Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-32622
GLOBAL CASH ACCESS HOLDINGS, INC.
(Exact name of Registrant as specified in our charter)
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| Delaware
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20-0723270 |
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(I.R.S. Employer Identification Number) |
3525 East Post Road, Suite 120, Las Vegas, Nevada 89120
(Address of principal executive offices including Zip code)
(800) 833-7110
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class
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Name of Each Exchange on Which Registered |
| Common Stock, $0.001 par value per share
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New York Stock Exchange |
Securities registered pursuant to Section 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 Securities Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
YES o NO þ
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 þ NO o
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer,” ” large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Non-accelerated filer o
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
As of June 30, 2007, the aggregate market value of the registrant’s common stock held by
non-affiliates was approximately $735.5 million.
There were 82,981,212 shares of the registrant’s common stock issued and outstanding as of the
close of business on March 12, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders
to be held on May 1, 2008 are incorporated by reference into this Annual Report on Form 10-K in
response to Part III, Items 10, 11, 12, 13, and 14. Except as expressly incorporated by reference,
the registrant’s Proxy Statement shall not be deemed to be a part of this Annual Report on Form
10-K.
GLOBAL CASH ACCESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
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PART I
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities
and Exchange Act of 1934 (the “Exchange Act”). All statements in this Annual Report on Form 10-K
other than statements of historical fact are “forward-looking statements” for purposes of these
provisions, including any statements of the plans and objectives for future operations and any
statement of assumptions underlying any of the foregoing. Statements that include the use of
terminology such as “anticipate,” “contemplate,” “may,” “intend,” “will,” “expect,” “believe,”
“plan,” “estimate,” “seek,” “will continue to be,” “potential,” or “continue,” or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations or intentions are
forward-looking statements.
Forward-looking statements include, but are not limited to, statements regarding the following
matters: in Item 1, (1) the declining usage of checks relative to other forms of payment; (2) our
efforts to obtain card association acceptance of biometric facial recognition as an approved
transaction completion protocol to enable the completion of credit card cash advance and POS debit
card transactions at our ACMs without the assistance of a cashier and the potential of our ACM’s to
reduce transaction times, to improve the customer experience or to reduce a gaming establishment’s
cashier labor costs; (3) our belief that gaming establishments find our patron marketing services
helpful as they try to attract new patrons and to retain existing patrons; (4) our continuing to
build existing patron profiles and add new patron profiles to our patron transaction database as
the applicable transaction volume increases; (5) our plan to submit EDITH for approval in other
gaming jurisdictions in the future; (6) our continued efforts to comply with any and all gaming
regulatory authorities, requests, inquiries or applications, including but not limited to
determinations of suitability, investigations, if any, and disclosures as to beneficial ownership;
(7) our belief that the ability to introduce and respond to technological innovation in the gaming
industry will be an increasingly important qualification for the future success of any provider of
cash access services; (8) our belief that almost all gaming establishments outsource their cash
access service to third-party providers; (9) our continuing to implement policies and procedures as
well as adapt our business practices to comply with the Fair Credit Reporting Act, the Fair and
Accurate Credit Transactions Act of 2003, similar state credit reporting laws and regulations, the
Gramm-Leach-Bliley Act and similar state privacy laws and regulations; (10) our engagement in
efforts to collect on our QuikCredit Service, dishonored checks purchased by Central Credit
pursuant to our check warranty services, returns from customer payments on their account with the
Arriva Card, and chargebacks on our cash advance products; (11) our expectation to become subject
to additional gaming regulations and other laws in the jurisdictions into which we expand our
operations; in Item 1A, (12) our expectation that competition in the market for cash access
products and related services will continue to intensify;
(13) our belief that we will incur $2.9
million in costs to resolve commission calculation issues for relevant customers; (14) our
continued compliance with the PCI Data Security Standard; (15) our expectation to pay a
significantly lower amount in United States federal income taxes than we provide for in our income
statements due to recording $247.0 million in deferred taxes; (16) our expectation to grow our
business through the introduction of new products and services by continuing to enter into joint
development projects; (17) our intention to provide our services in international markets in which
we have not previously operated and have no experience as to chargebacks; (18) our expectation that
a substantial portion of our future growth will result from the general expansion of the gaming
industry; in Item 2, (19) our belief that our facilities are adequate for our business as currently
conducted, in Item 3, (20) our belief that resolution of legal disputes and proceedings arising
from the ordinary course of general business activities will not have a material adverse effect on
our consolidated financial position, results of operations or cash flows; in Item 5, (21) our
intention to retain all our earnings to finance the growth and development of our business and our
anticipation that we will not pay any dividends on our common stock in the foreseeable future; in
Item 7, (22) our recognition and enjoyment of deferred tax assets and liabilities from the expected
tax consequences of differences between the book basis and tax basis of our assets and liabilities
in connection with our conversion to a taxable entity and the pro forma expected effect of such
asset; (23) our expectation that the increase in the average amount disbursed per cash advance
transaction is a trend that will continue; (24) our expectation that the increase in the number of
transactions completed at our ATMs and the increase in the average surcharge assessed to patrons is
a trend that will continue; (25) our expectation that commissions will increase as a percentage of
revenue as new contracts are signed or existing contracts are renewed; (26) our expectation that
revenue in 2008, excluding the contemplated acquisition of Certegy Gaming Services, will continue
to increase, although at rates significantly below those in 2007; (27) our expectation that a
decline in gaming patronage and revenues will continue in 2008; (28) our expectation that
commissions and interchange will continue to increase, and that in 2008 cost of revenues (exclusive
of depreciation and amortization) will increase at a rate faster than revenues; (29) our
expectation that operating expenses will decrease in 2008 as compared to those levels experienced
in 2007; (30) our expectation that depreciation and amortization will not vary significantly in
2008 from those amounts incurred in 2007; (31) our expectation that, assuming a constant level of
LIBOR, interest income (expense), net will decline in 2008 as a result of
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lower anticipated levels
of outstanding indebtedness; (32) our anticipated effective tax rate for 2008 and our belief that pretax income in 2008 will be
higher than it was in 2007; (33) our expectation that IFT will record a loss in 2008; (34) our
belief that our estimates and assumptions in preparing our consolidated financial statements in
accordance with critical accounting policies are reasonable; (35) our belief that it is more
likely than not that we will be able to utilize our deferred tax assets; (36) our expectation that
this will result in an aggregate of $197.0 million in cash savings over the remaining 12 year life
of the deferred tax asset related to our conversion to a corporation; (37) our belief that
borrowings available under our senior secured credit facilities together with our anticipated
operating cash flows will be adequate to meet our anticipated future requirements for working
capital, capital expenditures and scheduled interest payments on our debt through the next
12 months and the foreseeable future; (38) our belief that replacement costs of equipment,
furniture and leasehold improvements will not materially affect our operations; in Item 7A, (39)
our expectation to continue to pay interest based on LIBOR of various maturities; in Item 8, (40)
our expected amortization of the acquisition cost of the “3-in-1 rollover” patent over its
remaining legal life of 11 years; (41) our intent to reinvest the earnings of our foreign
subsidiaries into such subsidiaries; (42) our use of significant estimates in preparing the
consolidated financial statements including the estimated useful lives for depreciable and
amortizable assets, estimated cash flows in assessing the recoverability of long-lived assets, and
estimated liabilities for warranty expense, chargebacks, litigation, claims and assessments; (43)
our use of estimates in determining the fair value of options granted, including expected option
lives and employee option exercise behavior, expected volatility and expected dividend yield and
our expectation that the cost of unrecognized compensation expense with respect to stock options
will be recognized on a straight-line basis over a weighted average period of 2.6 years; (44) our
expectation regarding the vesting of restricted shares and that the cost of unrecognized
compensation expense with respect to the restricted stock will be recognized on a straight-line
basis over a weighted average period of 2.8 years; (45) our expectation to defend the Canadian GST
rebate claim through the assessment process, the appeals process and then through court, if
necessary; (46) our expectation that all issues raised by card associations will be resolved in the
normal course of business and that related changes to transaction processing, if any, will not
result in a material adverse impact to our financial results; (47) our belief that the Company’s
income tax filing position and deductions will be sustained on audit and we do not anticipate any
adjustments that will result in a material change in our financial position; (48) our expected
future use of net operating losses and foreign tax credits to offset future taxable income; (49)
our expectation to consummate the Stock Purchase Agreement with FIS and CGS in April of 2008; and
(50) our intention to promptly disclose to the public, to the extent required by law, any
amendments to, or waivers from, any provision of the Code of Conduct by posting the relevant
material on our website in accordance with the SEC rules.
These forward-looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from those projected or assumed in such forward-looking
statements, including, without limitation, (1) changing consumer preferences with respect to the
choice of payment methods and the possibility that consumers find the usage of checks increasingly
desirable in the future; (2) card association resistance to accepting new technologies, the failure
of biometric facial recognition to accurately identify patrons, patron unfamiliarity with ACMs or
patron preferences to complete transactions in person at a cashier; (3) gaming establishments
finding our patron marketing services as unnecessary, costly or less desirable than alternative
methods of attracting new patrons and retaining valued patrons; (4) changes to applicable privacy
laws and regulations or patron opt-out elections that limit the collection of data that is
necessary to build patron profiles and add new patron profiles; (5)unduly burdensome obstacles to
obtaining regulatory approval for our EDITH product; (6) unexpected difficulties in achieving
approvals from gaming regulatory authorities or satisfying inquiries by gaming regulatory
authorities, through no fault of our own; (7) competitive pressures such as pricing, availability
or breadth of offerings causing technological innovation to become a decreasingly important
qualification for the future success of any provider of cash access services; (8) gaming
establishments replacing their outsourced cash access services with in-house cash access services
to generate additional revenue, exert greater control over their operations or increase their
autonomy; (9) our establishment of policies, procedures and business practices that fully comply
with the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act of 2003, similar
state credit reporting laws and regulations, the Gramm-Leach-Bliley Act and similar state privacy
laws and regulations, or our discontinuation of product or service offerings that require
compliance with these laws and regulations; (10) our potential outsourcing of all collection
efforts or our decision not to pursue collection efforts in any particular instance for business
development, cost containment or other reasons; (11) our inability to expand our operations into
jurisdictions in which we do not currently operate for competitive, regulatory or operational
limitations; (12) unexpected decline in the growth of the gaming market; (13) inability to
accurately predict the costs associated with resolving outstanding commission calculation issues
with relevant customers, (14) unexpected changes in PCI Data Security Standard compliance
requirements; (15) inability to accurately predict federal income tax expenses related to our
recordation of deferred taxes; (16) unexpected complications or disputes related to our joint
development projects; (17) inability to accurately predict our success in integrating into
international markets; (18) stagnant growth in the gaming industry; (19) unexpected growth
necessitating the need to enter into additional facility leases; (20) uncertainties associated with
and our limited ability to control the litigation process; (21) an unanticipated accumulation of
cash or stockholder pressure to declare or pay cash dividends; (22) unanticipated changes to
applicable tax rates or laws or changes in our tax position, including changes in the amortization
of
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our tax asset as a result of an audit or otherwise; (23) a change in patron behavior that results in smaller but more frequent cash advance transactions; (24) an increase
in the availability and usage of competitive ATMs nearby gaming establishments that displaces use
of our ATMs; (25) our ability to offer gaming establishments other incentives to enter into new
contracts or renew existing contracts without increasing commission rates; (26) inability to
accurately predict revenues for 2008; (27) inability to accurately forecast the gaming patronage in
2008; (28) our inability to control interchange rates and our ability to offer gaming
establishments incentives other than increased commission rates; (29) inability to accurately
predict the rate at which our operating expenses will decrease in 2008 (30) unanticipated cost
savings or larger than anticipated revenue increases due to market expansion, competitive success
or otherwise; (31) our inability to control LIBOR, our failure to repay existing indebtedness or
unanticipated incurrence of additional indebtedness; (32) changes to tax laws or changes in our tax
position, unanticipated increases in operating expenses as a result of litigation, changes in labor
rates or otherwise or a decline in revenue due to competitive forces, in each case resulting in
lower than expected pretax income in 2007; (33) an unanticipated realization of revenue by IFT as a
result of product introduction into the market, recoveries in litigation to enforce intellectual
property rights, or otherwise; (34) unanticipated changes in accounting guidance and inaccuracies
of our assumptions (35) changes to tax laws or changes in our tax position, as a result of an
audit or otherwise, including changes in the amortization of our tax asset as a result of an audit
or otherwise; (36) changes to tax laws or changes in our tax position, as a result of an audit or
otherwise, including changes in the amortization of our tax asset as a result of an audit or
otherwise; (37) unanticipated needs for working capital and capital expenditures, our failure to
satisfy conditions precedent to our ability to borrower under our senior secured credit facilities
or an unanticipated reduction in cash flow from operations as a result of competitive pressures or
otherwise; (38) the unanticipated loss of or damage to our equipment or the need to replace our
equipment as a result of unanticipated obsolescence, regulatory changes or otherwise; (39)
fluctuation in interest rates generally and LIBOR specifically; (40) unanticipated invalidation of
or obsolescence of the “3-in-1 rollover” patent or our potential disposition of the patent prior to
the expiration of its legal life; (41) our need to repatriate the cash earnings of our foreign
subsidiaries to satisfy capital requirements of our operations in the United States; (42) the
unanticipated obsolescence of certain assets due to technological innovation or otherwise and the
inherent uncertainties in estimating cash flows and liabilities from future operations; (43) our
inability to predict employee turnover, control employee option exercise behavior, and predict
stock price volatility, or the unanticipated payment of dividends; (44) our inability to predict
employee turnover that affects the vesting of restricted stock; (45) the possibility that we
abandon our pursuit of the GST rebate claim due to doubts as to the likelihood of success or to
avoid costs; (46) our inability to predict changes in card association regulations and the
possibility that unanticipated changes materially impair our operations; (47) unexpected changes to
corporate tax regulations; (48) changes to tax laws or changes in our tax position or our failure
to generate income against which net operating losses or foreign tax credits can be applied; (49)
unexpected delays in consummating the Stock Purchase Agreement with FIS and CGS;) and (50) a change
in our disclosure policy relating to amendments to or waivers of our Code of Conduct to utilize an
alternative method of disclosure that is permitted under applicable law.
Additional factors that could cause actual results to differ materially are included under the
heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. All forward-looking
statements and risk factors included in this document are made as of the date hereof, based on
information available to us as of the date hereof, and we assume no obligation to update any
forward-looking statement or risk factor. You should consult the risk factors listed from time to
time in our Reports on Form 10-Q.
ITEM 1. BUSINESS
Global Cash Access Holdings, Inc. (“the Company” or “Holdings”) is a holding company, the
principal asset of which is the capital stock of Global Cash Access, Inc. (“GCA”). GCA directly or
indirectly owns all of the assets and either all or a majority of the equity interests of the
subsidiaries that operate our business. These subsidiaries include Central Credit, LLC (“Central”
or “Central Credit”), Global Cash Access (Canada) Inc. (“GCA Canada”) (formerly known as CashCall
Systems Inc.), Global Cash Access (BVI) Inc. (“BVI”), Arriva Card, Inc. (“Arriva”), Global Cash
Access Switzerland A.G. (“GCA Switzerland”), Innovative Funds Transfer, LLC (“IFT”) (formerly known
as QuikPlay, LLC), Global Cash Access (UK) Ltd. (“GCA UK”), Global Cash Access (HK) Ltd. (“GCA HK”)
and GCA (Macau) S.A. (“GCA Macau”). IFT is a joint venture that is 60% owned by GCA and 40% owned
by International Game Technology (“IGT”). Unless otherwise indicated, the terms “we,” “us,” “our,”
“our company” and “our business” refer to Global Cash Access Holdings, Inc. together with its
consolidated subsidiaries.
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Overview
We are a provider of cash access products and related services to the gaming industry in the
United States and several international markets. Our products and services provide gaming
establishment patrons access to cash through a variety of methods, including Automated Teller
Machine (“ATM”) cash withdrawals, credit card cash advances, point-of-sale (“POS”) debit
card transactions, check verification and warranty services and money transfers. In addition,
we also provide products and services that improve credit decision-making, automate cashier
operations and enhance patron marketing activities for gaming establishments. Commencing in the
third quarter of 2006, we began offering, through Arriva, the Arriva Card, a private-label
revolving credit card aimed at consumers who perform cash advance transactions in gaming
establishments. In February 2008, we announced that as part of our strategy of focusing on our
core electronic payments business, we will discontinue offering the Arriva Card.
We provide cash access products and related services at gaming establishments worldwide. In
general, our contracts with gaming establishments are exclusive and range in duration from one to
three years.
In 2007, we processed over 90.5 million transactions, which resulted in approximately $21.3
billion in cash being disbursed to gaming patrons. For the year ended December 31, 2007, we
generated revenues and operating income of $600.9 million and $72.7 million, respectively.
We began our operations in July 1998 as a joint venture limited liability company among M&C
International, entities affiliated with Bank of America, N.A. (“Bank of America”) and First Data
Corporation (“First Data”). In September 2000, Bank of America sold its entire ownership interest
in us to M&C International and First Data. In March 2004, all of our outstanding ownership
interests were contributed to a holding company and all of First Data’s ownership interest in us
was redeemed. Simultaneously, Bank of America reacquired an ownership interest in us (the
“Recapitalization”). In May 2004, M&C International sold a portion of its ownership interest to a
number of private equity investors, including entities affiliated with Summit Partners, and we
converted from a limited liability company to a corporation (the “Private Equity Restructuring”).
In September 2005, we completed an initial public offering of our common stock. In 2007, M&C
International distributed its holdings of our common stock to its two principals, Karim Maskatiya
and Robert Cucinotta.
Our principal executive offices are located at 3525 East Post Road, Suite 120, Las Vegas,
Nevada 89120. Our telephone number is (800) 833-7110. Our Internet web site address is
http://www.globalcashaccess.com. The information on our web site is not part of this Annual Report
on Form 10-K or our other filings with the United States Securities and Exchange Commission
(“SEC”).
Our Business
Our cash access products and services enable three primary types of electronic payment
transactions: ATM cash withdrawals, credit card cash advances and POS debit card transactions. As
of December 31, 2007, patrons could complete any of these three transactions at any of our Casino
Cash Plus 3-in-1 ATMs, Automated Cashier Machines (“ACMs”) or 3-in-1 Enabled redemption devices.
In addition, patrons can complete credit card cash advances and POS debit card transactions at any
of our QuikCash kiosks, all of which we own. We also provide check verification and warranty
services to gaming establishments that cash patron checks. Commencing in the third quarter of
2006, through Arriva, we began offering the Arriva Card, a private-label revolving credit card
aimed at consumers who perform cash advance transactions in gaming establishments. In February
2008, we announced that as part of our strategy of focusing on our core electronic payments
business, we will discontinue offering the Arriva Card.
ATM Cash Withdrawals
ATM cash withdrawal transactions represent the largest category of electronic payment
transactions that we process, as measured by dollar and transaction volume. In an ATM cash
withdrawal, a patron directly accesses funds from a device enabled with our ATM service by either
using an ATM card to withdraw funds from his or her bank account or using a credit card to access
his or her line of credit; in either event the patron must use the Personal Identification Number
(“PIN”) associated with such card. Our processor then routes the transaction request through an
electronic funds transfer (“EFT”) network to the patron’s bank or issuer. Depending upon a number
of factors, including the patron’s account balance or credit limit and daily withdrawal limit
(which is usually $300 to $500 during a 24-hour period and is determined by the patron’s bank or
issuer), the bank or issuer will either decline or authorize the transaction. If the transaction
is authorized, then the ATM-enabled device dispenses the cash to the customer. For a transaction
using an ATM card, the patron’s bank account is debited by the amount of cash disbursed plus a
service fee that we assess the patron for the use of ATM service. For a transaction using a credit
card, the patron’s credit card account is charged by the amount of cash disbursed plus a service
fee that we assess the patron for the use of our ATM service. The service fee is currently a fixed
dollar amount and not a percentage of the transaction size. In most circumstances we share the
majority of this service fee with our gaming establishment customer for the right to operate on its
premises. We also receive a fee, we refer to as reverse interchange, from the patron’s bank for
accommodating the bank’s customer.
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Credit Card Cash Advances and POS Debit Card Transactions
Patrons can also obtain credit card cash advances and POS debit card transactions using many
of our devices. A patron’s credit card cash advance limit is usually a sub-limit of the total
credit line and is set by the card-issuing bank. These limits vary significantly and can be larger
or smaller than the POS debit limit. A credit card cash advance transaction obligates the patron
to repay the issuing bank over time on terms that are preset by the cardholder agreement. A
patron’s POS debit card allows him or her to make cash withdrawals at the point of sale in an
amount equal to the lesser of the amount of funds in his or her account or a daily limit that is
generally five to ten times as large as the patron’s daily ATM limit. A POS debit card transaction
immediately reduces the balance in the patron’s account.
When a patron requests a credit card cash advance or POS debit card transaction, our processor
routes the transaction request through one of the card associations (e.g., VISA or MasterCard) or
EFT networks (e.g., Star, Interlink or Maestro) to the issuing bank. Depending upon several
factors, such as the available credit or bank account balance, the transaction is either authorized
or declined by the issuing bank. If authorized, the patron’s bank account is debited or their
credit card balance is increased by an amount equal to the funds requested plus a service fee that
we charge the patron. The service fee is a percentage of the transaction size. If the transaction
is authorized, our machines inform the patron that the transaction has been approved. If the
transaction involves one of the card associations that have permitted us to complete transactions
at an ACM, cash is dispensed. Otherwise, our machines instruct the patron to proceed to the gaming
establishment’s cashier to complete the transaction, because credit card cash advances and POS
debit card transactions involving other card associations or that are not undertaken at an ACM must
currently be completed in face-to-face environments and a unique signature must be received in
order to comply with rules of those card associations. Once at the cashier, the patron
acknowledges payment of the fee and authorizes the transaction by placing his or her signature on a
money order issued by our money order provider and made payable to the gaming establishment in an
amount equal to the face amount and receives the face amount in cash. We remit the face amount to
our money order provider and retain the fee. The gaming establishment deposits the money order in
its own bank, and after a period of two to three days, the money order is presented to our money
order provider for payment. In general, we pay the gaming establishment a portion of the service
fee as a commission for the right to operate on their premises, although this payment as percentage
of the fee is generally smaller for credit card cash advances and POS debit card transactions than
for ATM withdrawals. We do not pay commissions in Switzerland and Belgium. In addition, we are
obligated to pay interchange fees to the issuing bank and processing costs related to the
electronic payment transaction.
Check Verification and Warranty Services
Although the usage of checks relative to other forms of payment is declining, patrons still
cash checks at gaming establishments to fund their gaming play. When a patron presents a check at
the cashier, the gaming establishment can (a) accept or deny the transaction based on its own
customer information and at its own risk; (b) obtain third-party verification information about the
check writer and the check to manage its risk; or (c) obtain a warranty on payment of the check
which entitles the gaming establishment to reimbursement of the full face amount of the check if it
is dishonored.
There are a number of check verification services. One such service is our Central Credit
database, which is used primarily by gaming establishments to make credit issuing decisions.
Central Credit maintains information on the check cashing history of many patrons. In general, we
do not charge separately for check verification queries to our Central Credit database on a per
transaction basis, but rather charge a fixed monthly subscription fee.
