Cardtronics, plc.
CARDTRONICS INC (Form: 10-K, Received: 02/22/2016 09:32:34)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549  

 

FORM 10-K  

(Mark One)

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended  December 31, 2015  

 

or  

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934

 

 

 

For the transition period from____ to____  

 

Commission f ile n umber: 001-33864  

                                                  

 

CARDTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware  

76-0681190  

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

3250 Briarpark Drive, Suite 400  

77042  

Houston, T exas  

(Zip Code)

(Address of principal executive offices)

 

 

Registrant's telephone number, including area code: (832) 308-4000

  Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

The NASDAQ Stock Market LLC

 

Securities registered pursuant to s ection 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes    No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes    No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,   accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer   

Smaller reporting company   

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes    No 

Aggregate market value of common stock held by non-affiliates as June 30, 201 5 , the last business day of the registrant’s most recently completed second fiscal quarter, based on the reported last sale price of common stock on that date:   $1,637,946,859 .

Number of shares outs tanding as of February 19, 2016: 45,192,582 shares of Common Stock, par value $0.0001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive proxy statement for the 201 6 Annual Meeting of   Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2015 , are incorporated by reference into Part III of this Annual Report on   Form 10-K.

 

 

 


 

Table of Contents

CARDTRONICS, INC.

 

TABLE OF CONTENTS

 

 

 

Page

Cautionary Statement Regarding Forward-Looking Statements  

 

PART I  

 

Item 1.  

Business

 

Item 1A.  

Risk Factors

 

14 

Item 1B.  

Unresolved Staff Comments

 

32 

Item 2.  

Properties

 

32 

Item 3.  

Legal Proceedings

 

32 

Item 4.  

Mine Safety Disclosures

 

32 

PART II  

 

33 

Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

33 

Item 6.  

Selected Financial Data

 

36 

Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

37 

Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

 

68 

Item 8.  

Financial Statements and Supplementary Data

 

72 

Item 9.  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

126 

Item 9A.  

Controls and Procedures

 

126 

Item 9B.  

Other Information

 

127 

PART III  

 

128 

Item 10.  

Directors, Executive Officers and Corporate Governance

 

128 

Item 11.  

Executive Compensation

 

128 

Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

128 

Item 13.  

Certain Relationships and Related Transactions, and Director Independence

 

128 

Item 14.  

Principal Accounting Fees and Services

 

128 

PART IV  

 

129 

Item 15.  

Exhibits, Financial Statement Schedules

 

129 

Signatures  

 

130 

 

When we refer to “us,” “we,” “our,” “ours,” “the Company,” or “Cardtronics,” we are describing Cardtronics, Inc. and/or our subsidiaries, unless the context indicates otherwise.

 

 

 

 


 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENT S

 

This Annual Report on Form 10-K (th is   201 5 Form 10-K ) contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act ). These statements are identified by the use of the words project,   believe,   estimate,   expect,   anticipate,   intend,   contemplate,   foresee,   would,   could,   plan, and similar expressions that are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our estimates for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause actual results to differ materially from those in the forward-looking statements are those described in: Part I. Item 1A. Risk Factors.

 

Readers are cautioned not to place undue reliance on forward-looking statements contained in this document,   which speak only as of the date of this 201 5 Form 10-K. We undertake no   obligation to publicly update or revise any forward-looking statements after the date   they are made, whether as a result of new information, future events or   otherwise.

 

 

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PART  I

 

ITEM 1. BUSINES S

 

Overview  

 

Cardtronics, Inc. provides convenient automated consumer financial services through its network of automated teller machines ( ATMs ) and multi-function financial services kiosks. As of December 31, 2015 , we were the world’s largest retail ATM owner, providing services to approximately 190,000   devices throughout the United States ( U.S. ) (including the U.S. territory of Puerto Rico), the United Kingdom ( U.K. ), Germany, Poland, Canada, and Mexico. During 2015, 69.1 % of our total revenues wer e derived from our operations in North America (which includes the U.S., Canada, and Mexico) and 30.9 % from our operations in Europe (which includes the U.K., Germany, and Poland). In the U.S., certain of our devices are multi-function financial services kiosks that, in add ition to traditional ATM functions such as cash dispensing and bank account balance inquiries, perform other consumer financial services, including bill payments, check cashing, remote deposit capture (which is deposit-taking at ATMs using electronic imaging), and money transfers. I ncluded in the number of devices in our network as of December 31, 2015 were approximately 112,600 ATMs to which we provided processing services or various forms of managed services solutions. Under a managed services arrangement, retailers, financial institutions, and ATM distributors rely on us to handle some or all of the operational aspects associated with operating and maintaining ATMs, typically in exchange for a monthly service fee , fee per transaction, or fee per service provided.

 

We often partner with large retail merchants of varying sizes under multi-year contracts to place our ATMs and kiosks within their store locations. In doing so, we provide our retail partners with a compelling automated financial services solution that helps attract and retain customers, and in turn, increases the likelihood that our devices will be utilized. We also own and operate electronic funds transfer ( EFT ) transaction processing platforms that provide transaction processing services to our network of ATMs and financial services kiosks, as well as to other ATMs owned and operated by third parties.

 

We generally deploy and operate devices under three distinct arrangements with our retail partners: Company-owned ATM placements, merchant-owned ATM placements, and managed services (which includes transaction processing services) . Under Company-owned arrangements, we provide the physical device (ATM) and are typically responsible for all aspects of its operations, including transaction processing, managing cash and cash delivery, supplies, and telecommunications, as well as routine and technical maintenance. Under merchant-owned arrangements, the retail merchant or an independent distributor owns the device and is usually responsible for providing cash and performing simple maintenance tasks, while we provide more complex maintenance services, transaction processing, and connection to the EFT networks. We also offer various forms of managed services, depending on the needs of our customers. Each managed s ervice arrangement is a customized ATM management solution that can include any combination of the following services: monitoring, maintenance, cash management, cash delivery, customer service, transaction processing, and other services. As of December 31, 2015, 31.1 % of our devices operated were Company-owned, 9.6 % were merchant-owned, and   59.3 % of our devices were operated under a managed s ervices solution. Each of the arrangement types described above are attractive to us, and we plan to continue growing our revenues under each arrangement type.

 

In addition to its retail merchant relationships, we also partner with leading national financial institutions to brand selected ATMs and financial services kiosks within its network, including BBVA Compass Bancshares, Inc. ( BBVA ), Citibank, N.A. ( Citibank ), Citizens Financial Group, Inc. ( Citizens ), Cullen/Frost Bankers, Inc. ( Cullen/Frost ), PNC Bank, N.A. ( PNC Bank ), TD Bank, N.A. ( TD Bank ) , and Santander Bank, N.A. ( Santander )   in the U.S., Santander and The Bank of Nova Scotia ( Scotiabank ) in Puerto Rico, and Canadian Imperial Bank Commerce ( CIBC ), TD Bank , and Scotiabank in Canada. In Mexico, we operate Cardtronics Mexico, S.A. de C.V. ( Cardtronics Mexico ) and partner with Grupo Financiero Banorte, S.A. de C.V. ( Banorte ) and Scotiabank to place their brands on our ATMs in exchange for certain services provided by them. As of December 31, 2015, approximately 22,000 of our ATMs were under contract with approximately 500 financial institutions to place their logos on our ATMs and to provide convenient surcharge-free access for their banking customers.  

 

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We also own and operate the Allpoint network (“Allpoint”), the largest surcharge-free ATM network within the U.S. (based on the number of participating ATMs). Allpoint, which has approximately 55,000 participating ATMs, provides surcharge-free ATM access to customers of approximately 1,300 participating financial institutions that may lack a significant ATM network in exchange for either a fixed monthly fee per cardholder or a set fee per transaction that is paid by the financial institutions who are members of the network. The Allpoint network includes a majority of our ATMs in the U.S. and a portion of our ATMs in the U.K., Canada, Puerto Rico, and Mexico. Allpoint also works with financial institutions that manage stored-value debit card programs on behalf of corporate entities and governmental agencies, including general purpose, payroll and electronic benefits transfer (“EBT”) cards. Under these programs, the issuing financial institutions pay Allpoint a fee per issued stored-value card or per transaction in return for allowing the users of those cards surcharge-free access to Allpoint’s participating ATM network.

 

Our revenues are recurring in nature, and historically have been derived primarily from convenience transaction fees, which are paid by cardholders, and transaction fees, including interchange fees, which are paid by the cardholder’s financial institution for the use of the devices serving their customers and the connectivity to the applicable EFT network that transmits data between the device and the cardholder’s financial institution. Other revenue sources include: ( i )   branding our devices with the logos of leading national and regional banks and other financial institutions, ( ii ) providing managed services (including transaction processing services) solutions to retailers and financial institutions, ( iii ) collecting fees from financial institutions that participate in our Allpoint surcharge-free network, (iv) fees earned from foreign currency exchange transactions at the ATM, known as Dynamic Currency Conversion (“DCC”), and ( v ) selling ATM-related equipment and other ancillary services.

 

Organizational and Operational History

 

We were formed as a Texas corporation in 1993 and originally operated under the name of Cardpro, Inc. I n June 2001, Cardtronics Group, Inc. was incorporated under the laws of the state of Delaware and became the parent company for the existing business. In January 2004, Cardtronics Group, Inc. changed its name to Cardtronics, Inc. In December 2007, we completed the initial public offering of 12,000,000 shares of our common stock.

 

Since May 2001, we have acquired 2 6 ATM businesses , which have expanded our operations both domestically and internationally in multi-unit retail chains and individual merchant locations. We have also made other strategic acquisitions including the acquisition of Allpoint, our surcharge-free network, i-design group plc (“i-design”) , a Scotland-based provider and developer of marketing and advertising software and services for ATM owners, Sunwin Services Group (“Sunwin”) , a U.K. - based provider of secure cash logistics and ATM maintenance, and more recently in July 2015, Columbus Data Services, L.L.C. (“CDS”), a leading independent transactions processor for ATM deployers and payment card issuers, providing leading-edge solutions to ATM sales and service organizations and financial institutions .

 

From 2001 to 201 5 , the total number of annual transactions processed within our network increased from approximately 19.9 million to approximately 1.7 billion .

 

 

Additional Company Information

 

General information about us can be found on our website at http://www.cardtronics.com . We file annual, quarterly, and current reports as well as other information electronically with the SEC under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports are available free of charge on our website as soon as reasonably practicable after the reports are filed or furnished electronically with the SEC. You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov . You may also request an electronic or paper copy of our SEC filings at no cost by writing or telephoning us at the following: Cardtronics, Inc., Attention: Chief Financial Officer, 3250 Briarpark Drive, Suite 400, Houston, Texas 77042; (832)   308-4000. Information on our website is not incorporated into this 2015 Form 10-K or our other securities filings.

 

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Our Strategy

 

Our strategy is to leverage the expertise and scale we have built in our two largest markets, the U.S. and the U.K., to continue to expand in those markets, continue to grow in our other markets, and to drive expansion into new international markets to enhance our position as a leading provider of automated consumer financial services. We plan to continue partnering with leading financial institutions and retailers to expand our network of conveniently located ATMs and financial services kiosks. Additionally, we will seek to deploy additional products and services that will further incentivize consumers to utilize our network of devices. In the future, we may seek to diversify our revenues beyond services provided by financial services kiosks. In order to execute our strategy, we endeavor to :

 

Increase our Number of Deployed Devices with Existing and New Merchant Relationships. We believe that there are opportunities to deploy additional ATMs with our existing retail customers in locations that currently do not have ATMs. Furthermore, certain of our retail customers continue to expand their number of active store locations, either through acquisitions or through new store openings, thus providing us with additional ATM deployment opportunities. Additionally, we seek opportunities to deploy ATMs with new retailers, including retailers that currently do not have ATMs, as well as those that have existing ATM programs, but that are looking for a new ATM provider. We believe our expertise, broad geographic footprint, strong record of customer service, and significant scale positions us to successfully market to and enter into long-term contracts with additional leading merchants. In addition, we believe our existing relationships with leading U.S.- and U.K.-based retailers positions us to expand into international locations where these partners have operations.

 

Expand our Relationships with Leading Financial Institutions. Through our merchant relationships as well as our diverse product and service offerings, we believe we can provide our existing financial institution customers with convenient solutions to fulfill their growing ATM and automated consumer financial services requirements. Further, we believe we can leverage our product offerings to attract additional financial institutions as customers. Services currently offered to financial institutions include branding our ATMs with their logos, on-screen advertising and content management, providing image deposit capture, providing surcharge-free access to their customers, and providing managed services for their ATM portfolios. Our EFT transaction processing capabilities enable us to provide customized control over the content of the information appearing on the screens of our ATMs and ATMs we process for financial institutions, which increases the types of products and services we are able to offer to financial institutions. We also plan to continue growing the number of ATM machines and financial institutions participating in our Allpoint network, which drives higher transaction counts and profitability on our existing ATMs and increases our value to the retailers where our ATMs are located through increased foot traffic.

 

Work with Non - Traditional Financial Institutions and Card Issuers to Further Leverage our Extensive ATM and Financial Services Kiosk Network. We believe there are opportunities to develop or expand relationships with non-traditional financial institutions and card issuers, such as reloadable prepaid card issuers and alternative payment networks, which are seeking an extensive and convenient ATM network to complement their card offerings. Additionally, we believe that many of the prepaid debit card issuers in the U.S. can benefit by providing their cardholders with access to our ATM network on a discounted or fee-free basis. For example, through our Allpoint network, we have sold access to our ATM network to issuers of stored-value prepaid debit cards to provide the customers of these issuers with convenient and surcharge-free access to cash.

 

Increase Transaction Levels at our Existing Locations. We believe there are opportunities to increase the number of transactions that are occurring today at our existing ATM locations. On average, only a small fraction of the individuals that enter our retail customers’ locations utilize our ATMs and financial services kiosks. In addition to our existing initiatives that tend to drive additional transaction volumes to our ATMs, such as bank-branding and network-branding, we have developed and are continuing to develop new initiatives to drive incremental transactions to our existing ATM locations. For example, we have developed a data analysis technology that we refer to as SightLine to analyze transaction patterns at our ATMs, which we believe has value to retailers and financial institutions alike by enabling them to better understand their customers’ behavior. We are also developing programs to steer cardholders of our existing financial institution partners and members of our Allpoint network to visit our ATMs in convenient retail locations. These programs may include incentives to cardholders such as coupons and rewards that influence customers to visit our ATMs within our existing retail footprint. While we are in various stages of developing and implementing many of these programs, we

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believe that these programs, when properly structured, can benefit multiple constituents (i.e., retailers, financial institutions, and cardholders) in addition to driving increased transaction volumes to our ATMs.

 

Develop and Provide Additional Services at our Existing ATMs. Service offerings by ATMs continue to evolve. Certain ATM models are capable of providing numerous automated consumer financial services, including check cashing, image deposit capture, money transfer, bill payment services, and stored-value card reload services. Certain of our devices are capable of, and currently provide, these types of services. We believe these additional consumer financial services offered by our devices, and other machines that we or others may develop, could provide a compelling and cost-effective solution for financial institutions and stored-value prepaid debit card issuers looking to provide convenient broader financial services to their customers at well-known retail locations. We also allow advertisers to place their messages on our ATMs equipped with advertising software in the U.S., Canada, and the U.K. Offering additional services at our devices, such as advertising, allows us to create new revenue streams from assets that have already been deployed, in addition to providing value to our customers through beneficial offers and convenient services. We plan to develop additional products and services that can be delivered through our existing ATM network.

 

Pursue Additional Managed Services Opportunities. Over the last several years, we significantly expanded the number of ATMs that are operated under managed services arrangements. Under these arrangements, retailers and financial institutions generally pay us a fixed management fee per ATM and/or a set fee per transaction in exchange for handling some or all of the operational aspects associated with operating and maintaining their ATM fleets. Surcharge and interchange fees under these arrangements are generally earned by the retailer or the financial institution rather than by us. As a result, in this arrangement type, our revenues are partially protected from fluctuations in transaction levels of these machines and changes in network interchange rates. We plan to continue pursuing additional managed services opportunities with leading merchants and financial institutions in the markets in which we operate.

 

Pursue International Growth Opportunities. Applying many of the aforementioned strategies, w e have invested significant amounts of capital in our U.K., Germany, Canada, and Mexico businesses, and we plan to continue to grow our business in these markets, as well as in the more recently entered Poland market. Additionally, we expect to expand our operations into other international markets where we believe we can leverage our operational expertise, EFT transaction processing platform, and scale advantages. Our future international expansion, if any, will depend on a number of factors, including the estimated economic opportunity for us, the business and regulatory environment in the international market, our ability to identify suitable business partners in the market and other factors.

 

Pursue Acquisition Opportunities. We have historically generated a large part of our growth through acquisitions, and expect to continue to pursue select acquisition opportunities in the future. Since 2011, we have acquired: (i) eight domestic ATM operators, expanding our fleet in both multi-unit regional retail chains and individual merchant ATM locations in the U.S. by approximately 58,000, (ii) two Canadian ATM operators for a total of approximately 1,400 ATMs, which allowed us to enter into and expand our presence in Canada, and (iii) Cardpoint Limited (“Cardpoint”) in August 2013, which expanded our U.K. ATM operations by approximately 7,100 ATMs and also allowed us to enter into the German market with approximately 800 ATMs, and (iv) Sunwin in November of 2014, which expanded our cash-in-transit and maintenance servicing capabilities in the U.K. and allowed us to acquire and operate approximately 2,000 existing high-transacting ATMs located at the Co-operative (“Co-op”) Food stores and the opportunity to install and operate new ATMs in up to 800 stores that do not currently have ATMs.

 

In addition to ATM acquisitions, we have also made strategic acquisitions including: (i) LocatorSearch in August 2011, a domestic leading provider of location search technology deployed by financial institutions to help customers and members find the nearest, most appropriate and convenient ATM location based on the service they seek, (ii) i-design in March 2013, which is a Scotland-based provider and developer of marketing and advertising software and services for ATM operators, and (iii) CDS in July 2015, a leading independent transaction processor for ATM deployers and payment card issuers, providing leading-edge solutions to ATM sales and service organizations and financial institutions.

 

For additional information on items that may impact our strategy, see Part II . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Developing Trends in the ATM and Financial Services Industry .

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Our Products and Services

 

Under our Company-owned arrangement type, we typically provide our merchant customers with all of the services required to operate ATMs and financial services kiosks, which include monitoring, maintenance, cash management, customer service, and transaction processing. We believe our merchant customers value our high level of service and our 24-hour per day monitoring and accessibility. In connection with the operation of our devices under our traditional ATM services model, we generate revenue on a per-transaction basis from the surcharge fees charged to cardholders for the convenience of using our devices and from interchange fees charged to these cardholders’ financial institutions for processing the related transactions conducted on those devices. As further described below, we also earn revenues on these devices based on our relationships with certain financial institutions and our Allpoint network.

