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GCAP > SEC Filings for GCAP > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for GAIN CAPITAL HOLDINGS, INC.

Form 10-Q for GAIN CAPITAL HOLDINGS, INC.


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION
In this Quarterly Report on Form 10-Q, the words "GAIN", the "Company", "our", "we" and "us" refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, to GAIN's subsidiaries. Our fiscal quarter ended on June 30, 2013.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains a number of forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's current beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that we "believe", "expect", "anticipate", "plan" and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this report and the discussion below. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. In particular, we can provide no assurance that we will be able to complete the proposed acquisition of GFT on acceptable terms, or at all, due to a number of factors, including but not limited to the failure to satisfy all applicable closing conditions. Additional factors include those set forth in the section entitled "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and discussed elsewhere in this Quarterly Report on Form 10-Q. The risks and uncertainties described therein and herein are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also impair the business. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.
OVERVIEW
We are a global provider of trading services and solutions, specializing in global over-the-counter, or OTC, markets, including foreign exchange, or forex, and precious metals, "contracts-for-difference", or CFDs, which are investment products with returns linked to the performance of an underlying commodity, index or security, and exchange-traded products, including futures and options on futures. We have customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Powell, Ohio; Cleveland, Ohio; London, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore.
Our retail trading business, which has historically made up the majority of our business, allows customers to trade through our FOREX.com brand. We also offer retail customers the ability to trade exchange-traded products through our Open E Cry, or OEC brand, which offers futures products. Our institutional trading business, GTX, launched in March 2010 to serve institutional market participants, including hedge funds, banks and high-frequency trading firms. We have also historically offered equity products through our wholly-owned subsidiary, GAIN Securities. In July 2013, GAIN Securities entered into an agreement to transfer substantially all of its customer accounts to TradeKing,
LLC. The transaction is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, and is expected to close in the late third quarter or early fourth quarter of 2013. We have invested considerable resources in developing our retail and institutional trading platforms and tools to allow our customers to trade and manage their accounts. While our retail and institutional trading businesses use separate platforms, we are able to leverage our combined scale and trading volume in our relationships with our wholesale trading partners, bank liquidity providers and other service providers. In addition, we believe that our platforms complement each other, which allows us to cross-sell our services and to leverage our facilities and the technologies we develop. Our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research, automated trading and account management.


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Market Overview
Overall market conditions improved in the six months ended June 30, 2013, due in part to higher levels of volatility as compared to the multi-year lows experienced in 2012. While volatility levels in the quarter were still well below 2008-2011 averages, we saw increased engagement from clients in the quarter, resulting in higher trading volumes. GFT Transaction
On April 24, 2013, we entered into a Stock Purchase Agreement with Gary L. Tilkin and Global Futures & Forex, Ltd., or GFT, pursuant to which we have agreed to purchase all of the issued and outstanding shares of common stock of GFT from Mr. Tilkin. The transaction is subject to customary closing conditions, not all of which have been satisfied as of the date of this report. We continue to work through the issues that must be resolved in order to close the acquisition. The descriptions of the transaction below and elsewhere in this report are based on the terms and conditions set forth in the transaction documents entered into on April 24, 2013. There can be no assurance that we will be able to complete the proposed acquisition of GFT on acceptable terms, or at all, and we can offer no update at this time regarding the timing, and changes to the terms, if any, of the transaction.
The Stock Purchase Agreement provides for an aggregate purchase price consisting of (i) $40.0 million in cash to be paid upon the closing of the transaction,
(ii) 4,944,165 shares of our common stock and (iii) a term loan from Mr. Tilkin to the Company in an amount equal to approximately $40.0 million. The purchase price is subject to an upwards or downwards adjustment based on GFT's working capital, cash and transaction expenses on the date the transaction closes. We intend to fund the cash portion of the purchase price through the use of cash on hand, including cash currently held by certain of our foreign operating subsidiaries. On April 24, 2013, we entered into a Stockholders' Agreement with Mr. Tilkin, pursuant to which we agreed to appoint Mr. Tilkin to the Company's Board of Directors effective upon the closing of the GFT transaction. Under the terms of the Stockholders' Agreement, Mr. Tilkin will be entitled to remain a director, subject to certain conditions, until (i) he owns less than 20% of the total amount of common stock issued to him in connection with the GFT transaction and
(ii) the outstanding principal amount of the term loan described below is less than 20% of the principal amount of such loan as of the date the GFT transaction closes. The foregoing descriptions of the Stock Purchase Agreement and Stockholders' Agreement do not purport to be complete, and are qualified in their entirety by reference to the full text of those agreements, which were filed with as exhibits to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. The representations, warranties and covenants contained in the Stock Purchase Agreement and Stockholders' Agreement have been made solely for purposes of those agreements and as of specific dates and are not intended as statements of fact to be relied upon by any party other than the parties to those agreements. Pursuant to the terms of the Stock Purchase Agreement, on the closing date, we will enter into a Loan and Security Agreement with Mr. Tilkin, pursuant to which Mr. Tilkin will be deemed to have made the term loan to us on the closing date. The term loan will mature five years from the closing date and will bear interest at a rate of 8.0% per annum, payable quarterly. We will also make quarterly payments of principal in an amount of $1.5 million per quarter, plus additional payments of principal based on (i) certain EBITDA thresholds,
(ii) excess available capital due to the elimination of regulatory requirements and (iii) availability of net cash proceeds in connection with liquidity events, subject to de minimis thresholds and certain reinvestment rights. The Loan and Security Agreement will require us to comply with a minimum debt service coverage ratio and a maximum total funded debt ratio, along with other customary negative covenants. Our obligations under the Loan and Security Agreement will be secured by substantially all of the Company's assets, including the Company's ownership interests in Gain Holdings, LLC, but excluding any intellectual property. Following the closing of the acquisition and our payment of the cash portion of the purchase price, the amount of our cash on hand, both in the United States and abroad, will be reduced from historical levels due to the need to fund the cash portion of the purchase price and to repay the amounts outstanding under our revolving credit facility. In addition, after the closing, a portion of the cash generated by our operations going forward must be used to make payments of principal and interest on the term loan from Mr. Tilkin, such that our ability to fund capital expenditures, acquisitions and other working capital needs of our business in the future may be adversely affected. Moreover, the Loan and Security Agreement would limit our ability to incur additional indebtedness, other than principally subordinated debt and a limited amount of unsecured debt, without Mr. Tilkin's prior written consent, which may further adversely affect our ability to fund capital expenditures, acquisitions and other working capital needs of our business. In connection with the closing of the acquisition, we expect to acquire approximately $80.0 million in cash held by GFT, a substantial portion of which is required to satisfy applicable regulatory capital and/or collateral requirements. We intend to combine the operations of certain of our regulated operating subsidiaries with those acquired from GFT, and believe that we will be able to reduce the amount of GFT's cash that is currently held to satisfy our subsidiaries' applicable regulatory requirements.


Table of Contents

Key Income Statement Line Items and Key Operating Metrics The following table sets forth key financial metrics for our business for the periods indicated:

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