If a gaming establishment chooses to have a check warranted, it sends a request to a check
warranty service provider, asking whether it will warrant the check. If the check warranty service
provider warrants payment on the check, the gaming establishment is obligated to pay a fee for that
service. The gaming establishment then pays the patron the face amount and deposits the check. If
the check is dishonored by the patron’s bank, the gaming establishment invokes the warranty, and
the check warranty service provider purchases the check from the gaming establishment for the face
amount and then pursues collection activities on its own.
We currently provide check warranty services on two platforms: TRS Recovery Services
(formerly known as TeleCheck Recovery Services, Inc.) (“TeleCheck”) and Central Credit Check
Warranty. Our Central Credit Check Warranty product is currently the larger of the two platforms
as measured by face amount of checks warranted. Under our agreement with TeleCheck, we receive all
of the check warranty revenue and we pay a portion of TeleCheck’s operating expenses and warranty
expenses. Operating expenses are fixed at a percentage of check warranty revenues. Warranty
expenses are defined as any amounts paid by TeleCheck to gaming establishments to purchase
dishonored checks. Our agreement further provides that TeleCheck will pay us
the actual collections realized within 120 days after a check is purchased, subject to the
obligation to pay us a guaranteed minimum amount of dishonored checks. In our Central Credit Check
Warranty product, we receive all of the warranty revenue and incur all of the warranty risk,
collection responsibility and operating expenses. We use and pay certain third party services to
assist us in the warranty decision and the collection processes.
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Central Credit
In addition to the three primary types of electronic payment transactions described above, a
small number of gaming establishment patrons choose to access funds through credit extended by the
gaming establishment. Central Credit is a gaming patron credit bureau specifically designed for
the gaming industry to allow gaming establishments to improve their credit-granting decisions. Our
Central Credit database contains gaming patron credit history and transaction data on gaming
patrons. Our gaming credit reports are comprised of information recorded from patron credit
histories at hundreds of gaming establishments. We provide such information to gaming
establishments, who use that data, among other things, to determine if or how much credit they will
grant credit to a patron. At a gaming establishment’s request, we can augment the information
provided in our gaming credit reports with traditional credit reports or bank ratings provided by
third-party consumer credit bureaus and bank reporting agencies. We charge our customers for
access to gaming patron credit reports on a monthly basis; our fees are a combination of a fixed
minimum fee plus per-transaction charges for certain requests.
Other
We also market money transfer services that allow patrons to receive money transfers at gaming
establishments and provide information services that automate cashier operations and enhance patron
marketing activities. In the third quarter of 2006, we launched the Arriva Card, a credit card for
consumers who perform cash advance transactions in gaming establishments. CIT Bank is the issuer
of the card and provides the credit to the customers, while Arriva is the administrator and
servicer of Arriva Card accounts. As servicer, we earn interest and other fees from customers
related to the use of their Arriva Cards. In February 2008, we announced that as part of our
strategy of focusing on our core electronic payments business, we will discontinue offering the
Arriva Card.
Our Products and Services
Our customer solutions consist of cash access products and services, information services,
cashless gaming products and credit card servicing.
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Cashless Gaming Products |
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• Casino Cash Plus 3-in-1 ATM
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• Central Credit
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• 3-in-1 Enabled Redemption Devices
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• Arriva Card |
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• QuikCash
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• QuikCash Plus Web
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• EDITH |
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• ACM
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• QuikReports |
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• Check verification and warranty
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• Money transfers |
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Cash Access Products and Services
We provide gaming establishments with the ability to enable their patrons to access cash
through a variety of products and services.
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Casino Cash Plus 3-in-1 ATM is an unmanned, cash-dispensing machine that offers patrons a
quick way to access cash through ATM cash withdrawals, POS debit card transactions and credit card
cash advances using our patented “3-in-1 rollover” functionality. Our patented “3-in-1 rollover”
functionality allows a gaming patron to easily convert an unsuccessful ATM cash withdrawal into a
POS debit card transaction or a credit card cash advance. When a patron is denied a standard ATM
transaction, our “3-in-1 rollover” functionality automatically provides the option of obtaining
funds via a POS debit card transaction or a credit card cash advance. For authorized ATM
transactions, the Casino Cash Plus 3-in-1 ATM dispenses cash to the patron. For successful POS
debit card transactions and credit card cash advances, once the transaction is authorized, the
Casino Cash Plus 3-in-1 ATM instructs the patron to proceed to the cashier who completes the
transaction by undertaking certain procedures in accordance with the rules of the major card
associations, printing the money order, and dispensing cash to the patron. In addition to our own
ATM, we have a strategic alliance with Capital One, N.A. (“Capital One”), pursuant to which we have
incorporated our “3-in-1 rollover” functionality into Capital One ATMs and redemption devices that
are located in gaming establishments. As of December 31, 2007 we had incorporated our “3-in-1
rollover” functionality into 166 Capital One ATMs and redemption devices that are located in gaming
establishments.
QuikCash is the brand name of our stand-alone, non-ATM cash advance kiosks for the gaming
industry. Our QuikCash kiosks are customer-activated terminals that provide patrons with access to
credit card cash advances and POS debit card transactions. Once the transaction is authorized, the
patron is instructed to proceed to the cashier who undertakes certain procedures in accordance with
the rules of the major card associations, prints the money order, and dispenses cash to the patron.
Automated Cashier Machine (“ACM”) is an unmanned, cash-dispensing “virtual cashier” which was
designed to provide gaming establishment patrons with credit card cash advances, POS debit card
transactions, and ATM cash withdrawals as well as check cashing services without the need to visit
the cashier after the initial “registration transaction.” Our ACMs provide gaming patrons the same
cash access features as our Casino Cash Plus 3-in-1 ATMs. After an initial face-to-face enrollment
transaction performed with the assistance of a gaming establishment’s cashier, our ACMs use
biometric facial recognition technology, as a surrogate for face-to-face interaction with the
cashier, to verify the patron’s identity. ATM transactions, check cashing transactions, POS debit
card transactions and credit card cash advance involving one of the major card associations can be
completed at the ACM without the assistance of a cashier. We assume chargeback liability for any
credit card cash advance transaction in which we do not obtain a contemporaneous cardholder
signature, which may result in increased chargeback liability. The use of biometric facial
recognition is not an accepted surrogate for face-to-face interaction by other major card
associations. We have been working with the card associations to achieve broader acceptance of
biometric facial recognition as an approved transaction completion protocol.
Check verification and warranty services allow gaming establishments to manage or eliminate
risk on patron checks that they cash. A gaming establishment can query our Central Credit database
to review the check cashing history of a gaming establishment patron before deciding whether to
cash the patron’s check. If the gaming establishment wants additional protection against loss, it
can seek a warranty on payment of the check. We have an exclusive relationship with TeleCheck to
market check warranty services to gaming establishments. As an alternative to TeleCheck’s check
warranty service, we have developed our own Central Credit Check Warranty service that is based
upon our Central Credit database, our proprietary patron transaction database, third-party risk
analytics and actuarial assumptions.
Money transfer services are provided through a contractual relationship with Western Union
Financial Services, Inc. (“Western Union”). We are the worldwide exclusive marketer to the gaming
industry of Western Union’s electronic and paper-based systems for receiving funds transfers at
gaming establishments. Western Union contracts directly with gaming establishments and we receive
a monthly payment based upon the number of transactions completed.
Information Services
We market our information services to gaming establishments to improve credit decision-making,
to automate cashier operations and to enhance patron marketing activities.
9
Improve Credit Decision-Making
Central Credit is the leading gaming patron credit bureau, which allows gaming establishments
to improve their credit-granting decisions. Our Central Credit database contains decades of gaming
patron credit history and transaction data on millions of gaming patrons. Our gaming credit
reports are comprised of information recorded from patron experiences at hundreds of
gaming establishments. We provide such information to gaming establishments, who use that
data, for among other things, to determine if or how much credit they will grant to a patron. To
allow gaming establishments to improve their credit-granting decisions, Central Credit offers a
variety of tools, including underwriting of gaming patron credit requests, and gaming credit
reports. At a gaming establishment’s request, we can augment the information provided in our
gaming credit reports with traditional credit reports or bank ratings obtained from third-party
consumer credit bureaus and bank reporting agencies.
Automated Cashier Operations
QuikCash Plus (“QCP”) Web is a proprietary browser-based, full service cash access transaction
processing system for gaming establishment cashier operations that runs on a gaming establishment’s
own computer hardware. Cashiers using QCP Web can process credit card cash advances, POS debit
card transactions, check verification and warranty services and money transfer services online
through a single terminal. QCP Web reduces cage operating complexity, improves transaction times,
saves space by eliminating multiple pieces of hardware and reduces training requirements for cage
operators, potentially lowering operating costs for gaming establishments. QCP Web is delivered as
an application service with a customizable user interface that allows gaming establishments to add
additional workstations by simply connecting them to the application server. In addition, QCP Web
can assist gaming establishments in satisfying legal reporting requirements by providing
information that may assist in completing required regulatory reports such as Currency Transaction
Reports (“CTRs”) and Suspicious Activity Reports (“SARs”).
Enhance Patron Marketing
Gaming establishment marketing professionals can use our patron data to develop, implement and
refine their customer loyalty programs. Because we have data on patron cash access activity across
multiple gaming establishments, we are uniquely able to help an operator understand how much of a
patron’s cash access activity, in aggregate, is being done in other gaming establishments in order
to gauge the patron’s loyalty to the gaming establishment.
QuikReports is a browser-based reporting tool that provides marketing professionals with
real-time access to, and analysis of, information on patron cash access activity. We provide this
information through a secure Internet connection at user-specified levels of detail ranging from
aggregated summary information to individual cash access transactions. For example, an operator
may use QuikReports to focus its marketing efforts on target patrons by generating a report of the
patrons who accessed the greatest amounts of cash at the operator’s gaming establishment during a
specified period, and comparing the amounts of cash accessed at the operator’s gaming
establishments with the aggregate amounts of cash accessed at other gaming establishments that are
part of our network. A gaming establishment may also use QuikReports to monitor or analyze the
cash access activities of its patrons to determine peak periods, the relative popularity of various
cash access methods, or the traffic volumes, at particular machines in particular locations.
QuikMarketing. Through our QuikMarketing service, we query our proprietary patron transaction
database using criteria supplied by the gaming establishment. We then assist in the distribution
through a third-party mailhouse of gaming establishment-supplied marketing materials to patrons in
our database that match target patron criteria supplied by the gaming establishment. Our
proprietary patron transaction database includes information that is captured from transactions we
process in which personal information is available; ATM transactions are not included. Patrons may
“opt out” of having their names included in QuikMarketing mailing lists
Cashless Gaming Products
A recent trend in gaming has been the movement towards cashless gaming as a more efficient
means for gaming operators to manage their slot machine operations. Cashless gaming, also known as
“ticket-in-ticket-out” (“TITO”), reduces the amount of cash utilized in slot machines by dispensing
bar-coded tickets instead of cash for jackpots and cash-outs. To capitalize on the movement
towards cashless gaming initiatives, we have developed, together with our strategic partners,
products that facilitate an efficient means of accessing funds in a cashless gaming environment.
Our cash access services are platform independent and our existing infrastructure has been designed
to be adaptable to new platforms and/or operating environments.
3-in-1 Enabled Redemption Device is a multi-function patron kiosk, which incorporates our
“3-in-1 rollover” functionality for cash access into self-service kiosks for slot ticket redemption
services provided by redemption device manufacturers, including NRT Technology Corporation (“NRT”).
When a patron presses the cash out button on a cashless slot machine, the patron receives the
value of the winnings on a paper ticket dispensed from a printer embedded in the slot machine.
10
The ticket can then be inserted into other slot machines or exchanged for cash at a redemption
device. The availability of our cash access services on these slot ticket redemption devices
provides us with additional points of contact with gaming patrons at locations that are closer to
the slot machines than traditional cash access devices that are typically located on the periphery
of the area within the gaming establishment where gaming activity is conducted. These additional
points of contact provide gaming patrons with more opportunities to access their cash with less
cashier involvement, thereby creating labor cost savings for gaming establishments. In addition,
by incorporating our cash access services into a redemption device, we enjoy the benefit of the
redemption device manufacturer’s existing relationships with gaming establishments and its sales
and marketing efforts directed towards additional gaming establishments. We have the exclusive
right to provide cash access services on self-service redemption devices serviced by NRT. We have
a similar alliance with Western Money Systems, another provider of slot ticket and player point
redemption kiosks, subject to completion of development and regulatory approval. We have a similar
alliance with Glory (U.S.A.) Inc.
Electronic Debit Interactive Terminal Housing (“EDITH”) is a cashless gaming device developed
by IFT that allows gaming patrons to purchase slot machine tickets from a customer-activated kiosk.
EDITH allows gaming establishment patrons to purchase slot tickets with their debit card. Patrons
swipe their debit card, enter their PIN and request an amount. Upon approval of the transaction, a
bar-coded slot ticket is dispensed from EDITH’s ticket printer. An optional receipt is also
provided upon the patron’s request. The bar-coded slot ticket may then be inserted into a
TITO-enabled slot machine or redeemed at a cashier station. EDITH was approved in July 2006 by
Gaming Laboratories International, Inc. (“GLI”). Many Native American gaming establishments and
certain state regulatory authorities rely on GLI for product certification. We plan to submit
EDITH for approval in other gaming jurisdictions in the future.
Credit Card Servicing
The Arriva Card is a private label credit card issued by CIT Bank. The Arriva Card is
structured specifically for use in gaming establishments and has many features not typically
available with traditional credit cards, including better rates and terms on cash advances than
most cards through its exclusive loyalty program. The Arriva Card can be used in any gaming
establishment in the United States and the Caribbean in which we provide cash advance services.
The Arriva Card was first issued in July 2006. As of December 31, 2007, there were approximately
11,000 cardholders of the Arriva Card and more than $46.1 million in cash access transactions had
been completed using the Arriva Card. On February 28, 2008, the Company announced that as part of
its strategy of focusing on its core electronic payments business, it will discontinue offering the
Arriva Card.
Customer Service
We operate a customer service call center from our facility in Las Vegas, Nevada that is
accessible 24 hours a day, 365 days a year. Our customer service representatives assist cashier
personnel and gaming patrons in their use of our products and services. Through our use of
third-party translation services, our customer service representatives can serve gaming
establishment customers and patrons in approximately 150 different languages.
Intellectual Property
We believe that the ability to introduce and respond to technological innovation in the gaming
industry will be an increasingly important qualification for the future success of any provider of
cash access services. Our continued competitiveness will depend on the pace of our product
development; our patent, copyright, trademark and trade secret protection; and our relationships
with customers. Our business development personnel work with gaming establishments, our joint
venture partners, our strategic partners and the suppliers of the financial services upon which our
cash access services rely to design and develop innovative cash access products and services and to
identify potential new solutions for the delivery and distribution of cash in gaming
establishments.
We have one issued United States patent and two pending United States patent applications. We
have ten United States trademark registrations, including two registered United States trademarks
related to our ACM product and one registered United States trademark relating to our name. In
addition to our United States trademark registrations, we have a total of 45 trademark
registrations or pending registrations in jurisdictions outside the United States. However, we
rely principally on unregistered copyrights and trade secrets for protection of our intellectual
property.
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Our ACMs use biometric facial recognition technology and our patented “3-in-1 rollover”
functionality to provide credit card cash advances, POS debit card transactions, ATM cash
withdrawals, check cashing and money transfer services at a single, unmanned machine. These
technologies are key differentiating technologies from our competitors.
Some of our systems, such as the software that implements our QCP Web and QuikReports products
and the software that drives our ACM product, were developed by Infonox on the Web (“Infonox”), a
corporation whose principals are family members of our director Karim Maskatiya, and are hosted and
operated on an infrastructure platform that is owned by Infonox. We own all of the intellectual
property developed for us by Infonox, and Infonox has granted us an exclusive license in the gaming
industry to use its infrastructure platform to deliver our products and services to our customers.
Sales and Marketing
We sell and market our products and services to gaming establishments primarily through the
use of a direct sales force. The target customers of our direct sales force are gaming
establishments in the United States and in international markets where gaming is conducted. Our
target customers include traditional land-based casinos, gaming establishments operated on Native
American lands, racinos, riverboats, cruise ships with gaming operations, pari-mutuel wagering
facilities and card rooms. In 2007, 2006 and 2005, respectively, revenues from our operations
outside the United States comprised 3.0%, 3.0% and 3.4% of our revenues.
Our sales and marketing efforts are directed by 16 sales executives, each with business
development responsibility for the gaming establishments in those regions. These sales executives
target all levels of gaming establishment personnel, including senior executives, finance
professionals, marketing staff and cashiers, and seek to educate them on the benefits of our cash
access products and services.
The sales executives are supported by 31 field account managers, who provide on site customer
service to most of our customers. These field account managers reside in the vicinity of the
specific gaming establishments that they support to ensure that they respond to the customer
service needs of those gaming establishments.
We also have joint sales efforts with a number of strategic partners, including NRT, Western
Money Systems and Capital One, which allow us to market our cash access services to gaming
establishments through channels other than our direct sales force.
Competition
We compete with other providers of cash access services to the gaming industry. Our principal
competitors in North America are Global Payments Inc. operating as Cash & Win; and Cash Systems,
Inc. We also compete with financial institutions, such as U.S. Bancorp and other regional and local
banks that operate ATMs on the premises of gaming establishments. Some of these other providers
and financial institutions have also established cooperative relationships with each other to
expand their service offerings. In markets outside North America, we encounter competition from
banks and other financial service companies established in those markets.
We face potential competition from gaming establishments that may choose to operate their own
in-house cash access systems rather than outsource to us. In the past, some gaming establishments
have operated their own in-house cash access systems. We believe that almost all gaming
establishments, however, outsource their cash access service to third-party providers because
providing these services is not a core competency of gaming establishment operators, and because
gaming establishment operators are unable to achieve the same scale that can be obtained by
third-party providers that deploy cash access services across multiple gaming establishments.
We may in the future also face competition from traditional transaction processors, such as
First Data, that may choose to enter the gaming patron cash access services market. In connection
with our redemption of First Data’s interest in us, First Data agreed not to compete with us prior
to March 10, 2007. Given its familiarity with our business, operations and industry as a result of
being our majority owner from inception until March 10, 2004, First Data could be a significant
competitive threat now that this covenant not to compete has expired. In addition, we may in the
future face potential competition from new entrants into the market for cash access products and
related services and, subject to certain covenants made by some of the banks that sponsor us into
the card associations, competition from such banks during and after expiration of our contracts
with such banks. Some of these potential competitors may have a number of significant advantages
over us, including greater name recognition and marketing power, longer operating histories,
pre-existing relationships with current or potential customers and significantly greater
financial, marketing and other resources and access to capital which allow them to respond
more quickly to new or changing opportunities.
12
Regulation
Various aspects of our business are subject to gaming regulation and financial services
regulation. Depending on the nature of the noncompliance, our failure to comply with these
regulations may result in the suspension or revocation of any license or registration at issue, as
well as the imposition of civil fines and criminal penalties.
Gaming Regulation
We are subject to a variety of gaming and other regulations in the jurisdictions in which we
operate. As a general matter, we are regulated by gaming commissions or similar authorities at the
state or tribal level, such as the New Jersey Casino Control Commission and New Jersey Division of
Gaming Enforcement. In some jurisdictions, such as Nevada, we are considered a supplier of
“associated equipment” and could be required by the regulatory authorities, in their discretion, to
file a license application. In such event, any of our officers, directors or beneficial owners of
our securities could be required to apply for a license or a finding of suitability. Most of the
jurisdictions in which we operate distinguish between gaming-related suppliers and vendors, such as
manufacturers of slot machine or other gaming devices, and non-gaming suppliers and vendors, such
as food and beverage purveyors, construction contractors and laundry and linen suppliers. In these
jurisdictions, we are typically characterized as a non-gaming supplier or vendor and we must obtain
a non-gaming supplier’s or vendor’s license, qualification or approval. The licensure,
qualification and approval requirements and the regulations imposed on non-gaming suppliers and
vendors are generally less stringent than for gaming-related suppliers and vendors, and as such, we
are often subject to a lesser degree of regulation than our customers that directly engage in
gaming activities. However, some of the jurisdictions in which we do business do not distinguish
between gaming-related and non-gaming related suppliers and vendors, and other jurisdictions
categorize our services and/or products as gaming related, and we are subject to the same stringent
licensing, qualification or approval requirements and regulations that are imposed upon vendors and
suppliers that would be characterized as gaming-related in other jurisdictions. Most state and
many tribal gaming regulators require us to obtain and maintain a permit or license to provide our
services to gaming establishments. The process of obtaining such permits or licenses often
involves substantial disclosure of information about us, our officers, directors and beneficial
owners of our securities, and involves a determination by the regulators as to our suitability as a
supplier or vendor to gaming establishments.
The expansion of our business, the introduction of new cash access products or services, or
changes to applicable rules and regulations may result in us being characterized as a
gaming-related supplier or vendor in jurisdictions in which we are now a non-gaming related
supplier or vendor. Our EDITH cashless gaming product, for example, interacts with a gaming
establishment’s slot system and operate in close physical proximity to slot machines, and is
therefore much more closely connected to gaming activity than our other products and services that
provide access to cash independent of any gaming equipment. These differences may result in a
regulatory characterization of us as a gaming-related supplier or vendor, which would subject us to
an increased regulatory burden which could include, but is not limited to: requiring the licensure
or finding of suitability of any of our officers, directors, key employees or beneficial owners of
our securities; the termination or disassociation with such officer, director, key employee or
beneficial owner of our securities that fails to file an application or to obtain a license or
finding of suitability; the submission of detailed financial and operating reports; submission of
reports of material loans, leases and financing; and, requiring regulatory approval of some
commercial transactions such as the transfer or pledge of equity interests in the company. These
regulatory burdens are imposed upon gaming-related suppliers or vendors on an ongoing basis.
Gaming regulatory authorities have broad discretion and can require any beneficial holder of
our securities, regardless of the number of shares of common stock or amount of debt securities
owned, to file an application, be investigated, and be subject to a determination of suitability.
If the beneficial holder of our securities who must be found suitable is a corporation,
partnership, or trust, such entity must submit detailed business and financial information
including a list of its officers, directors, partners and beneficial owners. Further disclosure by
those officers, directors, partners and beneficial owners may be required. Under some
circumstances and in some jurisdictions, an institutional investor, as defined in the applicable
gaming regulations, that acquires a specified amount of our securities may apply to the regulatory
authority for a waiver of these licensure, qualification or finding of suitability requirements,
provided the institutional investor holds the voting securities for investment purposes only. An
institutional investor will not be deemed to hold voting securities for investment purposes unless
the securities were acquired and are held in the ordinary course of its business.