 

Under our merchant-owned arrangement type, we typically provide transaction   processing services, certain customer support functions, and settlement services. We generally earn interchange revenue on a per transaction basis in this arrangement. In some cases, the surcharge is earned completely by the merchant, in which case our revenues are derived solely from interchange revenues. In other arrangements, we also share a portion of the surcharge revenues .

 

For ATMs under managed services arrangements (including transaction processing arrangements) , we typically receive a fixed monthly management fee and/or fixed rate per transaction in return for providing the agreed-upon service or suite of services. We do not generally receive surcharge and interchange fees in these arrangements, but rather those amou nts are earned by our customer.

 

We also generate revenues from other services at our ATMs, such as DCC fees, on-screen advertising, and other transaction-based fees, across our various arrangement types.

 

The following table summarizes the number of devices we owned and operated under our various arrangements as of December 31, 2015 :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATM Operations

 

 

 

 

 

 

 

 

Company -  Owned

 

Merchant -  Owned

 

Subtotal

 

Managed Services and Processing

 

Total

Number of devices at period end

 

59,005

 

 

18,164

 

 

77,169

 

 

112,622

 

 

189,791

 

Percentage

 

31.1

%

 

9.6

%

 

40.7

%

 

59.3

%

 

100.0

%

 

We have found that the primary factor affecting transaction volumes at a given ATM or financial services kiosk is its location. Therefore, our strategy in deploying our devices, particularly those placed under Company-owned arrangements, is to identify and deploy them at locations that provide high visibility and high retail transaction volume. Our experience has demonstrated that the following locations often meet these criteria: convenience stores , gas stations with convenience stores , grocery stores, drug stores, transportation hubs (e.g., airports and train stations ), and other major regional and national retail outlets. We have entered into multi-year agreements with many well-known merchants, including CVS Caremark Corporation ( CVS ), Cumberland Farms, Inc., Hess Corporation, The Kroger Co., HEB Grocery Company, L.P., The Pantry, Inc. ( Pantry ), Safeway, Inc., Bi-Lo Holdings , LLC, Speedway LLC ( Speedway ), Sunoco, Inc., Target Corporation, CST Brands  ( “Corner Store” ), Rite Ai d Corporation, Walgreens Boots Alliance, Inc.  ( Walgreens ) , and   7-Eleven, Inc. (“7-Eleven”), in the U.S.; Bank of Ireland Group, BP p.l.c., BT Group plc, Martin McColl Ltd., Network Rail Infrastructure Limited, Royal Dutch Shell plc, Southern Railway Ltd., Tates Ltd., Waitrose Ltd., Welcome Break Holdings Ltd., and Co-op Food in the U.K.; Cadena Comercial OXXO S.A. de C.V. in Mexico; and 7-Eleven as well as Suncor Energy’s retail and wholesale marketing brand ( Petro-Canada ) in Canada.  

 

We generally operate our ATMs and kiosks under multi-year contracts that provide a recurring and stable source of revenue and typically have an initial term of five to seven years. As of December 31, 2015, our contracts with our top five merchant customers (based on 2015 pro forma revenues) accounted for approximately   37 % of our pro forma revenues and had a weighted average remaining life of 2.6 years (3.7 years excluding 7-Eleven, which expires in July 2017) .   For a discussio n of the risks associated with our customer mix, see Item 1A. Risk Factors - We derive a substantial portion of our revenue from devices placed with a small number of merchants. The expiration, termination or renegotiation of any

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of these contracts with our top merchants, or if one or more of our top merchants were to cease doing business with us, or substantially reduce its dealings with us, could cause our revenues to decline significantly and our business, financial condition and results of operations could be adversely impacted .

 

Additionally, we enter into arrangements with financial institutions to brand certain of our Company-owned ATMs with their logos. These branding arrangements allow a financial institution to expand its geographic presence for a fraction of the cost of building a branch location and typically for less than the cost of placing one of its own ATMs at that location. These arrangements allow a financial institution to rapidly increase its number of branded ATM sites and improve its competitive position. Under these arrangements, the branding institution’s customers are allowed to use the branded ATMs without paying a surcharge fee to us. In return, we receive monthly fees on a per-ATM basis from the branding institution, while retaining our standard fee schedule for other cardholders using the branded ATMs. In addition, our branded machines typically generate higher interchange revenue as a result of the increased usage of our ATMs by the branding institution’s customers and others who prefer to use a bank-branded ATM. In 2013, we introduced a new approach to bank-branding by launching preferred branding, where additional financial institutions (aside from the principal branding partner on the ATM) can add their logos to the ATM’s screen and safe door. We intend to continue pursuing additional branding arrangements as part of our growth strategy. As of December 31, 2015, we had bank-branding on approximately 22,000 ATMs with 500 financial institutions including BBVA , Citibank, Citizens, Cullen/Frost, Santander, TD Bank, and PNC Bank in the U.S., Scotiabank, CIBC, and TD Bank in Canada, and Santander and Scotiabank in Puerto Rico. In Mexico, we partner with Banorte and Scotiabank to place their brands on our ATMs in exchange for certain services provided by them.  

 

In addition to our bank-branding arrangements, we offer financial institutions another type of surcharge-free program through our Allpoint nationwide surcharge-free ATM network. Under the Allpoint network, financial institutions that are members of the network pay us either a fixed monthly fee per cardholder or a set fee per transaction in exchange for us providing their cardholders with surcharge-free access to ATMs in the Allpoint network, which includes ATMs throughout the U.S., U.K., Mexico, Canada, and Puerto Rico. We believe our Allpoint network offers an attractive alternative to financial institutions that lack their own extensive ATM network , including the issuers of prepaid debit cards .  

 

For additional information on the amount of revenue contributed by our various service offerings, see Part II . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Components of Revenues,   Costs of Revenues, and Expenses - Revenues .

 

Segment and Geographic Information

 

As of December 31, 2015, our operations consisted of our North America and Europe segments. Our North America segment includes operations in all 50 states, Puerto Rico, Canada, and Mexico, and accounted for 69.1 % of our total revenues for the year ended December 31, 2015. Our Europe segment includes our operations in the U.K., Germany, and Poland, and it accounted for 30.9 % of our total revenues for the year ende d December 31, 2015.

 

In 2015 we revised our operating segments to merge our former U.S. and Other International segments into a single North America segment to align with our revised internal operating structure. Previously, the Other International segment was comprised of our operations in Mexico and Canada.

 

For financial information including revenues, earnings, and total assets of our reporting segments, see Part II . Item 8.   Financial Statements and Supplementary Data, Note 20 . Segment Information. Additionally, for a discussion of the risks associated with our international operations, see Item 1A. Risk Factors - Our international operations, including any future international operations, involve special risks   and may not be successful, which would result in a reduction of our gross and net profits.

 

Sales and Marketing

 

In the U.S., our sales and marketing teams are organized by customer type. We have team s focused on developing new relationships with national, regional, and local merchants as well as building and maintaining relationships with our existing merchants and ATM distributors. In addition, we have sales and marketing teams focused on developing and managing our branding relationships with financial institutions. Finally, we have sales and marketing team s focused on

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developing and managing our Allpoint relationships with financial institutions and stored-value debit card issuers, as we look to expand the types of services that we offer to such institutions. Our sales and marketing teams also focus on identifying potential managed services opportunities with financial institutions and retailers alike. Additionally, we maintain sales teams in each of the international markets in which we currently operate.

 

In addition to targeting new business opportunities, our sales and marketing teams support our customer retention and growth initiatives by building and maintaining relationships with our established and recently-acquired merchants. We seek to identify growth opportunities within each merchant account by analyzing ATM cardholder patterns . We also analyze foot traffic and various demographic data to determine the best opportunities for new ATM and financial services kiosk placements, as well as the optimum drivers for increasing same-store ATM transactions that will positively impact merchant store sales .   E mployees who focus on sales are typically compensated with a combination of incentive-based compensation and base salary.

 

Technology

 

Our technology and operations platform consists of ATMs and financial services kiosks, central transaction processing systems, network infrastructure components (including hardware, software, and telecommunication circuits used to provide real-time device monitoring, software distribution, and transaction processing services), cash management and forecasting software tools, customer service, and ATM management infrastructure.

 

Equipment. We purchase our ATMs from global manufacturers, including, but not limited to, NCR Corporation ( NCR ), Diebold Incorporated ( Diebold ), Nautilus Hyosung, Inc. ( Hyosung ), and   Triton Systems (“Triton”) and place them in our customers’ locations. The wide range of advanced technology available from these ATM manufacturers provides our customers with advanced features and reliability through sophisticated diagnostics and self-testing routines. All of the ATMs perform basic functions, such as dispensing cash and enabling balance inquiries . Additionally, some of our devices provide enhanced financial services transactions, including bill payments, check cashing, remote deposit capture (deposit-taking) , and money transfers.

 

Transaction Processing. We place significant emphasis on providing quality service with a high level of security and minimal interruption. We have carefully selected support vendors and systems, as well as developed internal professional staff to optimize the performance of our network. In 2006, we implemented an EFT transaction processing operation, which was further expanded with our recent acquisition of CDS in the second half of 2015.   EFT transaction processing enables us to process and monitor transactions on our devices and to control the flow and content of information appearing on the screens of such devices. We have also implemented new products and services such as currency conversion services and have introduced targeted marketing campaigns through on-screen advertising. With our acquisitions of ATM businesses over the past few years, we are actively converting the transaction processing of the acquired ATMs to our in-house solution as previous contractual processing relationships expire or are terminated.  

 

Internal Systems. Our internal systems, including our EFT transaction processing operation, include multiple layers of security to help protect the systems from unauthorized access. Protection from external sources is provided by the use of hardware - and software -   based security features that work to prevent and report unauthorized access attempts. We employ user authentication and security measures at multiple levels. These systems are protected by detailed security rules to only allow appropriate access to information based on the employee’s job responsibilities. C hanges to systems are controlled by policies and procedures, with automatic prevention and reporting controls that are placed within our processes. Our real-time connections to the various financial institutions’ authorization systems that allow withdrawals, balance inquiries, transfers, and advanced functionality transactions are accomplished via gateway relationships or direct connections. We have installed these communications circuits with backup connectivity to help protect us from telecommunications interruption in any particular circuit. We use commercially-available and custom software that continuously monitors the performance of the devices in our network, including details of transactions at each device and expenses relating to those devices, further allowing us to monitor our on-line availability and financial profitability at each location. We analyze transaction volume and profitability data to determine whether to continue operating at a given site, to determine how to price various operating arrangements with merchants and branding partners, and to create a profile of successful locations to assist us in deciding the best locations for additional deployments.

 

Product Development . In recent years we have made investments to develop new technology which we anticipate will drive transaction volume at our ATMs. In March 2013, we acquired i-design, a Scotland-based company providing

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technology and services for ATM operators to enable custom screens, graphical receipt content, advertising and marketing data capture on the ATM. We expect to continue to grow and leverage the products and services of this business within our own network of ATMs and with select external parties. A number of products are in various stages of development, pilot and rollout.

 

ATM Cash Management. Our ATM cash management function uses commercially-available software and proprietary analytical models to determine the necessary fill frequency and cash load amount for each ATM. We project cash requirements for each ATM on a daily basis, taking into consideration its location, the day of the week, the timing of holidays, and other factors such as specific events occurring in the vicinity of the ATM. After receiving a cash order from us, the cash provider forwards the request to its vault location nearest to the applicable ATM. Personnel at the vault location then arrange for the requested amount of cash to be set aside and made available for the designated armored courier to access and subsequently transport to the ATM. Our ATM cash management department utilizes data generated by the cash providers, internally-generated data, and a proprietary methodology to confirm daily orders, audit delivery of cash to armored couriers and ATMs, monitor cash balances for cash shortages, coordinate and manage emergency cash orders, and audit costs from both armored couriers and cash providers.

 

In the U.K., we operate our own armored courier operation and recently significantly expanded this internal capability through the acquisition of Sunwin in November 20 1 4. As of December 31, 2015 , this operation was servicing approximately   12,400 of our ATMs in the U.K.  

 

Customer Service. We believe one of the factors that differentiates us from our competitors is our customer service responsiveness and proactive approach to managing any downtime experienced by our devices. We use an advanced software and highly skilled technicians that monitor our devices 24 hours a day for service interruptions and notif y our maintenance engineers and vendors for prompt dispatch of necessary service calls.

 

Finally, we use proprietary software systems to maintain a database of transactions made on, and performance metrics for, each of our devices. This data is aggregated into individual merchant and financial institution customer profiles that are readily accessible by our customer service representatives and managers. We believe our proprietary databases enable us to provide superior quality and accessibl e and reliable customer support, along with information on trends that is valuable to our retail and financial institution partners.

 

Primary Vendor Relationships

 

To maintain an efficient and flexible operating structure, we outsource certain aspects of our operations, including cash supply and cash delivery, maintenance , and certain transaction processing services. Due to the large number of devices we operate, we believe we have obtained favorable pricing terms from most of our major vendors. We contract for the provision of the services described below in connection with our operations.

 

Transaction Processing. We own and operate EFT processing platform s that utilize proprietary as well as commercially available software . Historically, our processing efforts have been primarily focused on controlling the flow and content of information on the ATM screen , and we have largely relied on third-party service providers to handle our connections to the EFT networks and to perform certain funds settlement and reconciliation procedures on our behalf. The third-party transaction processors communicate with the cardholder’s financial institution through various EFT networks in order to obtain transaction authorizations and to provide us with the information we need to ensure that the related funds are properly settled. In addition, we have developed a capability to connect to major financial institutions and certain networks on a direct or virtually-direct basis , and we recently expand ed this direct model via our CDS acquisition .   As a result of our past acquisitions, a portion of our withdrawal transactions are currently processed through other third-party processors, with whom the acquired businesses had existing contractual relationships. We plan to c onvert transaction processing services to our EFT processing platform s when economically advantageous as these contracts expire or are terminated.

 

EFT Network Services. Our transactions are routed over various EFT networks to obtain authorization for cash disbursements and to provide account balances. EFT networks set the interchange fees that they charge to the financial institutions, as well as the amount paid to us. We attempt to maximize the utility of our ATMs to cardholders by

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participating in as many EFT networks as practical. Additionally, we own the Allpoint network, the largest surcharge-free network in the U.S. Having this network further enhances our ATM utility by providing certain cardholders surcharge-free access to our ATMs, as well as allowing us to receive network-related economic benefits such as receiving additional transaction-based revenue and setting interchange rates on transactions over this network.

 

Equipment. We purchase substantially all of our ATMs from a number of global ATM manufacturers, including NCR, Diebold, Hyosung , and Triton .   The large quantity of machines that we purchase from these manufacturers enables us to receive favorable pricing and terms. In addition, we maintain close working relationships with these manufacturers in the course of our business, allowing us to stay informed about product updates and to receive prompt attention for any technical problems with purchased equipment. The favorable pricing we receive from these manufacturers also allows us to offer certain of our customers an affordable solution to replace their ATMs to be compliant with new regulatory requirements as they arise.

 

Although we have historically purchased the majority of our devices from NCR, we regularly purchase devices from other suppliers.   In the event of a device supply shortage from one supplier, we can shift purchases to another supplier.

 

Maintenance. We typically contract with third-party service providers for on-site maintenance services, except for in the U.K., where maintenance services are mostly performed by our in-house technicians.

 

ATM Cash Management. We obtain cash to fill our Company-owned devices, and in some cases dealer and merchant-owned and managed services ATMs, under arrangements with various cash providers. We pay a monthly fee based on the average amount outstanding to our primary vault cash providers under a formula, which is generally based on various benchmark interest rates such as London Interbank Offered Rates ( LIBOR ).   In virtually all cases, beneficial ownership of the cash is retained by the cash providers, and we have no right to the cash and no access except for those ATMs that are serviced by our wholly-owned armored courier operation s in the U.K. While our U.K. armored courier operation s ha ve physical access to the cash loaded in those machines, beneficial ownership of that cash remains with the cash provider at all times. We also contract with third-parties to provide us with certain cash management services, which varies by geography, which may include reporting, armored courier coordination, cash ordering, cash insurance, reconciliation of ATM cash balances, and claims processing with armored couriers, financial institutions, and processors.

 

For the quarter ended December 31, 2015, we had an average of approximately $2.2 billion in cash in our North America ATMs under these arrangements, with Bank of America, N.A. ( Bank of America ), Wells Fargo, N.A. ( Wells   Fargo ), Elan Financial Services (“Elan”) ( a division of U.S. Bancorp) , and Capital One Financial Corp. ( Capital One ). In Europe, the average balance of cash held in our ATMs was $ 1.5  billion for the quarter ended December   31,   2015, which was primarily supplied by Santander, Royal Bank of Scotland ( RBS ), and Barclays PLC (“Barclays”) . For additional information on our vault cash agreements and the related risks, see Item 1A. Risk Factors - We rely on third-parties to provide us with the cash we require to operate many of our devices . If these third- parties were unable or unwilling to provide us with the necessary cash to operate our devices, we would need to locate alternative sources of cash to operate our devices or we would not be able to operate our business.

 

The vault cash that we are contractually responsible for in all of the jurisdictions in which we operate is insured up to certain per location loss limits and subject to per incident and annual aggregate deductibles through a syndicate of multiple Lloyd’s of London and U.S. - based underwriters.

 

Cash Replenishment. We contract with armored courier services to transport and transfer most of the cash to our devices. We use leading third-party armored couriers in all of our jurisdictions except for in the U.K., where we primarily utilize our own armored courier operations. Under these arrangements, the armored couriers pick up the cash in bulk, and using instructions received from us and our cash providers, prepare the cash for delivery to each ATM on the designated fill day. Following a predetermined schedule, the armored couriers visit each location on the designated fill day, load cash into each ATM, and then balance each machine and provide cash reporting to the applicable cash provider.

 

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Merchant Customers

 

In each of our markets, we typically deploy our Company-owned devices under long-term contracts with major national and regional merchants, including convenience stores, supermarkets, drug stores, and other high-traffic locations. Our merchant-owned ATMs are typically deployed under arrangements with smaller independent merchants.

 

The terms of our merchant contracts vary as a result of negotiations at the time of execution. In the case of Company-owned devices, the contract terms vary, but typically include the following:

 

·

a multi-year term, typically five to seven years;

·

exclusive deployment of devices at locations where we install a device;

·

the right to increase surcharge fees, with merchant consent required in some cases;

·

in the U.S., our right to terminate or remove devices or renegotiate the fees payable to the merchant if surcharge fees or interchange fees are reduced or eliminated as a result of regulatory action; and

·

provisions that make the merchant’s fee dependent on the number of device transactions.

