets. We complement our hybrid brokerage capabilities with decision supportservices, such as value-added data and analytics products. We earn revenues forour brokerage services and charge fees for certain of our data and analyticsproducts.

 

On January 31,2005, we completed an IPO of our common stock, selling 3,947,369 shares ofcommon stock at $21.00 per share.  Ourproceeds from the IPO after deducting underwriters’ discounts and expenses were$73.9 million.

 

For a detaileddescription of the Company’s business, including its operations and theassociated risks, see the Company’s 2004 Form 10-K filed by the Company underthe Exchange Act.

 

**Business Environment**

 

The global business environment during the Company’s first quarterended March 31, 2005 was generally favorable due to a combination offactors.  Overall, the U.S. and globalfinancial markets saw modest volatility, but experienced acute volatility incertain sectors, such as energy and credit, in which we provide brokerageservices.  Such volatility led to robusttransaction activity in a number of our brokerage markets.  Also, global capital flows and interest rateactivity continued to stimulate foreign exchange and interest rate derivativetransactions.  In addition, the highglobal price of oil contributed to increased trading volume in numerous energyand commodity markets.  The relativelydirectionless global equities markets resulted in greater activity in manycredit markets, including key credit sectors, such as the automotiveindustry.  In addition, we continued tosee increased revenues for our brokerage services in corporate fixed income products,which we believe supports our belief that there is a growing correlationbetween the markets for cash and derivative products.

 

# **Results of Operations**

# ** **

Thefollowing table sets forth our condensed consolidated results of operations forthe periods indicated:

 

23

----

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| REVENUES:                                |       |                   |       |   |   |
| Brokerage revenues:                      |       |                   |       |   |   |
| Agency commissions                       |       | $                      | 89,479     |   | $ | 58,379 |   |
| Principal transactions                   |       | 26,604                 |       | 23,757 |   |
| Total brokerage revenues                 |       | 116,083                |       | 82,136 |   |
| Analytics and market data                |       | 5,402                  |       | 4,673 |   |
| Interest income                          |       | 1,060                  |       | 276 |   |
| Other income (loss)                      |       | (251                   | )          | 608 |   |
|                                     |       |                   |       |   |   |
| Total revenues                           |       | 122,294                |       | 87,693 |   |
|                                     |       |                   |       |   |   |
| EXPENSES:                                |       |                   |       |   |   |
| Compensation and employee benefits       |       | 75,477                 |       | 55,086 |   |
| Communications and quotes                |       | 5,799                  |       | 4,674 |   |
| Travel and promotion                     |       | 5,761                  |       | 3,948 |   |
| Rent and occupancy                       |       | 3,428                  |       | 2,573 |   |
| Depreciation and amortization            |       | 4,092                  |       | 3,142 |   |
| Professional fees                        |       | 2,469                  |       | 1,766 |   |
| Clearing fees                            |       | 3,371                  |       | 1,065 |   |
| Interest expenses                        |       | 1,244                  |       | 579 |   |
| Other expenses                           |       | 4,009                  |       | 2,025 |   |
| Total Expenses                           |       | 105,650                |       | 74,858 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 16,644                 |       | 12,835 |   |
| PROVISION FOR INCOME TAXES               |       | 7,490                  |       | 6,032 |   |
| NET INCOME                               |       | $                      | 9,154      |   | $ | 6,803 |   |

 

Thefollowing table sets forth our condensed consolidated results of operations asa percentage of our total revenues for the periods indicated:

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| REVENUES:                                |       |                   |       |   |   |
| Brokerage revenues:                      |       |                   |       |   |   |
| Agency commissions                       |       | 73.2                   | %          | 66.6 | % |
| Principal transactions                   |       | 21.8                   | %          | 27.1 | % |
| Total brokerage revenues                 |       | 95.0                   | %          | 93.7 | % |
| Analytics and market data                |       | 4.4                    | %          | 5.3 | % |
| Interest income                          |       | 0.8                    | %          | 0.3 | % |
| Other income                             |       | (0.2                   | )%         | 0.7 | % |
|                                     |       |                   |       |   |   |
| Total revenues                           |       | 100.0                  | %          | 100.0 | % |
|                                     |       |                   |       |   |   |
| EXPENSES:                                |       |                   |       |   |   |
| Compensation and employee benefits       |       | 61.7                   | %          | 62.8 | % |
| Communications and quotes                |       | 4.8                    | %          | 5.3 | % |
| Travel and promotion                     |       | 4.7                    | %          | 4.5 | % |
| Rent and occupancy                       |       | 2.8                    | %          | 2.9 | % |
| Depreciation and amortization            |       | 3.3                    | %          | 3.6 | % |
| Professional fees                        |       | 2.0                    | %          | 2.0 | % |
| Clearing fees                            |       | 2.8                    | %          | 1.2 | % |
| Interest expenses                        |       | 1.0                    | %          | 0.7 | % |
| Other expenses                           |       | 3.3                    | %          | 2.3 | % |
| Total Expenses                           |       | 86.4                   | %          | 85.3 | % |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 13.6                   | %          | 14.7 | % |
| PROVISION FOR INCOME TAXES               |       | 6.1                    | %          | 6.9 | % |
| NET INCOME                               |       | 7.5                    | %          | 7.8 | % |