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The changes in our ownership, management and corporate structure that resulted from the
recapitalizations of our ownership in 2004 and our conversion from a limited liability company to a
corporation in 2004, required us to notify many of the state and tribal gaming regulators under
whose jurisdiction we operate. In many cases, those regulators have asked us for further
information and explanation of those changes. To date, we have satisfied many of these inquiries,
and are continuing to cooperate with those that are ongoing. Given the magnitude of the changes in
our ownership that resulted from the recapitalizations, we were required to re-apply for new
permits or licenses in some jurisdictions, but were not required to discontinue our operations
during the period of re-application. In 2005 we notified many of the state and tribal gaming
regulators under whose jurisdictions we operate of our initial public offering of common stock,
which required further disclosures or re-applications for new permits or licenses, none of which
required us to discontinue our operations in any such jurisdictions. In some jurisdictions we are
in the process of obtaining licenses and have yet to receive final approval of such licenses from
the applicable regulatory authority. In these jurisdictions, we operate under temporary licenses
or without a license. We may not be issued a license in these jurisdictions.
Financial Services Regulation
Anti-Money Laundering. The USA PATRIOT Act of 2001 and its implementing federal regulations
require us to establish and maintain an anti-money laundering program. Our anti-money laundering
program includes: (1) internal policies, procedures, and controls designated to identify and report
money laundering; (2) a designated compliance officer; (3) an ongoing employee training program;
and (4) an independent audit function to test the program.
In addition, the cash access services that we provide are subject to recordkeeping and
reporting obligations under the Bank Secrecy Act. Our gaming establishment customers and we are
required to file a SAR with the U.S. Treasury Department’s Financial Crimes Enforcement Network to
report any suspicious transaction relevant to a possible violation of law or regulation. To be
reportable, the transaction must meet criteria that are designed to identify the hiding or
disguising of funds derived from illegal activities. Our gaming establishment customers, in
situations where our cash access services are provided through gaming establishment cashier
personnel, and we, in situations where we provide our cash access services directly to patrons
through satellite cages or booths that we staff and operate, are required to file a CTR of each
deposit, withdrawal, exchange of currency or other payment or transfer by, through, or to us which
involves a transaction in currency of more than $10,000 in a single day. Our QCP Web product can
assist in identifying transactions that give rise to reporting obligations. When we issue or sell
drafts for currency in amounts between $3,000 and $10,000, we maintain a record of information
about the purchaser, such as the purchaser’s address, Social Security Number and date of birth.
Finally, we maintain a record of each extension of credit by us in an amount in excess of $10,000,
including the name and address of the person to whom the extension of credit is made, the amount,
the nature and purpose of the credit, and the date of the loan.
Following the events of September 11, 2001, the United States and other governments have
imposed and are considering a variety of new regulations focused on the detection and prevention of
money laundering and money transmitting to or from terrorists and other criminals. Compliance with
these new regulations may impact our business operations or increase our costs.
Fund Transfers. Our POS debit card transactions and ATM services are subject to the
Electronic Fund Transfer Act, which provides gaming patrons with rights with respect to electronic
fund transfers, including the right to dispute unauthorized charges, charges that list the wrong
date or amount, charges for goods and services that are not accepted or delivered as agreed, math
errors and charges for which a cardholder asks for an explanation or written proof of transaction
along with a claimed error or request for clarification. We have implemented the necessary
policies and procedures in order to comply with the regulatory requirements for fund transfers.
Money Transmitter. Most states require a money transmitter license in order to issue the
negotiable instruments that are used to complete credit card cash advance and POS debit card
transactions. On November 27, 2006, we entered into an agreement with Integrated Payment Systems,
Inc. (“IPS”), whereby IPS appointed us as IPS’s agent to use and sell IPS money orders in
connection with credit card and point-of-sale debit card transactions consummated by us for patrons
of gaming establishments. This agreement has a three-year term. IPS holds the required money
transmitter licenses and is our sole and exclusive provider of money orders. We are entitled to
receive monthly commission payments from IPS for money orders used and sold by us and we are
obligated to pay transaction fees per money order to IPS.
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Credit Reporting. Our Central Credit gaming patron credit bureau services and check
verification and warranty services are subject to the Fair Credit Reporting Act and the Fair and
Accurate Credit Transactions Act of 2003 and their implementing rules, which require consumer
credit bureaus, such as Central Credit, to provide credit report information to businesses only for
certain purposes and to otherwise safeguard credit report information; to disclose to consumers
their credit report on request; and
to permit consumers to dispute and correct inaccurate or incomplete information in their
credit report. These laws and rules also govern the information that may be contained in a
consumer credit report. We continue to implement policies and procedures as well as adapt our
business practices in order to comply with these laws and regulations. In addition to federal
regulation, our Central Credit gaming patron credit bureau services are subject to the state credit
reporting regulations which impose similar requirements to the Fair Credit Reporting Act and the
Fair and Accurate Credit Transactions Act of 2003. Our credit granting programs such as the Arriva
Card and QuikCredit, also are subject to federal and state credit reporting laws and rules,
requiring, among other things, that we notify consumers when we deny credit based on credit report
information.
Debt Collection. Although we currently outsource most of our debt collection efforts to third
parties, we do engage in debt collection efforts for credit extended via the Arriva Card. We may
engage in efforts to collect on our QuikCredit service, dishonored checks purchased by Central
Credit pursuant to our check warranty services, returns from customer payments on their account
with the Arriva Card and chargebacks on our cash advance products. All such collection practices
may be subject to the Fair Debt Collections Practices Act, which prohibits unfair, deceptive or
abusive debt collection practices, as well as consumer-debt-collection laws and regulation adopted
by the various states.
Privacy Regulations. Our collection of information from patrons who obtain from us financial
products and services, such as the Arriva Card or our cash access services, are subject to the
financial information privacy protection provisions of the Gramm-Leach-Bliley Act and its
implementing federal regulations. We gather, as permitted by law, non-public,
personally-identifiable financial information from patrons who use our cash access services, such
as names, addresses, telephone numbers, bank and credit card account numbers and transaction
information. The Gramm-Leach-Bliley Act requires us to safeguard and protect the privacy of such
non-public personal information. Also, the Gramm-Leach-Bliley Act requires us to make disclosures
to patrons regarding our privacy and information sharing policies and give patrons the opportunity
to direct us not to disclose information about them to unaffiliated third parties in certain
situations. In this regard, we provide patrons with a privacy notice, an opportunity to review our
privacy policy, and an opportunity to opt out of specified types of disclosures. In addition to
the federal Gramm-Leach-Bliley Act privacy regulations we are subject to state privacy regulations.
Some state privacy regulations impose more stringent limitations on access and use of personal
information. We continue to implement policies and programs as well as adapt our business
practices in order to comply with federal and state privacy laws and regulations.
ATM Operations. Our ATM services are subject to applicable state banking regulations in each
jurisdiction in which we operate ATMs. These regulations require, among other things, that we
register with the state banking regulators as an operator of ATMs, that we provide gaming patrons
with notices of the transaction fees assessed upon use of our ATMs, that our transaction fees do
not exceed designated maximums, that we offer gaming patrons a means of resolving disputes with us,
and that we comply with prescribed safety and security requirements.
Check Cashing. In jurisdictions in which we serve as a check casher or agree to defer deposit
of gaming patrons’ checks under our QuikCredit services, we are subject to the state licensing
requirements and regulations governing check cashing activities. Generally, these regulations
require us to obtain a license from the state’s banking regulators to operate as a check casher.
Some states also impose restrictions on this activity such as restrictions on the amounts of
service fees that may be imposed on the cashing of certain types of checks, requirements as to
records that must be kept with respect to dishonored checks, and requirements as to the contents of
receipts that must be delivered to gaming patrons at the time a check is cashed.
Arriva Card. Although the Arriva Card is issued by CIT Bank, Arriva administers and services
the Arriva Card accounts. Our marketing and servicing of the Arriva Card is subject to state and
federal laws, including those state and federal laws governing consumer lending, debt collection
practices and credit reporting such as the Federal Truth in Lending Act and Regulation Z, the Equal
Credit Opportunity Act and Regulation B, the Fair Debt Collection Practices Act, the Fair Credit
Reporting Act and the Fair and Accurate Credit Transactions Act as well as the regulations related
to such laws.
Lending. We currently operate our QuikCredit service at one of our customer locations in
Florida. QuikCredit is a service where a patron writes a check payable to a gaming establishment
that deposits this check under deferred presentment terms. In other states in which we are deemed
to operate as a short-term consumer or payday lender as a result of our QuikCredit services, we are
subject to the various state regulations governing the terms of the loans. Typically, the state
regulations limit the amount that a lender or service provider may lend or provide and, in some
cases, the number of loans or transactions that a lender or service provider may make to any
customer at one time, restrict the amount of finance or service charges or fees that the lender or
service provider may assess in connection with any loan or transaction. The lender or service
provider must also comply with various consumer disclosure requirements, which are typically
similar or equivalent to the Federal Truth in Lending Act and corresponding federal regulations, in
connection with the loans or transactions.
15
Network and Card Association Regulation. In addition to the governmental regulation described
above, some of our services are also subject to rules promulgated by various payment networks, EFT
networks and card associations. For example, we must comply with the Payment Card Industry (“PCI”)
Data Security Standard. Since June 30, 2006 we have been designated as a compliant service
provider under the PCI Data Security Standard. On an annual basis, we must be certified to
maintain our status as a compliant service provider.
Other Regulation
When contracting with tribal owned or controlled gaming establishments, we become subject to
tribal laws and regulations that may differ materially from the non-tribal laws and regulations
under which we generally operate. In addition to tribal gaming regulations that may require us to
provide disclosures or obtain licenses or permits to conduct our business on tribal lands, we may
also become subject to tribal laws that govern our contracts. These tribal governing laws may not
provide us with processes, procedures and remedies that enable us to enforce our rights as
effectively and advantageously as the processes, procedures and remedies that would be afforded to
us under non-tribal laws, or to enforce our rights at all, and may expose us to an increased risk
of contract repudiation as compared to that inherent in dealing with non-tribal customers. Many
tribal laws permit redress to a tribal adjudicatory body to resolve disputes; however, such redress
is largely untested in our experience. We may be precluded from enforcing our rights against a
tribal body under the legal doctrine of sovereign immunity.
We are also subject to a variety of gaming regulations and other laws in the international
markets in which we operate. We expect to become subject to additional gaming regulations and
other laws in the jurisdictions into which we expand our operations. Our expansion into new
markets is dependent upon our ability to comply with the regulatory regimes adopted by such
jurisdictions. For example, our entry into Macau SAR was subject to receipt of approvals, licenses
or waivers by or from the Monetary Authority of Macau, the Macau Gaming Commission and the Macau
Gaming Inspection and Coordination Bureau. Difficulties in obtaining approvals, licenses or
waivers from the monetary and gaming authorities, in addition to other potential regulatory and
quasi-regulatory issues that we have not yet ascertained, may arise in other international
jurisdictions into which we wish to enter.
As we develop new services and new products, we may become subject to additional federal and
state regulations. For example, in the event that we form or acquire a bank or industrial loan
company, we would become subject to a number of additional banking and financial institution
regulations, which may include the Bank Holding Company Act. These additional regulations could
substantially restrict the nature of the business in which we may engage and the nature of the
businesses in which we may invest.
Employees
As of December 31, 2007, we had 334 employees. We are not subject to any collective
bargaining agreements and have never been subject to a work stoppage. We believe that we have
maintained good relationships with our employees.
Available Information
Our Internet address is http://www.globalcashaccess.com. We make available free of charge in
the “Investor Relations” portion of our website under “SEC Filings” our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file or furnish such materials to
the SEC. The SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding our filings at http://www.sec.gov.
16
ITEM 1A. RISK FACTORS
Risks Related to Our Business
If we are unable to maintain our current customers on terms that are favorable to us, our
business, financial condition and operating results may suffer a material adverse effect.
We enter into contracts with our gaming establishment customers to provide our cash access
products and related services. Our contracts have a term ranging from one to five years in
duration and provide that we are the only provider of cash access products to these establishments
during the term of the contract. However, some of our contracts are terminable upon 30 days
advance notice and some of our contracts either become nonexclusive or terminable by our gaming
establishment customers in the event that we fail to satisfy specific covenants set forth in the
contracts, such as covenants related to our ongoing product development. We are typically required
to renegotiate the terms of our customer contracts upon their expiration, and in some circumstances
we may be forced to modify the terms of our contracts before they expire. When we have
successfully renewed these contracts, these negotiations have in the past resulted in, and in the
future may result in, financial and other terms that are less favorable to us than the terms of the
expired contracts. In particular, we are often required to pay a higher commission rate to a
gaming establishment than we previously paid in order to renew the relationship. Assuming constant
transaction volume, increases in commissions or other incentives paid to gaming establishments
would reduce our operating results. We may not succeed in renewing these contracts when they
expire, which would result in a complete loss of revenue from that customer, either for an extended
period of time or forever. As our contracts are often executed by one corporation for the
provision of services at multiple gaming establishments, the loss of a single contract often
results in the loss of multiple gaming establishments. If we are required to pay higher commission
rates or agree to other less favorable terms to retain our customers or we are not able to renew
our relationships with our customers upon the expiration of our contracts, our business, financial
condition and operating results would be harmed.
Competition in the market for cash access services is intense, which could result in higher
commissions or loss of customers to our competitors.
The market for cash access products and related services is intensely competitive, and we
expect competition to increase and intensify in the future. We compete with other providers of cash
access products and services such as Certegy Gaming Services, Inc. (formerly known as Game
Financial Corporation), a subsidiary of Fidelity National Information Services Inc. operating as
GameCash; Global Payment Systems operating as Cash & Win; and Cash Systems, Inc. On February 28,
2008, we entered into a definitive agreement to acquire all of the outstanding stock of Certegy
Gaming Services, Inc. (“CGS”). We compete with financial institutions such as U.S. Bancorp and
other regional and local banks that operate ATMs on the premises of gaming establishments. In
markets outside North America, we encounter competition from banks and other financial service
companies established in those markets. We face potential competition from gaming establishments
that may choose to operate cash access systems on their own behalf rather than outsource to us. We
may in the future also face competition from traditional transaction processors, such as First
Data, that may choose to enter the gaming patron cash services market. In connection with our
redemption of First Data’s interest in us, First Data agreed not to compete with us prior to
March 10, 2007. Given its familiarity with our specific industry and business and operations as a
result of being our majority owner from inception until March 10, 2004, First Data could be a
significant competitive threat now that this covenant not to compete has expired. In addition, we
may in the future face potential competition from new entrants into the market for cash access
products and related services and, subject to certain covenants made by some of the banks that
sponsor us into the card associations, competition from such banks during and after expiration of
our contracts with such banks. Some of our competitors and potential competitors have significant
advantages over us, including greater name recognition, longer operating histories, pre-existing
relationships with current or potential customers including pre-existing relationships relating to
other financial services, significantly greater financial, marketing and other resources and more
ready access to capital which allow them to respond more quickly to new or changing opportunities.
In addition, some providers of cash access products and services to gaming establishments have
established cooperative relationships with financial institutions in order to expand their service
offerings.
Other providers of cash access products and services to gaming establishments have in the past
increased, and may in the future continue to increase, the commissions or other incentives they pay
to gaming establishments in order to win those gaming establishments as customers and to gain
market share. To the extent that competitive pressures force us to increase commissions or other
incentives to establish or maintain relationships with gaming establishments, our business and
operating results could be adversely affected.
Under our agreements with NRT, Western Money Systems and Glory (U.S.A.) Inc. (“Glory”), these
companies are subject to certain prohibitions related to providing their cash handling services on
any device that provides cash access services of other providers. We may face competition from
these companies or other providers of cash access services to the extent that NRT, Western Money
Systems or Glory enters the market to provide these services or establishes cooperative
relationships with other cash access service providers.
17
Because of significant concentration among our top customers, the loss of a top customer could
have a material adverse effect on our revenues and profitability.
For the years ended December 31, 2007 and 2006, our five largest customers accounted for
approximately 40.6% and 40.2% of our revenues, respectively. Our largest customer accounted for
19.5% and 18.1% of our revenues in the years ended December 31, 2007 and 2006, respectively. The
loss of, or a substantial decrease in revenues from, any one of our top customers could have a
material adverse effect on our business and operating results.
Consolidation among operators of gaming establishments may also result in the loss of a top
customer to the extent that customers of ours are acquired by our competitors’ customers.
We depend on key personnel and they would be difficult to replace.
We depend upon the ability and experience of key members of management who have substantial
experience with our operations and the gaming patron cash access industry. In 2007, certain key
members of our management team, including our former Chief Executive Officer and former Chief
Financial Officer, and a former member of our Board of Directors, left the Company voluntarily or
were terminated. We relied heavily on these individuals for the operations and management of the
Company. In October 2007, Scott Betts was employed by us in the roles of President and Chief
Executive Officer. He also assumed the role of Chief Financial Officer on an interim basis. On
February 25, 2008, we hired George Gresham as our Chief Financial Officer. While Mr. Gresham has a
background in the payments processing industry, he may not be able to immediately understand our
unique operations. During the transition of this role from Mr. Betts to Mr. Gresham, there could
be significant inefficiencies in our operations and management. Mr. Gresham is in the process of
familiarizing himself with the processes, systems and procedures that are necessary to understand
our operations.
Other than Mr. Betts, Mr. Gresham, Kathryn Lever, our General Counsel, Mari Ellis, our Senior
Vice President, Technology and Development, and Udai Puramsetti, Executive Vice President,
Operations, none of our executive officers have employment agreements with us.
Our future success depends upon our ability to attract, train and retain key managers involved
in the development, operation and marketing of our products and services to gaming establishments.
We may need to increase the number of key managers as we further develop our products and services
and as we enter new markets and expand in existing markets. Our ability to enter into contracts
with gaming establishments depends in large part on the relationships that our key managers have
formed with management-level personnel of gaming establishments. Competition for individuals with
such relationships is intense, and we may not be successful in recruiting such personnel. Our
employees are subject to certain noncompetition covenants following their departure from the
Company, which noncompetition covenants could be rendered unenforceable in whole or in part. As
such, we may not be able to retain such individuals as they may leave our Company and go to work
for our competitors. Our sales efforts would be particularly hampered by the defection of
personnel with long-standing relationships with management-level personnel of gaming
establishments. We also suffered attrition in several non-management positions during 2007, which
has placed an additional burden on our remaining personnel. This additional burden has made the
retention of existing personnel and recruitment of additional personnel more difficult. If we are
unable to attract or retain key personnel, our business, financial condition, operating results and
liquidity could be materially adversely affected.
Failure to maintain an effective system of internal control over financial reporting may lead
to our inability to accurately report our financial results. As a result, current and potential
stockholders could lose confidence in our financial reporting, which would harm our business, our
reputation and the trading price of our stock.
Effective internal control over financial reporting is necessary for us to provide reliable
financial reports. If we cannot provide reliable financial reports, our business and operating
results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations
implemented by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight
Board, have required changes in the corporate governance practices and financial reporting
standards for public companies. These laws, rules and regulations, including compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), have increased our legal and
financial compliance costs and made many activities more time-consuming and more burdensome.
18
The Company was required for the first time to comply with Section 404 in connection with our
Annual Report filed on Form 10-K for the fiscal year ended
December 31, 2006. As a result of our
internal reviews in connection with
Section 404, we identified material weaknesses in our internal control over financial
reporting. The material weaknesses meant that there was a reasonable possibility that a material
misstatement of our annual or interim financial statements would not be prevented or detected on a
timely basis. As is described more fully in Item 9A of this Annual Report filed on Form
10-K, we have undertaken measures to remediate each of those material weaknesses.
The remediation measures that we undertook may not have remediated the material weaknesses in
full or permanently, and those material weaknesses or new material weaknesses may arise in the
future. Any material weaknesses could cause us to fail to meet our reporting obligations, cause
investors to lose confidence in our reported financial information, cause a decline or volatility
in our stock prices, cause a reduction in our credit ratings or tarnish our public perception.
Also, increased expenses due to remediation costs and increased regulatory scrutiny are also
possible. Moreover, we run the risk of further non-compliance by not successfully remediating the
weaknesses in a timely manner, which could adversely affect our financial condition or results of
operations. Inadequate internal control over financial reporting could also cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading
price of our stock and our reputation.
We may be required to make payments to certain of our customers to resolve disputes over our
calculation of commissions for certain types of transactions.
As a result of inquiries made during the internal investigation announced on November 14,
2007, the Company reviewed and considered the application of contract clauses relating to the
calculation of commissions payable to certain of the Company’s customers in connection with certain
types of transactions. In reviewing the commission computation provisions of the customer
contracts, the Company has identified issues with the payment of certain commissions to twenty-two
of our customers during the period from 2005 through 2007. We believe that it is probable we will
incur $2.9 million in costs to resolve any commission calculation for the relevant customers. To
the extent that other customers dispute our commission calculations, or customers refuse to resolve
their commission calculation disputes with us for the amounts we propose, we may be required to
make payments in excess of $2.9 million to resolve such disputes. If we are unable to resolve
these disputes, we may lose customers or become subject to costly litigation.
We are subject to extensive rules and regulations of card associations, including MasterCard
International, Visa International and Visa U.S.A., that are always subject to change, which may
harm our business.
For the years ended December 31, 2007 and 2006, a substantial portion of our revenues were
derived from transactions subject to the extensive rules and regulations of the leading card
associations, Visa International and Visa U.S.A. (collectively “VISA”), and MasterCard
International (“MasterCard”). From time to time, we receive correspondence from these card
associations regarding our compliance with their rules and regulations. In the ordinary course of
our business, we engage in discussions with the card associations, and the banks that sponsor us
into the card associations, regarding our compliance with their rules and regulations. The rules
and regulations do not expressly address some of the contexts and settings in which we process cash
access transactions, or do so in a manner subject to varying interpretations. For example, neither
of the major card associations has determined that our ability to process credit card cash advance
transactions using biometric technology at an unmanned machine and without cashier involvement
through our ACM complies with its regulations. One association has allowed us to conduct these
transactions as long as we assume chargeback liability for any transaction in which we do not
obtain a contemporaneous cardholder signature. An increase in the level of chargebacks could have
a material adverse effect on our business or results of operations. Therefore, patrons still must
complete these transactions at the cashier, which is less convenient to patrons and prevents gaming
establishments from realizing potential cashier labor cost savings. As another example, in 2003,
one of the major card associations informed our sponsoring bank that authorization requests
originating from our systems needed to be encoded to identify our transactions as gambling
transactions, even though our services do not directly involve any gambling activity. This
resulted in a large number of card issuing banks declining all transactions initiated through our
services. We resolved this issue by encoding the authorization requests with an alternative
non-gambling indicator that the card association agreed was applicable. As another example, we and
certain of our providers must continue to comply with the PCI Data Security Standard. The failure
by any of such providers to comply with such standards could result in our being fined or losing
certain “safe harbor” protections. These examples only illustrate some of the ways in which the
card association rules and regulations have affected us in the past or may affect us in the future;
there are many other ways in which these rules and regulations may adversely affect us beyond the
examples provided in this document.
19
The card associations’ rules and regulations are always subject to change, and the card
associations may modify their rules and regulations from time to time. Given the recent ownership
changes in the card associations, the possibility of such changes may increase. Our inability to
anticipate changes in rules, regulations or the interpretation or application thereof may result in
substantial disruption to our business. In the event that the card associations or our
sponsoring banks determine that the manner in which we process certain types of card transactions
is not in compliance with existing rules and regulations, or if the card associations adopt new
rules or regulations that prohibit or restrict the manner in which we process certain types of card
transactions, we may be forced to pay a fine, modify the manner in which we operate our business or
stop processing certain types of cash access transactions altogether, any of which could have a
material negative impact on our business and operating results.