 

Our contracts under merchant-owned arrangements typically include similar terms, as well as the following additional terms:

 

·

in the U.S., provisions prohibiting or restricting in-store check cashing by the merchant and, in the U.S. and the U.K., the operation of any other cash-back devices; and

·

provisions requiring the merchant to operate the ATMs at any time its stores are open for business.

 

Finally, our managed services contracts are tailored to the needs of the merchant and therefore vary in scope and terms. Under these types of arrangements, our customers determine the location, the surcharge fee, and the services offered while we typically receive a fixed management fee on a per machine basis and/or a fixed rate per transaction.

 

We derived approximately 37% of our total revenue from ATMs placed at the locations of our top five largest merchants during the year ended December 31, 2015. 7-Eleven in the U.S. is the largest merchant customer in our portfolio, representing approximately 18 % of our pro forma total revenues . The next four largest merchant customers together comprised approximately 19% of our pro forma total revenues for the year. In July 2015, 7-Eleven announced that it would not renew its ATM placement agreement with us when it expires in July 2017 , but has instead entered into a new ATM placement agreement with a 7-Eleven related entity of 7-Eleven’s parent company . After 7-Eleven, our next four largest merchant customers (based on total pro forma revenues) during 2015 were CVS, Co-op Food , Walgreens, and Speedway ,   none of which individually contributed more than 6% of our pro forma total revenues in 2015. For a discussio n of the risks associated with our customer mix, see Item 1A. Risk Factors - We derive a substantial portion of our revenue from devices placed with a small number of merchants. The expiration, termination or renegotiation of any of these contracts with our top merchants, or if one or more of our top merchants were to cease doing business with us, or substantially reduce its dealings with us, could cause our revenues to decline significantly and our business, financial condition and results of operations could be adversely impacted .

 

Seasonality

 

Our overall business is somewhat seasonal in nature , with generally fewer transactions occurring in the first quarter of the year. Transaction volumes at our devices located in regions affected by strong winter weather patterns typically experience declines in volume during the first and fourth quarters as a result of decreases in the amount of consumer traffic through such locations. These declines, however, have been partially offset somewhat by increases in the number of our devices located in retail locations that benefit from increased consumer traffic during the holiday buying season. With all of our ATMs located in the northern hemisphere, we usually see an increase in transactions in the warmer summer months from May through August, which are also aided by increased vacation and holiday travel. We expect these fluctuations in transaction volumes to continue in the future.

 

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Competition

 

Historically, we have competed with financial institutions and other independent ATM deployers (commonly referred to as IADs ) for ATM placements, new merchant accounts, branding, and acquisitions. In 2015 a related entity of 7-Eleven’s parent company entered into an agreement to operate all of the ATMs at the 7-Eleven stores in the U.S. upon the expiration of our ATM placement agreement in mid-2017. IADs continue to compete with us for placement rights at merchant locations. Our devices compete with the devices owned and operated by financial institutions and other IADs for underlying consumer transactions. In certain merchant location types with very high foot traffic, such as airports or major train stations, large arenas or stadiums, we often see competition from large financial institutions as the institutions may contemplate utilizing such locations for marketing and advertising purposes, and in some cases are willing to subsidize the operations of the ATM. Recently, we have seen somewhat lower competition from banks seeking to place ATMs directly at merchant locations.  

 

We have established relationships with leading national and regional financial institutions through our bank-branding program and our Allpoint network. Both of these programs can be cost-efficient alternatives to banks and other financial service providers in lieu of owning and operating extensive ATM networks. We believe the scale of our extensive network, our EFT transaction processing services and our focus on customer service provide us with competitive advantages for providing services to leading financial institutions.  

 

Through our Allpoint surcharge-free network, we have significantly expanded our relationships with local and regional financial institutions as well as large issuers of stored-value debit card programs. With regard to our Allpoint network, we encounter competition from other organizations’ surcharge-free networks that are seeking to sell their network to retail locations and offer surcharge-free ATM access to issuers of stored-value debit cards , as well as smaller financial institutions that lack large ATM footprints.

 

We work to continually develop the types of services we provide to financial institutions and merchants, including management of their ATMs. With respect to our managed services   offering, we believe we are well-positioned to offer a comprehensive ATM outsourcing solution with our breadth of services, in-house expertise, and network of existing locations that can leverage the economies of scale required to operate an ATM portfolio. There are several large financial services companies, equipment manufacturers, and service providers that currently offer some of the services we provide, with whom we expect to compete directly in this area. In spite of this, we believe that we have unique advantages that will allow us to offer a compelling solution to financial institutions and retailers alike.  

 

We regularly compete for acquisition opportunities in each of the markets in which we operate. Acquisitions have been a consistent part of our strategy and we expect to continue to seek acquisition opportunities in our existing markets and new markets. Typically , competition for acquisitions is from other IADs, financial service or payments businesses, and/ or private equity sponsors of ATM portfolios.

 

Finally, we   face indirect competition from alternative payment mechanisms, such as smart phones. While we have not experienced or been able to detect significant direct effects from alternat ive payment source s on our transaction volumes to date, expansion in electronic payment forms and the entry of new and less traditional competitors could reduce demand for cash at merchant locations . We expect to continue to face competition from emerging payments technology in the future. See Item 1A. Risk Factors - The proliferation of payment options other than cash, including credit cards, debit cards, stored-value cards, and mobile payments options could result in a reduced need for cash in the marketplace and a resulting decline in the usage of our ATMs.

 

Government and Industry Regulation

 

Our principal business, ATM network ownership and operation, is subject to government (federal, state , or local) and industry regulations. Our failure to comply with applicable laws and regulations could result in restrictions on our ability to provide our products and services in such jurisdictions, as well as the imposition of civil fines. Recent regulatory matters that have impacted our operations or are expected to impact us in the future are discussed in Part  II.   Item   7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Events .  

 

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Risk Management

 

We have adopted a formalized Enterprise Risk Management program that seeks to identify and manage the major risks we face.   The major risks are prioritized and assigned to a member of the management team who develops mitigation plans, monitors the risk activity, and is responsible for implementation of the mitigation plan, if necessary.   The risks, plans, and activities are monitored by our management team and Board of Directors on a regular basis.

 

Employees

 

As of December 31, 2015 , we had 1,739  employees ,   124 of which were represented by a union or covered by a collective bargaining agreement. We currently believe our relationships with employees represented by unions are good , and we have not experienced any work stoppages.

 

ITEM 1A. RISK FACTORS

 

Risks associated with our industry

 

The proliferation of payment options other than cash, including credit cards, debit cards, stored-value cards, and mobile payments options could result in a reduced need for cash in the marketplace and a resulting decline in the usage of our ATMs.

 

The U.S., the U.K., and other developed markets have seen a shift in consumer payment trends since the late 1990’s, with more customers now opting for electronic forms of payment (e.g., credit cards and debit cards) for their in-store purchases over traditional paper-based forms of payment (e.g., cash and checks). Additionally, some merchants offer free cash back at the point-of-sale ( POS ) for customers that utilize debit cards for their purchases, thus providing an additional incentive for consumers to use these cards. According to the Nilson Report issued in December 201 5 , the percentage of cash transaction counts in the U.S. declined from approximately 32.6% of all payment transactions in 200 9 to approximately 26.5 % in 201 4 , with declines also seen in check and credit usage as debit and stored-value card transactions increased. However, in terms of absolute dollar value, the volume of cash used in payment transactions actually increased from $1.4 trillion in 200 9 to $ 1.5 trillion in 201 4 . We have seen a near flat rate of growth in the number of cash withdrawal transactions conducted on our domestic ATMs during the last 12-24 months and a slightly negative rate of growth in the number of cash withdrawal transactions conducted on our U.K.-based ATMs in recent periods. The continued growth in electronic payment methods , such as mobile phone payments, could result in a reduced need for cash in the marketplace and ultimately, a decline in the usage of ATMs. New payment technology and virtual currencies such as Bitcoin, or other new payment method preferences by consumers could reduce the general population’s need or demand for cash and negatively impact our transaction volumes in the future. The proliferation of payment options and changes in consumer preferences and usage behavior could reduce the need for cash and have a material adverse impact on our operations and cash flows.

 

Interchange fees, which comprise a substantial portion of our transaction revenues, may be lowered in some cases at the discretion of the various EFT networks through which our transactions are routed, or through potential regulatory changes, thus reducing our future revenues.

 

Interchange fees, which represented 37.3 % of our total ATM operating revenues for the year ended December 31,  2015 , are set by the various EFT networks and major interbank networks through which the transactions conducted on our devices are routed . These fees vary from one network to the next. As of December 31, 2015 ,   approximately 4 % of our total ATM operating revenues were subject to pricing changes by U.S. networks over which we currently have limited influence or where we have no ability to offset pricing changes through lower payments to merchants .   A pproximately   20 % of our total ATM operating revenues during the year ended December   31,   2015   were derived from interchange revenues in the U.K. , where the significant majority of the interchange revenues we earn are based on rates set by LINK, the major interbank network in that market, based on an annual cost-based study performed by an independent third-party organization. The remainder of reported interchange revenue reflects transaction-based revenues where we have contractually agreed to the rate with a financial institution or network. Accordingly, if some of the networks through which our ATM transactions are routed were to reduce the interchange rates paid to us or increase

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their transaction fees charged to us for routing transactions across their network, our future transaction revenues could decline.

 

In past years, certain networks have reduced the net interchange rates paid to ATM deployers for ATM transactions in the U.S. routed across their debit networks through a combination of reducing the transaction rates charged to financial institutions and higher per transaction fees charged by the networks to ATM operators. In addition to the impact of the net interchange rate decrease, we saw certain financial institutions migrate their volume away from some networks to take advantage of the lower pricing offered by other networks, resulting in   lower net interchange rates per transaction to us.  

 

Additionally, some consumer groups in the U.S. have expressed concern that consumers using an ATM may not be aware that , in addition to paying the surcharge fee that is disclosed to them at the ATM, their financial institution may also assess an additional fee with regard to that consumer’s transaction. These fees are sometimes referred to as foreign bank fees or out of network fees. While there are currently no pending legislative actions calling for limits on the amount of interchange fees that can be charged by the EFT networks to financial institutions for ATM transactions or the amount of fees that financial institutions can charge to their customers to offset their interchange expense, there can be no assurance that such legislative actions will not occur in the future. Any potential future network or legislative actions that affect the amount of interchange fees that can be assessed on a transaction may adversely affect our revenues.

 

Our U.K.-based revenues are also impacted by interchange rates, with the majority of our interchange revenues in that market being earned via the LINK network. LINK sets interchange rates for its participants using a cost-based methodology that incorporates ATM service costs , generally from two years back (i.e., operating costs from 201 4 are considered for determining the 201 6 interchange rate) and, as a result, the interchange rate   can vary year-to-year based on the output of the cost-based study. We have seen this LINK interchange rate move both up and down based on the results of the cost study . While over time, we think this methodology generally enables us to recover our costs and earn a reasonable profit margin, large spikes in costs within a particular time period could adversely impact our profitability in this market as the interchange rates are currently fixed on a calendar year basis.   In addition to LINK transactions, certain card issuers in the U.K. have issued cards that are not affiliated with the LINK network, and instead carry the Visa Inc. (“Visa”) or MasterCard Inc. (“Master C ard”) network brands.   Transactions conducted on our ATMs from these cards, which currently represent approximately   1.5 % of our annual withdrawal transactions in the U.K., receive interchange fees that are set by Visa or MasterCard, respectively .   The interchange rates set by Visa and MasterCard have historically been less than the rates that have been established by LINK.   Accordingly, if any major financial institutions in the U.K. were to decide to leave the LINK network in favor of Visa or MasterCard, such a move could further reduce the interchange revenues that we receive from the related withdrawal transactions conducted on our ATMs in that market.   Additionally, should LINK change its interchange-setting mechanism or should there be a significant change in the LINK scheme or its membership, our U.K. interchange revenues and profits could be adversely impacted. Currently, L INK is undergoing certain changes, which are being driven in part by the new Payment Systems Regulator ( PSR ) organization in the U.K. As a result, certain processing functions previously handled by L INK are now being separated into a new organization. Additionally, the interchange setting mechanism is under review but is not expected to change until the year 2018 . The ultimate impact of these changes are unknown to us at this time, but we do not expect a material change in interchange revenues prior to the end of 2017 .

 

Future changes in interchange rates, some of which we have minimal or no control over, could have a material adverse impact on our operations and cash flows.

 

We operate in a changing and unpredictable regulatory environment , which may harm our business . If we are subject to new legislation regarding the operation of our ATMs, we could be required to make substantial expenditures to comply with that legislation, which may reduce our net income and our profit margins.

 

With its initial roots in the banking industry, the U.S. ATM industry is regulated by the rules and regulations of the federal Electronic Funds Transfer Act, which establishes the rights, liabilities, and responsibilities of participants in EFT systems. The vast majority of states have few, if any, licensing requirements. However, legislation related to the U.S. ATM industry is periodically proposed at the state and local level. In past years, certain members of the U.S. Congress called for a re-examination of fees that are charged for an ATM transaction, although no legislation was passed relative to th ese matter s . As a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) , the Consumer

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Financial Protection Bureau was created, and it is possible that this governmental agency could enact new or modify existing regulations that could have a direct or indirect impact on our business. For further discussion on this topic, see the risk factor below entitled  The passage of legislation banning or limiting the fees we receive for transactions conducted on our ATMs would severely impact our revenues and our operations .

 

The Americans with Disabilities Act ( ADA ) requires that ATMs be accessible to and independently usable by individuals with disabilities, such as visually-impaired or wheel-chair bound persons. The U.S. Department of Justice has issued accessibility regulations under the ADA that became effective in March 2012.   Leading up to this deadline, we took measures to achieve compliance with the ADA for our ATMs, which required us to upgrade and replace a portion of our ATM fleet. It is possible that future similar regulations may require us to make more substantial expenditures and we may be forced to replace and or stop operating such ATMs until such time as compliance has been achieved.

 

Additionally, we have been subject to litigation in the past claiming discrimination against certain groups. For example, the National Federation of the Blind (the NFB ) sought to require us to ensure that all of our ATMs are voice-guided. E ffective May 2015, we entered into an amended and restated settlement agreement (the New Agreement ) with the NFB and the Commonwealth of Massachusetts ( Commonwealth ) to resolve outstanding issues arising out of an earlier settlement agreement that pre-dated the issuance of the 2012 ADA accessibility regulations. This New Agreement provides for a process utilizing a court - appointed special master to certify compliance with accessibility features, such as voice guidance and braille stickers, as set forth in either the 2012 ADA regulations or the New Agreement . The New Agreement also calls for monitor ing our compliance in the deployment and maintenance of such features on our ATMs and impose s prescribed liquidated damages if we fail to meet any specific requirement. Should we fail to meet the terms of the New Agreement, we could incur significant liquidated damages.

 

In the U.K., the ATM industry has historically been largely self-regulating. Most ATMs in the U.K. are part of the LINK network and must operate under the network rules set forth by LINK, including complying with rules regarding required signage and screen messages. However, in March 2013, the U.K. Treasury department issued a formal recommendation to further regulate the U.K. payments industry, including LINK, the nation’s formal ATM scheme.   In October 2013, the U.K. government responded by establishing the new PSR to oversee any payment system operating in the U.K. and its participants. The new PSR became active in 2015.   The PSR has commissioned a review of LINK, which has caused several outcomes, including: (i) a separation of the processing component of LINK which will require us to separately enter into new agreements for certain operational services , (ii) a review of the interchange-setting mechanism for LINK, and (iii) other areas under review that could potentially impact our operations .   We are currently uncertain as to what impact the processing separation will have on our business. Additionally, we are uncertain what impact the PSR will have on LINK, its rules and its interchange rate setting process, or on our business.

 

We are also subject to various regulations in other jurisdictions that we operate in, including Germany, Poland, Mexico , and Canada. Legislation proposed in any of the jurisdictions that we operate in, or adverse changes in the laws that we are subject to, may materially affect our business through the requirement of additional expenditures to comply with that legislation. We will continue to monitor all such legislation and attempt, to the extent possible, to prevent the passage of such laws that we believe are needlessly burdensome or unnecessary. If regulatory legislation is passed in any of the jurisdictions in which we operate, we could be required to make substantial expenditures which would reduce our net income.

 

If we fail to adapt our products and services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology are not successful, we could lose customers or have difficulty attracting new customers, which would adversely impact our revenues and our operations.

 

The markets for our products and services are characterized by constant technological changes, frequent introductions of new products and services and evolving industry standards. Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. Our ability to take advantage of opportunities in the market may require us to invest considerable resources adapting our organization and capabilities to support development of products and systems that can support new services or be integrated with new technologies and incur other expenses well in advance of our ability to generate revenue from these products and services. These developmental efforts may divert resources from

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other potential investments in our businesses, management time and attention from other matters, and these efforts may not lead to the development of new products or services on a timely basis. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these products and services, or our new products and services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we are unsuccessful in offering products or services that gain market acceptance, it could have an adverse impact on our ability to retain existing customers or attract new ones, which could have a material adverse effect on our revenues and our operations.

 

Security breaches, including the occurrence of a cyber- incident or a deficiency in our cybersecurity,   could harm our business by compromising merchant and cardholder information and disrupting our transaction processing services, thus damaging our relationships with our merchant customers , business partners, and generally exposing us to liability.

 

As part of our transaction processing services, we electronically process and transmit cardholder information. If a cyber-incident (including, e.g., accidental or intentional computer or network issues (such as phishing attacks, viruses, malware installation, server malfunction, software or hardware failures, impairment of data integrity, loss of data or other computer assets, adware, or other similar issues)) impairs or shuts down one or more of our computing systems or our IT network, we may be subject to negative treatment by our customers, our business partners, the press, and the public at large. Furthermore, companies that process and transmit cardholder information have been specifically and increasingly targeted in recent years by sophisticated criminal organizations in an effort to obtain information and utilize it for fraudulent transactions. The technical and procedural controls we and our partners use to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data security breaches or other cyber incidents. The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Unauthorized access to our computer systems, or those of our third-party service providers, could result in the theft or publication of the information or the deletion or modification of sensitive records, and could cause interruptions in our operations. Any inability to prevent security breaches could damage our relationships with our merchant and financial institution customers, cause a decrease in transactions by individual cardholders, expose us to liability including claims from merchants, financial institutions , and cardholders , a nd subject us to network fines. Further, we could be forced to expend significant resources in response to a security breach, including repairing system damage and increasing cyber security protection costs by deploying additional personnel, each of which could divert the attention of our management and key personnel away from our business operations. These claims also could result in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices. We maintain insurance intended to cover some of these risks . H owever, this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. As a global company, we could be impacted by existing and proposed U.S. and foreign laws and regulations, as well as government policies and practices related to cybersecurity, privacy , and data protection. An actual security breach or cyber-incident could have a material adverse impact on our operations and cash flows.  