 

24

----

 

# **Three Months Ended March 31, 2005 Compared tothe Three Months Ended March 31, 2004**

# ** **

Net income for the three months ended March 31, 2005 was $9.2 millionas compared to net income of $6.8 million for the three months ended March 31,2004, an increase of $2.4 million or approximately 35.3%.  Total revenues increased by $34.6 million, or39.5%, to $122.3 million for the three months ended March 31, 2005 from $87.7million from the same period from the prior year.  Our increased revenues were primarily due toincreased brokerage revenues across each of our product categories.  Additionally, broker productivity (defined astotal revenues during the period divided by average monthly brokerage personnelheadcount for the period) increased by approximately 11.8% for the three monthsended March 31, 2005.  Total expensesincreased by $30.7 million, or 41.0%, to $105.6 million for the three monthsended March 31, 2005 from $74.9 million for the same period from the prioryear.  Expenses increased primarilybecause of increased compensation expense, which was attributable to anincrease in performance-based bonuses as a result of higher brokeragecommission revenues for the three months ended March 31, 2005.

 

***Revenues***

 

*Brokerage Revenues*

 

We offer our brokerage services in four broad product categories:credit, financial, equity and commodity. The charts below detail our brokerage revenues by product category indollars and as a percentage of our total brokerage revenues for the periodsindicated.

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| **BROKERAGE  REVENUES:** |       |                             |       |   |   |
| Credit                   |       | $                                | 51,653     |   | $ | 37,223 |   |
| Financial                |       | 26,285                           |       | 20,540 |   |
| Equity                   |       | 21,002                           |       | 12,549 |   |
| Commodity                |       | 17,143                           |       | 11,824 |   |
| Total brokerage revenues |       | $                                | 116,083    |   | $ | 82,136 |   |
|                     |       |                             |       |   |   |
| **BROKERAGE  REVENUES:** |       |                             |       |   |   |
| Credit                   |       | 44.5                             | %          | 45.3 | % |
| Financial                |       | 22.6                             |       | 25.0 |   |
| Equity                   |       | 18.1                             |       | 15.3 |   |
| Commodity                |       | 14.8                             |       | 14.4 |   |
| Total brokerage revenues |       | 100.0                            | %          | 100.0 | % |

 

25

----

 

Total brokerage revenues increased by $34.0 million, or 41.4%, to$116.1 million for the three months ended March 31, 2005, as compared to $82.1million for the three months ended March 31, 2004.  Agency commissions increased by $31.2million, or 53.5%, to $89.5 million for the three months ended March 31, 2005as compared to $58.3 million for the three months ended March 31, 2004.  Principal transactions increased by $2.8million, or 11.8%, to $26.6 million for the three months ended March 31, 2005from $23.8 million for the three months ended March 31, 2004.

 

Of the total increase in brokerage revenues of $34.0 million,approximately $27.1 million was attributable to the performance of our existingbrokerage desks across all product areas. We believe the increase in credit product brokerage revenues of $14.4million was due to a number of factors including: robust trading activity inthe credit markets as a result of the uncertainty during the period in equitymarkets, strong volatility in credit spreads for reference entities in key creditsectors, such as the automotive industry, and continued overall growth in thecredit derivatives market.  Our existingcredit product desks contributed $13.4 million of the total increase in creditproduct brokerage revenues.  Theremaining increase of $1.0 million was generated by the addition of eight newcredit product desks since March 31, 2004.

 

Of the total increase in equity product brokerage revenues of $8.5million, our existing equity product desks contributed $5.2 million in equityproduct brokerage revenues.  Theremaining increase of $3.3 million in equity product brokerage revenues wasattributable to the addition of five new equity desks since March 31,2004.  The increase in financial productbrokerage revenues of $5.8 million was primarily attributable to thecombination of increased revenues from existing interest rate markets and aslight rebound in revenues from brokerage desks covering emerging markets.  The majority of the increase in our financialproduct brokerage revenues was generated from our existing financial productdesks, which contributed $5.6 million of the increase in financial productbrokerage revenues.  The increase in ourcommodity product brokerage revenues of $5.3 million was attributable to thecombination of investment in new desks, a resurgence of participants in themarket, and greater volatility in the energy market.  Our existing commodity product deskscontributed $2.9 million of the increase in commodity product brokeragerevenues.  The remaining increase of $2.4million was generated from the addition of six new commodity product deskssince March 31, 2004.