In both our credit card and POS debit card cash advance businesses, patrons are generally
issued a negotiable instrument, which is surrendered to the gaming establishment in exchange for
cash. These transactions are classified by the card associations as “quasi-cash” transactions, and
are identified to the card associations as such by the use of a specific merchant processing code.
These merchant processing codes are unique to the respective card associations and the issuing
banks use these codes as one of the factors they consider in determining whether to authorize such
transactions. EDITH is a product that we have developed to dispense a bar-coded slot ticket based
on a POS debit authorization. It has not yet been determined whether the card associations will
deem the slot ticket a negotiable instrument or not. If they do not, we may be required to route
such transactions using a different merchant processing code, and the use of a different merchant
processing code may result in lower approval rates and higher interchange expense than we
experience with quasi-cash transactions. If approval rates for EDITH transactions are lower than
approval rates for quasi-cash transactions, gaming establishment patrons may be dissuaded from
using EDITH, resulting in the failure of our EDITH product to gain commercial acceptance.
We also process transactions involving the use of the proprietary credit cards such as those
offered by Discover Card and American Express as well as other regional card issues in certain
international markets. The rules and regulations of the proprietary credit card networks that
service these cards present risks to us that are similar to those posed by the rules and
regulations of VISA and MasterCard.
Changes in interchange rates and other fees may affect our cost of revenues (exclusive of
depreciation and amortization) and net income.
We pay credit card associations fees for services they provide in settling transactions routed
through their networks, called interchange fees. In addition, we pay fees to participate in
various ATM or POS debit card networks as well as processing fees to process our transactions. The
amounts of these interchange fees are fixed by the card associations and networks in their sole
discretion, and are subject to increase at any time. VISA and MasterCard both increased applicable
interchange fees in April 2007. Also, in 2004, VISA’s Interlink network, through which we process
a substantial portion of our POS debit card transactions, materially increased the interchange
rates for those transactions. Since that date, the proportion of our POS debit card transactions
that are routed on the Interlink network has increased, resulting in a decrease in profitability of
our POS debit card business. Certain of our contracts enable us to pass through increases in
interchange or processing fees to our customers, but competitive pressures might prevent us from
passing all or some of these fees through to our customers in the future. To the extent that we
are unable to pass through to our customers all or any portion of any increase in interchange or
processing fees, our cost of revenues (exclusive of depreciation and amortization) would increase
and our net income would decrease, assuming no change in transaction volumes. Any such decrease in
net income could have a material adverse effect on our financial condition and operating results.
Additionally, the transformation of the ownership structure of Visa and MasterCard from private
associations of issuing banks to publicly traded corporations may negatively impact the manner in
which these card associations manage and determine interchange rates. This could have a material
adverse effect on our business and operating results.
We receive fees from the issuers of ATM cards that are used in our ATMs, called reverse
interchange fees. The amounts of these reverse interchange fees are fixed by electronic funds
transfer networks, and are subject to decrease in their discretion at any time. Our contracts with
gaming operators do not enable us to pass through to our customers the amount of any decrease in
reverse interchange fees. To the extent that reverse interchange fees are reduced, our net income
would decrease, assuming no change in transaction volumes, which may result in a material adverse
effect on our operating results.
20
Our indebtedness could materially adversely affect our operations and financial results and
prevent us from obtaining additional financing, if necessary.
As of December 31, 2007, we had total indebtedness of $263.5 million in principal amount (of
which $152.8 million consisted of senior subordinated notes and $110.7 million consisted of senior
secured debt). Our substantial indebtedness could have important consequences. For example, it:
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makes it more difficult for us to satisfy our obligations with respect to either our
senior secured debt or our senior subordinated notes, which, if we fail to do, could
result in the acceleration of all of our debt; |
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increases our vulnerability to general adverse economic and industry conditions; |
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may require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, which would reduce the availability of our cash flow to
fund working capital, capital expenditures, expansion efforts and other general
corporate purposes; |
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limits our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate; |
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restricts our ability to pay dividends or repurchase our common stock; |
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places us at a competitive disadvantage compared to our competitors that have less
debt; |
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restricts our ability to acquire businesses or technologies that would benefit our
business; |
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restricts our ability to engage in transactions with affiliates or create liens or
guarantees; and |
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limits, along with the financial and other restrictive covenants in our other
indebtedness, among other things, our ability to borrow additional funds. |
In addition, our senior secured credit facilities and the indenture for the Notes contain
financial and other restrictive covenants that limit our ability to engage in activities that we
may believe to be in our long-term best interests. These financial covenants require, among other
things, delivery of financial statements and the filing of periodic reports with the SEC, each on
prescribed timeframes. These restrictive covenants include, among other things, limits on our
ability to make investments, pay dividends, incur debt, sell assets, or merge with or acquire
another entity. Our failure to comply with those covenants could result in an event of default,
which if not cured or waived, could result in the acceleration of all of our debt. Certain matters
may arise that require us to get waivers or modifications of these covenants. For example, as
described more fully below, we may seek to obtain our own money transmitter licenses. These
licenses may require us to provide letters of credit or surety bonds in excess of the amounts
currently allowed under the credit facilities. We may address these risks by seeking modifications
or waivers of our existing agreements, by refinancing those agreements, or both. If we are unable
to get these matters waived, modified or refinanced, an event of default could occur, which if not
cured or waived, could result in the acceleration of all of our debt.
Our senior secured debt currently bears interest at a rate that is based on LIBOR, and is
adjusted periodically to reflect changes in LIBOR. We are therefore exposed to the risk of
increased interest expense in the event of any increase in LIBOR. The substantial amount of our
senior secured debt magnifies this risk.
To service our indebtedness we will require a significant amount of cash, and our ability to
generate cash flow depends on many factors beyond our control.
Our ability to generate cash flow from operations depends on general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control. Due to these
factors, it is possible that our business will not generate sufficient cash flow from operations to
enable us to pay our indebtedness as it matures and to fund our other liquidity needs. This would
cause us to have to borrow money to meet these needs and future borrowing may not be available to
us at all or in an amount sufficient to satisfy these needs. In such events, we will need to
refinance all or a portion of our indebtedness on or before maturity. We may not be able to
refinance any of our indebtedness on commercially reasonable terms or at all. We could have to
adopt one or more alternatives, such as reducing or delaying planned expenses and capital
expenditures, selling assets, restructuring debt or obtaining additional equity or debt financing
or joint venture partners. We may not be able to affect any of these financing strategies on
satisfactory terms, if at all. Our failure to generate sufficient cash flow to satisfy our debt
obligations or to refinance our obligations on commercially reasonable terms would have a material
adverse effect on our business and our ability to satisfy our obligations with respect to our
indebtedness.
The terms of our senior secured debt may require us to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness, which will reduce the availability of
our cash flow to fund working capital, capital expenditures, expansion efforts and other general
corporate purposes.
Because of our dependence on a few providers, or in some cases one provider, for some of the
financial services we offer to patrons, the loss of a provider could have a material adverse effect
on our business or our financial performance.
We depend on a few providers, or in some cases one provider, for some of the financial
services that we offer to patrons. The loss of any of these providers could have a material
adverse effect on our business and financial performance.
21
Money Order Instruments. We currently rely on IPS to issue the negotiable instruments that
are used to complete credit card cash advance and POS debit card transactions. Most states require
a money transmitter license in order to issue the negotiable instruments that are used to complete
credit card cash advance and POS debit card transactions. We do not hold any money transmitter
licenses, but currently issue negotiable instruments as an agent of IPS, which holds the required
money transmitter licenses. On November 27, 2006, we entered into an agreement with IPS for a term
of approximately three years. Under terms of this agreement, subject to limited exceptions, IPS is
our sole and exclusive provider of money order instruments. On February 22, 2007, IPS’ parent
company, First Data, announced that it had decided to gradually exit the business of issuing money
order instruments over the next two to three years. We have been advised that our agreement will
be honored until the expiration of the agreement in accordance with its terms on December 31, 2009.
Prior to such date we will either be required to enter in an agency relationship with another
third-party that holds the required money transmitter licenses or obtain our own money transmitter
licenses. We may not be able to enter into an agreement for such an agency relationship on terms
that are favorable to us prior to the expiration of our agreement with IPS or at all. If we are
unable to enter into such agreement, we may be unable to provide our cash advance services which
would have a material adverse effect on our business and financial performance.
We are also considering obtaining our own money transmitter licenses. Many of the regulatory
authorities that issue money transmitter licenses would require the posting of letters of credit or
surety bonds to guaranty our obligations with respect to the negotiable instruments we would issue
to gaming establishments to consummate credit card cash advance and POS debit card transactions.
To post these letters of credit or surety bonds, we may need to obtain certain amendments or
waivers of the terms of our senior secured credit facilities and we may need to partially secure
our obligations under our senior subordinated notes. We may not be able to obtain our own money
transmitter licenses. If we are unable to obtain such licenses prior to the expiration of our
contract with IPS, we may be unable to complete credit card cash advance and POS debit card
transactions, which would have a material adverse effect on our business and financial performance.
Check Warranty Services. We rely on TeleCheck to provide many of the check warranty services
that our gaming establishment customers contract with us to use when cashing patron checks. Unless
extended pursuant to its terms, our contract with TeleCheck expires on June 30, 2008 and we are
currently negotiating the terms of a new contract with TeleCheck. Unless we and TeleCheck mutually
agree to a new contract, we will need to make alternative arrangements for the provision of check
warranty services and we may not have any continuing interest in those contracts that are executed
directly between the gaming establishments and TeleCheck, which may have a significant impact on
revenues derived from check services. We may not be able to make such alternative arrangements on
terms that are as favorable to us as the terms of our contract with TeleCheck, or on any terms at
all. In addition, our Central Credit check warranty service, as currently deployed, uses risk
analytics provided by third-party providers.
Authorizations and Settlement. We rely on USA Payments and USA Payment Systems, each of which
is affiliated with or controlled by Messrs. Maskatiya and Cucinotta, to obtain authorizations for
credit card cash advances, POS debit card transactions, ATM cash withdrawal transactions and to
provide settlement transaction files to card associations and Arriva for some of these
transactions. Additionally, USA Payments and USA Payment Systems may in some cases be dependent
upon a single access point to connect to the various transaction processing networks. Service
outages experienced by these access points may inhibit the ability of USA Payments and USA Payment
Systems to process our transactions, which would have a material adverse effect on our business and
financial performance
Card Association Sponsorship. We rely on Bank of America Merchant Services (“BAMS”), which is
affiliated with Bank of America Corporation, for sponsorship into the Visa U.S.A. and MasterCard
card associations for domestic transactions at no cost to us through September 2010. We also rely
on a foreign bank in each foreign jurisdiction in which we operate, for example Banco Weng Hang in
Macau SAR, to process transactions conducted in these jurisdictions through the Visa International
and MasterCard card associations.
ATM Cash Supply. We rely exclusively on Bank of America to supply cash for substantially all
of our ATMs. Under our agreement, Bank of America is not obligated to supply us with more than
$410 million in cash at any given time; however, to satisfy our ATM cash supply needs, Bank of
America has regularly provided us with cash in excess of this limit. If Bank of America ever
refuses to provide cash in excess of this $410 million limit, we would have an inadequate supply of
cash for our ATMs. On February 28, 2008, we announced the execution of a definitive stock
purchase agreement pursuant to which we will acquire all of the outstanding stock of Certegy Gaming
Services, Inc. (“CGS”), formerly known as Game Financial Corporation, which is a division of
Fidelity National Information Services, Inc. that operates as GameCash. CGS operates ATMs at
gaming establishments and funds these ATMs out of cash reserves from their operations. If, after
the close of this acquisition, the cash required to operate these ATMs is in excess of the
available limits under our agreement with Bank of America and we are unable
to obtain an increase to our limit we will be required to provide the cash to operate these
ATMs from our existing sources of working capital. Our inability to increase the limit of amounts
available to us under the agreement with Bank of America or the ability to obtain an adequate
supply of cash from an alternate source would have a material adverse effect on our business and
financial performance.
22
Our agreement with Bank of America for the supply of ATM cash expires on December 19, 2010.
Upon the expiration of this agreement we need to obtain an adequate supply of cash for our ATMs
from Bank of America pursuant to a new agreement or from an alternate source. We may not be able
to obtain such adequate supply of cash on terms that are favorable to us or at all. Our inability
to obtain such adequate supply of cash from an alternate source would have a material adverse
effect on our business and financial performance.
Software Development and System Support. We generally rely on Infonox, which is controlled by
family members of our director Karim Maskatiya, and USA Payments and USA Payment Systems, each of
which is affiliated with or controlled by Messrs. Maskatiya and Cucinotta, for software development
and system support. In addition, we rely on NRT, Western Money Systems and Glory for software
development and system support related to their self-service slot ticket and player point
redemption kiosks that incorporate our cash access services.
Product Development. We rely on our joint venture partner and strategic partners for some of
our product development. For example, we are developing cashless gaming products through IFT, our
joint venture with IGT. With our strategic partners NRT, Western Money Systems and Glory, we have
jointly developed and are marketing self-service slot ticket and player point redemption kiosks
that incorporate our cash access services. These activities have risks resulting from unproven
combinations of disparate products and services, reduced flexibility in making design changes in
response to market changes, reduced control over product completion schedules and the risk of
disputes with our joint venture partners and strategic partners. In addition, if our cashless
gaming products are unsuccessful or do not receive necessary approvals for operation, we could lose
our entire investment in IFT.
Money Transfers. We rely on Western Union Financial Services, Inc. (“Western Union”) to
facilitate money transfers. We have provided Western Union with notice of termination of our
Amended and Restated Western Union North America Network Agency Agreement. In the event that we do
not enter into a new agreement with Western Union or another entity to facilitate money transfers,
we may not be able to continue the provision of money transfer services.
Arriva Card. Although we have decided to discontinue offering the Arriva Card, until we
dispose of our portfolio of cardholder accounts, we will continue to rely on CIT and Fiserv for the
issuance, underwriting and processing of our private label credit card. Our contracts with these
providers are for varying terms and provide early termination rights in the event of our breach of
or the occurrence of an event of default under these contracts. Replacing any of these or other
products and services we obtain from third parties could be materially disruptive to our
operations. We may not be able to enter into contracts or arrangements with alternate providers on
terms and conditions as beneficial to us as the contracts or arrangements with our current
providers, or at all. A change in our business relationships with any of these third-party
providers or the loss of their services or failed execution on their part could adversely affect
our business, financial condition, results of operations or cash flows.
The loss of our sponsorship into the Visa U.S.A., Visa International and MasterCard card
associations would have a material adverse effect on our business.
We cannot provide cash access services involving VISA cards and MasterCard cards in the United
States without sponsorship into the Visa U.S.A. and MasterCard card associations. BAMS currently
sponsors us into the card associations at no cost to us. BAMS began this sponsorship of us into
the card associations in 1998 when it held a significant ownership interest in us. When BAMS sold
its interest in us in 2000, BAMS agreed to continue its sponsorship of us at no cost to us
conditioned upon First Data’s continued indemnification of BAMS for any losses it may suffer as a
result of such sponsorship. When we redeemed First Data’s ownership interest in us in 2004, First
Data agreed to continue to indemnify BAMS for any losses it may suffer as a result of sponsoring us
into the card associations through September 2010. First Data will have the right to terminate its
indemnification obligations prior to September 2010 in the event that we breach indemnification
obligations that we owe to First Data, in the event that we incur chargebacks in excess of
specified levels, in the event that we are fined in excess of specified amounts for violating card
associations’ operating rules, or in the event that we amend the sponsorship agreement without
First Data’s consent.
23
In the event that First Data terminates its indemnification obligations and as a result we
lose our sponsorship by BAMS into the card associations, we would need to obtain sponsorship into
the card associations through another member of the card associations that is capable of supporting
our transaction volume. We would not be able to obtain such alternate sponsorship on terms as
favorable to us as the terms of our current sponsorship by BAMS, which is at no cost to us. We may
not be able to obtain alternate sponsorship at all. Our inability to obtain alternate sponsorship
on favorable terms or at all would have a material adverse effect on our business, operating
results and liquidity.
We cannot provide cash access services involving VISA cards and MasterCard cards outside of
the United States without a processing agreement with or sponsorship into the Visa International
and MasterCard card associations by a bank in each foreign jurisdiction in which we conduct cash
access transactions. We are currently a party to processing agreements or sponsored into these
card associations by foreign banks in each of the foreign jurisdictions in which we conduct cash
access transactions. In the event that any foreign bank that currently is a party to such
processing agreement or sponsors us into these card associations terminates such processing
agreement or its sponsorship of us, we would need to obtain a processing agreement or sponsorship
into the card associations through another foreign bank that is capable of supporting our
transaction volume in the relevant jurisdiction. For example, in early 2005 we were notified that
Bank of America is not authorized to sponsor us in some Caribbean markets. We paid a $25,000 fine
to one of the card associations in connection with this non-compliant practice and entered into an
alternate processing arrangement. We may not be able to obtain alternate sponsorship or processing
arrangements in any region on terms as favorable to us as the terms of our current sponsorship by
or processing arrangements with foreign banks, or at all. Our inability to obtain alternate
sponsorship or processing arrangements on favorable terms or at all could have a material adverse
effect on our business and operating results.
Changes by M&C International and First Data to certain of their tax returns may have an impact
on the value of a component of our deferred tax asset. In addition, changes in tax laws,
regulations and interpretations may adversely affect our business.
In connection with the Recapitalization and Private Equity Restructuring that occurred in
2004, we recorded a deferred tax asset of $247.0 million. In connection with this deferred tax
asset, we expect to pay a significantly lower amount in United States federal income taxes than we
provide for in our income statements. Our calculation of the starting balance of the deferred tax
asset is based upon information we received from M&C International and First Data about the gains
they recorded in the Recapitalization and the Private Equity Restructuring. If M&C International
or First Data change their calculation of the gains and file amended tax returns, we may be
required to recalculate the starting balance of the deferred tax asset and the annual amortization
thereof.
Unanticipated changes in applicable income tax rates or laws or changes in our tax position
could adversely impact our future results of operations. Our future effective tax rates could be
affected by changes in the valuation of our deferred tax asset as a result of an audit or
otherwise. Additionally, changes in tax laws or interpretations of such laws by domestic and
foreign tax authorities could affect our results of operations.
Certain providers upon whom we are dependent are controlled by Karim Maskatiya and Robert
Cucinotta, the loss of which could have a material adverse effect on our business.
We depend on services provided by USA Payments and USA Payment Systems, each of which is
controlled by or affiliated with Messrs. Maskatiya and Cucinotta, to provide many of the financial
services that we offer to patrons. The interests of Messrs. Maskatiya and Cucinotta may not
coincide with the interests of the holders of our common stock and Messrs. Maskatiya and Cucinotta
may take action that benefits themselves or these entities to our detriment. For example, Messrs.
Maskatiya and Cucinotta could cause any of these entities to take actions that impair the ability
of these entities to provide us with the services they provide today or that reduce the importance
of us to them in the future. Messrs. Maskatiya and Cucinotta could dispose of their interests in
these entities at any time and the successor owner or owners of such interests may not cause such
entities to treat us with the same importance as they treat us today. Any loss of the services of
these entities could adversely impact our business. During the years ended December 31, 2007 and
2006, we incurred costs and expenses from USA Payments and USA Payment Systems of an aggregate of
$4.4 million and $4.2 million, respectively. We also depend on services provided by Infonox, which
is controlled by family members of our director Karim Maskatiya. These familial relationships may
provide Mr. Maskatiya with influence over Infonox, presenting the same risks with respect to
Infonox as those described above with respect to USA Payments and USA Payment Systems.
24
If we are unable to protect our intellectual property adequately, we may lose a valuable
competitive advantage or be forced to incur costly litigation to protect our rights.
Our success depends on developing and protecting our intellectual property. We have entered
into license agreements with other parties for intellectual property that is critical to our
business. We rely on the terms of these license agreements, as well as 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. We hold two issued patents and have three patent applications pending. These
patent applications may not become issued patents. If they do not become issued patents, our
competitors would not be prevented from using these inventions.
We have also entered into license agreements with other parties for the exclusive use of their
technology and intellectual property rights in the gaming industry, such as our license to use
portions of the software infrastructure upon which our systems operate from Infonox. We rely on
these other parties to maintain and protect this technology and the related intellectual property
rights. If our licensors fail to protect their intellectual property rights in material that we
license and we are unable to protect such intellectual property rights, the value of our licenses
may diminish significantly and our business could be significantly harmed. It is possible that
third parties may copy or otherwise obtain and use our information and proprietary technology
without our authorization or otherwise infringe on our intellectual property rights or intellectual
property rights that we exclusively license. In addition, we may not be able to deter current and
former employees, consultants, and other parties from breaching confidentiality agreements with us
and misappropriating proprietary information from us or other parties. If we are unable to
adequately protect our intellectual property or our exclusively licensed rights, or if we are
unable to continue to obtain or maintain licenses for proprietary technology from other parties,
including in particular Infonox, it could have a material adverse effect on the value of our
intellectual property, our reputation, our business and our operating results.
We may have to rely on costly litigation to enforce our intellectual property rights and
contractual rights. For example, from 2004 to 2006 we pursued a claim against competitors of ours
alleging the infringement of the patented “3-in-1 rollover”. By pursuing this type of litigation,
we become exposed to the risk that defendants will attempt to invalidate our right to the subject
intellectual property or otherwise limit its scope. If litigation that we initiate is
unsuccessful, we may not be able to protect the value of our intellectual property and our business
could be adversely affected. In addition, in the litigation we do initiate, the defendants may
assert various counterclaims that may subject us to liability. In addition to losing the ability
to protect our intellectual property, we may also be liable for damages. We may also face
difficulty enforcing our rights in the QuikCash trademark because of the timing and sequence of
some of the assignment and renewal actions relating to the trademark.
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. 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 time. Any
litigation of this type, whether successful or unsuccessful, could result in substantial costs to
us and diversions of our resources.
We may make acquisitions or strategic investments, which involve numerous risks that we may
not be able to address without substantial expense, delay or other operational or financial
problems.
In order to obtain new customers in existing markets, expand our operations into new markets,
or grow our business through the introduction of new products and services, we may consider
acquiring additional businesses, technologies, products and intellectual property. For example, in
February 2008, we entered into a definitive agreement to acquire CGS; this acquisition has not yet
been and may not be consummated. Additionally, we may consider acquiring or forming a bank or
other financial services company for the purpose of, among other things, issuing our own credit
cards and/or using that bank’s vault cash to supply cash to our ATMs.
25
Acquisitions and strategic investments involve various risks, such as:
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difficulty integrating the technologies, operations and personnel from the acquired
business; |
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overestimation of potential synergies or a delay in realizing those synergies; |
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disruption to our ongoing business, including the diversion of management’s
attention and of resources from our principal business; |
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inability to obtain the desired financial and strategic benefits from the
acquisition or investment; |
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loss of customers of an acquired business; |
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assumption of unanticipated liabilities; |
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loss of key employees of an acquired business; and |
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entering into new markets in which we have limited prior experience. |
Acquisitions and strategic investments could also result in substantial cash expenditures, the
dilutive issuance of our equity securities, the incurrence of additional debt and contingent
liabilities, and amortization expenses related to other intangible assets that could adversely
affect our business, operating results and financial condition. Acquisitions and strategic
investments may also be highly dependent upon the retention and performance of existing management
and employees of acquired businesses for the day-to-day management and future operating results of
these businesses. Our ability to consummate acquisitions may be impaired by a number of factors,
including decreases in the trading price of our common stock, our inability to comply with
covenants relating to our existing debt or our inability to incur additional debt that is required
to consummate acquisitions or finance the post closing operation of acquired businesses.