 

Computer viruses or unauthorized software (malware) could harm our business by disrupting our transaction processing services, causing n oncompliance with network rules, damaging our relationships with our merchant and financial institution customers, and damaging our reputation causing a decrease in transactions by individual cardholders.

 

Computer viruses or malware have rapidly spread over the Internet and could infiltrate our systems, thus disrupting our delivery of services , causing delays or loss of data or public releases of confidential data or m aking our applications unavailable, all of which could have a material adverse effect on our revenues and our operations and cash flows . Although we utilize several preventative and detective security controls in our network, they may be ineffective in preventing computer viruses or malware that could damage our relationships with our merchant and financial institution customers, cause a decrease in transactions by individual cardholders, cause our reputation to be damaged, require us to make significant expenditure s to repair or replace equipment, or cause us to be in non-compliance with applicable network rules and regulations.

 

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Regulatory, legislative or self-regulatory/standard developments regarding privacy and data security matters could adversely affect our ability to conduct our business.

 

We, along with our partners and customers in the financial services area, are subject to a number of domestic and international laws and regulations. These laws, rules and regulations address a range of issues including data privacy and cyber security, and restrictions or technological requirements regarding the collection, use, storage, protection, retention or transfer of data.

 

In the U.S. , the rules and regulations to which we (directly or contractually through our banking partners or our marketers) may be subject include those promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, the Gramm Leach Bliley Act and state cybersecurity and breach notification laws, as well as regulator enforcement positions and expectations.

 

The European Union ( E . U . ) courts determined in late 2015 that data sharing between the E . U . and the  U . S . was not in fact compliant with the  E . U . data protection regulations. The E . U . is further releasing regulation s in 2016 that will require us to appoint a Data Protection Officer to oversee and supervise our compliance with European data protection regulations. The new regulations further introduce measures that will make data sharing between our European businesses and our U.S.-based businesses more difficult by potentially requiring the implementation of additional data protections and policies.

 

Such government regulation (along with applicable industry standards) may increase the costs of doing business online. Federal, state, municipal and foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, regulations, and standards covering user privacy, data security, technologies such as cookies that are used to collect, store and/or process data, marketing online, the use of data to inform marketing, the taxation of products and services, unfair and deceptive practices, and the collection (including the collection of information), use, processing, transfer, storage and/or disclosure of data associated with unique individual internet users .   New regulation or legislative actions regarding data privacy and security could have a material adverse impact on our operations and cash flows.

 

The ATM industry is highly competitive and such competition may increase, which may adversely affect our profit margins.

 

The ATM business is and can be expected to remain highly competitive. Our principal competition comes from independent ATM companies and financial institutions in all of the countries in which we operate. Our competitors could prevent us from obtaining or maintaining desirable locations for our devices, cause us to reduce the surcharge revenue generated by transactions at our devices, or cause us to pay higher merchant fees, thereby reducing our profits. In addition to our current competitors, new and less traditional competitors may enter the market or we may face additional competition associated with alternative payment mechanisms and emerging payment technologies . Increased competition could result in transaction fee reductions, reduced gross margins and loss of market share. As a result, the failure to effectively adapt our organization, products, and services to the market could significantly reduce our offerings to gain market acceptance, could significantly reduce our revenue, increase our operating costs, or otherwise adversely impact our operations and cash flows .

 

The passage of legislation banning or limiting the fees we receive for transactions conducted on our ATMs would severely impact our revenues and our operations .

 

Despite the nationwide acceptance of surcharge fees at ATMs in the U.S. since their introduction in 1996, consumer activists have from time to time attempted to impose local bans or limits on surcharge fees. Even in the few instances where these efforts have passed the local governing body (such as with an ordinance adopted by the city of Santa Monica, California), federal courts have overturned these local laws on federal preemption grounds. Although Section 1044 of the Dodd-Frank Act contains a provision that will limit the application of federal preemption with respect to state laws that do not discriminate against national banks, federal preemption will not be affected by local municipal laws, where such proposed bans or limits often arise. Additionally , some federal officials have expressed concern that surcharge fees charged by banks and non-bank ATM operators are unfair to consumers. For example , in 2010, an amendment proposing limits on

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the fees that ATM operators, including financial institutions, can charge consumers was introduced in the U.S. Senate, but was not ultimately included in the final version of the Dodd-Frank Act that was signed into law. Additionally, we rely on transaction based revenues in each of our international markets and any regulatory fee limits that could be imposed on our transactions may have an adverse impact on our revenues and profits. If legislation were to be enacted in the future in any of our markets , and the amount we were able to charge consumers to use our ATMs was reduced, our revenues and related profitability would be negatively impacted. Furthermore, if such limits were set at levels that are below our current or future costs to operate our ATMs, it would have a material adverse impact on our ability to continue to operate under our current business model and adversely impact our revenues and cash flows .  

 

Potential new currency designs may require modifications to our ATMs that could impact our cash flows.  

 

In th e action styled: American Council of the Blind, et. al., v. Timothy F. Geithner, Secretary of the Treasury (Case #1:02-cv-00864) in the U.S. District Court for the District of Columbia (the Court ) an order w as entered that found that U.S. currencies (as currently designed) violated the Rehabilitation Act, a law that prohibits discrimination in government programs on the basis of disability, as the paper currencies issued by the U.S. are identical in size and color, regardless of denomination.   As a consequence of this ruling, the U.S. Treasury stated in its semi-annual status report filed with the Court in September 2012, that the Bureau of Engraving and Printing ( BEP ) was making progress towards implementing the Secretary’s decision to provide meaningful access to paper currency by :   ( i ) adding a raised t actile feature to each Federal Reserve note that the BEP may lawfully redesign ,  ( ii ) continuing the BEP’s program of adding large high-contrast numerals and different colors to each denomination that it may lawfully redesign , and (iii ) implementing a supplemental currency reader distribution program for blind and other visually impaired U.S. citizens and legal residents.   Of these three steps only the first materially affects the ATM industry .   T he BEP continues to research the raised tactile feature ; however, recent comments from the U.S. Treasury suggest that raised tactile features on currency are not expected to be in circulation prior to 2020. Until a selection is made and disclosed by the BEP , the impact, if any, this raised tactile feature on the notes will have on the ATM industry (including us), remains unknown . However, it is possible that such a change could require us to incur additional costs, which could be substantial, to modify our ATMs in order to store and dispense notes with raised tactile features.

 

Additionally, polymer notes are being introduced by the Bank of England, which will likely impact our machines in the U.K. and may require upgrades to software and physical device components on our ATMs. These notes are not expected to be implemented before September 2017. At this time, we are not certain what impact these new notes will have on our ATMs in the U.K. but we do not believe at this time the requirement will have a significant financial or operation al impact on us.

 

Risks associated with our business

 

We depend on ATM and financial services transaction fees for substantially all of our revenues, and our revenues and profits would be reduced by a decline in the usage of our ATMs and financial services kiosks or a decline in the number of devices that we operate, whether as a result of global economic conditions or otherwise.  

 

Transaction fees charged to cardholders and their financial institutions for transactions processed on our ATMs and financial services kiosks, including surcharge and interchange transaction fees, have historically accounted for most of our revenues. We expect that transaction fees, including fees we receive through our bank-branding and surcharge-free network offerings, will continue to account for a substantial majority of our revenues for the foreseeable future. Consequently, our future operating results will depend on many factors, including :   ( i ) the market acceptance of our services in our target markets, ( ii ) the level of transaction fees we receive, ( iii ) our ability to install, acquire, operate, and retain more devices, ( iv ) usage of our devices by cardholders, and ( v ) our ability to continue to expand our surcharge-free and other consumer financial services offerings. If alternative technologies to our services are successfully developed and implemented, we may experience a decline in the usage of our devices. Surcharge rates, which are largely market-driven and are negotiated between us and our merchant partners, could be reduced over time. Further, growth in surcharge-free ATM networks and widespread consumer bias toward these networks could adversely affect our revenues, even though we maintain our own surcharge-free offerings. Many of our devices are utilized by consumers that frequent the retail establishments in which our devices are located, including convenience stores and gas stations, malls, grocery stores, drug stores, airports , train stations , and other large retailers. If there is a significant slowdown in consumer spending, and the number of consumers

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that frequent the retail establishments in which we operate our devices declines significantly, the number of transactions conducted on those devices, and the corresponding transaction fees we earn, may also decline. A decline in usage of our devices by cardholders or in the levels of fees received by us in connection with this usage, or a decline in the number of devices that we operate, would have a negative impact on our revenues and cash flows and would limit our future growth potential. For further discussion on interchange fees, see the risk factor above entitled  Interchange fees, which comprise a substantial portion of our transaction revenues, may be lowered in some cases at the discretion of the various EFT networks through which our transactions are routed, or through potential regulatory changes, thus reducing our future revenues.

 

We derive a substantial portion of our revenue from devices placed with a small number of merchants. The expiration, termination or renegotiation of any of these contracts with our top merchants, or if one or more of our top merchants were to cease doing business with us, or substantially reduce its dealings with us, could cause our revenues to decline significantly and our business, financial condition and results of operations could be adversely impacted.

 

For the year ended December 31, 2015, we derived approximately   37% of our pro forma total revenues from ATMs and financial services kiosks placed at the locations of our five largest merchant customers. Pro forma total revenues are our actual total revenues for 2015 and the pro forma effect of revenues from our acquisitions completed in 2015. For the year ended December 31, 2015, our top five merchants (based on our pro forma total revenues) were 7-Eleven , CVS ,   Co-op Food (in the U.K.) ,   Walgreen s ,   and Speedway . Our ATM placement agreement with 7-Eleven in the U.S. , which is the largest merchant customer in our portfolio, comprised approximately 18% of our pro forma total revenues for the year ended December   31,   2015.   The next four largest merchant customers together comprised approximately 19% of our pro forma total revenues.   In July 2015, we were informed by 7-Eleven that it does not intend to renew the ATM placement agreement with us when it expires in mid-2017. T he ultimate impact to our business as a result of this decision is not known at this time, as there are a number of factors that could impact both our revenues and profits related to this customer loss, such as the timing of the transition to the new ATM operator, compliance with the Europay, MasterCard, and Visa (“ EMV ”) standard, our ability to reduce costs, our ability to preserve certain product revenues (such as network branding and bank-branding), the impact on our relationship with 7-Eleven in Canada, and other factors. T he non-renewal of th is   ATM placement agreement could also affect us by adversely impacting, among other things, our partner and supplier relationships that are utilized in servicing the 7-Eleven relationship.   Because of the scale of this relationship and the volume of transactions on ATM s in 7-Eleven stores  ( which are higher than our average in the U.S. )   we currently believe the loss of this merchant in 2017 will most likely have a higher negative impact (in percentage terms) on our income from operations relative to the revenue impact .   As a result, the loss of this merchant in 2017 will likely have a significant negative impact on our results from operations and cash flows .

 

Because a significant percentage of our future revenues and operating income depends upon the successful continuation of our relationship with our top merchants the loss of any of our largest merchants , a decision by any one of them to reduce the number of our devices placed in their locations , or a decision to sell or close their locations   c ould result in a decline in our revenues or otherwise adversely impact our business operations. Furthermore, if their financial conditions were to deteriorate in the future, and as a result, one or more of these merchants was required to close a significant number of their store locations, our revenues would be significantly impacted. Additionally, these merchants may elect not to renew their contracts when they expire. As of December 31, 2015, the contracts we have with our top five merchants, other than 7-Eleven, had a weighted average remaining life of approximately   3.7 years .

 

Even if our major contracts are extended or renewed, the renewal terms may be less favorable to us than the current contracts. If any of our largest merchants enters bankruptcy proceedings and rejects its contract with us, fails to renew its contract upon expiration, or if the renewal terms with any of them are less favorable to us than under our current contracts, it could result in a decline in our revenues and profits and have a material adverse impact on our operations and cash flows .

 

Deterioration in global credit markets, as well as changes in legislative and regulatory requirements, could have a negative impact on financial institutions that we conduct business with.

 

We have a significant number of customer and vendor relationships with financial institutions in all of our key markets, including relationships in which those financial institutions pay us for the right to place their brands on our devices. Additionally, we rely on a small number of financial institution partners to provide us with the cash that we maintain in

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our Company-owned devices and some of our merchant-owned ATMs. Volatility in the global credit markets, such as that experienced in 2008 to 2009, may have a negative impact on those financial institutions and our relationships with them. In particular, if the liquidity positions of the financial institutions with which we conduct business deteriorate significantly, these institutions may be unable to perform under their existing agreements with us. If these defaults were to occur, we may not be successful in our efforts to identify new branding partners and cash providers, and the underlying economics of any new arrangements may not be consistent with our current arrangements. Furthermore, if our existing bank-branding partners or cash providers are acquired by other institutions with assistance from the Federal Deposit Insurance Corporation ( FDIC ), or placed into receivership by the FDIC, it is possible that our agreements may be rejected in part or in their entirety.

 

We rely on third- parties to provide us with the cash we require to operate many of our devices. If these third- parties were unable or unwilling to provide us with the necessary cash to operate our devices, we would need to locate alternative sources of cash to operate our devices or we would not be able to operate our business.

 

In North America , we rely primarily on Bank of America, Wells Fargo, Elan (a division of U. S. Ban c orp ) , and Capital One to provide us with the cash that we use in approximately 42,000 of our   ATMs where cash is not provided by the merchant. In Europe , we rely primarily on Santander , RBS, and Barclays to provide us with the vault cash that we use in over 14,000 of our ATMs. For the quarter ended December 31, 2015 , we had an average balance of vault cash of $ 2.2   billion held in our   North America   ATMs and $ 1.5   b illion in our ATMs in Europe.  

 

Our existing vault cash rental agreements expire at various times through June 20 20 . However, each provider has the right to demand the return of all or any portion of its cash at any time upon the occurrence of certain events, including certain bankruptcy events of us or our subsidiaries, or a breach of the terms of our cash provider agreements. Other key terms of our agreements include the requirement that the cash providers provide written notice of their intent not to renew. Such notice provisions typically require a minimum of 180 to 360 days’ notice prior to the actual termination date. If such notice is not received, then the contracts will typically automatically renew for an additional one-year period.

 

If our vault cash providers were to demand return of their cash or terminate their arrangements with us and remove their cash from our devices, or if they fail to provide us with cash as and when we need it for our operations, our ability to operate our devices would be jeopardized, and we would need to locate alternative sources of vault cash or potentially suffer significant downtime of our ATMs . In the event this was to happen, the terms and conditions of the new or renewed agreements could potentially be less favorable to us, which would negatively impact our results of operations. Furthermore, restrictions on our access to cash to fill our devices could severely restrict our ability to keep our devices operating, and could subject us to performance penalties under our contracts with our customers. A significant reduction in access to the necessary cash to operate our devices could have a material adverse impact on our operations and cash flows.

 

We rely on EFT network providers, transaction processors, armored courier providers, and maintenance providers to provide services to our ATMs. If some of these providers that service a significant number of our ATMs fail or otherwise cease or no longer agree to provide their services, we could suffer a temporary loss of transaction revenues, incur significant costs or suffer the permanent loss of any contract with a merchant or financial institution affected by such disruption in service.

 

We rely on EFT network providers and have agreements with various transaction processors, armored courier providers, and maintenance providers. These providers enable us to provide card authorization, data capture, settlement, cash management and delivery, and maintenance services to our ATMs. Typically, these agreements are for periods of two or three years each. If we improperly manage the renewal or replacement of any expiring vendor contracts, or a key vendor fails or otherwise ceases to provide the services for which we have contracted and disruption of service to our ATMs occurs, our relationship with those merchants and financial institutions affected by the disrupted ATM service could suffer.

 

While we have more than one provider for each of the critical services that we rely on third - parties to perform, certain of these providers currently provide services to or for a significant number of our ATMs. Although we believe we would be able to transition these services to alternative service providers, this could be a time-consuming and costly process. In the event one of such service providers was unable to deliver services to us, we could suffer a significant disruption in our business, which could result in a material adverse impact to our financial results. Furthermore, any disruptions in service

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in any of our markets, whether caused by us or by third-party providers, may result in a loss of revenues under certain of our contractual arrangements that contain minimum service-level requirements and could result in a material adverse impact on our operations and cash flows.  

 

If we, our transaction processors, our EFT networks or other service providers experience system failures, the products and services we provide could be delayed or interrupted, which would harm our business.

 

Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our EFT transaction processing platform, third-party transaction processors, telecommunications network systems, and other service providers. Accordingly, any significant interruptions could severely harm our business and reputation and result in a loss of revenues and profits . Additionally, if any interruption is caused by us, especially in those situations in which we serve as the primary transaction processor, such interruption could result in the loss of the affected merchants and financial institutions, or damage our relationships with them. Our systems and operations and those of our transaction processors and our EFT network and other service providers could be exposed to damage or interruption from fire, natural disaster, unlawful acts, terrorist attacks, power loss, telecommunications failure, unauthorized entry, and computer viruses, among other things. We cannot be certain that any measures we and our service providers have taken to prevent system failures will be successful or that we will not experience service interruptions. Should a significant system failure occur, it could have a material adverse impact on our operations and cash flows.

 

Our armored transport business exposes us to additional risks beyond those currently experienced by us in the ownership and operation of ATMs.

 

During 2008, we commenced our own armored courier operation in the U.K. which delivers cash to and collects residual cash from our ATMs in that market. Our acquisition of Sunwin in November of 2014 significantly expanded our armored courier operations in the U.K. As of December 31, 2015 , we were providing armored courier services to approximately   12,400   of our ATMs in that market and we currently intend to further expand that operation to service additional ATMs. The armored transport business exposes us to significant risks, including the potential for cash-in-transit losses, employee theft, as well as claims for personal injury, wrongful death, worker's compensation, punitive damages, and general liability. While we seek to maintain appropriate levels of insurance to adequately protect us from these risks, there can be no assurance that we will avoid significant future claims or adverse publicity related thereto. Furthermore, there can be no assurance that our insurance coverage will be adequate to cover potential liabilities or that insurance coverage will remain available at costs that are acceptable to us. The availability of quality and reliable insurance coverage is an important factor in our ability to successfully operate this aspect of our operations. A loss claim for which insurance coverage is denied or that is in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations and cash flows .

 

Operational failures in our EFT transaction processing facilities could harm our business and our relationships with our merchant and financial institution customers.