 

*Analytics and Market Data*

 

Revenues from our analytics and market data products increased by $0.7million, or 14.9%, to $5.4 million for the three months ended March 31, 2005 ascompared to $4.7 million for the three months ended March 31, 2004.  The increase was primarily due to theincrease in foreign exchange software licenses, energy software subscriptionsand other data subscription and consulting fees, offset in part by a decreasein update fees for foreign exchange data services.

 

*Interest Income*

 

Interest income increased by $0.8 million, or 266.7%, to $1.1 millionfor the three months ended March 31, 2005 as compared to $0.3 million for thethree months ended March 31,

 

26

----

 

2004.  The increase is mainly attributable to interestearned on the higher level of average cash balances in the U.S. resulting fromthe receipt of the net proceeds raised from our IPO and the increase ininterest income on clearing accounts related to our brokerage operations.

 

*Other Income (Loss)*

 

Other income (loss) decreased by $0.9 million, or 150.0%, to a loss of$0.3 million for the three months ended March 31, 2005 from income of $0.6million for the three months ended March 31, 2004.  Other loss for the three months ended March31, 2005 mainly consisted of transactional net losses based on foreign currencyfluctuations and net losses on foreign exchange derivative contracts.  Other income for the three months ended March31, 2004 primarily consisted of the proceeds received by us from a litigationsettlement.

 

***Expenses***

 

*Compensation and Employee Benefits*

 

Compensation and employee benefits increased by $20.4 million, or 37.0%,to $75.5 million for the three months ended March 31, 2005 from $55.1 millionfor the three months ended March 31, 2004. The increase was primarily due to an increase in the number of brokeragepersonnel from 432 at March 31, 2004 to 597 at March 31, 2005 and an increasein brokerage personnel performance bonuses of $9.8 million resulting in largepart from our overall higher brokerage commission revenues.

 

Total compensation and employee benefits as a percentage of totalrevenues decreased slightly to 61.7% at March 31, 2005 from 62.8% from March31, 2004 primarily due to the increased use of deferred compensationarrangements.

 

*Communications and Quotes*

 

Communications and quotes increased by $1.1 million, or 23.4%, to $5.8million for the three months ended March 31, 2005 from $4.7 million for thethree months ended March 31, 2004.  Theincrease was primarily attributable to the increase in brokerage desks andbrokerage personnel.

 

*Travel and Promotion*

 

Travel and promotion increased by $1.9 million, or 48.7%, to $5.8million for the three months ended March 31, 2005 from $3.9 million for thethree months ended March 31, 2004.  Thisexpense, as a percentage of our total brokerage revenues for the three monthsended March 31, 2005 increased slightly from the same period from the prioryear.

 

*Rent and Occupancy*

 

Rent and occupancy increased by $0.8 million, or 30.8%, to $3.4 millionfor the three months ended March 31, 2005 from $2.6 million for the threemonths ended March 31, 2004.  Theincrease was primarily due to an increase in moving expenses, repairs andmaintenance and an increase in rent expenses resulting from the lease ofadditional office space. See Note 10 to the Condensed Consolidated FinancialStatements for further discussion of the lease of additional office space.

 

27

----

 

*Depreciation and Amortization*

 

Depreciation and amortization increased by $1.0 million, or 32.3%, to$4.1 million for the three months ended March 31, 2005 from $3.1 million forthe three months ended March 31, 2004. The increase was attributable to an increase in fixed assets, primarilyin New York and Asia and the accelerated depreciation of $0.6 million relatedto certain long-lived assets to be abandoned as a result of the earlytermination of the lease for our primary U.K. office premises.

 

*Professional Fees*

 

Professional fees increased by $0.7 million, or 38.9%, to $2.5 millionfor the three months ended March 31, 2005 from $1.8 million for the threemonths ended March 31, 2004.  Theincrease was primarily due to the increase in information technologyconsulting, audit and legal fees, costs associated with external seminars andtraining and our decision to compensate non-employee members of our board ofdirectors.

 

*Clearing Fees*

 

Clearing fees increased by $2.3 million, or 209.1%, to $3.4 million forthe three months ended March 31, 2005 from $1.1 million for the three monthsended March 31, 2004.  This increase wasdue to a higher volume in the number of principal transactions executed duringthe three months ended March 31, 2005 as compared to the same period in theprior year.  Principal transactions aregenerally settled through third party clearing organizations that charge us afee for their services.  We also use theservices of floor brokers on certain stock exchanges to assist in the executionof transactions.  Fees paid to floorbrokers in these circumstances are included in clearing fees.