Our business depends on our ability to introduce new, commercially viable products and
services in a timely manner.
Our ability to maintain and grow our business will depend upon our ability to introduce
successful new products and services in a timely manner. Our product development efforts are based
upon a number of complex assumptions, including assumptions relating to gaming patron habits,
changes in the popularity and prevalence of certain types of payment methods, anticipated
transaction volumes, the costs and time required to bring new products and services to market, and
the willingness and ability of both patrons and gaming establishment personnel to use new products
and services and bear the economic costs of doing so. Our new products and services may not
achieve market acceptance if any of our assumptions are wrong, or for other reasons.
Our ability to introduce new products and services may also require regulatory approvals,
which may significantly increase the costs associated with developing a new product or service and
the time required to introduce a new product or service into the marketplace. In order to obtain
these regulatory approvals we may need to modify our products and services which would increase our
costs of development and may make our products or services less likely to achieve market
acceptance.
For example, the commercial success of EDITH depends upon the continued viability of the
cashless gaming market segment. A curtailment in the prevalence of cashless gaming opportunities
as a result of legislative action, responsible gaming pressures or other factors beyond our control
would threaten the commercial success of our cashless gaming products and services. EDITH required
extensive laboratory testing and certification and to-date, has only been approved for use in one
gaming establishment. This product has been expressly disapproved for use in Nevada.
Our ability to grow our business through the introduction of new products and services depends
in part on our joint development activities with third parties over whom we have little or no
control. We have engaged in joint development projects with third parties in the past and we
expect to continue doing so in the future. Joint development can magnify several risks for us,
including the loss of control over development of aspects of the jointly developed products and
disputes with our joint venture partners.
26
We may suffer significant expense in our exit from the consumer credit business through the
discontinuance of the Arriva Card.
In 2006, through our wholly-owned subsidiary, Arriva, and together with CIT, a licensed
banking institution, and Fiserv, a credit processing service organization, we entered the consumer
credit business through the issuance of the Arriva Card, a private
label credit card. We have entered into an agreement with CIT whereby it issues the card,
extends the credit to the cardholder, and maintains a revolving credit account for the cardholder.
When a customer uses the Arriva Card for a transaction, CIT extends credit to the patron for the
face amount of transaction and the fee charged by the gaming establishment and acquires the
receivable from the customer. Through Arriva, we are required to purchase the originated
receivable from CIT three business days from the date the of the loan settlement from CIT. This
means that we bear the credit risk of any cardholders’ non-payment.
The rate of defaults in consumer credit is influenced by many factors, most of which are
beyond our ability to control and some of which are beyond our ability to forecast. Changes in
economic measures, including but not limited to unemployment rates, interest rates, exchange rates,
real estate market performance, consumer confidence, and inflation may affect cardholders’ ability
and willingness to repay amounts borrowed using the card. The fact that a consumer is or has been
a creditworthy borrower in the past does not guarantee that he or she will continue to be so in the
future. Cardholders who fail to repay their receivables could reduce the amounts we are able to
collect through the discontinuance of the Arriva Card, which could have a material adverse effect
upon our business, cash flows or results of operations.
By providing the Arriva Card to consumers, we also have become subject to a variety of state
and federal laws governing collection practices, and such collection regulations may impede or even
prevent our ability to collect amounts owed to us. These regulations include, but are not limited
to, the Federal Truth in Lending Act (Regulation Z) and the Equal Credit Opportunity Act
(Regulation B). In addition, by providing the Arriva Card to consumers, we have become subject to
an extensive array of federal and state statutes and regulations applicable to consumer lending
including, but not limited to, the Fair Debt Collection Practices Act, the Fair Credit Reporting
Act and the Fair and Accurate Credit Transactions Act. If our collection practices while we exit
the consumer business are not deemed to be in violation of these rules and regulations we could be
subject to fines and penalties which could have a material adverse effect upon our business, cash
flows or results of operations.
On February 28, 2008, we announced that we would discontinue offering the Arriva Card. As
part of this discontinuance, we may experience significant losses from consumers who are unwilling
or unable to pay their balances or from the loss we may experience from selling a portion or all of
the receivable balance to another entity.
We may experience increased delinquencies and credit losses from Arriva Card cardholders whose
accounts we have purchased.
Because Arriva is required to purchase the receivables three days from acquisition, we face
the risk that customers who carry a balance on the Arriva Card will not repay their balances.
Rising losses or leading indicators of rising losses (higher delinquencies or bankruptcy rates) may
require us to increase our liability to repurchase accounts from CIT and our allowance for bad debt
on the accounts we have purchased and may increase our operating losses from Arriva if we are
unable to raise revenue or reduce costs to compensate for these higher losses.
27
In particular, we face the following risks in this area:
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Missed Payments. We face the risk that customers will miss payments. Receivable
charge-offs (including from bankruptcies) are generally preceded by missed payments or
other indications of worsening financial condition. Customers may be more likely to
miss payments in the event of an economic downturn. In addition, we face the risk that
consumer behavior may change (i.e. an increased willingness to fail to repay debt),
causing a long-term rise in delinquencies and charge-offs. |
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Estimates of future losses. We face the risk that we may underestimate our future
losses and fail to hold a bad debt allowance sufficient to account for these losses.
Incorrect assumptions could lead to material underestimates of future losses and
inadequate allowance for bad debt. In addition, our estimate of future losses impacts
the amount of reserves we build to account for those losses. The build or release of
reserves impacts our current financial results. |
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Underwriting. We face the risk that our ability to assess the credit worthiness of
our customers may diminish. If the models and approaches we use to select, manage, and
underwrite our customers become less predictive of future charge-offs (due, for
example, to changes in the competitive environment or in the economy), our credit
losses and returns may deteriorate. |
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Industry practices. We face the risk that our charge-off and delinquency rates may
be impacted by industry developments. |
Our products and services are complex, depend on a myriad of complex networks and technologies
and may be subject to software or hardware errors or failures that could lead to an increase in our
costs, reduce our revenues or damage our reputation.
Our products and services, and the networks and third-party services upon which our products
and services are based, are complex and may contain undetected errors or may suffer unexpected
failures. We are exposed to the risk of failure of our proprietary computer systems, many of which
are deployed, operated, monitored and supported by Infonox, which we do not control. We rely on
Infonox to detect and respond to errors and failures in our proprietary computer systems. We rely
on NRT, Western Money Systems and Glory for software development and system support of the
self-service slot ticket and player point redemption kiosks that incorporate our cash access
services. We are exposed to the risk of failure of the computer systems that are owned, operated
and managed by USA Payments Systems, which we do not control. USA Payment Systems owns the data
centers through which most of our transactions are processed, and we rely on USA Payment Systems to
maintain the security and integrity of our transaction data, including backups thereof. We also
are exposed to the risk of failure of card association and electronic funds transfer networks that
are used to process and settle our transactions. These networks, which are owned and operated by
others, are subject to planned and unplanned outages and may suffer degradations in performance
during peak processing times. Finally, we are subject to the risk of disruption to, or failure of,
the telecommunications infrastructure upon which the interfaces among these systems are based. All
of these systems and networks, upon which we rely to provide our services, are potentially
vulnerable to computer viruses, physical or electronic break-ins, natural disasters and similar
disruptions, which could lead to interruptions, delays, loss of data, public release of
confidential data or the inability to complete patron transactions. The occurrence of these errors
or failures, disruptions or unauthorized access could adversely affect our sales to customers,
diminish the use of our cash access products and services by patrons, cause us to incur significant
repair costs, result in our liability to gaming establishments or their patrons, divert the
attention of our development personnel from product development efforts, and cause us to lose
credibility with current or prospective customers or patrons.
We may not successfully enter new markets, which could lead to an increase in our costs.
If and as new and developing domestic markets develop, competition among providers of cash
access products and services will intensify. If we attempt to enter these markets, we will have to
expand our sales and marketing presence in these markets. In competitive bidding situations, we
may not enjoy the advantage of being the incumbent provider of cash access products and services to
gaming establishments in these new markets and developers and operators of gaming establishments in
these new markets may have pre-existing relationships with our competitors. We may also face the
uncertainty of compliance with new or developing regulatory regimes with which we are not currently
familiar and oversight by regulators that are not familiar with us, or our business. Each of these
risks could materially impair our ability to successfully expand our operations into these new and
developing domestic markets.
28
Attempting to enter international markets in which we have not previously operated may expose
us to political, economic, tax, legal and regulatory risks not faced by businesses that operate
only in the United States. The legal and regulatory regimes of foreign markets and their
ramifications on our business are less certain. Our international operations will be subject to a
variety of risks, including different regulatory requirements and interpretations, trade barriers,
difficulties in staffing and managing foreign operations, higher rates of fraud, fluctuations in
currency exchange rates, difficulty in enforcing or interpreting contracts or legislation,
political and economic instability and potentially adverse tax consequences. For example, our
entry into Macau SAR was subject to receipt of approvals, licenses or waivers by or from the
Monetary Authority of Macau, the Macau Gaming Commission and the Macau Gaming Inspection and
Coordination Bureau, as applicable or deemed necessary by such authorities. If all of such
approvals, licenses or waivers were not received, we would not have been able to undertake all of
our operations in Macau SAR. Similar difficulties in obtaining approvals, licenses or waivers from
the monetary and gaming authorities of other jurisdictions, in addition to other potential
regulatory and quasi-regulatory issues that we have not yet ascertained, may arise in other
international jurisdictions into which we attempt to enter. In these new markets, our operations
will rely on an infrastructure of financial services and telecommunications facilities that may not
be sufficient to support our business needs, such as the authorization and settlement services that
are required to implement electronic payment transactions and the telecommunications facilities
that would enable us to reliably connect our networks to our products at gaming establishments in
these new markets. In these new markets, we may additionally provide services based upon
interpretations of applicable law, which interpretation may be subject to regulatory or judicial
review. These risks, among others, could materially adversely affect our business and operating
results. In connection with our expansion into new international markets, we may forge strategic
relationships with business partners to assist us. The success of our expansion into these markets
therefore may depend in part upon the success of the business partners with whom we forge these
strategic relationships. If we do not successfully form strategic relationships with the right
business partners or if we are not able to overcome cultural differences or differences in business
practices, our ability to penetrate these new international markets will suffer.
We are also subject to the risk that the domestic or international markets that we attempt to
enter or expand into may not develop as quickly as anticipated, or at all. The development of new
gaming markets is subject to political, social, regulatory and economic forces beyond our control.
The expansion of gaming activities in new markets can be very controversial and may depend heavily
on the support and sponsorship of local government. Changes in government leadership, failure to
obtain requisite voter support in referendums, failure of legislators to enact enabling legislation
and limitations on the volume of gaming activity that is permitted in particular markets may
inhibit the development of new markets.
Our estimates of the potential future transaction volumes in new markets are based on a
variety of assumptions, which may prove to be inaccurate. To the extent that we overestimate the
potential of a new market, incorrectly gauge the timing of the development of a new market, or fail
to anticipate the differences between a new market and our existing markets, we may fail in our
strategy of growing our business by expanding into new markets. Moreover, if we are unable to meet
the needs of our existing customers as they enter markets that we do not currently serve; our
relationships with these customers could be harmed.
We may encounter difficulties managing our growth, which could adversely affect our operating
results.
We will need to effectively manage the expansion of our operations in order to execute our
growth strategy of entering into new markets, expanding in existing markets and introducing new
products and services. Growth will strain our existing resources. It is possible that our
management, employees, systems and facilities currently in place may not be adequate to accommodate
future growth. In this situation, we will have to improve our operational, financial and
management controls, reporting systems and procedures. If we are unable to effectively manage our
growth, our operations, financial results and liquidity may be adversely affected.
An unexpectedly high level of chargebacks, as the result of fraud or otherwise, could
adversely affect our cash advance business.
When patrons use our cash access services, we either dispense cash or produce a negotiable
instrument that can be exchanged for cash. If a completed cash access transaction is subsequently
disputed and if we are unsuccessful in establishing the validity of the transaction, we may not be
able to collect payment for such transaction and such transaction becomes a chargeback. One of the
major credit card associations has allowed us to complete credit card cash advance transactions at
our ACMs so long as we assume chargeback liability for any transaction in which we do not obtain a
contemporaneous cardholder signature, which may result in increased chargeback liability. An
increased level of chargebacks could have a material adverse effect on our business or results of
operations. Moreover, in the event that we incur chargebacks in excess of specified levels, First
Data will have the right to terminate its indemnification obligations to BAMS, and we could lose
our no-cost sponsorship into the card associations. In
addition, in the event that we incur chargebacks in excess of specified levels, we could be
censured by the card associations by way of fines or otherwise.
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In certain foreign regions in which we currently operate or may operate in the future, new
card security features have been developed as a fraud deterrent. An example of such feature is
known as chip-and-pin, which requires merchant terminals to be capable of obtaining an
authorization through a chip-and-pin entry mode in addition to traditional magnetic stripe and
keyed entry modes. Currently, we are in the process of upgrading our devices in certain
international jurisdictions to accept these new technologies. In the interim, we are exposed to
potential additional chargeback risks arising from our inability to fully integrate these new card
security features in certain of the international jurisdictions in which we operate. The card
associations have mandated that in all jurisdictions other than the United States and Canada,
chargeback liability for those transactions authorized through non-chip-and-pin entry modes where
chip-and-pin should be supported will be borne by the applicable merchant, i.e. us, effective
January 1, 2007. The card associations have similarly mandated that such chargeback liability for
those transactions that occur in Canada will be borne by the applicable merchant, i.e. us,
effective January 4, 2010. Additionally, we intend to provide our services in international
markets in which we have not previously operated and have no experience as to chargebacks.
Accordingly, we may be exposed to higher than anticipated chargeback liability, which could have a
material adverse effect upon our business, cash flows or results of operations.
A material increase in market interest rates or changing regulations could adversely affect
our ATM business.
We obtain a supply of cash for our ATMs from Bank of America. Pursuant to our contract with
Bank of America, we are obligated to pay a monthly fee that is based upon the amount of cash used
to supply our ATMs and a market interest rate. Assuming no change in the amount of cash used to
supply our ATMs, an increase in market interest rates will result in an increase in the monthly fee
that we must pay to obtain this supply of cash, thereby increasing our ATM operating costs. Any
increase in the amount of cash required to supply our ATMs would magnify the impact of an increase
in market interest rates. An increase in interest rates may result in a material adverse effect on
our financial condition and operating results. For the years ended December 31, 2007 and 2006, we
incurred approximately $15.9 million and $15.7 million, respectively, in aggregate fees to Bank of
America for this supply of cash.
Our ATM services are subject to the applicable state banking regulations in each jurisdiction
in which we operate ATMs. Our ATM services may also be subject to local regulations relating to
the imposition of daily limits on the amounts that may be withdrawn from ATMs, the location of ATMs
and our ability to surcharge cardholders who use our ATMs. These regulations may impose
significant burdens on our ability to operate ATMs profitably in some locations, or at all.
Moreover, because these regulations are subject to change, we may be forced to modify our ATM
operations in a manner inconsistent with the assumptions upon which we relied when entering into
contracts to provide ATM services at gaming establishments.
An unexpected increase in check warranty expenses could adversely affect our check warranty
business.
We currently rely on TeleCheck to provide check warranty services to many of our customers.
When a gaming establishment obtains an authorization from TeleCheck pursuant to its check warranty
service, TeleCheck warrants payment on the patron’s check. If the patron’s check is subsequently
dishonored upon presentment for payment, TeleCheck purchases the dishonored check from the gaming
establishment for its face amount. Pursuant to the terms of our contract with TeleCheck, we share
a portion of the loss associated with these dishonored checks. Although this contract limits the
loss percentage of the dishonored checks to which we are exposed, there is no limit on the
aggregate dollar amount to which we are exposed, which is a function of the face amount of checks
warranted. TeleCheck manages and mitigates these dishonored checks through the use of risk
analytics and collection efforts, including the additional fees that it is entitled to collect from
check writers of dishonored checks. During the years ended December 31, 2007 and 2006, our
warranty expenses with respect to TeleCheck’s check warranty service were $5.7 million and
$8.4 million, respectively. We have no control over TeleCheck’s decision to warrant payment on a
particular check and we have limited visibility into TeleCheck’s collection activities. As a
result, we may incur an unexpectedly high level of check warranty expenses at any time, and if we
do, we may suffer a material adverse effect to our business or results of operations.
As an alternative to TeleCheck’s check warranty service, we have developed our own Central
Credit check warranty service that is based upon our own proprietary information, data from
third-party databases, and third-party risk analytics and actuarial assumptions. If these risk
analytics or actuarial assumptions are ineffective, we may incur an unexpectedly high level of
check warranty expenses which may have a material adverse effect on our business or operating
results.
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We operate our business in regions subject to natural disasters, including hurricanes. We may
suffer casualty losses as a result of a natural disaster, and any interruption to our business
resulting from a natural disaster will adversely affect our revenues and results of operations.
We operate our business primarily through equipment, including CasinoCash Plus 3-in-1 ATMs,
ACMs and QuikCash kiosks, which we install on the premises of gaming establishments and that
patrons use to access cash for gaming. Accordingly, a substantial portion of our physical assets
are located in locations beyond our direct control. Our business may be adversely affected by any
damage to or loss of equipment that we install at gaming establishments or the cash contained
therein resulting from theft, vandalism, terrorism, flood, fire or any other natural disaster. Any
losses or damage that we suffer may not be subject to coverage under our insurance policies.
In addition to these casualty losses, our business is exclusive to gaming establishments and
is dependent on consumer demand for gaming. In the event of a natural disaster, the operations of
gaming establishments could be negatively impacted or consumer demand for gaming could decline, or
both, and as a result, our business could be disrupted. For example, we believe that our revenues
and results of operations in Louisiana and Mississippi were reduced in 2006 from what we would
otherwise have expected as a result of Hurricanes Katrina and Rita, and that reduction may continue
in the future. Any interruption to our business resulting from a natural disaster will adversely
affect our revenues and results of operations. We do not carry any business interruption
insurance.
We may incur penalties in connection with the administration of our benefit plans.
Certain of the health, welfare and retirement plans that we maintain for the benefit of our
employees obligate us to file certain reports with the Department of Labor, Internal Revenue
Service and the Pension Benefit Guaranty Corporation. Although we have filed the required reports
for some of our benefit plans, we have not filed the required reports for others. As a result, we
may incur penalties.
Risks related to the industry
Economic downturns, a decline in the popularity of gaming or changes in the demographic
profile of gaming patrons could reduce the number of patrons that use our services or the amounts
of cash that they access using our services.
We provide our cash access products and related services exclusively to gaming establishments
for the purpose of enabling their patrons to access cash. As a result, our business depends on
consumer demand for gaming. Gaming is a discretionary leisure activity, and participation in
discretionary leisure activities has in the past and may in the future decline during economic
downturns because consumers have less disposable income. Therefore, during periods of economic
contraction, our revenues may decrease while some of our costs remain fixed, resulting in decreased
earnings. Gaming activity may also decline based on changes in consumer confidence related to
general economic conditions or outlook, fears of war, future acts of terrorism, or other factors.
A reduction in tourism could also result in a decline in gaming activity. Finally, a legislature
or regulatory authority may prohibit or significantly restrict gaming activities in its
jurisdiction. A decline in gaming activity as a result of these or any other factors would have a
material adverse effect on our business and operating results. Changes in consumer preferences
could also harm our business. Gaming competes with other leisure activities as a form of consumer
entertainment and may lose popularity as new leisure activities arise or as other leisure
activities become more popular. In addition, gaming in traditional gaming establishments competes
with Internet-based gaming for gaming patrons, which is currently not lawful in the United States
of America. The popularity and acceptance of gaming is also influenced by the prevailing social
mores and changes in social mores could result in reduced acceptance of gaming as a leisure
activity. To the extent that the popularity of gaming in traditional gaming establishments
declines as a result of either of these factors, the demand for our cash access services may
decline and our business may be harmed.
Aside from the general popularity of gaming, the demographic profile of gaming patrons changes
over time. The gaming habits and use of cash access services varies with the demographic profile
of gaming patrons. For example, a local patron may visit a gaming establishment regularly but
limit his or her play to the amount of cash that he or she brings to the gaming establishment. In
contrast, a vacationing gaming patron that visits the gaming establishment infrequently may play
much larger amounts and have a greater need to use cash access services. To the extent that the
demographic profile of gaming patrons in the markets we serve either narrows or migrates towards
patrons who use cash access services less frequently or for lesser amounts of cash, the demand for
our cash access services may decline and our business may be harmed.
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Changes in consumer willingness to pay a fee to access their funds could reduce the demand for
our cash access products and services.
Our business depends upon the willingness of patrons to pay a fee to access their own funds on
the premises of a gaming establishment. In most retail environments, consumers typically do not
pay an additional fee for using non-cash payment methods such as credit cards; POS debit cards, or
checks. In order to access cash in a gaming establishment, however, patrons must pay service
charges to access their funds. Gaming patrons could bring more cash with them to gaming
establishments, or access cash outside of gaming establishments without paying a fee for the
convenience of not having to leave the gaming establishment. To the extent that gaming patrons
become unwilling to pay these fees for convenience or lower cost cash access alternatives become
available, the demand for cash access services within gaming establishments will decline and our
business could suffer.
We are subject to extensive governmental gaming regulation, which may harm our business.
We are subject to a variety of regulations in the jurisdictions in which we operate. Most of
the gaming regulators in jurisdictions in which we operate distinguish between gaming-related
suppliers and vendors, such as manufacturers of slot machine or other gaming devices, and
non-gaming suppliers and vendors, such as food and beverage purveyors, construction contractors and
laundry and linen suppliers. In these jurisdictions, we are generally characterized as a
non-gaming supplier or vendor and we must obtain a non-gaming supplier’s or vendor’s license,
qualification or approval. The obtaining of these licenses, qualifications or approvals and the
regulations imposed on non-gaming suppliers and vendors are typically less stringent than for
gaming related suppliers and vendors. However, a few of the gaming regulators in jurisdictions in
which we do business do not distinguish between gaming-related and non-gaming related suppliers and
vendors, and in those jurisdictions we currently are subject to the same stringent licensing,
qualification and approval requirements and regulations that are imposed upon vendors and suppliers
that would be characterized as gaming-related in other jurisdictions. Such requirements include
licensure or finding of suitability for some of our officers, directors and beneficial owners of
our securities. If gaming regulatory authorities were to find any such officer, director or
beneficial owner unsuitable, or if any such officer, director, or beneficial owner fails to comply
with any licensure requirements, we would be required to sever our relationship with that person.