 

An operational failure in our EFT transaction processing facilities could harm our business and damage our relationships with our merchant and financial institution customers. Damage or destruction that interrupts our transaction processing services could also cause us to incur substantial additional expense to repair or replace damaged equipment and could damage our relationship with our customers . We have installed back-up systems and procedures to prevent or react to such disruptions. However, a prolonged interruption of our services or network that extends for more than several hours (i.e., where our backup systems are not able to recover) could result in data loss or a reduction in revenues as our devices would be unable to process transactions. In addition, a significant interruption of service could have a negative impact on our reputation and could cause our present and potential merchant and financial institution customers to choose alternative service providers, as well as subject us to fines or penalties related to contractual service agreements and ultimately cause a material adverse impact on our operations and cash flows.

 

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Errors or omissions in the settlement of merchant funds could damage our relationships with our merchant customers and expose us to liability.

 

We are responsible for maintaining accurate bank account information for certain of our merchant customers and accurate settlements of funds into these accounts based on the underlying transaction activity. This process relies on precise and authorized maintenance of electronic records. Although we have controls in place to help ensure the safety and accuracy of our records, errors or unauthorized changes to these records could result in the erroneous or fraudulent movement of funds, thus damaging our relationships with our merchant customers and exposing us to liability and potentially resulting in a material adverse impact on our operations and cash flows .

 

Changes in interest rates could increase our operating costs by increasing interest expense under our credit facilities and our vault cash rental costs.

 

Interest on amounts borrowed under our revolving credit facility is based on a floating interest rate, and our vault cash rental expense is based primarily on floating interest rates. As a result, our interest expense and cash management costs are sensitive to changes in interest rates. We pay rental fees on the average amount of vault cash outstanding in our ATMs under floating rate formulas based on a spread above various LIB OR in the U.S., U.K., Germany , and Poland . In Mexico, we pay a monthly rental fee to our vault cash providers under a formula based on the Interbank Equilibrium Interest Rate (commonly referred to as the TIIE ) and in Canada, the rate is based on the Bankers Acceptance Rate. Although we currently hedge a portion of our vault cash interest rate risk related to our operations in the U.S. through December 31,   20 20 by using interest rate swap agreements, we may not be able to enter into similar arrangements for similar amounts in the future. Furthermore, we have not currently entered into any derivative financial instruments to hedge our variable interest rate exposure in our international subsidiaries. Any significant future increases in interest rates could have a negative impact on our earnings and cash flow by increasing our operating costs and expenses. For additional information, see Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - I nterest Rate Risk.

 

We maintain a significant amount of cash within our Company-owned devices, which is subject to potential loss due to theft or other events, including natural disasters.

 

For the quarter ended December 31, 2015 , there was an average of approximately $ 3.7 billion in vault cash held in our domestic and international ATMs. Any loss of cash from our ATMs is generally our responsibility.   We typically require that our service providers, who either transport the cash or otherwise have access to the ATM safe, maintain adequate insurance coverage in the event cash losses occur as a result of theft, misconduct, or negligence on the part of such providers. Cash losses at the ATM occur in a variety of ways, such as natural disaster (hurricanes, tornadoes, etc.), fires, vandalism, and physical removal of the entire ATM, defeating the interior safe or by compromising the ATM’s technology components.   Because our ATMs are often installed at retail sites, they face exposure to attempts of theft and vandalism. Thefts of cash may be the result of an individual acting alone or as a part of a crime group. In recent periods, we have seen an increase in theft of cash from our ATMs across the geographic regions in which we operate.   For instance, during the fourth quarter of 2013, in response to increased physical ATM theft attempts and lower profitability on certain ATMs in Mexico, we took a number of ATMs out of service for a period of time to enhance some security features. While we maintain insurance policies to cover a significant portion of any losses that may occur that are not covered by the insurance policies maintained by our service providers, such insurance coverage is subject to deductibles, exclusions , and limitations that may leave us bearing some or all of those losses.   Significant cash losses could result in a material adverse impact on our operations and cash flows.  

 

Any increase in the frequency and/or amounts of theft and other losses could negatively impact our operating results by causing higher deductible payments and increased insurance premiums. Additionally, any damage sustained to our merchant customers’ store locations in connection with any ATM-related thefts, if extensive and frequent enough in nature, could negatively impact our relationships with those merchants and impair our ability to deploy additional ATMs in those existing or new locations of those merchants. Certain merchants have requested, and could request in the future, that we remove ATMs from store locations that have suffered damage as a result of ATM-related thefts, thus negatively impacting our financial results.   Finally, we have in the past, and may in the future, voluntarily remove cash from certain ATMs on a temporary or permanent basis to mitigate further losses arising from theft or vandalism. Depending on the magnitude and duration of any cash removal, our revenues and profits could be materially and adversely affected.

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The election of our merchant customers to not participate in our surcharge-free network offerings could impact the effectiveness of our offerings, which would negatively impact our financial results.

 

Financial institutions that are members of the Allpoint network pay a fee in exchange for allowing their cardholders to use selected Company-owned and/or managed ATMs on a surcharge-free basis. The success of the Allpoint network is dependent upon the participation by our merchant customers in that network. In the event a significant number of our merchants elect not to participate in that network, the benefits and effectiveness of the network would be diminished, thus potentially causing some of the participating financial institutions to not renew their agreements with us, and thereby negatively impacting our financial results.

 

We may be unable to effectively integrate our future acquisitions ,   which could increase our cost of operations ,   reduce our profitability , or reduce our shareholder value .

 

We have been an active business acquirer both in the U.S. and internationally, and expect to continue to be active in the future. The acquisition and integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on inherently limited due diligence) and integration (managing the complex process of integrating the acquired company’s personnel, products, processes, technology, and other assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition).

 

The process of integrating operations is time consuming and could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management’s attention from day-to-day operations , any delays or difficulties encountered in connection with acquisitions , and the integration of the companies’ operations could have an adverse effect on our business, results of operations, financial condition or prospects. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds, and combining different corporate cultures. Further, if we cannot successfully integrate an acquired company’s internal control over financial reporting, the reliability of our financial statements may be impaired and we may not be able to meet our reporting obligations under applicable law. Any such impairment or failure could cause investor confidence and, in turn, the market price of our common stock, to be materially adversely affected.

 

In addition, even if we are able to integrate acquired businesses successfully, we may not realize the full benefits of the cost efficiency or synergies, or other benefits that we anticipated when selecting our acquisition candidates or that these benefits will be achieved within a reasonable period of time. We may be required to invest significant capital and resources after an acquisition to maintain or grow the business that we acquire. Further, acquired businesses may not achieve anticipated revenues, earnings , or cash flows. Any shortfall in anticipated revenues, earnings, or cash flows could require us to write down the carrying value of the intangible assets associated with any acquired company, which would adversely affect our reported earnings.

 

Since May 2001, we have acquired 2 6 ATM businesses ,   a surcharge-free ATM network, a technology product offering that complements our surcharge-free offering,   an ATM installation company in the U.K., a Scotland-based provider and developer of marketing and advertising software and services for ATM owners, a U.K.-based pro vider of secure cash logistics and ATM maintenance , and a transaction processor in the U.S. We have made acquisitions to obtain the assets of deployed ATM networks and the related businesses and their infrastructure, as well as for strategic reasons to enhance the capability of our ATMs and expand our service offerings. We currently anticipate that our future acquisitions, if any, will likely reflect a mix of asset acquisitions and acquisitions of businesses, with each acquisition having its own set of unique characteristics.   In the future, we may acquire businesses outside of our traditional areas, which could introduce new risks and uncertainties. To the extent that we elect to acquire an existing company or the operations, technology, and the personnel of the company, we may assume some or all of the liabilities associated with the acquired company and face new and added challenges integrating such acquisition into our operations.

 

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Our international operations, including any future international operations, involve special risks and may not be successful, which would result in a reduction of our gross and net profits.

 

As of December 31, 2015 ,   11.3 % of our devices were located in the U.K., Germany, Poland, Mexico, and Canada. Those devices contributed approximately   29.4 % of our gross profits (exclusive of depreciation, accretion, and amortization) for the year ended December 31, 2015 . We expect to continue to expand in the countries in which we currently operate, and potentially into other countries as opportunities arise. However, our international operations are subject to certain inherent risks, including:

 

·

exposure to currency fluctuations, including the risk that our future reported operating results could be negatively impacted by unfavorable movements in the functional currencies of our international operations relative to the U.S. dollar, which represents our consolidated reporting currency;

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the imposition of exchange controls, which could impair our ability to freely move cash;

·

difficulties in complying with the different laws and regulations in each country and jurisdiction in which we operate, including unique labor and reporting laws and restrictions on the collection, management, aggregation, and use of information ;

·

unexpected changes in laws, regulations, and policies of foreign governments or other regulatory bodies, including changes that could potentially disallow surcharging or that could result in a reduction in the amount of interchange or other transaction-based fees that we receive;

·

unanticipated political and social instability that may be experienced;

·

rising crime rates in certain of the areas we operate in, including increased incidents of crimes on our ATMs and against store personnel where our ATMs are located;

·

difficulties in staffing and managing foreign operations, including hiring and retaining skilled workers in those countries in which we operate;

·

decreased ATM usage related to decreased travel and tourism in the markets that we operate in, such as our ATMs in Mexico a number of which are located in tourist destinations; and

·

potential adverse tax consequences, including restrictions on the repatriation of foreign earnings.

 

Any of these factors could have a material adverse impact on us and reduce the revenues and profitability derived from our international operatio ns and thereby adversely impact our consolidated operations and cash flows.

 

We derive a significant portion of our revenues and profits from branding relationships with financial institutions. A decline in these revenues as a result of changes in financial institution demand for this service may have a significant negative impact to our results.

 

I n 2014, we received notice from one of our largest branding partners, JP Morgan Chase & Co. ( Chase ) , of their intention not to renew or extend a number of ATM branding contracts with us.   To the extent we are unable to find alternate branding partners for these locations or additional financial institutions do not renew their contracts with us , and we are unable to rebrand those locations , a decline in our branded ATM locations could have a significant impact to our financial results.

 

In addition, consolidations within the banking industry may impact our branding relationships as existing branding customers   are acquired by other financial institutions, some of which may not be existing branding customers .   Our branding contracts could be   adversely affected by such consolidations.  

 

If we experience impairments of our goodwill or other intangible assets, we will be required to record a charge to earnings, which may be significant.

 

We have a large amount of goodwill and other intangible assets and are required to perform periodic assessments for any possible impairment for accounting purposes. As of December 31, 2015 , we had goodwill and other intangible assets of $ 706.8 million, or 53.3 % of our total assets. During the year ended December 31, 2015 , we added $79.1 million in goodwill and intangible assets. We periodically evaluate the recoverability and the amortization period of our intangible assets under accounting principles generally accepted in the U.S. ( U.S. GAAP ). Some of the factors that we consider to be important in assessing whether or not impairment exists include the performance of the related assets relative to the

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expected historical or projected future operating results, significant changes in the manner of our use of the assets or the strategy for our overall business, and significant negative industry or economic trends. These factors and assumptions, and any changes in them, could result in an impairment of our goodwill and other intangible assets. In the event we determine our goodwill or amortizable intangible assets are impaired, we may be required to record a significant charge to earnings in our financial statements, which would negatively impact our results of operations and that impact could be material.

 

We have a significant amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants, and make payments on our indebtedness.

 

As of December 31, 2015 , our outstanding indebtedness was $ 575.4 million, which represents 60.9 % of our total book capitalization of $ 945.2 million. Our indebtedness could have important consequences. For example, it could:

 

·

make it difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under the indentures governing our senior subordinated notes and the agreements governing our other indebtedness;

·

require us to dedicate a substantial portion of our cash flow in the future to pay principal and interest on our debt, which will reduce the funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes;

·

limit our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;

·

make us more vulnerable to adverse changes in general economic, industry and competitive conditions, and adverse changes in government regulation; and

·

limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy, research and development costs, or other purposes.

 

Any of these factors could materially an d adversely affect our business, results of operations , and cash flows . We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings, including those under our credit facilities, will be available in an amount sufficient to pay our indebtedness. If we do not have sufficient earnings or capital resources to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money, delay investment and capital expenditures, or sell equity or debt securities, none of which we can guarantee we will be able to do on commercially reasonable terms or at all.

 

The terms of our credit agreement and the indentures governing our senior notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

 

Our credit agreement and the indentures governing our senior notes include a number of covenants that, among other items, restrict or limit our ability to:

 

·

sell or transfer property or assets;

·

pay dividends on or redeem or repurchase stock;

·

merge into or consolidate with any third-party;

·

create, incur, assume, or guarantee additional indebtedness;

·

create certain liens;

·

make investments;

·

engage in transactions with affiliates;

·

issue or sell preferred stock of restricted subsidiaries; and

·

enter into sale and leaseback transactions.

 

In addition, we are required by our credit agreement to adhere to certain covenants and maintain specified financial ratios. While we currently have the ability to borrow the full amount available under our credit agreement, as a result of these ratios, we may be limited in the manner in which we conduct our business in the future and may be unable to engage in favorable business activities or finance our future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business and prevent us from fulfilling our debt obligations. A failure to comply

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with the covenants or financial ratios could result in an event of default. In the event of a default under our credit agreement, the lenders could exercise a number of remedies, some of which could result in an event of default under the indentures governing the senior notes. An acceleration of indebtedness under our credit agreement would also likely result in an event of default under the terms of any other financing arrangement we have outstanding at the time. If any or all of our debt were to be accelerated, we cannot assure you that our assets would be sufficient to repay our indebtedness in full. If we are unable to repay any amounts outstanding under our bank credit facility when due, the lenders will have the right to proceed against the collateral securing our indebtedness. Such actions could have a material adverse impact on our operations and cash flows. For additional information about our credit agreement and indentures, see Part II. Item 7. Management’s Discussion and Analysis of Financial Cond ition and Results of Operation s - Liquidity and   Capital Resources - Financing Facilities.

 

The fundamental change and make-whole fundamental change provisions associated with our $250.0 million of 1.00% convertible senior notes due December 2020 (“Convertible Notes”) may delay or prevent an otherwise beneficial takeover attempt of us.

 

The fundamental change purchase rights, which will allow holders of our Convertible Notes to require us to purchase all or a portion of their notes upon the occurrence of a fundamental change, and the provisions requiring an increase to the conversion rate for conversions in connection with certain other circumstances may delay or prevent a takeover of us or the removal of current management that might otherwise be beneficial to investors.

 

We may not have the ability to raise the funds necessary to pay the amount of cash due upon conversion of the Convertible Notes , if relevant, or upon the occurrence of a fundamental change as described in our convertible indentures, and our debt may contain limitations on our ability to pay cash upon conversion or required purchase of the Convertible Notes .  

 

Upon the occurrence of a fundamental change, holders of our Convertible Notes may require us to purchase, for cash, all or a portion of their Convertible Notes at a fundamental change purchase price specified within the convertible note indentures. There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price if holders submit their Convertible Notes for purchase by us upon the occurrence of a fundamental change or to pay the amount of cash (if any) due if holders surrender their Convertible Notes for conversion. In addition, the occurrence of a fundamental change may cause an event of default under agreements governing us or our subsidiaries’ indebtedness.   Agreements governing any future debt may also restrict our ability to make any of the required cash payments even if we have sufficient funds to make them. Furthermore, our ability to purchase the Convertible Notes or to pay cash (if any) due upon the conversion of the Convertible Notes may be limited by law or regulatory authority.   In addition, if we fail to purchase the Convertible Notes or to pay the amount of cash (if any) due upon conversion of the Convertible Notes , we will be in default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which in turn may result in the acceleration of other indebtedness we may then have. If the repayment of the other indebtedness were to be accelerated, we may not have sufficient funds to repay that indebtedness and to purchase the Convertible Notes or to pay the amount of cash (if any) due upon conversion.

 

Noncompliance with established EFT network rules and regulations could expose us to fines and penalties and could negatively impact our results of operations. Additionally, new EFT network rules and regulations could require us to expend significant amounts of capital to remain in compliance with such rules and regulations.

 

Our transactions are routed over various EFT networks to obtain authorization for cash disbursements and to provide account balances. These networks include Star, Pulse, NYCE, Cirrus (MasterCard), and Plus (Visa) in the U.S.; LINK in the U.K.; Promoción y Operación S.A. de C.V. in Mexico; Interac Association (“Interac”) in Canada; and Girocard in Germany. EFT networks set the interchange fees that they charge to the financial institutions, as well as the amounts paid to us. Additionally, EFT networks, including MasterCard and Visa, establish rules and regulations that ATM providers, including ourselves, must comply with in order for member cardholders to use those ATMs. Failure to comply with such rules and regulations could expose us to penalties and/or fines, which could negatively impact our financial results. For example, in the U.K. and Canada, MasterCard and Visa require compliance with the EMV security standard. This standard provides for the security and processing of information contained on microchips imbedded in certain debt and credit cards,

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known as “smart cards.” The p ayment networks rules and regulations are generally subject to change and they may modify their rules and regulations from time to time. Our inability to react to changes in the rules and regulations or the interruption or application thereof, may result in the substantial disruption of our business.

 

In 2012, MasterCard announced plans for a liability shift from the issuers of EMV-enabled cards to the party that has not made the investment in EMV equipment (acquirer) for fraudulent counterfeit card Maestro cross-border transactions in the U.S. Under this liability shift, transactions may sti l l occur on a non-EMV-compliant ATM , but the operator of that ATM c ould be liable for   fraud associated with the transactions.   MasterCard’s liability shift on International Maestro (MasterCard) transactions occurred in April 2013, and while the majority of our U.S. ATMs are not currently EMV-compliant, this liability shift has not had a significant impact on our business or results to date as International Maestro transactions currently comprise less than 1 .0 % of our U.S. transaction volume.   As of the Maestro liability shift date, we implemented additional fraud monitoring methods to minimize fraud losses.   To date, we have seen minimal fraud losses.   In February 2013, Visa announced plans for a liability shift to occur in October 2017 for all transactions types on domestic or international EMV-issued cards in the U.S.   MasterCard has also announced that a liability shift for its domestic ATM transactions on EMV-issued cards will occur in October 2016. At this time, neither MasterCard nor Visa are requiring mandatory upgrades to ATM equipment; however, all of our recent ATM deployments have been with ATMs that are EMV-ready and we plan to upgrade the majority of our U.S. Company-owned fleet in advance of the October 2016 Master C ard liability shift date for domestic transactions. We are currently working through a plan that calls for us to visit the significant majority of our Company-owned ATMs over the next year to enable most of the fleet to be EMV-compliant and also enhance security and enable other features. During 2015, we procured the majority of the ATMs and upgrade kits required to enable EMV on our Company-owned fleet. The remaining capital cost required to enable the majority of our Company-owned ATM fleet to be EMV-compliant has been contemplated in our 2016 capital expenditure plan and is projected to be approximately $10 million to $ 15 million. Due to the significant operational challenges of enabling EMV and other hardware and software enhancements across the majority of our U.S. ATM fleet, which comprises many types and models of ATMs, along with potential compatibility issues with various processing platforms, we could experience increased downtime in our U.S. fleet over the course of the next year. As a result of this potential downtime, we could suffer lost revenues or incur penalties with certain of our contracts. We also may incur increased charges from networks associated with actual or potential ly fraudulent transactions and may also incur additional administrative overhead costs to support the handling of an increased volume of disputed transactions. We also may experience a higher rate of unit count or transaction attrition for our merchant-owned ATMs and ATMs for which we process transactions, as a result of this standard, as we may elect to entirely block certain ATMs or certain transaction types for merchant-owned ATMs that are not EMV-enabled in the future. Noncompliance with the EMV standard or other network rules could have a material adverse impact on our operations and cash flows.