 

*Interest Expense*

 

Interest expense increased by $0.6 million, or 100.0%, to $1.2 millionfor the three months ended March 31, 2005 from $0.6 million for the threemonths ended March 31, 2004.  Theincrease was primarily due to increased interest charges on clearing accountsrelated to our brokerage operations.

 

*Other Expenses*

 

Other expenses increased by $2.0 million, or 100.0%, to $4.0 millionfor the three months ended March 31, 2005 from $2.0 million for the threemonths ended March 31, 2004.  Theincrease was primarily attributable to an increase in fair value of the Fenicspurchase obligation, an increase in irrecoverable Value Added Tax related toincreased purchases in communications and quotes in the U.K., and an increasein other general office and miscellaneous expenses, such as charitablecontributions and computer equipment expenses, partially offset by a decreasein litigation reserves.

 

*Provision for Income Taxes*

 

Our provision for income taxes totaled $7.5million for the three months ended March 31, 2005 and $6.0 million for thethree months ended March 31, 2004. Our effective tax rate was approximately 45%for the three months ended March 31, 2005 as compared to 47% for the comparableperiod in 2004. The reduction in the effective tax rate was primarily due to adecrease in taxes related to foreign operations which was partially offset byan increase in state and local income taxes.

 

28

----

 

**Quarterly Results of Operations**

 

The following table sets forth, by quarter, our unaudited statement ofincome data for the period from January 1, 2004 to March 31, 2005.  Results of any period are not necessarilyindicative of results for a full year.

 

| ** **                           | ** ** | **Quarter Ended**          | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **March 31,  2005**        | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokerage revenues:                  |       |                       |       |   |   |   |   |   |   |   |   |
| Agency commissions                   |       | $                          | 89,479     |   | $ | 73,366 |   | $ | 69,705 |   | $ | 60,589 |   | $ | 58,379 |   |
| Principal transactions               |       | 26,604                     |       | 25,627 |   | 24,977 |   | 26,978 |   | 23,757 |   |
| Total brokerage revenues             |       | 116,083                    |       | 98,993 |   | 94,682 |   | 87,567 |   | 82,136 |   |
| Analytics and market data            |       | 5,402                      |       | 3,732 |   | 3,664 |   | 4,012 |   | 4,673 |   |
| Interest income                      |       | 1,060                      |       | 776 |   | 356 |   | 170 |   | 276 |   |
| Other income (loss)                  |       | (251                       | )          | 1,597 |   | 1,077 |   | 701 |   | 608 |   |
| Total revenues                       |       | 122,294                    |       | 105,098 |   | 99,779 |   | 92,450 |   | 87,693 |   |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |
| **Expenses**                         |       |                       |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits   |       | 75,477                     |       | 66,224 |   | 62,062 |   | 58,475 |   | 55,086 |   |
| Communications and quotes            |       | 5,799                      |       | 5,341 |   | 5,196 |   | 5,325 |   | 4,674 |   |
| Travel and promotion                 |       | 5,761                      |       | 6,251 |   | 4,382 |   | 4,930 |   | 3,948 |   |
| Rent and occupancy                   |       | 3,428                      |       | 2,479 |   | 2,861 |   | 2,756 |   | 2,573 |   |
| Depreciation and amortization        |       | 4,092                      |       | 4,060 |   | 3,411 |   | 3,243 |   | 3,142 |   |
| Professional fees                    |       | 2,469                      |       | 2,676 |   | 2,848 |   | 2,178 |   | 1,766 |   |
| Clearing fees                        |       | 3,371                      |       | 3,623 |   | 2,743 |   | 2,385 |   | 1,065 |   |
| Interest expenses                    |       | 1,244                      |       | 1,076 |   | 838 |   | 666 |   | 579 |   |
| Other expenses                       |       | 4,009                      |       | 3,343 |   | 2,299 |   | 2,686 |   | 2,025 |   |
| Lease termination costs to affiliate |       | —                     |       | 2,651 |   | — |   | — |   | — |   |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Total expenses                       |       | 105,650                    |       | 97,724 |   | 86,640 |   | 82,644 |   | 74,858 |   |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Income before provision for taxes    |       | 16,644                     |       | 7,374 |   | 13,139 |   | 9,806 |   | 12,835 |   |
| Provision for income taxes           |       | 7,490                      |       | 4,017 |   | 5,266 |   | 4,716 |   | 6,032 |   |
| Net income                           |       | $                          | 9,154      |   | $ | 3,357 |   | $ | 7,873 |   | $ | 5,090 |   | $ | 6,803 |   |

 

29

----

 

The following table sets forth our quarterly results of operations as apercentage of our total revenues for the indicated periods:

 

| ** **                           | ** ** | **Quarter Ended**   | ** ** |
|--------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
|                                 |       |                |       |   |   |   |   |   |   |   |   |
| **Revenues**                         | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokerage revenues:                  |       |                |       |   |   |   |   |   |   |   |   |
| Agency commissions                   |       | 73.2                | %          | 69.8 | % | 69.9 | % | 65.5 | % | 66.6 | % |
| Principal transactions               |       | 21.8                |       | 24.4 |   | 25.0 |   | 29.2 |   | 27.1 |   |
| Total brokerage revenues             |       | 95.0                |       | 94.2 |   | 94.9 |   | 94.7 |   | 93.7 |   |
| Analytics and market data            |       | 4.4                 |       | 3.6 |   | 3.6 |   | 4.3 |   | 5.3 |   |
| Interest income                      |       | 0.8                 |       | 0.7 |   | 0.4 |   | 0.2 |   | 0.3 |   |
| Other income (loss)                  |       | (0.2                | )          | 1.5 |   | 1.1 |   | 0.8 |   | 0.7 |   |
| Total  revenues                      |       | 100.0               | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
|                                 |       |                |       |   |   |   |   |   |   |   |   |
| **Expenses**                         |       |                |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits   |       | 61.7                | %          | 63.1 | % | 62.2 | % | 63.3 | % | 62.8 | % |
| Communications and quotes            |       | 4.8                 |       | 5.1 |   | 5.2 |   | 5.8 |   | 5.3 |   |
| Travel and promotion                 |       | 4.7                 |       | 5.9 |   | 4.4 |   | 5.4 |   | 4.5 |   |
| Rent and occupancy                   |       | 2.8                 |       | 2.4 |   | 2.9 |   | 3.0 |   | 2.9 |   |
| Depreciation and amortization        |       | 3.3                 |       | 3.9 |   | 3.4 |   | 3.5 |   | 3.6 |   |
| Professional fees                    |       | 2.0                 |       | 2.5 |   | 2.9 |   | 2.4 |   | 2.0 |   |
| Clearing fees                        |       | 2.8                 |       | 3.4 |   | 2.7 |   | 2.6 |   | 1.2 |   |
| Interest expenses                    |       | 1.0                 |       | 1.0 |   | 0.8 |   | 0.7 |   | 0.7 |   |
| Other expenses                       |       | 3.3                 |       | 3.2 |   | 2.3 |   | 2.9 |   | 2.3 |   |
| Lease termination costs to affiliate |       | —              |       | 2.5 |   | — |   | — |   | — |   |
| Total expenses                       |       | 86.4                | %          | 93.0 | % | 86.8 | % | 89.6 | % | 85.3 | % |
| Income before provision for taxes    |       | 13.6                |       | 7.0 |   | 13.2 |   | 10.4 |   | 14.7 |   |
| Provision for income taxes           |       | 6.1                 |       | 3.8 |   | 5.3 |   | 5.1 |   | 6.9 |   |
| Net income                           |       | 7.5                 | %          | 3.2 | % | 7.9 | % | 5.3 | % | 7.8 | % |

 

The table below details our brokerage revenues by product category indollars and as a percentage of our total brokerage revenues for the indicatedperiods:

 
| ** **               | ** ** | **Quarter Ended**          | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **March 31,  2005**        | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage  Revenues:** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Credit                   |       | $                          | 51,653     |   | $ | 36,304 |   | $ | 42,315 |   | $ | 37,247 |   | $ | 37,223 |   |
| Financial                |       | 26,285                     |       | 24,870 |   | 20,377 |   | 18,922 |   | 20,540 |   |
| Equity                   |       | 21,002                     |       | 21,753 |   | 18,656 |   | 18,515 |   | 12,549 |   |
| Commodity                |       | 17,143                     |       | 16,066 |   | 13,334 |   | 12,883 |   | 11,824 |   |
| Total brokerage Revenues |       | $                          | 116,083    |   | $ | 98,993 |   | $ | 94,682 |   | $ | 87,567 |   | $ | 82,136 |   |
|                     |       |                       |       |   |   |   |   |   |   |   |   |
| **Brokerage  Revenues:** |       |                       |       |   |   |   |   |   |   |   |   |
| Credit                   |       | 44.5                       | %          | 36.7 | % | 44.7 | % | 42.6 | % | 45.3 | % |
| Financial                |       | 22.6                       |       | 25.1 |   | 21.5 |   | 21.6 |   | 25.0 |   |
| Equity                   |       | 18.1                       |       | 22.0 |   | 19.7 |   | 21.1 |   | 15.3 |   |
| Commodity                |       | 14.8                       |       | 16.2 |   | 14.1 |   | 14.7 |   | 14.4 |   |
| Total brokerage Revenues |       | 100.0                      | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |

 

30

----

 