Severing our relationship with a person may require such individual ceasing to provide services to
us in any capacity, including as an officer, director, employee or consultant, such person
divesting himself, herself or itself of all or substantially all of its equity interest in us, and
we refraining from conducting any business or maintaining any business relationship with such
person or any entity that such person is a director, officer or stockholder of or otherwise
affiliated with. Any of the foregoing could be costly to the Company and materially disruptive of
its management and operations. Any loss or denial of licensure or finding of unsuitability in any
one jurisdiction would likely result in similar adverse regulatory actions in several other
jurisdictions, resulting in a domino effect of adverse regulatory actions. The effects of the
internal investigation that we announced on November 14, 2007 have resulted in heightened scrutiny
from gaming regulators and an increased risk of regulatory intervention.
Some public issuances of securities and other transactions by us also require the approval of
regulatory authorities.
If we must obtain a gaming-related supplier’s or vendor’s license, qualification or approval
because of the introduction of new products (such as products related to cashless gaming) or
services or because of a change in the laws or regulations, or interpretation thereof, our business
could be materially adversely affected. This increased regulation over our business could include,
but is not limited to: requiring the licensure or finding of suitability in many jurisdictions of
any officer, director, key employee or beneficial owner of our securities; the termination or
disassociation with any officer, director, key employee or beneficial owner of our securities that
fails to file an application or to obtain a license or finding of suitability; the submission of
detailed financial and operating reports; submission of reports of material loans, leases and
financing; and, requiring regulatory approval of some commercial transactions such as the transfer
or pledge of equity interests in us.
Prior changes in our ownership, management and corporate structure, including the
recapitalization of our ownership and our conversion from a limited liability company to a
corporation in 2004, required us to notify many of the state and tribal gaming regulators under
whose jurisdiction we operate. In many cases, those regulators have asked us for further
information and explanation of these changes. To date, we have satisfied some of these inquiries,
and are continuing to cooperate with those that are ongoing. Given the magnitude of the changes in
our ownership that resulted from recapitalization, we were required to reapply for new permits or
licenses in many jurisdictions but we were not required to discontinue our operation during the
period of re-application.
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Any new gaming license or related approval that may be required in the future may not be
granted, and our existing licenses may be revoked, suspended, limited or may not be renewed. In
some jurisdictions we are in the process of obtaining licenses and
have yet to receive final approval of such licenses from the applicable regulatory authority.
In these jurisdictions, we operate under temporary licenses or without a license. We may not be
issued a license in these jurisdictions.
Regulatory authorities at the federal, state, local and tribal levels have broad powers with
respect to the licensing of gaming-related activities and may revoke, suspend, condition or limit
our licenses, impose substantial fines and take other actions against us or the gaming
establishments that are our customers, any one of which could have a material adverse effect on our
business, financial condition and operating results. Any new gaming license or related approval
that may be required in the future may not be granted, and our existing licenses may not be renewed
or may be revoked, suspended or limited. If additional gaming regulations are adopted in a
jurisdiction in which we operate, such regulations could impose restrictions or costs that could
have a material adverse effect on our business. From time to time, various proposals are
introduced in the legislatures of some of the jurisdictions in which we have existing or planned
operations that, if enacted, could adversely affect the tax, regulatory, operational or other
aspects of the gaming industry or cash access in the gaming industry. Legislation of this type may
be enacted in the future.
In addition, some of the new products and services that we may develop cannot be offered in
the absence of regulatory approval of the product or service or licensing of us, or both. For
example, our EDITH cashless gaming product has to date only been approved by the gaming regulators
for use at one gaming establishment and cannot be used at any other location unless and until we
receive approval from the appropriate authority in such additional location. These approvals could
require that we and our officers, directors or ultimate beneficial owners obtain a license or be
found suitable and that the product or service be approved after testing and review. We may fail
to obtain any such approvals in the future.
When contracting with tribal owned or controlled gaming establishments, we become subject to
tribal laws and regulations that may differ materially from the non-tribal laws and regulations
under which we generally operate. In addition to tribal gaming regulations that may require us to
provide disclosures or obtain licenses or permits to conduct our business on tribal lands, we may
also become subject to tribal laws that govern our contracts. These tribal governing laws may not
provide us with processes, procedures and remedies that enable us to enforce our rights as
effectively and advantageously as the processes, procedures and remedies that would be afforded to
us under non-tribal laws, or to enforce our rights at all. Many tribal laws permit redress to a
tribal adjudicatory body to resolve disputes; however, such redress is largely untested in our
experience. We may be precluded from enforcing our rights against a tribal body under the legal
doctrine of sovereign immunity. A change in tribal laws and regulations or our inability to obtain
required licenses or licenses to operate on tribal lands or enforce our contract rights under
tribal law could have a material adverse effect on our business, financial condition and operating
results.
The cash access industry is subject to change, and we must keep pace with the changes to
successfully compete.
The demand for our products and services is affected by new and evolving technology and
industry standards. Cash access services are based on existing financial services and payment
methods, which are also continually evolving. Our future success will depend, in part, upon our
ability to successfully anticipate, develop and introduce new cash access services based on
emerging financial services and payment methods. Stored value cards, Internet-based payment
methods and the use of portable consumer devices such as personal digital assistants and mobile
telephones are examples of evolving payment technologies that could impact our business. Our
future success will depend, in part, upon our ability to successfully develop and introduce new
cash access products and services and to enhance our existing products and services to respond to
changes in technology and industry standards on a timely basis. The products or services that we
choose to develop may not achieve market acceptance or obtain any necessary regulatory approval.
In addition, alternative products, services or technologies may replace our products and services
or render them obsolete. If we are unable to develop new products or services or enhance existing
products or services in a timely and cost-effective manner in response to technological or market
changes, our business, financial condition and operating results may be materially adversely
affected.
The cash access industry also changes based on changing consumer preferences. Our failure to
recognize or keep pace with changing preferences could have a material adverse effect on our
business, financial condition and operating results. For example, we have observed a decline in
the volume of check cashing at gaming establishments over time as patron familiarity and comfort
with credit card cash advances, POS debit card transactions and ATM cash withdrawal transactions
has increased. To the extent that we continue to rely on check warranty services for a substantial
portion of our business, a continued decline in check cashing volume could have a material adverse
effect on our business, financial condition and operating results.
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Growth of the gaming industry in any market is subject to political and regulatory
developments that are difficult to anticipate.
We expect a substantial portion of our future growth to result from the general expansion of
the gaming industry. The expansion of gaming activities in new markets can be very controversial
and may depend heavily on the support of national and local governments. Changes in government
leadership, failure to obtain requisite voter support in referenda, failure of legislators to enact
enabling legislation and limitations on the volume of gaming activity that is permitted in
particular markets may prevent us from expanding our operations into new markets. A failure by the
gaming industry to expand at the rate that we expect could have a material adverse effect on our
business, growth rates, financial condition, operating results and cash flows.
The United Kingdom (“UK”) Gambling Act 2005 (the “Gambling Act”) entered into force as law on
September 1, 2007. The UK Gambling Act may be interpreted as prohibiting our provision of credit
card cash advance services in UK casinos. Because of this interpretation by the UK Gambling
Commission and their regulatory body, the Department of Culture, Media and Sport, we ceased
processing credit card cash advance transactions in UK casinos as of September 1, 2007. If a
similar position is taken by gaming regulators in other jurisdictions, we could be subject to
material adverse effects on our business, financial condition and operating results. Undertaking
judicial review of such determinations or interpretations, whether successful or unsuccessful,
could result in substantial costs to us, and diversions of our resources. Finally, if we were to
resume providing credit card cash advance transactions in gaming establishments in the UK following
a judicial interpretation or regulatory action that prohibits us from doing so, we could be subject
to prosecution that results in harm to our reputation and the imposition of penalties or fines.
A governmental shutdown of a gaming regulatory body in a jurisdiction where we operate may
cause a disruption in our business and harm our operating results.
On July 5, 2006, Atlantic City casinos were forced to suspend their gaming operations due to
the shutdown of the New Jersey Casino Control Commission. The New Jersey State government stopped
non-essential governmental functions because the legislature had not adopted a new budget by the
constitutional deadline. One such non-essential governmental function was the operation of the New
Jersey Casino Control Commission, which regulates gaming in Atlantic City’s casinos. New Jersey
State law prohibits the operation of casinos without the supervision of New Jersey Casino Control
Commission employees, so the casinos were forced to suspend their gaming operations. Another
shutdown of the New Jersey Casino Control Commission or a similar shutdown of a regulatory gaming
body in another jurisdiction where we do business may disrupt our ability to do business and
adversely affect our revenue and results of operations.
Many of the financial services that we provide are subject to extensive rules and regulations,
which may harm our business.
Our Central Credit gaming patron credit bureau services are subject to the Fair Credit
Reporting Act, the Fair and Accurate Credit Transactions Act of 2003 and similar state laws. Our
QuikCredit service and TeleCheck’s and our collection practices in connection with dishonored
checks with respect to which TeleCheck or Central Credit has issued authorizations pursuant to
TeleCheck’s or Central Credit’s check warranty service, are subject to the Fair Debt Collections
Practices Act and applicable state laws relating to debt collection. All of our cash access
services and patron marketing services are subject to the privacy provisions of state and federal
law, including the Gramm-Leach-Bliley Act. Our POS debit card transactions and ATM withdrawal
services are subject to the Electronic Fund Transfer Act. Our ATM services are subject to the
applicable state banking regulations in each jurisdiction in which we operate ATMs. Our ATM
services may also be subject to local regulations relating to the imposition of daily limits on the
amounts that may be withdrawn from ATMs, the location of ATMs and our ability to surcharge
cardholders who use our ATMs. The cash access services we provide are subject to recordkeeping and
reporting obligations under the Bank Secrecy Act and the USA PATRIOT Act of 2001. In most gaming
establishments, our cash access services are provided through gaming establishment cashier
personnel, in which case the gaming establishments are required to file CTRs SAR. In a limited
number of gaming establishments, we provide our cash access services directly to patrons at
satellite cashiers or booths that we staff and operate, in which case we are required to file CTRs
and SARs on a timely basis. Additionally, as of December 31, 2006, IPS commenced required
notification of FINCen as to our agency relationship with IPS, which relationship was not
previously reported to FINCen. As a result of such notification, we are required to commence the
filing of SARs with respect to transactions completed at all gaming establishments at which our
cash access services are provided and may be required to additionally file SARs with respect to
transactions completed during the previous nine month period at all such gaming establishments. If
we are found to be noncompliant in any way with these laws, we could be subject to substantial
civil and criminal penalties. In jurisdictions in which we serve as a check casher or offer our
QuikCredit service, we are subject to the applicable state licensing requirements and regulations
governing check cashing activities and deferred deposit service providers. Banking regulators in
Rhode Island have previously questioned whether our provision of check verification and guarantee
services to gaming establishments in Rhode Island required us to hold a check cashing license
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and
currently question whether our provision
of cash access services to gaming establishments in Rhode Island require us to hold a check
cashing license. It is our position that our check verification and guarantee services merely
support a gaming establishment’s check cashing activities, but do not themselves constitute check
cashing and that we therefore do not need a check cashing license to provide such services. It is
also our position that our cash access services, which involve the purchase and sale of a
negotiable instrument, do not constitute check cashing and that we therefore do not need a check
cashing license to provide such services. Our entry into the consumer credit business through the
provision of the Arriva Card requires us to maintain a relationship with a licensed banking
institution to issue Arriva Cards and subjects us to compliance with numerous state and federal
laws governing consumer lending, debt collection practices and credit reporting. In addition, our
relationship with IPS expires on December 31, 2009. On February 22, 2007, IPS’ parent company,
First Data, announced that it will be exiting the official check and money order business over the
course of the next two to three years. We are considering obtaining money transmitter licenses in
many states, which would cause us to become subject to state licensing requirements and regulations
governing money transmitters.
We are subject to formal or informal audits, inquiries or reviews from time to time by the
regulatory authorities that enforce these financial services rules and regulations. In the event
that any regulatory authority determines that the manner in which we provide cash access services,
patron marketing services, gaming patron credit bureau services or private label credit cards is
not in compliance with existing rules and regulations, or the regulatory authorities adopt new
rules or regulations that prohibit or restrict the manner in which we provide cash access services,
patron marketing services, gaming patron credit bureau services or private label credit cards, we
may be forced to modify the manner in which we operate, or stop processing certain types of cash
access transactions, providing patron marketing services, gaming patron credit bureau services or
private label credit cards altogether. We may also be required to pay substantial penalties and
fines if we fail to comply with applicable rules and regulations. For example, if we fail to file
CTRs or SARs on a timely basis or if we are found to be noncompliant in any way with either the
Bank Secrecy Act or the USA PATRIOT Act of 2001, we could be subject to substantial civil and
criminal penalties. In addition, our failure to comply with applicable rules and regulations could
subject us to private litigation. Any such actions could have a material adverse effect on our
business, financial condition and operating results.
Following the events of September 11, 2001, the United States and other governments have
imposed and are considering a variety of new regulations focused on the detection and prevention of
money laundering and money transmitting to or from terrorists and other criminals. Compliance with
these new regulations may impact our business operations or increase our costs.
As we develop new products and services, we may become subject to additional regulations. For
example, in the event that we form or acquire a bank or industrial loan company, we would become
subject to a number of additional banking and financial institution regulations, which may include
the Bank Holding Company Act. These additional regulations could substantially restrict the nature
of the business in which we may engage and the nature of the businesses in which we may invest. In
addition, changes in current laws or regulations and future laws or regulations may restrict our
ability to continue our current methods or operation or expand our operations and may have a
material adverse effect on our business, results of operations and financial condition.
Consumer privacy laws may change, requiring us to change our business practices or expend
significant amounts on compliance with such laws.
Our patron marketing services depend on our ability to collect and use non-public personal
information relating to patrons who use our products and services and the transactions they
consummate using our services. We are required by federal and state privacy laws and rules to
safeguard and protect the privacy of such information, to make disclosures to patrons regarding our
privacy and information sharing policies and, in some cases, to provide patrons an opportunity to
“opt out” of the use of their information for certain purposes. The failure or circumvention of
the means by which we safeguard and protect the privacy of information we gather may result in the
dissemination of non-public personal information, which may harm our reputation and may expose us
to liability to the affected individuals and regulatory enforcement proceedings or fines.
Regulators reviewing our policies and practices may require us to modify our practices in a
material or immaterial manner or impose fines or other penalties if they believe that our policies
and practices do not meet the necessary standard. To the extent that our patron-marketing services
have in the past failed or now or in the future fail to comply with applicable law, our privacy
policies or the notices that we provide to patrons, we may become subject to actions by a
regulatory authority or patrons which cause us to pay monetary penalties or require us to modify
the manner in which we provide patron-marketing services. To the extent that patrons exercise
their right to “opt out,” our ability to leverage existing and future databases of information
would be curtailed. Consumer and data privacy laws are evolving, and due to recent high profile
thefts and losses of sensitive consumer information from protected databases, such laws may be
broadened in their scope and application, impose additional requirements and restrictions on
gathering, encrypting
and using patron information or narrow the types of information that may be collected or used
for marketing or other purposes or require patrons to “opt-in” to the use of their information for
specific purposes, or impose additional fines or potentially costly compliance requirements which
will hamper the value of our patron-marketing services.
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Responsible gaming pressures could result in a material adverse effect on our business and
operating results.
Responsible gaming pressures can have a similar effect on us as governmental gaming
regulation. Our ability to expand our business and introduce new products and services depends in
part on the support of, or lack of opposition from, social responsibility organizations that are
dedicated to addressing problem gaming. If we are unable to garner the support of responsible
gaming organizations or if we face substantial opposition from responsible gaming organizations, we
may face additional difficulties in sustaining our existing customer relationships, establishing
new customer relationships, obtaining required regulatory approvals for new products or services,
or providing our services into new markets, each of which could have a material adverse effect on
our business, financial condition and operating results.
Lawsuits could be filed against gaming establishments and other gaming related product and
service providers on behalf of problem gamblers. We may be named in such litigation because we
provide patrons the ability to access their cash in gaming establishments. This litigation could
develop as individual complaints or as mass tort or class action claims. We would vigorously
defend ourselves in any such litigation, and this defense could result in substantial expense to
us, and distraction of our management. The outcome of any such litigation would be substantially
uncertain, and it is possible that our business, financial condition and operating results could be
materially affected by an unfavorable outcome against either us, or our gaming establishment
customers.
Risk related to our capital structure
Our common stock has only been publicly traded since September 22, 2005 and we expect that the
price of our common stock will fluctuate substantially.
There has been a public market for our common stock since September 22, 2005. The market
price of our common stock may fluctuate significantly in response to a number of factors, some of
which are beyond our control, including those described above under “— Risks related to our
business,” “— Risks related to the industry” and the following:
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our failure to maintain our current customers, including because of consolidation in the
gaming industry; |
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increases in commissions paid to gaming establishments as a result of competition; |
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increases in interchange rates or processing or other fees paid by us or decreases in
reverse interchange rates; |
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actual or anticipated fluctuations in our or our competitors’ revenue, operating results
or growth rate; |
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our inability to adequately protect or enforce our intellectual property rights; |
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any adverse results in litigation initiated by us or by others against us; |
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our inability to make payments on our outstanding indebtedness as they become due or our
inability to undertake actions that might otherwise benefit us based on the financial and
other restrictive covenants contained in our senior secured credit facilities and the
indenture for our senior subordinated notes; |
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the loss of a significant supplier or strategic partner, or the failure of a significant
supplier or strategic partner to provide the goods or services that we rely on them for; |
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our inability to introduce successful, new products and services in a timely manner or
the introduction of new products or services by our competitors that reduce the demand for
our products and services; |
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our failure to successfully enter new markets or the failure of new markets to develop
in the time and manner that we anticipate; |
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announcements by our competitors of significant new contracts or contract renewals or of
new products or services; |
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changes in general economic conditions, financial markets, the gaming industry or the
payments processing industry; |
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the trading volume of our common stock; |
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sales of common stock or other actions by our current officers, directors and
stockholders; |
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acquisitions, strategic alliances or joint ventures involving us or our competitors; |
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future sales of our common stock or other securities; |
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the failure of securities analysts to cover our common stock or changes in financial
estimates or recommendations by analysts; |
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our failure to meet the revenue, net income or earnings per share estimates of
securities analysts or investors; |
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• |
|
additions or departures of key personnel; |
| |
| |
• |
|
terrorist acts, theft, vandalism, fires, floods or other natural disasters; and |
| |
| |
• |
|
rumors or speculation as to any of the above which we may be unable to confirm or deny
due to disclosure restrictions imposed on us by law or which we otherwise deem imprudent to
comment upon. |
In addition, the stock market in general has experienced price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of particular
businesses. These broad market and industry factors may materially reduce the market price of our
common stock, regardless of our operating performance.
Following our public announcement on November 14, 2007 of an internal investigation by an
independent committee of our Board of Directors and the delay in filing our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007, the trading price of our common stock suffered
a significant decline. Securities class action litigation is often brought against a company
following a decline in the market price of its securities. The announcement of the investigation
and decline in trading price of our common stock have exposed us to greater risks associated with
securities class action litigation, which could be time consuming, expensive, and may distract
management from the conduct of our business. Any adverse resolution of such litigation could have
a material adverse effect on our business, financial condition and results of operations.
On December 12, 2007, a derivative action was filed by a stockholder on behalf of the Company
in the United States District Court, District of Nevada, against our current directors, one of our
former directors, our former chief executive officer and our former chief financial officer,
alleging breach of fiduciary duties, waste of corporate assets, unjust enrichment and violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. On February 8, 2008,
an additional derivative action was filed by a stockholder on behalf of the Company in the United
States District Court, District of Nevada, against our current directors, one of our former
directors, our former chief executive officer and our former chief financial officer, alleging
breach of fiduciary duties, insider trading and waste of corporate assets. These actions include
claims for, among other things, damages in favor of the Company, certain corporate actions to
purportedly improve the Company’s corporate governance, and an award of costs and expenses to the
plaintiff stockholders including attorneys’ fees. The Company has indemnification agreements with
each of the individual defendants that may cause the Company to incur expenses associated with the
defense of these actions and that may also protect such individuals from liability to the Company.
Their derivative actions could be time consuming, expensive, and may distract management from the
conduct of our business. Any adverse resolution of these derivative actions could have a material
adverse effect on our business, financial condition and results of operations.
37
Future sales of our common stock may cause the market price of our common stock to drop
significantly, even if our business is doing well.
The market price of our common stock could decline as a result of sales of additional shares
of our common stock by us or our stockholders or the perception that these sales could occur.
Certain stockholders have the right to require us to register their
shares of our common stock. If we propose to register any of our securities under the
Securities Act of 1933 either for our own account or for the accounts of other stockholders,
subject to some conditions and limitations, the holders of registration rights will be entitled to
include their shares of common stock in the registered offering. In addition, holders of
registration rights may require us on not more than five occasions to file a registration statement
under the Securities Act of 1933 with respect to their shares of common stock. Further, the
holders of registration rights may require us to register their shares on Form S-3 if and when we
are eligible to use this form. We are required to pay the costs and expenses of the registration
(other than underwriting discounts and commissions and fees) and sale of all such shares of common
stock.
In the future, we will also issue additional shares or options to purchase additional shares
to our employees, directors and consultants, in connection with corporate alliances or
acquisitions, and in follow-on offerings to raise additional capital. Based on all of these
factors, sales of a substantial number of shares of our common stock in the public market could
occur at any time. These sales could reduce the market price of our common stock. In addition,
future sales of our common stock by our stockholders could make it more difficult for us to sell
additional shares of our common stock or other securities in the future.
Messrs. Maskatiya and Cucinotta and entities affiliated with Summit Partners possess
significant voting power and may take actions that are not in the best interests of our other
stockholders.
As of December 31, 2007, Messrs. Maskatiya and Cucinotta and entities affiliated with Summit
Partners owned or controlled shares representing, in the aggregate, approximately 45.9% of the
outstanding shares of our common stock. Accordingly, Messrs. Maskatiya and Cucinotta and these
entities affiliated with Summit Partners will exert substantial influence over all matters
requiring approval of our stockholders, including the election and removal of directors and the
approval of mergers or other business combinations. Mr. Maskatiya’s and Mr. Cucinotta’s and these
entities’ ownership may have the effect of delaying or preventing a change of control of our
company or discouraging others from making tender offers for our shares, which could prevent
stockholders from receiving a premium for their shares. These actions may be taken even if other
stockholders oppose them and even if they are not in the interests of other stockholders.
Conflicts of interest may arise because some of our directors are also directly or indirectly
our controlling stockholders.
Two of our directors are principals of M&C International and two of our other directors are
partners and members of various entities affiliated with Summit Partners. We depend on services
provided by entities affiliated with M&C International or its principals to provide many of the
financial services that we offer to patrons. Summit Partners and its affiliates may invest in
entities that directly or indirectly compete with us or companies in which they currently invest
may begin competing with us. As a result of these relationships, when conflicts between the
interests of M&C International or Summit Partners, on the one hand, and the interests of our other
stockholders, on the other hand, arise, these directors may not be disinterested.
Some provisions of our certificate of incorporation and bylaws may delay or prevent
transactions that many stockholders may favor.