 

The majority of the electronic debit networks over which our transactions are conducted require sponsorship by a bank, and the loss of any of our sponsors and our inability to find a replacement may cause disruptions to our operations.

 

In each of the geographic segments in which we operate, bank sponsorship is required in order to process transactions over certain networks. In all of our markets, our ATMs are connected to financial transaction switching networks operated by organizations such as Visa and MasterCard. The rules governing these switching networks require any company sending transactions through these switches to be a bank or a technical service processor that is approved and monitored by a bank. As a result, the operation of our ATM network in all of our markets depends on our ability to secure these sponsor arrangements with financial institutions. In the U.S., our largest geographic segment by revenues, bank sponsorship is required on the significant majority of our transactions and we rely on our sponsor bank s for access to the applicable networks. In the U.K., only international transactions require bank sponsorship. In Mexico, all ATM transactions require bank sponsorship, which is currently provided by our banking partners in the country.   In Canada and Germany, bank sponsorships are also required and are obtained through our relationships with third-party processors. If our current sponsor banks decide to no longer provide this service, or are no longer financially capable of providing this service as may be determined by certain networks, it may be difficult to find an adequate replacement at a cost similar to what we incur today, or potentially, we could incur a temporary service disruption for certain transactions in the event we lose or do not retain bank sponsorship, which may negatively impact our profitability and may prevent us from doing business in that market .  

 

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If we lose key personnel or are unable to attract additional qualified personnel as we grow, our business could be adversely affected.

 

We are dependent upon the ability and experience of a number of key personnel who have substantial experience with our operations, the rapidly changing automated consumer financial services industry, and the geographical segments in which we operate. It is possible that the loss of the services of one or a combination of several of our senior executives would have an adverse effect on our operations, if we are not able to find suitable replacements for such persons in a timely manner. Unexpected turnover in key leadership positions within the Company may adversely impact our ability to manage the Company efficiently and effectively, could be disruptive and distracting to management and may lead to additional departures of existing personnel, any of which could adversely impact our business. Any adverse change in our reputation, whether as a result of decreases in revenue or a decline in the market price of our common stock, could affect our ability to motivate and retain our existing employees and recruit new employees. Our success also depends on our ability to continue to attract, manage, motivate and retain other qualified management, as well as technical and operational personnel as we grow. We may not be able to continue to attract and retain such personnel in the future, which could adversely impact our business .

 

We are subject to laws and regulations worldwide, changes to which could increase our costs and individually or in the aggregate adversely affect our business.

 

We currently conduct a portion of our business outside the U.S. Thus, we are subject to laws and regulations which affect both our domestic and international operations in a number of areas. These laws and regulations affect our business including, but not limited to, areas of labor, advertising, consumer protection, real estate, billing, e-commerce, promotions, quality of services, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health, and safety.

 

Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation could have a material adverse effect on our business, financial condition and results of operations. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.

 

We operate in several jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other similar anti-corruption laws.

 

Our business operations in countries outside the U.S. are subject to anti-corruption laws and regulations, including restrictions imposed by the U.S. Foreign Corrupt Practices Act ( FCPA ). The FCPA and similar anti-corruption laws in other jurisdictions, such as the U.K. Bribery Act, generally prohibit companies and their intermediaries from paying or promising to pay government officials, political parties, or political party officials for the purpose of obtaining, retaining, influencing, or directing business. We operate in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, compliance with anti-corruption laws may conflict with local customs and practices.

 

Our employees and agents may interact with government officials on our behalf, including interactions necessary to obtain licenses and other regulatory approvals necessary to operate our business, import or export equipment and resolve tax disputes. These interactions create a risk that actions may occur that could violate the FCPA or other similar laws.

 

Although we have implemented policies and procedures designed to ensure compliance with local laws and regulations as well as U.S. laws and regulations, including the FCPA, there can be no assurance that all of our employees, consultants, contractors and agents will abide by our policies. If we are found to be liable for violations of the FCPA or similar anti-corruption laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer from criminal or civil penalties which could have a material and adverse effect on our business, results of operations, financial condition, and cash flows.

 

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If we are unable to adequately protect our intellectual property, we may lose a valuable competitive advantage or be forced to incur costly litigation to protect our rights. Additionally, if we face claims of infringement we may be forced to incur costly litigation.

 

Our success depends, in part, on developing and protecting our intellectual property. We rely on copyright, patent, trademark and trade secret laws to protect our intellectual property. We also rely on other confidentiality and contractual agreements and arrangements with our employees, affiliates, business partners and customers to establish and protect our intellectual property and similar proprietary rights. While we expect these agreements and arrangements to be honored, we cannot assure you that they will be and, despite our efforts, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors. Agreements entered into for that purpose may not be enforceable or provide us with an adequate remedy. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our applications and services are made available. Any litigation relating to the defense of our intellectual property, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.

 

In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. We may expose ourselves to additional liability if we agree to indemnify our customers against third party infringement claims. If the owner of intellectual property establishes that we are, or a customer which we are obligated to indemnify is, infringing its intellectual property rights, we may be forced to change our products or services, and such changes may be expensive or impractical, or we may need to seek royalty or license agreements from the owner of such rights. In the event a claim of infringement against us is successful, we may be required to pay royalties to use technology or other intellectual property rights that we had been using, or we may be required to enter into a license agreement and pay license fees, or we may be required to stop using the technology or other intellectual property rights that we had been using. We may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable amount of time. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and potentially cause a diversion of our resources.

 

We are subject to business cycles, seasonality, and other outside factors that may negatively affect our business.

 

Our overall business is subject to seasonal variations. For example, we have generally had fewer transactions occur in the first quarter of the year. Transaction volumes at our devices located in regions affected by strong winter weather patterns typically experience declines in volume during the first and fourth quarters as a result of decreases in the amount of consumer traffic through such locations, which decline is partially offset for the fourth quarter by increases in the number of our devices located in retail locations that benefit from increased consumer traffic during the holiday buying season. With all of our ATMs located in the northern hemisphere, we usually see an increase in transactions in the warmer summer months from May through August, which are also aided by increased vacation and holiday travel. As a result of these seasonal variations, our quarterly operating results may fluctuate and could lead to volatility in the price of our shares.   In addition, a recessionary economic environment could reduce the level of transactions taking place on our networks, which could have a material adverse impact on our operations and cash flows .

 

Risks associated with our common stock

 

Our operating results have fluctuated historically and could continue to fluctuate in the future, which could affect our ability to maintain our current market position or expand.

 

Our operating results have fluctuated in the past and may continue to fluctuate in the future as a result of a variety of factors, many of which are beyond our control, including the following:

 

·

changes in general economic conditions and specific market conditions in the ATM and financial services industries;

·

changes in payment trends and offerings in the markets in which we operate;

·

changes in consumers’ preferences for cash as a payment vehicle;

·

competition from other companies providing the same or similar services that we offer;

·

changes in the mix of our retail partners;

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·

the timing and magnitude of operating expenses, capital expenditures, and expenses related to the expansion of sales, marketing, and operations, including as a result of acquisitions, if any;

·

the timing and magnitude of any impairment charges that may materialize over time relating to our goodwill, intangible assets , or long-lived assets;

·

changes in the general level of interest rates in the markets in which we operate;

·

changes in regulatory requirements associated with the ATM and financial services industries;

·

changes in the mix of our current services;

·

changes in the financial condition and credit risk of our customers;

·

any adverse results in litigation by us or by others against us;

·

our inability to make payments on our outstanding indebtedness as they become due;

·

our failure to successfully enter new markets or the failure of new markets to develop in the time and manner we anticipate;

·

acquisitions, strategic alliances, or joint ventures involving us or our competitors;

·

terrorist acts, theft, vandalism, fires, floods, or other natural disasters;

·

additions or departures of key personnel;

·

changes in the financial condition and operational execution of our key vendors and service providers ;

·

changes in tax rates or tax policies in the jurisdictions in which we operate ; and

·

exposure to currency fluctuations, including the risk that our future reported operating results could be negatively impacted by unfavorable movements in the functional currencies of our international operations relative to the U.S. dollar, which represents our consolidated reporting currency.

 

Any of the foregoing factors could have a material adverse effect on our business, results of operations, and financial condition. Although we have experienced revenue growth in recent years, this growth rate is not necessarily indicative of future operating results. A relatively large portion of our expenses are fixed in the short-term, particularly with respect to personnel expenses, depreciation and amortization expenses, and interest expense. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior periods should not be relied upon as indications of our future performance.

 

We may issue additional shares of our common stock or instruments convertible into shares of our common stock, which may materially and adversely affect the market price of our common stock and the trading price of our Convertible Notes .

 

We may conduct future offerings of our common stock, preferred stock , or other securities convertible into our common stock to fund acquisitions, finance operations or for general corporate purposes. In addition, we may elect to settle the conversion of our outstanding Convertible Notes in shares of common stock, and we may also issue common stock under our equity awards programs.   The market price of shares of our common stock or the trading price of the Convertible Notes could decrease significantly if we conduct such future offerings, if any of our existing stockholders sells a substantial amount of our common stock or if the market perceives that such offerings or sales may occur. Moreover, any issuance of additional common stock will dilute the ownership interest of our existing common stockholders, and may adversely affect the a bility of holders of our Convertible Notes to participate in any appreciation of our common stock.

 

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

 

Under U.S. GAAP, an entity must separately account for the debt component and the embedded conversion option of convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as our Convertible Notes , in a manner that reflects the issuer’s economic interest cost. The effect of the accounting treatment for such instruments is that the value of such embedded conversion option is treated as an original issue discount for purposes of accounting for the debt component of the Convertible Notes , and that original issue discount is amortized into interest expense over the term of the Convertible Notes using an effective yield method. As a result, we are required to record non-cash interest expense as a result of the amortization of the effective original issue discount to the Convertible Notes ’ face amount over the term of the notes and as a result of the amortization of the debt issuance costs. Accordingly, we report

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lower net income in our financial results because of the recognition of both the current period’s amortization of the debt discount and the Convertible Notes ’ coupon interest.

 

Under certain circumstances, convertible debt instruments that may be settled entirely or partially in cash are evaluated for their impact on earnings per share utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the notes are accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be certain that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share could be adversely affected.

 

In addition, if the conditional conversion feature of the notes is triggered, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

 

ITEM 1B. UNRESOLVED STAFF COMMENT S

 

None.

 

ITEM 2. PROPERTIE S

 

Our North America segment includes offices throughout the U.S., Mexico, and Canada. O ur principal executive offices are located at 3250 Briarpark Drive, Suite 400, Houston, Texas 77042, and our telephone number is (832) 308-4000. In the U.S. , w e lease 62,249  square feet of office space for our Houston headquarters and 44,258 square feet of other office and warehouse space in north Houston. Furthermore, we lease 44,778  square   feet in the Dallas ,   Texas area , where we manage our EFT transaction processing operations.   We also lease office spaces in Bethesda,   Maryland ;   Whippany,   New   Jersey; Minnetonka, Minnesota; Portland, Oregon; Rohnert Park, California; Chandler,   Arizona; Peoria,   Illinois ; Bloomington, Illinois ;   and St. Louis, Missouri for   other regional offices. We also lease offices in Mexico   City , Mexico; Lethbridge   Alberta ; and Ottawa, Ontario.  

 

In Europe, we lease office spaces   in and near London , U.K. for our ATM operations and various other locations throughout the U.K. to support our cash-in-transit operations and other business activities. In Germany , we lease office space in Trier.   For our i-design operations, we lease office space in Dundee, Scotland.

 

Our facilities are leased pursuant to operating leases for various terms and we believe they are adequate for our current use. We believe that our leases are at competitive or market rates and do not anticipate any difficulty in leasing suitable additional space upon expiration of our current lease terms.

 

ITEM 3. LEGAL PROCEEDINGS

 

For a description of our material pending legal and regulatory proceedings and settlements, see Part II. Item 8. Financial Statements and Supplementary   Data, Note 17 . Commitments and Contingencies - Legal Matters.

 

ITEM 4. MINE SAFETY DISCLOSURE S

 

Not Applicable.

 

 

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PART I I

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER   MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock trades on The NASDAQ Global Select Market under the symbol CATM. ”   As of February   19,  2016, there   were 37 stockholders of record of our common stock, excluding an indeterminate number of beneficial holders whose shares may be held of record at brokerage and clearing agencies.

 

Quarterly Stock Prices. The following table reflects the quarterly high and low sales prices for our common stock as reported on The NASDAQ Stock Market LLC:

 

 

 

 

 

 

 

 

 

High

 

 

Low

2015

 

 

 

 

 

Fourth Quarter

$

38.68

 

$

32.29

Third Quarter

 

37.07

 

 

32.18

Second Quarter

 

39.87

 

 

36.29

First Quarter

 

39.77

 

 

33.61

 

 

 

 

 

 

2014

 

 

 

 

 

Fourth Quarter

$

40.00

 

$

33.04

Third Quarter

 

39.42

 

 

31.38

Second Quarter

 

39.41

 

 

28.03

First Quarter

 

44.00

 

 

36.97

 

Dividend Information. We have historically not paid, nor do we anticipate paying, dividends with respect to our common stock. For information on restrictions on our ability to pay dividends, see Item 8.   Financial Statements and Supplementary Data, Note 10. Long-Term Debt and   Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and   Capital Resources - Financing Facilities.

 

Stock Performance Graph.   The following graph compares the five-year total return to holders of Cardtronics Inc.'s common stock, the NASDAQ Composite index (the Index ), and a customized peer group of 1 9 companies that includes: (i) ACI Worldwide, Inc. (ACIW), (ii) Acxiom Corporation (ACXM), (iii) CSG Systems International, Inc. (CSGS), (iv)   Earthlink Inc. (ELNK), (v) Euronet Worldwide, Inc. (EEFT), (vi) Fair Isaac Corp. (FICO), (vii) Everi Holdings Inc. (EVRI), (viii) Global Payments, Inc. (GPN), (ix) Jack Henry & Associates, Inc. (JKHY), (x) NeuStar, Inc. (NSR), (xi)   Outerwall, Inc. (OUTR), (xii) SS&C Technologies Holdings, Inc. (SSNC), (xiii) WEX, Inc. (WEX), (xiv) Heartland Payment Systems, Inc. (HPY), (xv) Vantiv Inc. (VNTV), (xvi) Total Systems Services, Inc. (TSS), (xvii) VeriFone Systems, Inc. (PAY), (xviii) MoneyGram International, Inc. (MGI), and (xix) Blackhawk Network Holdings, Inc. (HAWK) (collectively, the “New Peer Group ).   We selected the New Peer Group companies because they are publicly traded companies that: (i) have the same Global Industry Classification Standard classification, (ii) generate a similar amount of revenues, (iii) have similar market values, and (iv) provide services that are similar to the services we provide. The New Peer Group companies were revised during 2015. Our previous peer group included: (i) ACI Worldwide, Inc. (ACIW), (ii) Acxiom Corporation (ACXM), (iii) CSG Systems International, Inc. (CSGS), (iv) Earthlink Inc. (ELNK), (v) Euronet Worldwide, Inc. (EEFT), (vi) Fair Isaac Corp. (FICO), (vii) Global Cash Access Holdings, Inc. (GCA), (viii) Global Payments, Inc. (GPN), (ix) Jack Henry & Associates, Inc. (JKHY), (x) NeuStar, Inc. (NSR), (xi) Outerwall, Inc. (OUTR), (xii) Sapient Corp. (SAPE), (xiii) SS&C Technologies Holdings, Inc. (SSNC), and (xiv) WEX, Inc. (WEX) (collectively, the “Old Peer Group”).

 

The performance graph was prepared based on the following assumptions: (i) $100 was invested in our common stock, in our New Peer Group , in our Old Peer Group, and the Index on December 31, 20 10, (ii) investments in the New Peer Group and our Old Peer Group were weighted based on the returns of each individual company within the group according to their market capitalization at the beginning of the period, and (iii) dividends were reinvested on the relevant payment dates. The stock price performance included in this graph is historical and not necessarily indicative of future stock price performance.

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The following graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

 

PICTURE 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/10

 

 

12/11

 

 

12/12

 

 

12/13

 

 

12/14

 

 

12/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardtronics Inc.

 

$

100.00

 

$

152.88

 

$

134.12

 

$

245.48

 

$

217.97

 

$

190.11

NASDAQ Composite

 

$

100.00

 

$

100.53

 

$

116.92

 

$

166.19

 

$

188.78

 

$

199.95

Old Peer Group

 

$

100.00

 

$

104.51

 

$

126.35

 

$

188.67

 

$

190.81

 

$

228.64

New Peer Group

 

$

100.00

 

$

106.79

 

$

120.93

 

$

177.29

 

$

182.72

 

$

225.08

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following table provides information about purchases of shares of our common stock, the class of which is registered by us pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares

 

Approximate Dollar Value

 

 

 

Total Number of

 

Average Price

 

Purchased as Part of a Publicly

 

that may Yet be Purchased

 

Period

 

Shares Purchased  (1)

 

Paid Per Share  (2)

 

Announced Plan or Program

 

Under the Plan or Program   (3)

 

October 1 - October 31, 2015

 

213

 

$

33.73

 

 —

 

$

 —

 

November 1 - November 30, 2015

 

729

 

$

34.58

 

 —

 

$

 —

 

December 1 - December 31, 2015

 

2,468

 

$

36.09

 

 —

 

$

 —

 

                                                  

(1)

Represents shares surrendered to us by participants in our Second Amended and Restated 2007 Stock Incentive Plan (“2007 Plan”) to settle the participants’ personal tax liabilities that resulted from the lapsing of restrictions on shares awarded to the participants under the 2007 Plan.

(2)

The price paid per share was based on the average high and low trading prices of our common stock on the dates on which we repurchased shares from the participants under our 2007 Plan or in the open market.