The table below details our brokerage revenues by geographic region indollars and as a percentage of our total brokerage revenues for the indicatedperiods:

 
| ** **               | ** ** | **Quarter Ended**          | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **March 31,  2005**        | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage  Revenues:** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.                     |       | $                          | 56,495     |   | $ | 49,590 |   | $ | 45,150 |   | $ | 41,054 |   | $ | 34,644 |   |
| U.K.                     |       | 52,096                     |       | 44,330 |   | 44,025 |   | 41,625 |   | 42,437 |   |
| Asia-Pacific             |       | 7,492                      |       | 5,073 |   | 5,507 |   | 4,888 |   | 5,055 |   |
| Total brokerage Revenues |       | $                          | 116,083    |   | $ | 98,993 |   | $ | 94,682 |   | $ | 87,567 |   | $ | 82,136 |   |
|                     |       |                       |       |   |   |   |   |   |   |   |   |
| **Brokerage  Revenues:** |       |                       |       |   |   |   |   |   |   |   |   |
| U.S.                     |       | 48.6                       | %          | 50.1 | % | 47.7 | % | 46.9 | % | 42.1 | % |
| U.K.                     |       | 44.9                       |       | 44.8 |   | 46.5 |   | 47.5 |   | 51.7 |   |
| Asia-Pacific             |       | 6.5                        |       | 5.1 |   | 5.8 |   | 5.6 |   | 6.2 |   |
| Total brokerage Revenues |       | 100.0                      | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |

 

# **Liquidity and Capital Resources**

# ** **

On January 31, 2005, we completed an IPO of our common stock, selling3,947,369 shares of common stock at $21.00 per share.  Our proceeds from the IPO after deductingunderwriters’ discounts and expenses were $73.9 million.

 

At March 31, 2005, we had cash and cash equivalents of $104.1 million,a decrease of $1.1 million as compared to $105.2 million at December 31,2004.  Cash used in operating activitieswas $13.9 million, which was primarily attributable to the net increase inworking capital items such as net receivables from brokers, dealers andclearing organizations, accrued commission receivable, accrued compensation andother assets, and offset by the increase in net income and non-cash items suchas depreciation and amortization and the loss on the Fenics purchaseobligation.  Cash used in investingactivities of $1.3 million reflected purchases of property, equipment andleasehold improvements.  Cash provided byfinancing activities of $14.3 million reflected net proceeds received from theIPO, offset by the repayment of the notes payable to JPI in January 2005 andthe borrowing outstanding under our Credit Facility in February 2005.

 

Our liquidity and available cash resources are in part restricted bythe regulatory requirements of our operating subsidiaries including GFISecurities LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK)Securities LLC and GFI Group Pte Ltd. GFI Securities LLC is subject to regulatory capital requirements underthe Exchange Act and the

 

31

----

 

Commodity Exchange Act.  GFI Securities Limited and GFI BrokersLimited are subject to the regulatory capital requirements of the FinancialServices Authority in the United Kingdom. GFI (HK) Securities LLC is subject tothe regulatory capital requirements of the Securities and Futures Commission inHong Kong.  GFI Group Pte. Ltd. issubject to the regulatory capital requirements of the Monetary Authority ofSingapore.  At March 31, 2005, GFISecurities LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK)Securities LLC and GFI Group Pte. Ltd. were in compliance with their respectiveregulatory capital requirements.  SeeNote 13 to the condensed consolidated financial statements for furtherdiscussion.

 

Although we have no material commitments for capital expenditures, weanticipate that we will experience a substantial increase in our capitalexpenditures and lease commitments consistent with our anticipated growth inoperations, infrastructure and personnel. We currently anticipate that we willcontinue to experience significant growth in our operating expenses for theforeseeable future and that our operating expenses will be a material use ofour cash resources.

 

We believethat, based on current levels of operations and anticipated growth, our cashfrom operations, together with cash currently available and availablility underour Credit Facility, will be sufficient to fund our operations for at least thenext twelve months. Poor financial results, unanticipated expenses,unanticipated acquisitions or unanticipated strategic investments could giverise to additional financing requirements sooner than we expect. There can beno assurance that equity or debt financing will be available when needed or, ifavailable, that the financing will be on terms satisfactory to us and notdilutive to our then-current stockholders.

 

#### **ContractualObligations and Commitments**

#### ** **

Our contractual obligations and off-balance sheet entities aredescribed in “Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations” contained in the 2004 Form 10-K.  Except as described below in this Form 10-Q,there have been no material changes to those obligations or arrangements duringthe three months ended March 31, 2005.

 

In January 2005, we entered into an amendment to the lease of ourexecutive headquarters located at 100 Wall Street, New York, NY, to provide foradditional office space.  This lease forthis additional space is scheduled to expire on September 30, 2013.  The future minimum rental commitments forthis additional space are as follows: $0.4 million in 2005, $0.4 million in2006, $0.5 million in 2007, $0.5 million in 2008, $0.5 million in 2009 and $1.7million thereafter.