Some provisions of our amended and restated certificate of incorporation and amended and
restated bylaws may have the effect of delaying, discouraging, or preventing a merger or
acquisition that our stockholders may consider favorable or a change in our management or our Board
of Directors. These provisions:
| |
• |
|
divide our Board of Directors into three separate classes serving staggered three-year
terms, which will have the effect of requiring at least two annual stockholder meetings
instead of one, to replace a majority of our directors, which could have the effect of
delaying of preventing a change in our control or management; |
| |
| |
• |
|
provide that special meetings of stockholders can only be called by our Board of
Directors, Chairman of the Board or Chief Executive Officer. In addition, the business
permitted to be conducted at any special meeting of stockholders is limited to the business
specified in the notice of such meeting to the stockholders; |
| |
| |
• |
|
provide for an advance notice procedure with regard to business to be brought before a
meeting of stockholders which may delay or preclude stockholders from bringing matters
before a meeting of stockholders or from making nominations for directors at a meeting of
stockholders, which could delay or deter takeover attempts or changes in management; |
38
| |
• |
|
eliminate the right of stockholders to act by written consent so that all stockholder
actions must be effected at a duly called meeting; |
| |
| |
• |
|
provide that directors may only be removed for cause with the approval of stockholders
holding a majority of our outstanding voting stock; |
| |
| |
• |
|
provide that vacancies on our Board of Directors may be filled by a majority, although
less than a quorum, of directors in office and that our Board of Directors may fix the
number of directors by resolution; |
| |
| |
• |
|
allow our Board of Directors to issue shares of preferred stock with rights senior to
those of the common stock and that otherwise could adversely affect the rights and powers,
including voting rights and the right to approve or not to approve an acquisition or other
change in control, of the holders of common stock, without any further vote or action by
the stockholders; and |
| |
| |
• |
|
do not provide for cumulative voting for our directors, which may make it more difficult
for stockholders owning less than a majority of our stock to elect any directors to our
Board of Directors. In addition, we are also subject to Section 203 of the Delaware
General Corporation Law, which provides, subject to enumerated exceptions, that if a person
acquires 15% or more of our voting stock, the person is an “interested stockholder” and may
not engage in “business combinations” with us for a period of three years from the time the
person acquired 15% or more of our voting stock. |
These provisions may have the effect of entrenching our management team and may deprive our
stockholders of the opportunity to sell shares to potential acquirers at a premium over prevailing
prices. This potential inability to obtain a premium could reduce the price of our common stock.
If we fail to attract or retain independent directors, we may face unfavorable public
disclosure, a halt in the trading of our common stock and delisting from the New York Stock
Exchange.
Under the Sarbanes-Oxley Act of 2002 and the rules and regulations of the New York Stock
Exchange, we are required to establish and maintain a board of directors consisting of a majority
of independent directors and an audit committee consisting entirely of independent directors. A
majority of our directors satisfy the applicable independence requirements. In the future, if we
fail to maintain a board of directors consisting of a majority of independent directors, or fail to
maintain independent audit committee members, we will fail to comply with the corporate governance
listing requirements of the New York Stock Exchange and the SEC, which we would be required to
publicly disclose, which may in turn cause a reduction in the trading price of our common stock.
In addition, our failure to comply with these corporate governance listing requirements may also
result in a halt in the trading of our common stock and the delisting of our common stock from the
New York Stock Exchange, which may result in there being no public market for shares of our common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in a leased facility in Las Vegas, Nevada and consist of
approximately 40,000 square feet of office space, which is under a lease through April 2011. We
operate remote sales offices in Atlantic City, New Jersey under a lease through August 2008 and in
Macau SAR under a lease through March 2008. We believe that these facilities are adequate for our
business as presently conducted.
39
ITEM 3. LEGAL PROCEEDINGS
On December 12, 2007, a derivative action was filed by a stockholder on behalf of the Company
in the United States District Court, District of Nevada, naming our current directors, one of our
former directors, our former chief executive officer and our former chief financial officer,
alleging breach of fiduciary duties, waste of corporate assets, unjust enrichment and violations of
Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. On February 8, 2008,
an additional derivative action was filed by a stockholder on behalf of the Company in the United
States District Court, District of Nevada, against our current directors, one of our former
directors, our former chief executive officer and our former chief financial officer, alleging
breach of fiduciary duties, insider trading and waste of corporate assets. These actions include
claims for, among other things, damages in favor of the Company, certain corporate actions to
purportedly improve the Company’s corporate governance, and an award of costs and expenses to the
plaintiff stockholders, including attorneys’ fees.
We are also party to and threatened with various legal disputes and proceedings arising from
the ordinary course of general business activities. Resolution of these matters is not expected to
have a material adverse effect on our consolidated financial position, results of operations or
cash flows; however, the ultimate disposition of any litigation is uncertain.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock has traded on the New York Stock Exchange under the symbol “GCA” since
September 23, 2005. Prior to that time, there was no public market for our stock. On March 12,
2008, there were 18 holders of record of our common stock. Because many of our shares of common
stock are held by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial stockholders represented by these record holders.
The following table sets forth for the indicated periods, the high and low closing sale prices
per share of our common stock:
| |
|
|
|
|
|
|
|
|
| |
|
Price Range |
|
| |
|
High |
|
|
Low |
|
2007: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.69 |
|
|
$ |
14.33 |
|
Second Quarter |
|
|
16.81 |
|
|
|
15.35 |
|
Third Quarter |
|
|
16.56 |
|
|
|
10.55 |
|
Fourth Quarter |
|
|
11.25 |
|
|
|
3.06 |
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
17.52 |
|
|
$ |
14.45 |
|
Second Quarter |
|
|
19.49 |
|
|
|
15.01 |
|
Third Quarter |
|
|
15.79 |
|
|
|
13.79 |
|
Fourth Quarter |
|
|
16.52 |
|
|
|
14.76 |
|
On March 12, 2008, the closing sale price of our common stock on the New York Stock Exchange
was $4.78.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and do not anticipate
paying any dividends on our common stock in the foreseeable future. We currently intend to retain
all our earnings to finance the growth and development of our business. Any future change in our
dividend policy will be made at the discretion of our Board of Directors and will depend on
contractual restrictions, our results of operations, earnings, capital requirements and other
factors considered relevant by our Board of Directors. In addition, our senior secured credit
facilities and the indenture governing our senior subordinated notes limit the ability of GCA to
declare and pay cash dividends. Because we conduct our business entirely through GCA and its
subsidiaries, as a practical matter these restrictions similarly limit our ability to pay dividends
on our common stock.
40
Common Stock Repurchases
On February 6, 2007, the Company’s Board of Directors authorized the repurchase pursuant to
Rule 10b-18 under the Securities and Exchange Act of 1934, as amended, of up to $50.0 million worth
of the Company’s issued and outstanding common stock, subject to compliance with any contractual
limitations on such repurchases under the Company’s financing agreements in effect from time to
time, including but not limited to those relating to the Company’s senior secured indebtedness and
senior subordinated notes. The maximum authorized repurchases were completed during the quarter
ending March 31, 2008.
ISSUER PURCHASES AND WITHHOLDING OF EQUITY SECURITIES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
| |
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Value of Shares that |
|
| |
|
Total Number of |
|
|
Average Price per |
|
|
Purchased as Part of |
|
|
May Yet Be Purchased |
|
| |
|
Shares Purchased or |
|
|
Share Purchased or |
|
|
Publicly Announced |
|
|
Under the Plans or |
|
| |
|
Withheld |
|
|
Withheld |
|
|
Plans or Programs |
|
|
Programs |
|
10/1/07 – 10/31/07 |
|
|
917,262 |
(1) |
|
|
10.58 |
(3) |
|
|
917,262 |
(1) |
|
|
22,127,151 |
(5) |
|
|
|
3,185 |
(2) |
|
|
11.14 |
(4) |
|
|
3,185 |
(2) |
|
|
|
|
11/1/07 – 11/30/07 |
|
|
1,046,788 |
(1) |
|
|
7.05 |
(3) |
|
|
1,046,788 |
(1) |
|
|
13,515,818 |
(5) |
|
|
|
125,654 |
(2) |
|
|
9.78 |
(4) |
|
|
125,654 |
(2) |
|
|
|
|
12/1/07 – 12/31/07 |
|
|
996,669 |
(1) |
|
|
5.19 |
(3) |
|
|
996,669 |
(1) |
|
|
8,331,707 |
(5) |
|
|
|
1,401 |
(2) |
|
|
5.42 |
(4) |
|
|
1,401 |
(2) |
|
|
|
|
Subtotals |
|
|
2,960,719 |
(1) |
|
|
7.52 |
(3) |
|
|
2,960,719 |
(1) |
|
|
|
|
|
|
|
130,240 |
(2) |
|
|
9.77 |
(4) |
|
|
130,240 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,090,959 |
|
|
|
7.62 |
|
|
|
3,090,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Represents shares of common stock that we repurchased in open market transactions
pursuant to the Rule 10b-18 share repurchase authorization that we publicly announced on
February 8, 2007. Our board of directors authorized the repurchase up to $50 million worth
of common stock. The share buyback program did not obligate us to repurchase any specific
number of shares and could have been suspended or terminated at any time. No time frame for
the completion of the authorized repurchases was specified in the board of directors’
authorization. The maximum authorized repurchases were completed during the quarter ending
March 31, 2008. |
| |
| (2) |
|
Represents shares of common stock that were withheld from restricted stock awards to
satisfy the minimum applicable tax withholding obligations incident to the vesting of such
restricted stock awards. |
| |
| (3) |
|
Represents the average price per share of shares of common stock repurchased pursuant
to the Rule 10b-18 share buyback program. |
| |
| (4) |
|
Represents the average price per share of shares of common stock withheld from
restricted stock awards on the date of withholding. |
| |
| (5) |
|
Represents the maximum approximate dollar value of shares of common stock available for
repurchase pursuant to the Rule 10b-18 share repurchase authorization at the end of the
stated period. There is no limitation on the number of
shares of common stock that may be withheld from restricted stock awards to satisfy the
minimum applicable tax withholding obligations incident to the vesting of such restricted
stock awards. |
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our
audited consolidated financial statements and related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial data for the fiscal years ended December
31, 2007, 2006, 2005, 2004 and 2003 have been derived from our audited consolidated financial
statements. Our selected consolidated financial data may not be indicative of our future financial
condition or results of operations. The pro forma income tax amounts below have been calculated to
reflect the taxes that would have been reported had we been subject to federal and state income
taxes as a corporation during the periods presented.
41
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
(amounts in thousands, except per share) |
|
|
|
|
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
316,007 |
|
|
$ |
287,053 |
|
|
$ |
235,055 |
|
|
$ |
209,962 |
|
|
$ |
186,547 |
|
ATM |
|
|
240,575 |
|
|
|
221,727 |
|
|
|
182,291 |
|
|
|
158,433 |
|
|
|
132,341 |
|
Check services |
|
|
31,213 |
|
|
|
29,166 |
|
|
|
26,376 |
|
|
|
23,768 |
|
|
|
26,326 |
|
Central Credit and other revenues |
|
|
13,094 |
|
|
|
10,202 |
|
|
|
10,358 |
|
|
|
10,840 |
|
|
|
10,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
600,889 |
|
|
|
548,148 |
|
|
|
454,080 |
|
|
|
403,003 |
|
|
|
355,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
(434,413 |
) |
|
|
(389,251 |
) |
|
|
(308,481 |
) |
|
|
(270,095 |
) |
|
|
(232,457 |
) |
Operating expenses |
|
|
(82,015 |
) |
|
|
(63,812 |
) |
|
|
(51,206 |
) |
|
|
(45,339 |
) |
|
|
(45,436 |
) |
Depreciation and amortization |
|
|
(11,789 |
) |
|
|
(9,889 |
) |
|
|
(12,109 |
) |
|
|
(13,548 |
) |
|
|
(14,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
72,672 |
|
|
|
85,196 |
|
|
|
82,284 |
|
|
|
74,021 |
|
|
|
63,760 |
|
Interest expense, net (1) |
|
|
(34,477 |
) |
|
|
(42,031 |
) |
|
|
(51,879 |
) |
|
|
(32,025 |
) |
|
|
(5,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (provision) benefit and minority ownership loss |
|
|
38,195 |
|
|
|
43,165 |
|
|
|
30,405 |
|
|
|
41,996 |
|
|
|
58,310 |
|
Income tax (provision) benefit |
|
|
(14,727 |
) |
|
|
(16,739 |
) |
|
|
(7,953 |
) |
|
|
212,422 |
|
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority ownership loss |
|
|
23,468 |
|
|
|
26,426 |
|
|
|
22,452 |
|
|
|
254,418 |
|
|
|
57,989 |
|
Minority ownership loss, net of tax (2) |
|
|
236 |
|
|
|
183 |
|
|
|
139 |
|
|
|
137 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,704 |
|
|
$ |
26,609 |
|
|
$ |
22,591 |
|
|
$ |
254,555 |
|
|
$ |
58,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.33 |
|
|
$ |
0.49 |
|
|
$ |
7.91 |
|
|
$ |
1.81 |
|
Diluted |
|
$ |
0.29 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
$ |
3.56 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
81,108 |
|
|
|
81,641 |
|
|
|
45,643 |
|
|
|
32,175 |
|
|
|
32,175 |
|
Diluted |
|
|
81,377 |
|
|
|
81,921 |
|
|
|
74,486 |
|
|
|
71,566 |
|
|
|
71,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma computation related to conversion to corporation for income tax purposes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit (provision) and minority ownership loss—historical |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
41,996 |
|
|
$ |
58,310 |
|
Income tax provision—historical, exclusive of one-time tax benefit (3) |
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(10,443 |
) |
|
|
(321 |
) |
Pro forma income tax provision—unaudited (4) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(4,600 |
) |
|
|
(20,741 |
) |
Minority ownership loss — historical loss, net of tax |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
137 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
27,090 |
|
|
$ |
37,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
0.84 |
|
|
$ |
1.17 |
|
Diluted |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
0.38 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(at end of period) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,063 |
|
|
$ |
40,919 |
|
|
$ |
35,123 |
|
|
$ |
49,577 |
|
|
$ |
23,423 |
|
Total assets |
|
|
539,323 |
|
|
|
588,647 |
|
|
|
510,418 |
|
|
|
496,625 |
|
|
|
243,627 |
|
Total borrowings |
|
|
263,480 |
|
|
|
274,480 |
|
|
|
321,412 |
|
|
|
478,250 |
|
|
|
— |
|
Stockholders’ equity (deficiency) and members’ capital |
|
|
138,296 |
|
|
|
132,157 |
|
|
|
94,484 |
|
|
|
(56,779 |
) |
|
|
199,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
$ |
91,874 |
|
|
$ |
70,079 |
|
|
$ |
38,585 |
|
|
$ |
75,212 |
|
|
$ |
33,471 |
|
Net cash used in investing activities (5) |
|
(10,960 |
) |
|
|
(17,061 |
) |
|
|
(17,860 |
) |
|
|
(4,861 |
) |
|
|
(7,047 |
) |
Net cash used in financing activities |
|
|
(49,715 |
) |
|
|
(46,761 |
) |
|
|
(35,190 |
) |
|
|
(43,950 |
) |
|
|
(63,067 |
) |
42
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Other Data (unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate dollar amount processed (in billions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
6.4 |
|
|
$ |
5.7 |
|
|
$ |
4.7 |
|
|
$ |
4.2 |
|
|
$ |
3.8 |
|
ATM |
|
$ |
13.6 |
|
|
$ |
12.3 |
|
|
$ |
9.9 |
|
|
$ |
8.4 |
|
|
$ |
6.9 |
|
Check warranty |
|
$ |
1.4 |
|
|
$ |
1.3 |
|
|
$ |
1.1 |
|
|
$ |
0.9 |
|
|
$ |
1.0 |
|
Number of transactions completed (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
|
11.3 |
|
|
|
10.4 |
|
|
|
9.1 |
|
|
|
8.8 |
|
|
|
8.1 |
|
ATM |
|
|
73.8 |
|
|
|
69.2 |
|
|
|
58.9 |
|
|
|
53.2 |
|
|
|
45.7 |
|
Check warranty |
|
|
5.3 |
|
|
|
5.1 |
|
|
|
4.7 |
|
|
|
4.3 |
|
|
|
4.9 |
|
|
|
|
| (1) |
|
Interest expense, net, includes interest income and loss on early extinguishment of debt. |
| |
| (2) |
|
Minority ownership loss, net of tax, represents the portion of the loss from operations of
IFT that is attributable to the 40% ownership interest in IFT, which is not owned by us. |
| |
| (3) |
|
In connection with our conversion to a taxable corporate entity for United States income tax
purposes, we recognized a net tax asset created by a step up in the tax basis of our net
assets due to the redemption of ownership interests in us by First Data and the sale of
ownership interests in us to private equity investors. For purposes of determining the pro
forma net income, the recognition of this one-time step up in basis has been excluded from our
pro forma tax computation. |
| |
| (4) |
|
The pro forma un-audited income tax adjustments represent the tax effects that would have
been reported had the Company been subject to United States federal and state income taxes as
a corporation. Pro forma expenses are based upon the statutory income tax rates and
adjustments to income for estimated permanent differences occurring during the period. Actual
rates and expenses could have differed had the Company been subject to United States federal
and state income taxes for all periods presented. Therefore, the un-audited pro forma amounts
are for informational purposes only and are intended to be indicative of the results of
operations had the Company been subject to United States federal and state income taxes for
all periods presented. |
The following table presents the computation of the pro forma income tax expense for all
the periods presented (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income before income taxes, as reported |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
41,996 |
|
|
$ |
58,310 |
|
Effective pro forma income tax rate |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
36.00 |
% |
|
|
36.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income tax expense |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
15,119 |
|
|
$ |
21,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5) |
|
In 2004, net cash used in investing activities includes $1.0 million of non-compete payments
to two former executives. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and related notes
contained herein and the information included in our other filings with the Securities and Exchange
Commission. This discussion includes “forward-looking statements” within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements in this Annual
Report on Form 10-K other than statements of historical fact are forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties. Our actual results
may differ materially from those projected or assumed in such forward-looking
statements. Among the factors that could cause actual results to differ materially are the
risk factors discussed under Item 1A. All forward-looking statements and risk factors included in
this document are made as of the date of this report, based on information available to us as of
such date. We assume no obligation to update any forward-looking statement or risk factor.
43
Overview
We are a provider of cash access products and related services to the gaming industry in the
United States and several international markets. Our products and services provide gaming
establishment patrons access to cash through a variety of methods, including ATM cash withdrawals,
credit card cash advances, POS debit cash advances, check cashing and money transfers. In
addition, we also provide products and services that improve credit decision-making, automate
cashier operations and enhance patron marketing activities for gaming establishments.
We began our operations as a joint venture limited liability company among M&C International
and entities affiliated with Bank of America Corporation and First Data in July 1998. In
September 2000, Bank of America Corporation sold its entire ownership interest in us to M&C
International and First Data. In March 2004, GCA issued $235 million in aggregate principal amount
of 8 3/4% senior subordinated notes due 2012 and borrowed $260 million under senior secured credit
facilities. Global Cash Access Holdings, Inc. was formed to hold all of the outstanding ownership
interests of Global Cash Access, Inc. and has guaranteed the obligations under the senior secured
credit facilities. A substantial portion of the proceeds of these senior subordinated notes and
senior secured credit facilities were used to redeem all of First Data’s ownership interest in us
and a portion of M&C International’s ownership interest in us through a recapitalization (the
“Recapitalization”), in which Bank of America Corporation reacquired an ownership interest in us.
In May 2004, we completed a private equity restructuring (the “Private Equity Restructuring”) in
which M&C International sold a portion of its ownership interest in us to a number of private
equity investors, including entities affiliated with Summit Partners, and we converted from a
limited liability company to a Delaware corporation.
In September 2005, we completed an initial public offering of common stock. In connection
with that offering, our various equity securities that were outstanding prior to the offering were
converted into common stock. In addition, we became a guarantor, on a subordinated basis, of
Global Cash Access, Inc.’s senior subordinated notes. In 2007, M&C International distributed its
holdings of our common stock to its two principals, Karim Maskatiya and Robert Cucinotta.
Other than insubstantial assets that are immaterial in amount and nature, the sole asset of
Global Cash Access Holdings, Inc. is the capital stock of Global Cash Access, Inc. The consolidated
financial data set forth and discussed below reflects our financial condition as if Global Cash
Access, Inc. had been a wholly-owned subsidiary of Global Cash Access Holdings, Inc. during each of
periods and at the dates presented.
In connection with our conversion from a limited liability company to a corporation for United
States federal income tax purposes, we recognized deferred tax assets and liabilities from the
expected tax consequences of differences between the book basis and tax basis of our assets and
liabilities at the date of conversion into a taxable entity. Prior to our conversion to a
corporation, we operated our business as a limited liability company that was treated as a pass
through entity for United States federal income tax purposes, making our owners responsible for
taxes on their respective share of our earnings. The pro forma information presented with our
consolidated statements of income reflects the expected tax effects had we operated our business
through a taxable corporation during all periods presented.
Principal Sources of Revenues and Expenses
We derive our revenues as follows:
Cash Advance. Cash advance revenues are comprised of transaction fees assessed to gaming
patrons in connection with credit card cash advances and POS debit card transactions at the time
the transactions are authorized. Such fees are based on a combination of a fixed amount plus a
percentage of the face amount of the credit card cash advance or POS debit card transaction amount.
The average amount disbursed per cash advance transaction has increased in recent years,
contributing to our revenue growth. We expect this trend to continue.
ATM. ATM revenues are comprised of transaction fees in the form of cardholder surcharges
assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are
authorized and reverse interchange fees paid to us by the patrons’ issuing banks. Cardholder
surcharges are recognized as revenue when a transaction is initiated and reverse interchange is
recognized as revenue on a monthly basis based on the total transactions occurring during the
month. The cardholder surcharges assessed to gaming patrons in connection with ATM cash
withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.
The number of transactions completed at our ATMs, and the average surcharge assessed to patrons
have both increased in recent years, contributing to our revenue growth. We expect these trends to
continue.
44
Check Services. Check services revenues are principally comprised of check warranty revenues
and are generally based upon a percentage of the face amount of checks warranted. These fees are
paid to us by gaming establishments. In some cases, gaming establishments pass on the fees to
patrons. From 2002 to 2004, the face amount of checks warranted declined. In the fourth quarter
of 2004, we introduced our Central Credit Check Warranty product, and its successful adoption in
the marketplace has contributed to an increase in the face amount of checks warranted. This has
been the principal reason that check services revenues increased in 2005 and 2006.
Central Credit and Other Revenues. Central Credit revenues are based upon either a flat
monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit
histories generated, while other revenues are primarily based on a fee for specific service
performed.
Our principal costs and expenses include:
Cost of Revenues (exclusive of Depreciation and Amortization). Cost of revenues are costs and
expenses directly related to the generation of revenue and exclude depreciation and amortization.
For cash advance, ATM and, to a much lesser extent, check services, we pay a commission to the
gaming establishment at which the transaction occurs. Commissions are the largest component of
cost of revenues (exclusive of depreciation and amortization). We expect commissions to increase
as a percentage of revenue as new contracts are signed or existing contracts are renewed. We pay
credit card associations and POS debit networks interchange fees for services they provide in
routing transactions through their networks. In addition, we pay fees to participate in various
ATM networks. The amounts of these interchange fees are determined by the card associations and
networks in their sole discretion, and are subject to increase in their discretion from time to
time. Many of our cash advance contracts enable us to pass through to our gaming establishment
customers, who may in turn pass through to patrons, the amount of any increase in interchange or
processing fees. In the past, the major card associations have increased interchange rates at
least annually, and they may do so in the future. We pay connectivity and processing fees to our
network services providers. We incur warranty expense when checks that we have warranted through
our Central Credit check warranty service or that TeleCheck has warranted through its check
warranty service are dishonored upon presentment for payment. Our contract with TeleCheck limits
our warranty expense for checks warranted by TeleCheck to a maximum percentage of the total face
amount of dishonored checks. We have no limits on warranty expense for our Central Credit check
warranty service. Other cost of revenues (exclusive of depreciation and amortization) consists
primarily of costs related to delivering our Central Credit service and our patron marketing
activities.