(3)

In connection with the lapsing of the forfeiture restrictions on restricted shares granted by us under our 2007 Plan, which was adopted in December 2007 and expires in December 2017, we permitted employees to sell a portion of their shares to us in order to satisfy their tax liabilities that arose as a consequence of the lapsing of the forfeiture restrictions. In future periods, we may not permit individuals to sell their shares to us in order to satisfy such tax liabilities. Since the number of restricted shares that will become unrestricted each year is dependent upon the continued employment of the award recipients, we cannot forecast either the total amount of such securities or the approximate dollar value of those securities that we might purchase in future years as the forfeiture restrictions on such shares lapse.

 

Unregistered Sales of Equity Securities. None that have not previously been r eported on a current report on   Form   8-   K.

 

 

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ITEM 6. SELECTED FINANCIAL DAT A

 

The following table sets forth selected financial data derived from our consolidated financial statements. As a result of acquisitions of businesses during the years presented below, our financial results are not comparable in all periods.   Additionally, these selected historical results are not necessarily indicative of results to be expected in the future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,  

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

(In thousands, excluding share and per share information and number of ATMs)  

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

1,200,301

 

$

1,054,821

 

$

876,486

 

$

780,449

 

$

624,576

Income from operations (1)

 

 

139,917

 

 

104,639

 

 

82,601

 

 

90,507

 

 

77,275

Net income (2)

 

 

65,981

 

 

35,194

 

 

20,647

 

 

43,262

 

 

70,146

Net income attributable to controlling interests and available to common stockholders (2)

 

 

67,080

 

 

37,140

 

 

23,816

 

 

43,591

 

 

70,233

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share (2)

 

$

1.50

 

$

0.83

 

$

0.52

 

$

0.97

 

$

1.60

Diluted net income per common share (2)

 

$

1.48

 

$

0.82

 

$

0.52

 

$

0.96

 

$

1.58

Basic weighted average shares outstanding

 

 

44,796,701

 

 

44,338,408

 

 

44,371,313

 

 

43,469,175

 

 

42,201,491

Diluted weighted average shares outstanding

 

 

45,368,687

 

 

44,867,304

 

 

44,577,635

 

 

43,875,332

 

 

42,886,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

26,297

 

$

31,875

 

$

86,939

 

$

13,861

 

$

5,576

Total assets

 

 

1,327,003

 

 

1,255,790

 

 

1,056,203

 

 

768,892

 

 

712,801

Total long-term debt and capital lease obligations, including current portion (3)

 

 

575,399

 

 

612,697

 

 

490,514

 

 

354,819

 

 

370,949

Total stockholders’ equity

 

 

369,793

 

 

286,535

 

 

247,114

 

 

148,804

 

 

113,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

256,553

 

$

188,553

 

$

183,557

 

$

136,388

 

$

113,325

Cash flows from investing activities

 

 

(209,562)

 

 

(336,881)

 

 

(266,740)

 

 

(113,764)

 

 

(234,454)

Cash flows from financing activities

 

 

(48,520)

 

 

99,248

 

 

154,988

 

 

(14,084)

 

 

123,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of ATMs (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATM operations

 

 

77,169

 

 

78,217

 

 

66,984

 

 

56,395

 

 

48,105

Managed services and processing, net (4)

 

 

112,622

 

 

31,989

 

 

13,610

 

 

6,365

 

 

4,781

Total number of ATMs (at period end)

 

 

189,791

 

 

110,206

 

 

80,594

 

 

62,760

 

 

52,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total transactions (excluding Managed services and processing, net)

 

 

1,251,626

 

 

1,040,241

 

 

860,062

 

 

704,809

 

 

516,564

Total cash withdrawal transactions (excluding Managed services and processing)

 

 

759,408

 

 

617,419

 

 

521,282

 

 

443,312

 

 

318,615

                                                  

(1)

The year ended December 31, 201 3 includes $8.7 million in nonrecurring property tax expense related to a change in assessment methodology in the U.K. Additionally, $ 27.1 , $18.1, and $15.4 million in acquisition and divestiture -related costs were included in the results for the years ended December 31, 2015 , 2014, and 201 3 , respectively .

(2)

The year ended December 31, 201 3 includes $13.8 million in income tax expense related to the restructuring of our U.K. business. The year ended December 31, 2011 include s $37.0 million in income tax benefits.   The income tax benefit in 2011 related to a tax reporting change that was implemented in our U.K. operations.

(3)

Our long-term debt as of December 31, 2015 consists of outstanding borrowings under our revolving credit facility, our senior notes, and our convertible senior notes that were issued in November 2013. The Convertible Notes are shown on our Consolidated Balance Sheet at a carrying value of $ 234.6 million as of December 31, 2015 , which represents the principal balance of $287.5 million less the unamortized discount of $ 52.9   million.

(4)

The notable increase in the Manage d   s ervices and processing, net ATM machine count is primarily attributable to the July 1,  2015 acquisition of CDS and the incremental number of transacting ATMs for which CDS provides processing services.

 

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ITEM 7. MANAGEMENT’S DISCUSSIO N AND ANALYSIS OF FINANCIAL CONDITION AND   RESULTS OF OPERATIONS  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations   contains forward-looking statements that are based on management’s current   expectations, estimates, and projections about our business and operations. Our   actual results may differ materially from those currently anticipated and expressed   in such forward-looking statements. Known material factors that could cause our actual results to differ from those in the forward-looking statements are those   we discuss under Part I. Item 1A. Risk Factors. Additionally, you should read   the following discussion together with the financial statements and the related   notes included in Item 8. Financial Statements and Supplementary Data.

 

Our discussion and analysis includes the following topics:

 

·

Strategic Outlook

·

Developing Trends in the ATM and Financial Services Industry

·

Recent Events

·

Components of Revenues, Cost of Revenues, and Expenses

·

Results of Operations

·

Non-GAAP Financial Measures

·

Liquidity and Capital Resources

·

Critical Accounting Policies and Estimates

·

New Accounting Pronouncements Issued but Not Yet Adopted

·

Commitments and Contingencies

·

Off Balance-Sheet Arrangements  

 

Strategic Outlook

 

Over the past several years, we have expanded our operations both domestically and internationally through acquisitions, continued to deploy ATMs in high-traffic locations under contracts with well-known retailers, expanded our relationships with leading financial institutions through growth of the Allpoint surcharge-free ATM network and bank-branding programs, and made strategic acquisitions and investments to expand new product offerings and capabilities of our ATMs.

 

We have completed several acquisitions since 2011, including the acquisitions of: (i) eight domestic ATM operators, expanding our fleet in both multi-unit regional retail chains and individual merchant ATM locations in the U.S. by approximately 5 8,000 , (ii) two Canadian ATM operators for a total of approximately 1,400 ATMs, which allowed us to enter into and expand our international presence in Can ada, (iii) Cardpoint in August 2013, which further expanded our U.K. ATM operations by approximately 7,100 ATMs and also allowed us to enter into the German market with approximately 800 ATMs , and   (iv )   Sunwin in November of 2014, which further expanded our cash-in-transit and maintenance servicing capabilities in the U.K. and allowed us to acquire and operate approximately 2,000 existing high-transacting ATMs located at the Co-op F ood stores and the opportunity to install and operate new ATMs in up to 800 stores that do not currently have ATMs.

 

In addition to ATM acquisitions, we have also made strategic acquisitions including : (i) LocatorSearch in August 2011, a domestic leading provider of location search technology deployed by financial institutions to help customers and members find the nearest, most appropriate and convenient ATM location based on the s ervice they seek, (ii) i-design in March 2013, which is a Scotland-based provider and developer of marketing and advertising software and services for ATM operators, and   (i ii )   CDS in July 2015, a leading independent transaction processor for ATM deployers and payment card issuers, providing leading-edge solutions to ATM sales and service organizations and financial institutions .

 

While we will continue to explore potential acquisition opportunities in the future as a way to grow our business, we also expect to continue to expand our ATM footprint and launch new products and services that will allow us to further

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leverage our existing ATM and financial services kiosk network.   In particular, we see opportunities to expand our operations through the following:

 

·

increase our number of deployed devices with existing as well as new merchant relationships ;

·

expand our relationships with leading financial institutions ;

·

work with non-traditional financial institutions and card issuers to further leverage our extensive ATM and   financial services kiosk network ;

·

increase transaction levels at our existing locations ;

·

develop and provide additional services at our existing ATMs ;

·

pursue additional managed services opportunities ; and

·

pursue international growth opportunities .

 

For additional discussion of each of our strategic points above, see Part I .   Item 1. Business - Our Strategy .

 

Developing Trends in the ATM and Financial Services Industry  

 

Increase in Surcharge - Free Offerings. Many U.S. retail banks aggressively compet e for market share, and part of their competitive strategy is to increase their number of customer touch points, including the establishment of an ATM network to provide convenient, surcharge-free access to cash for their customers. While owning a large ATM network would be a key strategic asset for a bank, we believe it would be uneconomical for all but the largest banks to build and operate an extensive ATM network. Bank-branding of ATMs and participation in surcharge-free networks allow financial institutions to rapidly increase surcharge-free ATM access for their customers at substantially lower cost than building their own ATM networks. These factors have led to an increase in bank-branding and participation in surcharge-free ATM networks, and we believe that there will be continued growth in such arrangements.

 

Increase in Usage of Stored - Value Prepaid Debit Cards. In the U.S., we have seen a proliferation in the issuance and acceptance of stored-value prepaid debit cards as a means for consumers to access their cash and make routine retail purchase s over the past ten years . Based on published studies, the value loaded on stored-value prepaid cards such as open loop network-branded money and financial services cards, payroll and benefit cards and social security cards, is expected to continue to increase in the next few years.

 

We believe that our network of ATMs and financial services kiosks, located in well-known retail establishments throughout the U.S., provides a convenient and cost-effective way for holders of such cards to access their cash and potentially conduct other financial services transactions. Furthermore, through our Allpoint network, we partner with financial institutions that issue and sponsor stored-value prepaid debit card programs on behalf of corporate entities and governmental organizations, and we are able to provide holders of such cards convenient, surcharge-free access to their cash. We believe that the number of prepaid cards being issued and in circulation has increased significantly over the last several years and represents a growing portion of our total withdrawal transactions at our ATMs in the U.S.

 

Growth in Other Automated Consumer Financial Services. The majority of all ATM transactions in the U.S. are cash withdrawals, with the remainder representing other banking functions such as balance inquiries , transfers, and deposits. We believe that there are opportunities for a large non-bank ATM operator to provide additional financial services to customers, such as check cashing, remote deposit capture, money transfer, and stored-value card reload services through self-service kiosks. These additional consumer financial services could result in additional revenue streams for us and could ultimately result in increased profitability. However, it would require additional capital expenditures on our part to offer these services more broadly than we currently do.

 

Managed Services. While many banks own significant networks of ATMs that serve as extensions of their branch networks and increase the level of service offered to their customers, large ATM networks are costly to operate and typically do not provide significant revenue for banks and smaller financial institutions. Similarly, there are retailers that own their own network of ATMs for added services to their customers. Operating a network of ATMs is not a core competency for the majority of banks or other financial institutions and for retailers; therefore, we believe there is an opportunity for a large non-bank ATM and financial services kiosk operator such as ourselves, with lower costs and an established operating history, to contract with financial institutions and retailers to manage their ATM networks. Such an

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outsourcing arrangement could reduce a fin ancial institution’s operating costs while extending their customer service. Additionally, we believe there are opportunities to provide selected services on an outsourced basis, such as transaction processing services, to other independent owners and operators of ATMs and financial services kiosks. 

 

Growth in International Markets. In most regions of the world, ATMs are less common than in the U.S. and the U.K. We believe the ATM industry will grow faster in certain international markets, as the number of ATMs per capita in those markets increases and begins to approach the levels in the U.S. and the U.K. In addition, there has been a trend toward growth of non-branch ATMs in the other international markets in which we operate , including Germany, which we entered into during 2013 through the Cardpoint acquisition.

 

·

United Kingdom . The U.K. is the largest ATM market in Europe. According to LINK (which connects the ATM networks of all U.K. ATM operators), approximately 7 1 ,000 ATMs were deployed in the U.K. as of December  2015 , of which approximately 39 ,000 were operated by non-banks. Similar to the U.S., electronic payment alternatives have gained popularity in the U.K. in recent years. However, cash is still the primary payment method preferred by consumers, representing approximately 6 0 % of spontaneous payments above £1.00 according to the U . K . Payments Council’s Consumer Payments 201 5 publication. Due to the maturing of the ATM market, we have seen both the number of ATM deployments and withdrawals slow in recent years, and there has been a shift from fewer pay-to-use ATMs to more free-to-use ATMs. We significantly expanded in the U.K. during 2013 through the acquisition of Cardpoint and in 2014 through the acquisition of Sunwin and a new ATM operating agreement with Co-op Food. We expect to further expand our operations in this market through new locations with existing merchant customers along with new merchants with whom we may acquire relationships and other growth strategies.

 

·

Germany . We entered the German market in August 2013 through our acquisition of Cardpoint. The German ATM market is highly fragmented and may be under-deployed, based on its population’s high use of cash relative to other markets in which we operate, such as the U.S. and the U.K. There are approximately 5 7 , 0 00 ATMs in Germany that are largely deployed in bank branch locations. This fragmented and potentially under-deployed market dynamic is attractive to us, and as a result, we believe there are a number of opportuni ties for growth in this market.

 

·

Canada . We entered the Canadian market in October 2011 through a small acquisition, and further expanded our presence in the country through another small acquisition in December 2012. We expect to continue to grow our number of ATM locations in this market and plan to leverage our U.S. operations to support our anticipated growth in this market. We have grown recently in this market , primarily through a combination of new merchant and financial institution partners. As we continue to expand our footprint in Canada, we plan to seek additional partnerships with financial institutions to implement bank-branding and other financial services, similar to our bank-branding and surcharge-free strategy in the U.S.

 

·

Mexico . According to the Central Bank of Mexico, as of September 201 5   there were approximately 4 5,000 ATMs operating throughout the country, most of which were owned by national and regional banks. Due to a series of governmental and network regulations over the past few years that have been mostly detrimental to us, along with increased theft attempts on our ATMs in this market, we have slowed our expansion in this market in recent years. However, we remain poised and able to selectively pursue opportunities with large retailers and financial institutions in the region , and believe there are currently opportunities to grow this business profitability. During December 2015, we expanded our ownership in this joint venture from 51 .0 % to over 95%.

 

·

Poland . In March 2015, Poland became our third European market, following the U.K. and Germany. Our expansion into Poland was achieved through close coordination with a key European merchant customer. We plan to continue to grow in this market through additional merchant relationships and financial institution partnerships.

 

Increases in Surcharge Rates. As financial institutions in the U.S. increase the surcharge rates charged to non-customers for the use of their ATMs, it enables us to increase the surcharge rates charged on our ATMs in selected markets and with certain merchant customers as well. We also believe that higher surcharge rates in the market make our surcharge-

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free offerings more attractive to consumers and other financial institutions. In 2009 and 2010, we saw broad increases in surcharge rates in the industry. Over the last few years, we have seen a slowing of surcharge rate increases and expect to see generally modest increases in surcharge rates in the near future.

 

Decrease in Interchange Rates. The interchange rates paid to independent ATM deployers, such as ourselves, are in some cases set by the various EFT networks over which the underlying transactions are routed.   In recent years, several networks in the U.S. have not only reduced the per transaction interchange paid to ATM deployers for transactions routed through their networks, but have also increased the fees they charge ATM deployers to have access to their networks. These access fees are referred to as acquirer fees. As a result of these actions, we have experienced a decrease in the net interchange rate we receive on transactions performed at our ATMs . During the second quarter of 2012, a major global network reduced the interchange it pays to ATM deployers and also increased the acquirer fees paid by ATM deployers. This network action also prompted some financial institutions to shift their transaction volume to lower interchange rate networks, further reducing our interchange revenues. If financial institutions move to take further advantage of lower interchange rates, or if networks reduce the interchange rates they currently pay to ATM deployers or increase their network fees, our future revenues and gross profits would be negatively impacted.   We have taken measures to mitigate our exposure to interchange rate reductions by networks, including, but not limited to: ( i ) where possible, routing transactions through a preferred network such as the Allpoint network, where we have influence o ver the per transaction rate , (ii ) negotiating directly with our financial institution partners for contractual interchange rates on transactions involving their customers ,  ( iii ) developing contractual protection from such rate changes in our agreements with merchants and financial institution partners, and (iv) negotiating pricing directly with certain networks.   As of December 31, 2015, approximately 4 % of our total ATM operating revenues were subject to pricing changes by U.S. networks over which we currently have limited influence or have limited ability to offset against fees we pay to merchants in the event of a rate decrease .

 

Interchange rates in the U.K. are primarily set by LINK, the U.K.’s primary ATM debit network. LINK sets the interchange rates in the U.K. annually using a cost-based methodology that generally incorporates ATM service costs from two years back (i.e., operating costs, interest rates , and other costs from 201 4 are considered for determining the 201 6 interchange rate). In addition to LINK transactions, certain card issuers in the U.K. have issued cards that are not affiliated with the LINK network, and instead carry the Visa or MasterCard network brands.   Transactions conducted on our ATMs from these cards, which currently represent approximately   1.5% of our annual withdrawal transactions in the U.K., receive interchange fees that are set by Visa or MasterCard, respectively.   The interchange rates set by Visa and MasterCard have historically been less than the rates that have been established by LINK.   Accordingly, if any major financial institutions in the U.K. were to decide to leave the LINK network in favor of Visa or MasterCard, such a move could further reduce the interchange revenues that we receive from the related withdrawal transactions conducted on our ATMs in that market. See also Part I. Item 1A. Risk Factors section for additional discussion and development regarding LINK.

 

Recent Events

 

Withdrawal T ransaction and Revenue Trends - U.S .   Many banks are reducing the number of branches they operate to reduce their operating costs, giving rise to a desire for automated banking solutions, such as ATMs. Bank-branding of our ATMs and participation in our surcharge-free network allow financial institutions to rapidly increase and maintain surcharge-free ATM access for their customers at a substantially lower cost than building and maintaining their own ATM network. We also believe there is an opportunity for a large non-bank ATM and financial services kiosk operator such as ourselves, with lower costs and an established operating history, to contract with financial institutions and retailers to manage their ATM networks. Such an outsourcing arrangement could reduce a financial institution’s operating costs while extending its customer service. Furthermore, we believe there are opportunities to provide selected services on an outsourced basis, such as transaction processing services, to other independent owners and operators of ATMs and financial services kiosks. These factors have led to an increase in bank-branding, participation in surcharge-free networks, and managed services arrangements, and we believe that there will be continued growth in such arrangements.