 

Additionally, in April 2005, we entered into a ten-year lease for newpremises, which will become our primary London office.  The future minimum rental commitments underthis lease are as follows: $2.7 million for 2008, $2.9 million for 2009 and$18.3 million thereafter.  In addition,we expect to incur increased charges related to the new lease for items such asutilities, service charges, real estate taxes, insurance and depreciation.  See Note 17 to the condensed consolidatedfinancial statements for further discussion.

 

In January 2005, we used a portion of the net proceeds of our IPO torepay, in full, the loan note payable to JPI.

 

In February 2005, we used a portion of the net proceeds of our IPO topay down all amounts then outstanding under our Credit Facility. See Note 5 tothe condensed consolidated financial statements for further discussion.

 

32

----

 

In March 2005, we made a written offer to purchase all of the ordinaryshares of Fenics Limited that were not held by us for $4.5 million.  As of April 7, 2005, the offer had beenaccepted by a majority of the remaining minority shareholders and we arecurrently in the process of completing the purchase of all remainingshares.  See Note 10 to the condensedconsolidated financial statements for further discussion.

 

#### **CriticalAccounting Policies and Estimates**

#### ** **

The Company has disclosed in Note 2 to its condensed consolidatedfinancial statements and in Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in the 2004 Form 10-K thoseaccounting policies that it considers to be significant in determining itsresults of operations and financial condition. There have been no material changes to the accounting policies theCompany considers significant as identified in the 2004 Form 10-K.  The accounting principles utilized by theCompany in preparing its condensed consolidated financial statements conform inall material respects to generally accepted accounting principles in the UnitedStates of America.

 

#### **RecentAccounting Pronouncements**

#### ** **

In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107,(“SAB No. 107) to provide guidance on SFAS No. 123(R), Share-Based Payments,(SFAS No. 123(R)).  SAB No. 107 providesthe staff’s view regarding the valuation of share-based payment arrangementsfor public companies.  In particular,this SAB provides guidance related to share-based payment transactions withnon-employees, the transition from non public to public entity status,valuation methods (including assumptions such as expected volatility andexpected term), the accounting for certain redeemable financial instrumentsissued under share-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first time adoption of SFASNo. 123(R), the modification of employee share options prior to the adoption ofSFAS No. 123(R) and disclosure in Management’s Discussion and Analysis subsequentto the adoption of SFAS No. 123(R). SAB No. 107 is effective March 29,2005.  In April 2005, the SEC modifiedthe effective date of SFAS No. 123(R) to be as of the first reporting period ofthe first fiscal year beginning after June 15, 2005.  The SEC’s modification of the effective datedid not change the accounting required by SFAS No. 123(R).  The impact of SFAS No. 123(R) and SAB No. 107on the Company’s condensed consolidated financial statements is currently beingevaluated and is not anticipated to be material.

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our quantitative and qualitative disclosures about market risk aredescribed in “Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations” contained in the 2004 Form 10-K.  Except as described below in this Form 10-Q,there have been no material changes to those market risks during the threemonths ended March 31, 2005.

 

##### **Foreign Currency Exposure Risk**

##### ** **

We are exposed tomarket risk associated with movements in foreign currency exchange rates.  There have been no material changes to ourrisk management policy as described in “Item 7A – Quantitativeand Qualitative Disclosures about Market Risk” contained in our 2004 Form 10-K.

 

33

----

 

At March 31, 2005, we had outstanding foreign exchange derivativecontracts to purchase and sell foreign currency with notional amountstranslated into U.S. Dollars of $108.9 million. We would have paid $5.3 millionat March 31, 2005 to settle these contracts, which represent the fair value ofthese contracts.  At March 31, 2005, ifthe Euro strengthened by 10% against the U.S. Dollar, it would decrease thefair value of these contracts and, as a result, accumulated other comprehensiveincome would decrease by approximately $5.2 million, net of tax.

 

While our international results of operations, as measured in U.S.dollars, are subject to foreign exchange rate fluctuations, we do not considerthe related risk to be material to our results of operations.  If the U.S. dollar strengthened by 10%against the Euro and the British Pound strengthened by 10% against the U.S.dollar, the net impact to our net income would have been a reduction ofapproximately $1.5 million.

 

##### **Interest Rate Risk**

##### ** **

At March 31, 2005, we had no variable-rate debt outstanding.  We paid off our note payable and loan notepayable during the first quarter of 2005. See Notes 5 and 6, respectively, to the condensed consolidated financialstatements for further discussion.  Assuch, we currently do not anticipate any material impact to our net incomeresulting from fluctuations in interest rates.

 

# **ITEM 4**.  CONTROLS AND PROCEDURES

# ** **

As of the endof the period covered by this report, the Company’s management carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report in providing a reasonable level ofassurance that information we are required to disclose in reports we file orfurnish under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

In addition,the Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, have evaluated the Company’s internal controls overfinancial reporting and determined that there have been no changes in ourinternal controls over financial reporting during the first quarter of 2005that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

## **PART II – OTHER INFORMATION**

## ** **

# **ITEM 1**.  LEGAL PROCEEDINGS

# ** **

In the normalcourse of business, we are and have been party to, or otherwise involved in,litigations, claims and arbitrations in the U.S. and U.K. that involve claimsfor substantial amounts.  Theseproceedings have generally involved either competitor claims in connection withnew employee hires, or claims from former employees in connection with thetermination of their employment from us. We are also involved, from time to time, in investigations orproceedings

 

34

----

 

by government agencies andself-regulatory organizations.  There isalso potential for client claims alleging the occurrence of errors in theexecution of brokerage transactions.

 

We believeproceedings of these types are common in the inter-dealer brokerage industrydue to its highly competitive and regulated nature.  Although the ultimate outcome of theseproceedings cannot be ascertained at this time, after consultation withcounsel, we believe that damages, if any, resulting from such proceedings willnot, in the aggregate, have a material adverse effect on our financialcondition, but may be material to our operating results for any particularperiod.

 

**ITEM 2****.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Theeffective date of our registration statement (Registration No. 333-116517)filed on Form S-1 relating to our IPO was January 25, 2005. In ourIPO, we sold 3,947,369 shares of common stock at a price of $21.00 per shareand the selling stockholders sold 2,788,439 shares (including shares soldpursuant to the exercise of the underwriters’ over-allotment option) of commonstock at $21.00 per share. Our IPO was managed on behalf of the underwriters byCitigroup, Merrill Lynch & Company, Banc of America Securities LLC, JPMorgan, and Jefferies & Company, Inc. The offering closed onJanuary 31, 2005. Proceeds to us from our IPO, after deduction ofunderwriting discounts and commissions of approximately $5.8 million andoffering costs of approximately $3.2 million, totaled approximately$73.9 million. Of the $73.9 million raised, approximately$9.65 million was used to repay the outstanding principal amount plusaccrued interest of our senior subordinated term loan with JPI. Pursuant to theterms of the senior subordinated loan agreement, upon the consummation of ourIPO, we were required to repay the loan in full.

 

In February 2005, weused a portion of the net proceeds from the IPO to pay down in full the currentoutstanding balance of $52.5 million plus accrued interest under ourCredit Facility.

 

Wealso intend to use approximately $4.5 million of the net proceeds from the IPOto purchase the remaining Fenics Limited shares not currently owned by us.  See Note 10 to the condensed consolidatedfinancial statements for further discussion.

 

We intend touse the remaining portion of the proceeds of our IPO for working capital andother general corporate purposes and for acquisitions of, or investment in,companies, technologies or other assets that complement our business, includingkey personnel recruitment. We have no present understandings, commitments oragreements to enter into any potential acquisitions or investments. Pendingapplication as described above, we currently plan to invest the remaining netproceeds received in short-term, investment grade, interest-bearing securities.

 

# **ITEM 6**.  EXHIBITS AND REPORTS ON FORM 8-K

# ** **

(a)                                  Exhibits:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                     |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
| 31.1             |       | Certification  of Chief Executive Officer.                                                                                          |
| 31.2             |       | Certification  of Chief Financial Officer.                                                                                          |
| 32.1             |       | Written  Statement of Chief Executive Officer Pursuant to Section 9.06 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |

 

35

----

 
| 32.2 |   | Written  Statement of Chief Financial Officer Pursuant to Section 9.06 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

 

(b)                                 Reportson Form 8-K

 

During the quarter ended March 31, 2005, the Company filed thefollowing Current Reports on Form 8-K;

 

(i)                    ACurrent Report on Form 8-K dated January 31, 2005 and filed on February 2, 2005pertaining to the resignation and appointment of directors;

 

(ii)                 ACurrent Report on Form 8-K dated March 10, 2005 and filed on March 11, 2005pertaining to the Company’s results of operations for the three months andfiscal year ended December 31, 2004; and

 

(iii)              ACurrent Report on Form 8-K dated March 24, 2005 and filed on March 30, 2005pertaining to the Company’s policy for the compensation of non-employeedirectors.

 

36

----

 

## **SIGNATURES**

## ** **

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this Quarterly Report onForm 10-Q for the three months ended March 31, 2005 to be signed on its behalfby the undersigned, thereunto duly authorized, on the 16th day of May, 2005.

 

 
|   | GFI GROUP INC. |
|--------|---------------------|
|   | By:                 |   |  /s/ James A. Peers |   |
|   |                | Name: | James A. Peers |
|   |                | Title: | Chief Financial Officer |
|   |                |   | (principal financial and  accounting officer) |

 

37

----