 

In 2014, we received notice from one of our largest branding partners, Chase, of their intention not to renew or extend a number of ATM branding contracts with us. While this action had a moderately negative impact on 2015 results, we do not believe that it will have a long-term adverse impact on our financial results or our ability to continue offering bank-branding solutions to financial institutions. We have already reached agreements with several financial institutions and are

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in advanced discussions with multiple other financial institutions to replace the branding on a significant number of the ATMs previously branded by Chase.

 

Total same-store cash withdrawal transactions conducted on our U.S. ATMs , inclusive of the locations previously branded by Chase, de creased for the year ended December  31,   2015 by 5.7 %, com pared to the prior year. The decline was due to a number of our ATMs having the Chase brand removed during 2015. This debranding activity caused a shift in consumer behavior at some of our ATMs, as ATMs that were previously free-to-use to Chase cardholders, now charge convenience fees to those cardholders. Chase may also charge its customers an out of network fee, making the ATM less attractive for Chase cardholders to use them. As we are able to partially offset the lost branding revenues from Chase with surcharge fees to their customers, our same-store revenues were up approximately   2 %   for the year.

 

Excluding locations that were impacted by the Chase debranding activity, the remainder of our U.S. fleet produced same-store withdrawals that were essentially flat for the year ended December 31, 2015. However, our same-store revenues for our U.S. ATMs were up almost 3% for the year ended December 31, 2015, driven by new branding and re-branding of certain locations, incremental Allpoint related revenues, and rate increases at certain locations.   Excluding ATM locations that have been recently debranded, we expect an approximately flat withdrawal transaction growth rate on a same-store basis on our domestic ATMs in the near-term.

 

In July 2015, we received notification from 7-Eleven   that they do not intend on renewing their ATM placement agreement in the U.S. with us upon expiration of the agreement in July 2017. 7-Eleven announced that it has selected a related entity of 7-Eleven’s parent company as its next ATM provider. 7-Eleven in the U.S. represents the single largest merchant customer in our portfolio, and comprised approximately 18 %   of our pro forma total   revenue for the year ended Decembe r 31 , 2015 .   This percentage is up slightly from the 17.5 % of pro forma total revenues disclosed   for the year ended December 31, 2014 primarily as a result of business divestitures during 2015 and chan ges in currency exchange rates. Our existing agreement with 7-Eleven remains in effect until July 2017. At this time, we do not expect a significant change in our revenues and earnings associated with this contract through July 2017 as a result of this notification. See also   Part  I.   Item  1A. Risk Factors .

 

Withdrawal Transaction and Revenue Trends - U.K.   In recent periods, we have installed more free-to-use ATMs as opposed to surcharging pay-to-use ATMs in the U.K., which is our largest operation in Europe, due in part to our major corporate customer contract additions that tend to operate mostly in high traffic locations where free-to-use ATMs are more prevalent. Although we earn less revenue per cash withdrawal transaction on a free-to-use machine, the significantly higher volume of transactions conducted on free-to-use machines have generally translate d into higher overall revenues. Our same-store withdrawal transactions have been slightly negative , approximately (- 2 % to -4%) , in recent periods in the U.K. However, in the current year, our organic revenue growth rate in the U.K.   exceeded 10% on a constant-currency basis ,   as we have been able to secure several ATM placement agreements with new and existing relationships and we also benefited from a higher interchange rate. Additionally, through our significant operating scale in this market, we have been able to grow our profit margins with the additional revenues from the expanded ATM estate.

 

Europay, Master C ard, Visa   (“EMV”) Standard in the U.S. The EMV standard provides for the security and processing of information contained on microchips embedded in certain debit and credit cards, known as chip cards. This standard has already been adopted in the U.K., Germany, Poland, Mexico, and Canada, and our ATMs in those markets are in compliance. In the U.S., MasterCard has announced plans for a liability shift from the issuers of these cards to the party that has not made the investment in EMV equipment (acquirer) on various dates. Under this liability shift, transactions may still occur on a non-EMV-compliant ATM, but the operator of that ATM would be liable for any fraudulent transactions. MasterCard’s liability shift on International Maestro (MasterCard) transactions occurred in April 2013, and while the majority of our U.S. ATMs are not currently EMV-compliant, to date, we have not experienced and do not expect this liability shift to have a significant impact on our business or results as International Maestro transactions currently comprise less than 1.0% of our U.S. transaction volume. As of the Maestro liability shift date of April 2013, we implemented additional fraud monitoring methods to minimize fraud losses. To date, we have seen minimal fraud losses. MasterCard has also announced that liability shift for its domestic ATM transactions on EMV-issued cards will occur starting in October 2016. In February 2013, Visa announced plans for a liability shift to occur in October 2017 for all transactions types on domestic or international EMV-issued cards. At this time, neither MasterCard nor Visa are requiring mandatory upgrades to ATM equipment; however, all of our recent ATM deployments have been with ATMs that are

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EMV-ready, and we plan to upgrade the significant majority of our U.S. Company-owned fleet in advance of the October 2016 MasterCard liability shift date for domestic transactions. We are currently working through a plan that calls for us to visit the significant majority of our Company-owned ATMs over the next year to enable most of the fleet to be EMV-compliant and also enhance security and enable other features. During 2015, we procured the majority of the ATMs and upgrade kits required to enable EMV on our Company-owned fleet. The remaining capital cost required to enable the majority of our Company-owned ATM fleet to be EMV-compliant has been contemplated in our 2016 capital expenditure plan and is projected to be approximately $10 million to $ 15 million. Due to the significant operational challenges of enabling EMV and other hardware and software enhancements across the majority of our U.S. ATM fleet, which comprises many types and models of ATMs, along with potential compatibility issues with various processing platforms, we could experience increased downtime in our U.S. fleet over the course of the next year. As a result of this potential downtime, we could suffer lost revenues or incur penalties with certain of our contracts. We also may incur increased charges from networks associated with actual or potential ly fraudulent transactions and may also incur additional administrative overhead costs to support the handling of an increased volume of disputed transactions. We also may experience a higher rate of unit count or transaction attrition for our merchant-owned ATMs and ATMs for which we process transactions, as a result of this standard, as we may elect to entirely block certain ATMs or certain transaction types for merchant-owned ATMs that are not EMV-enabled in the future. However, we are currently offering programs to make EMV upgrades attractive to merchants that own their own ATMs. At this time, we do not expect the U.S. EMV standard, being driven by MasterCard- and Visa-announced liability shifts, to have a major impact on our operating results in 2016.

 

Financial Regulatory Reform in the U.K. and the E.U.   In March 2013, the U.K. Treasury department issued a formal recommendation to further regulate the U.K. payments industry, including LINK, the nation’s formal ATM scheme. In October 2013, the U.K. government responded by establishing the new PSR to oversee any payment system operating in the U.K. and its participants. The PSR went live in April 2015 and to date there has been no significant immediate effect on us or our operations. We will continue to monitor and report on any further developments. See also Part I. Item IA Risk Factor s - We operate in a changing and unpredictable regulatory environment, which may harm our business. If we are subject to new legislation regarding the operation of our ATMs, we could be required to make substantial expenditures to comply with that legislation, which may reduce our net income and our profit margins .

 

In July 2013, the European Commission put forward a new draft directive to regulate payment service providers operating in the E.U.  ( PSD2 ). Broadly, PSD2 sought to harmonize rules for the licensing of payment institutions and introduce certain common rules applicable to all payment service providers ( PSPs ) throughout the E.U. PSD2 set out the rights and obligations of payment service users and PSPs together with transparency and security requirements to facilitate safe, efficient payment transactions. PSD2 was finalized on October 8, 2015, carrying forward the exemption related to independent ATM operators that was present in the prior directive.

 

Capital Investments. As was the case in 2015, we anticipate a n elevated level of capital investment   during 2016 to support the EMV requirements discussed above and other factors discussed in greater detail below, but we do not expect that this temporary increased level of capital investment will continue past 2016. We expect capital expenditures in 2016 to be slightly above what we invested during 2015. The higher levels of capital spending in 2015 and 2016 are being driven by the upcoming EMV requirements, coupled with many other factors including: (i) our strategic initiatives to enhance the consumer experience at our ATMs and drive transaction growth , (ii) increased demand from merchants and financial institutions for multi-function ATMs , (iii) competition for new merchant and customer contracts and a significant number of long-term renewals of existing merchant contracts , (iv) certain software and hardware enhancements required to facilitate our strategic initiatives, enhance security , and to continue running supported versions , and (v) other compliance related matters. As a result of the increased capital investments being planned, we are working to optimize our existing assets, but it is possible that as a result of this activity we could incur some asset write-offs or impairments and increased depreciation expense as we seek to optimize our investments . However, we project , in many cases, that the long-term revenue benefits of the investments will drive increased profitability in future periods and allow us to expand our position as the leading ATM operator of non-bank branch locations.

 

Acquisitions. On July 1, 2015, we completed the acquisition of CDS for a total purchase price of $80.6 million. CDS is a leading independent transaction processor for ATM deployers and payment card issuers, providing leading-edge solutions to ATM sales and service organizations and financial institutions.

 

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Divestitures. On July 1, 2015, we completed the divestiture of our retail cash-in-transit operation in the U.K. This business component, which mainly relates to the collection of cash by couriers at retail locations, was originally acquired through the Sunwin acquisition completed in November 2014. As this component was not deemed to be a core part of our on-going strategy, the business was sold to a third party operator. As there were certain conditions associated with the sale, w e   recorded estimated proceeds of £ 2 4.9 million, or approximately $ 3 9   million , on the sale transaction as of December   31,   201 5 , based on the estimated amount of proceeds we ultimately expect to receive . Of this amount, £ 20. 2   million, or approximately $ 31 million, was received during the year and £ 4.7   million, or approximately $ 7   million , was received subsequent to December 31, 2015 . As of December 31, 2015, the net pre-tax gain recognized on this transaction was $ 16.6 million, recognized within the (Gain) loss on disposal of assets line item in the accompanying Consolidated Statement of Operations. We also recorded approximately $ 1 5.3 million in costs associated with the sale of the assets and costs to close certain facilities in the U.K. that were no longer profitable to operate as a result of the sale of the non-core retail cash-in-transit operation. These costs and other costs, including excess operating costs associated with work that was in transition to other facilities during the period, are recorded in the third and fourth quarter of 2015 within the Acquisition and divestiture-related expense line item   in the accompanying Consolidated Statement of Operations.

 

For additional discussion related to the acquisition and divestiture discussions above, see Item 8. Financial Statements and Supplementary Data , Note 2. Acquisitions and Divestitures .

 

Factors Impacting Comparability Between Periods

 

·

Foreign Currency Exchange Rates. Our reported financial results are subject to fluctuations in exchange rates. With relatively minor fluctuations in the average rates between 2011 and 2014, our overall results have not been significantly impacted. However, during the second half of 2014, the U.S. dollar began to significantly appreciate in value relative to the currencies we transact business in our foreign operations. We estimate that the year-over-year strengthening in the U.S. dollar relative to the currencies in the foreign markets in which we operated caused our reported revenues to be lower by approximately $ 38.5 million , or 3.2 % , for the year ended December 31, 2015. As the U.S. dollar has continued to generally gain strength relative to the foreign currencies where we operate our international businesses, we expect that our 2016 results will also be somewhat adversely impacted as well.

 

·

Acquisitions and Divestitures . The results of operations for any acquired entities during a particular year have been included in our consolidated results for that year since the respective dates of acquisition. Similarly, the results of operations for any divested operations have been excluded from our consolidated results since the dates of divestiture. We do not believe the se effects are material in the years presented.  

 

Components of Revenues, Cost of Revenues, and Expenses

 

Revenues

 

We derive our revenues primarily from providing ATM and automated consumer financial services, bank-branding, surcharge-free network offerings, and sales and services of ATM equipment. We currently classify revenues into two primary categories: (i) ATM operating revenues and (ii) ATM product sales and other revenues.

 

ATM Operating Revenues. We present revenues from ATM and automated consumer financial services, branding arrangements, surcharge-free network offerings and managed services in the ATM operating revenues line item in our Consolidated Statements of Operations. These revenues include the fees we earn per transaction on our ATMs, fees we generate from bank-branding arrangements and our surcharge-free network offerings, fees we earn on managed services arrangements, and fees earned from providing certain ATM management services. Our revenues from ATM services have increased in recent years due to the acquisitions we have completed, by unit expansion with our customer base, acquisition of new merchant relationships, expansion of our bank-branding programs, the growth of our Allpoint network, and fee increases at certain locations, and introduction of new services, such as Dynamic Currency Conversion (“DCC”).

 

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ATM operating revenues primarily consist of the four following components: (i) surcharge revenue, (ii) interchange revenue, (iii) branding and surcharge-free network revenue, and (iv) managed services and processing revenue.

 

·

Surcharge revenue. A surcharge fee represents a convenience fee paid by the cardholder for making a cash withdrawal from an ATM. Surcharge fees often vary by the type of arrangement under which we place our ATMs and can vary widely based on the location of the ATM and the nature of the contracts negotiated with our merchants. Surcharge fees per surcharge-bearing transaction will vary depending upon the competitive landscape for surcharge fees at newly-deployed ATMs, the roll-out of additional branding arrangements, and future negotiations with existing merchant partners. For those ATMs that we own or operate that participate in surcharge-free networks, we do not receive surcharge fees related to withdrawal transactions from cardholders who are participants of such networks; rather we receive interchange and branding or surcharge-free network revenues, which are further discussed below. For certain ATMs owned and primarily operated by the merchant, we do not receive any portion of the surcharge but rather the entire fee is earned by the merchant. In the U.K., ATM operators must either operate ATMs on a free-to-use (surcharge-free) or on a pay-to-use (surcharging) basis. On free-to-use ATMs in the U.K., we only earn interchange revenue on withdrawal and other transactions, such as balance inquiries, that are paid to us by the customer’s financial institution through the ATM network in the U.K. On our pay-to-use ATMs, we only earn a surcharge fee on withdrawal transactions and no interchange is paid to us by the cardholder’s financial institution, except for non-cash withdrawal transactions such as balance inquiries for which interchange is paid to us by the cardholder’s financial institution. In Germany, we collect a surcharge fee on withdrawal transactions but generally do not receive interchange revenue. In Mexico, domestic surcharge fees are generally similar to those charged in the U.S., except for machines that dispense U.S. dollars, where we charge an additional foreign currency convenience fee. Finally, in Canada, surcharge fees are comparable to those charged in the U.S., and we also earn an interchange fee that is paid to us by the cardholder’s financial institution.

 

·

Interchange revenue. An interchange fee is a fee paid by the cardholder’s financial institution for its customer’s use of an ATM owned by another operator and for the EFT network charges to transmit data between the ATM and the cardholder’s financial institution. We typically receive a majority of the interchange fee paid by the cardholder’s financial institution, with the remaining portion being retained by the EFT network. In the U.S., interchange fees are earned not only on cash withdrawal transactions but on any ATM transaction, including balance inquiries, transfers, and surcharge-free transactions. In the U.K., interchange fees are earned on all ATM transactions other than pay-to-use cash withdrawals. LINK sets the interchange rates for most ATM transactions in the U.K. annually by using a cost-based methodology that generally incorporates ATM service costs from two years back (i.e., operating costs, interest rates, and other costs from 201 4 are considered for determining the 201 6 interchange rate). In Germany, our primary revenue source is surcharge fees paid by ATM users. Currently, we do not receive interchange revenue from domestic transactions in Mexico due to rules promulgated by the Central Bank of Mexico, which became effective in May 2010.   In Canada, interchang e fees are determined by Interac, the interbank network in Canada, and have remained at a constant rate over the past few years.

 

·

Bank-b randing and surcharge-free network revenue. Under a bank-branding agreement, ATMs that are owned and operated by us are branded with the logo of the branding financial institution. Cardholders of the branding institution can use those machines without paying a surcharge, and in exchange for the value associated with displaying the brand and providing surcharge-free access to their cardholders, the financial institution typically pays us a monthly per-ATM fee. Historically, this type of branding arrangement has resulted in an increase in transaction levels at branded ATMs, as existing customers continue to use the ATMs and cardholders of the branding financial institution are attracted by the service. Additionally, although we forego the surcharge fee on transactions by the branding institution’s customers, we continue to earn interchange fees on those transactions along with the monthly branding fee, and sometimes enjoy an increase in surcharge-bearing transactions from users who are not customers of the branding institution as a result of having a financial institution brand on the ATMs. In some instances, we have branded an ATM with more than one financial institution. Doing this has allowed us to serve more cardholders on a surcharge-free basis, and in doing so drive more traffic to our retail sites.   Based on these factors, we believe a branding arrangement can substantially increase the profitability of an ATM versus operating the same machine without a brand. Fees paid for branding vary widely within our industry, as well as within our own operations, depending on the ATM location, financial institutions operating in the area,

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and other factors. Regardless, we typically set branding fees at levels that more than offset our anticipated lost surcharge revenue.

 

Under the Allpoint network, financial institutions that are members of the network pay us either a fixed monthly fee per cardholder or a set fee per transaction in exchange for us providing their cardholders with surcharge-free access to many of our ATMs. These fees are meant to compensate us for the loss of surcharge revenues. Although we forego surcharge revenues on those transactions, we do continue to earn interchange revenues at a per transaction rate that is usually set by Allpoint. Allpoint also works with financial institutions that manage stored-value debit card programs on behalf of themselves, corporate entities and governmental agencies, including general purpose, payroll, and EBT cards. Under these programs, the issuing financial institutions pay Allpoint either a per transaction fee or a fee per issued stored-value card in return for allowing the users of those cards surcharge-free access to the Allpoint network. In addition to Allpoint, the ATMs that we operate in 7-Eleven stores, as well as select other merchant locations, participate in the Co-op network, the nation’s largest surcharge-free network devoted exclusively to credit unions.

 

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Managed services revenue. Under a managed service arrangement, we offer ATM-related services depending on the needs of our customers, including monitoring, maintenance, cash management, cash delivery, customer service, transaction processing, and other services. Our customers, who include retailers and financial institutions,   may also at times request that we own the ATM fleets. Under a managed services arrangement, all of the transaction-based surcharge and interchange fees are earned by our customer, whereas we typically receive a fixed management fee per ATM and/or a set fee per transaction for the services we provide.   This arrangement allows our customers to have greater flexibility to control the profitability per ATM by managing the surcharge fee levels.   Currently, we offer managed services in the U.S., the U.K., and Canada, and plan to grow this arrangement both domestically and internationally in the future.  

 

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Other revenue .   In addition to the above, we also earn ATM operating revenues from the provision of other financial services transactions at certain financial services kiosks that, in addition to standard ATM services, offer bill payment, check cashing, remote deposit capture, and money transfer services.

 

The following table presents the components of our total ATM operating revenues for the years ended December 31, 2015, 2014, and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2013

Surcharge revenue

 

40.9

%