Operating Expenses. Operating expenses consist primarily of salaries and benefits, armored
carrier expenses, bank fees, legal expenses, telecommunications expenses and the cost of repair and
maintenance on our cash access devices.
Interest Income. We generate interest income on the amount of cash in our bank accounts and
on cash that is deposited into accounts to settle our credit card cash advance and POS debit card
transactions.
Interest Expense. Interest expense includes interest incurred on our senior secured credit
facilities and our senior subordinated notes, and the amortization of deferred financing costs.
Interest expense also includes the cash usage fees associated with the cash used in our ATMs.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt includes the
redemption premiums paid to retire our borrowings and the write-off of the deferred financing costs
related to retired borrowings.
Income Tax. Our earnings are subject to taxation under the tax laws of the jurisdictions in
which we operate. Prior to our conversion to a Delaware corporation, our domestic earnings were
not subject to taxation because we were organized as a Delaware limited liability company, which is
a flow-through entity for tax purposes. Subsequent to our conversion to a Delaware corporation,
our domestic earnings have been subject to corporate taxation.
Minority Interest, Net of Tax. We operate IFT, a joint venture with IGT. We own 60% of the
equity interests of IFT and IGT owns 40% of the equity interests. The joint venture was formed to
develop and market cash access products using slot tickets. The minority interest shown on the consolidated financial statements reflects the addition to
our net income of the 40% of IFT’s losses that are attributable to IGT net of the expected tax
benefit associated with those losses.
45
Key Events in 2007
| |
• |
|
The employment of Kirk
Sanford and Harry Hagerty, the Company’s former chief
executive officer and former chief financial officer, respectively, ceased in July and
October, respectively. |
| |
| |
• |
|
William Harris resigned from the Board of Directors in August. |
| |
| |
• |
|
On September 1, 2007, many of the Company’s casino customers in the United Kingdom
(“UK”) chose to discontinue the provision of the Company’s credit card cash advance
services as a result of the UK Gambling Act 2005 becoming effective. |
| |
| |
• |
|
Scott Betts, the Company’s current chief executive officer, joined the Company on
October 31, 2007. |
| |
| |
• |
|
On November 14, 2007, we announced the commencement of an internal investigation
related to allegations by an individual whose identity was not made known to the
Company. On December 21, 2008, we announced the completion of this internal
investigation, which resulted in no finding of evidence of fraud or intentional
misconduct to substantiate any of the allegations. |
Results of Operations
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table sets forth the condensed consolidated results of operations for the years
ended December 31, 2007 and December 31, 2006 (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
316,007 |
|
|
|
52.6 |
% |
|
$ |
287,053 |
|
|
|
52.4 |
% |
ATM |
|
|
240,575 |
|
|
|
40.0 |
|
|
|
221,727 |
|
|
|
40.5 |
|
Check services |
|
|
31,213 |
|
|
|
5.2 |
|
|
|
29,166 |
|
|
|
5.3 |
|
Central Credit and other revenues |
|
|
13,094 |
|
|
|
2.2 |
|
|
|
10,202 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
600,889 |
|
|
|
100.0 |
|
|
|
548,148 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
(434,413 |
) |
|
|
(72.3 |
) |
|
|
(389,251 |
) |
|
|
(71.0 |
) |
Operating expenses |
|
|
(82,015 |
) |
|
|
(13.6 |
) |
|
|
(63,812 |
) |
|
|
(11.6 |
) |
Depreciation and amortization |
|
|
(11,789 |
) |
|
|
(2.0 |
) |
|
|
(9,889 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
72,672 |
|
|
|
12.1 |
|
|
|
85,196 |
|
|
|
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(34,477 |
) |
|
|
(5.7 |
) |
|
|
(42,031 |
) |
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision and minority ownership loss |
|
|
38,195 |
|
|
|
6.4 |
|
|
|
43,165 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(14,727 |
) |
|
|
(2.5 |
) |
|
|
(16,739 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority ownership loss |
|
|
23,468 |
|
|
|
3.9 |
|
|
|
26,426 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority ownership loss, net of tax |
|
|
236 |
|
|
|
0.0 |
|
|
|
183 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,704 |
|
|
|
3.9 |
% |
|
$ |
26,609 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Total Revenues
Total revenues for the year ended December 31, 2007 were $600.9 million, an increase of $52.7
million, or 9.6%, as compared to the year ended December 31, 2006. This increase was primarily due
to the reasons described below.
Cash Advance. Cash advance revenue for the year ended December 31, 2007 was $316.0 million,
an increase of $29.0 million, or 10.1%, as compared to the year ended December 31, 2006. This
increase was driven by increases in both the total number of cash advance transactions occurring at
our cage sites or ATM’s within our customers’ facilities and an increase in the average amount of
cash advanced per transaction.
ATM. ATM revenue for the year ended December 31, 2007 was $240.6 million, an increase of
$18.9 million, or 8.5%, as compared to the year ended December 31, 2006. The increase was
primarily attributable to an increase in the number of transactions occurring at the ATM’s that we
manage at our customers’ properties.
Check Services. Check services revenue for the year ended December 31, 2007 was $31.2
million, an increase of $2.0 million, or 7.0%, as compared to the year ended December 31, 2006.
This increase was driven both by an increase in the number of checks warranted and an increase in
the total face value of checks warranted.
Central Credit and Other. Central Credit and other revenues for the year ended December 31,
2007, were $13.1 million, an increase of $2.9 million, or 28.3%, as compared to the year ended
December 31, 2006. The increase was primarily due to the addition of new contracts for credit
check services.
We expect revenue in 2008, excluding the contemplated acquisition of Certegy Gaming Services,
to be largely consistent with those amounts seen in 2007 as total gaming patronage and revenues
began to decline in late 2007. We expect those trends to continue into 2008.
Costs and Expenses
Cost of Revenues (exclusive of Depreciation and Amortization). Cost of revenues (exclusive of
depreciation and amortization) increased 11.6% from $389.3 million to $434.4 million. As a
percentage of revenue, Cost of revenue (exclusive of depreciation and amortization) increased from
71.0% in 2006 to 72.3% in 2007. This increase is primarily due to an increased proportion of
interchange fees driven by the increased proportion of revenue coming from cash advance
transactions and increased commissions paid to our customers as a percentage of revenue resulting
from renewals at rates less favorable to the Company in 2007. We expect that commissions and
interchange will continue to increase, and we expect that in 2008 cost of revenues (exclusive of
depreciation and amortization) will increase at a rate faster than revenues.
Operating Expenses. Operating expenses for the year ended December 31, 2007 were $82.0
million, an increase of $18.2 million, or 28.5%, as compared to the year ended December 31, 2006.
This increase in operating expenses is primarily attributed to: 1) an increase in professional
services fees related to the conduct of an internal investigation in the fourth quarter of 2007 of
approximately $4.3 million, 2) an increase in non-cash stock compensation expense of $13.1 million
due primarily to departure of our former CEO and CFO resulting in an accelerated recognition of
otherwise amortizing costs, and 3) approximately $3.2 million of additional payroll expense from
the growth in average head count and approximately $0.8 million in termination benefits to former
executives. Offsetting these increases are other operating income of 1) $2.6 million related to
our settlement of the Visa Check/MasterMoney Antitrust Litigation and 2) $1.0 million in recovery
of escheatment items related to our booth operations. We expect operating expenses to decrease in
2008 compared to those levels experienced in 2007.
Depreciation and Amortization. Depreciation expense for the year ended December 31, 2007 was
$6.3 million, an increase of $1.9 million, or 44.2%, as compared to the year ended December 31,
2006. This increase was primarily driven by increased capital expenditures resulting from
increased ATM placement at our customers’ properties. Amortization expense, which relates
principally to computer software, customer contracts and our 3-in-1 rollover patent was flat in
2007 as compared to 2006. We do not expect depreciation and amortization to vary significantly in
2008 from those amounts incurred in 2007.
Primarily as a result of the factors described above, operating income for the year ended
December 31, 2007 was $72.7 million, a decrease of $12.5 million, or 14.7%, as compared to the year
ended December 31, 2006.
47
Interest Income (Expense), Net. Interest income (expense), net, was $34.5 million in 2007, a
decrease of $7.6 million, or 18.0%, from $42.0 million in 2006. Interest income was $3.7 million
in 2007, an increase of $0.2 million, or 5.3%, as compared to 2006, due primarily to higher
interest rates in 2007 as compared to 2006. Interest expense for the year ended December 31, 2007,
was $38.1 million, a decrease of $4.0 million, or 9.4%, as compared to December 31, 2006. Interest
expense on borrowings (including amortization of deferred financing costs) was $22.2 million in
2007 as compared to $26.4 million in 2006. The decrease in interest expense was largely due to a
lower average amount of outstanding indebtedness in 2007. The cash usage fee for cash used in our
ATMs is included in interest expense. ATM cash usage fees were $15.9 million in 2007 as compared
to $15.7 million in 2006, an increase of $0.2 million or 1.5%. The increase resulted primarily
from increases in LIBOR on which those funds are priced to 5.6% in 2007 as compared to 5.4% in
2006. The average balance of ATM cash in 2007 was $285.2 million, compared to $289.2 million in
2006. In 2006, we incurred losses on early extinguishment of debt of $3.4 million resulting from
the write-off of deferred financing fees from our refinancing of our senior secured indebtedness.
Assuming a constant level of LIBOR, we expect that interest income (expense), net will decline in
2008 as a result of lower anticipated levels of outstanding indebtedness.
Primarily as a result of the foregoing, income before income tax provision and minority
ownership loss was $38.2 million for the year ended December 31, 2007, a decrease of $5.0 million,
or 11.5%, as compared to the prior year.
Income Tax. Income tax expense was $14.7 million for the year ended December 31, 2007. The
decrease in income tax expense during 2007 is primarily attributable to a decrease in taxable
income as well as a slighty greater effective US federal tax rate. The higher effective rate of
38.9% in 2007 was principally due to the significant increase in non-deductibility of expense
related to certain equity awards granted to our employees offset by tax basis adjustments related
to certain of our subsidiary tax-based carrying values.
Primarily
as a result of the foregoing, income before minority ownership loss
was $23.5
million for the year ended December 31, 2007, a decrease of
$3.0 million, or 11.2%, as compared to
the prior year.
Minority Ownership Loss, net of Tax. Minority ownership loss, net of tax, attributable to IFT
for the year ended December 31, 2007 was $236,000, an increase of $53,000 or 29.0% from $183,000
for the year ended December 31, 2006. We expect that IFT will record a loss in 2008 as well.
Primarily
as a result of the foregoing, net income was $23.7 million for the year ended
December 31, 2007, a decrease of $2.9 million, or 10.9%, as compared to the prior year.
48
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
The following table sets forth the condensed consolidated results of operations for the years
ended December 31, 2006 and December 31, 2005 (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
|
December 31, 2005 |
|
| |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
287,053 |
|
|
|
52.4 |
% |
|
$ |
235,055 |
|
|
|
51.8 |
% |
ATM |
|
|
221,727 |
|
|
|
40.5 |
|
|
|
182,291 |
|
|
|
40.1 |
|
Check services |
|
|
29,166 |
|
|
|
5.3 |
|
|
|
26,376 |
|
|
|
5.8 |
|
Central Credit and other revenues |
|
|
10,202 |
|
|
|
1.9 |
|
|
|
10,358 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
548,148 |
|
|
|
100.0 |
|
|
|
454,080 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
(389,251 |
) |
|
|
(71.0 |
) |
|
|
(308,481 |
) |
|
|
(67.9 |
) |
Operating expenses |
|
|
(63,812 |
) |
|
|
(11.6 |
) |
|
|
(51,206 |
) |
|
|
(11.3 |
) |
Depreciation and amortization |
|
|
(9,889 |
) |
|
|
(1.8 |
) |
|
|
(12,109 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
85,196 |
|
|
|
15.5 |
|
|
|
82,284 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(42,031 |
) |
|
|
(7.7 |
) |
|
|
(51,879 |
) |
|
|
(11.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (provision) benefit and minority ownership loss |
|
|
43,165 |
|
|
|
7.9 |
|
|
|
30,405 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit |
|
|
(16,739 |
) |
|
|
(3.1 |
) |
|
|
(7,953 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority ownership loss |
|
|
26,426 |
|
|
|
4.8 |
|
|
|
22,452 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority ownership loss, net of tax |
|
|
183 |
|
|
|
0.0 |
|
|
|
139 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,609 |
|
|
|
4.9 |
% |
|
$ |
22,591 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
Total revenues for the year ended December 31, 2006 were $548.1 million, an increase of $94.1
million, or 20.7%, as compared to the year ended December 31, 2005. This increase was primarily
due to the reasons described below.
Cash Advance. Cash advance revenue for the year ended December 31, 2006 was $287.1 million,
an increase of $52.0 million, or 22.1%, as compared to the year ended December 31, 2005. This
increase was primarily comprised of a 19.4% increase in credit card cash advance revenue and a
47.3% increase in POS debit card transaction revenue. The total amount of cash disbursed increased
22.2% from $4.7 billion to $5.7 billion and the number of transactions completed increased 14.4%
from 9.1 million to 10.4 million. Revenue per cash advance transaction increased 6.8%, from $25.78
to $27.53.
ATM. ATM revenue for the year ended December 31, 2006 was $221.7 million, an increase of
$39.4 million, or 21.6%, as compared to the year ended December 31, 2005. The increase was
primarily attributable to a 17.4% increase in the number of transactions from 58.9 million to 69.2
million. Revenue per ATM transaction increased 3.9% from $3.09 to $3.21. There was a 24.0%
increase in the total amount of cash disbursed from $9.9 billion to $12.3 billion.
Check Services. Check services revenue for the year ended December 31, 2006 was $29.2
million, an increase of $2.8 million, or 10.6%, as compared to the year ended December 31, 2005.
The face amount of checks warranted increased 17.8% from $1.1 billion to $1.3 billion. The number
of checks warranted increased 8.5% from 4.7 million to 5.1 million, while the average face amount
per check increased from $242.08 to $262.70. Revenue as a percent of face amount was 2.09% in 2006
as compared to 2.19% for the year ended December 31, 2005, while revenue per transaction increased
3.4% from $5.31 to $5.49.
Central Credit and Other. Central Credit and other revenues for the year ended December 31,
2006, were $10.2 million, a decrease of $0.2 million, or 1.5%, as compared to the year ended
December 31, 2005. The decrease was primarily a result of pricing concessions given to certain
customers in connection with the signing of new contracts for cash access services.
49
Costs and Expenses
Cost of Revenues (exclusive of Depreciation and Amortization). Cost of revenues (exclusive of
depreciation and amortization) increased 26.2% from $308.5 million to $389.3 million. The largest
component of cost of revenues (exclusive of depreciation and amortization) is commissions, which
increased 26.9% in 2006 as contracts were signed or renewed at higher commission rates than
experienced in 2005. The second-largest component of cost of revenues (exclusive of depreciation
and amortization) is interchange, which increased 26.0%, primarily due to the increase in cash
advance transactions and volume. Warranty expenses, the third-largest component of cost of
revenues (exclusive of depreciation and amortization) increased 14.8%. This increase was the
result of the increased face amount of checks warranted, offset in part by a lower level of losses
on check warranted in 2006.
Operating Expenses. Operating expenses for the year ended December 31, 2006 were $63.8
million, an increase of $12.6 million, or 24.6%, as compared to the year ended December 31, 2005.
Included in operating expenses in 2006 is $9.1 million in non-cash stock based compensation expense
that was not recorded as expense in prior years, due to our grant of restricted stock in 2006 and
our adoption of SFAS No. 123(R), Share-Based Payment, for equity awards to our employees, in 2006.
Excluding the stock-based compensation expense in 2006, operating expenses in 2006 were $54.7
million, an increase of 6.8% over $51.2 million in 2005. Operating expenses increased in 2006
principally due to increases in expenses as a result of increased staffing and increased insurance
expenses from our conversion to a public company. We also incurred additional payroll expenses
from the
addition of new booth locations. In 2006, the Company incurred $0.7 million of expenses in
connection with a registered offering of common stock by certain of our shareholders and $0.2
million in expenses related to the settlement of litigation with a former customer.
Depreciation and Amortization. Depreciation expense for the year ended December 31, 2006 was
$4.4 million, a decrease of $2.4 million, or 35.9%, as compared to the year ended December 31,
2005. The decrease was primarily due to a certain fixed assets acquired as part of various
acquisitions in 2000 and 2001, becoming fully depreciated in 2005 yet remaining in service.
Amortization expense, which relates principally to computer software, customer contracts and our
acquisition of the 3-in-1 rollover patent in the third quarter of 2005, increased $0.2 million from
$5.3 million to $5.5 million in 2006 as compared to 2005.
Primarily as a result of the factors described above, operating income for the year ended
December 31, 2006 was $85.2 million, an increase of $2.9 million, or 3.5%, as compared to the year
ended December 31, 2005.
Interest Income (Expense), Net. Interest income (expense), net, was $42.0 million in 2006, a
decrease of $9.9 million, or 19.0%, from $51.9 million in 2005. Interest income was $3.5 million
in 2006, an increase of $1.7 million, or 91.9%, as compared to 2005, due primarily to higher
interest rates in 2006 as compared to 2005. Interest expense for the year ended December 31, 2006,
was $42.1million, a decrease of $2.1 million, or 4.7%, as compared to December 31, 2005. Interest
expense on borrowings (including amortization of deferred financing costs) was $26.4 million in
2006 as compared to $33.9 million in 2005. The decrease in interest expense was largely due to a
lower average amount of outstanding indebtedness in 2006. The cash usage fee for cash used in our
ATMs is included in interest expense. ATM cash usage fees were $15.7 million in 2006 as compared
to $10.2 million in 2005, an increase of $5.4 million or 53.2%. The increase resulted primarily
from increases in LIBOR on which those funds are priced to 5.4% in 2006 as compared to 3.7% in
2005. The average balance of ATM cash in 2006 was $289.2 million, compared to $276.9 million in
2005. In both 2006 and 2005, we incurred losses on early extinguishment of debt. The 2006 loss
was $3.4 million resulting from the write-off of deferred financing fees from our refinancing of
our senior secured indebtedness. The 2005 loss was $9.5 million, which was comprised of a $7.2
million premium paid to retire $82.25 million of the Company’s senior subordinated notes and the
write-off of $2.3 million of capitalized debt issuance costs associated with the retired notes.
Primarily as a result of the foregoing, income before income tax provision and minority
ownership loss was $43.2 million for the year ended December 31, 2006, an increase of $12.8
million, or 42.0%, as compared to the prior year.
Income Tax. Income tax expense was $16.7 million for the year ended December 31, 2006. The
increase in income tax expense during 2006 is primarily attributable to the higher level of taxable
income as well as a higher effective US federal tax rate. The higher effective rate of 38.7% in
2006 was due the non-deductibility of the stock offering expenses incurred by the Company on behalf
of certain selling shareholders as well as the non-deductibility of expense related to certain
equity awards granted to our employees.
50
Primarily as a result of the foregoing, income before minority ownership loss was $26.4
million for the year ended December 31, 2006, an increase of $4.0 million, or 17.7%, as compared to
the prior year.
Minority Ownership Loss, net of Tax. Minority ownership loss, net of tax, attributable to IFT
for the year ended December 31, 2006 was $183,000, an increase of $44,000 or 31.7% from $139,000
for the year ended December 31, 2005.
Primarily as a result of the foregoing, net income was $26.6 million for the year ended
December 31, 2006, an increase of $4.0 million, or 17.8%, as compared to the prior year.
Critical Accounting Policies
The preparation of our financial statements in conformity with United States GAAP requires us
to make estimates and assumptions that affect our reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities in our
consolidated financial statements. The SEC has defined a company’s critical accounting policies as
the ones that are most important to the portrayal of the financial condition and results of
operations, and which require management to make its most difficult and subjective judgments, often
as a result of the need to make estimates about matters that are inherently uncertain. Based on
this definition, we have identified our critical accounting policies as those addressed below. We
also have other key accounting policies that involve the use of estimates, judgments and
assumptions. You should review the notes to our
consolidated financial statements for a summary of these policies. We believe that our
estimates and assumptions are reasonable, based upon information presently available; however,
actual results may differ from these estimates under different assumptions or conditions.
Goodwill. We
have approximately $156.9 million in net unamortized goodwill on our
consolidated balance sheet at December 31, 2007 resulting from our acquisition of other businesses.
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, was
adopted in 2002 and requires an annual review of goodwill and other non-amortizing intangible
assets for impairment. We completed our initial assessment for impairment of goodwill and
determined that no impairment was necessary at that time. Our most recent annual assessment was
performed as of October 1, 2007 and it was determined that no impairment adjustment was necessary
at that time. The annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting unit to determine
their estimated fair value. Changes in forecasted operations can materially affect these
estimates, which could significantly affect our results of operations.
Income Taxes. We are subject to income taxes in the United States as well as various states
and foreign jurisdictions in which we operate. We account for income taxes under SFAS No. 109,
Accounting for Income Taxes, whereby deferred tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the financial statements or
income tax returns. Deferred tax assets and liabilities are determined based upon differences
between financial statement carrying amounts of existing assets and their respective tax bases
using enacted tax rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled.
The effect on the income tax provision and deferred tax assets and liabilities of a change in
rates is recognized in income in the period that includes the enactment date. We believe that it
is more likely than not that we will be able to utilize our deferred tax assets. Therefore we have
not provided any valuation allowance against our recorded deferred tax assets.
Revenue Recognition. We recognize revenue when evidence of an arrangement exists, services
have been rendered, our price is fixed or determinable and collectibility is reasonably assured.
We evaluate our revenue streams for proper timing of revenue recognition.
Cash advance revenue is comprised of upfront patron transaction fees assessed at the time
the transaction is initiated and a percentage of the face amount of the cash advance. Cash advance
revenue is recognized at the point that a negotiable money order instrument is generated by the
gaming establishment cashier.
ATM revenue is comprised of upfront patron transaction fees assessed at the time the
transaction is initiated and a percentage of interchange fees paid by the patron’s issuing bank.
These issuing banks share the interchange revenue, or reverse interchange, with us to cover the
costs we incur to acquire the ATM transaction. Upfront patron transaction fees are recognized when
a transaction is authorized and reverse interchange is recognized on a monthly basis.
51
Check services revenue is generally contractually based upon a percentage of the face amount
of total checks warranted. Check services revenue is recognized on a monthly basis.
Central Credit revenue is based upon either a flat monthly, unlimited usage fee or a variable
fee structure driven by the volume of patron credit histories generated. This revenue is
recognized on a monthly basis. Revenue derived from our patron marketing products and services is
recognized upon completion of services.
Recently Issued Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an
amendment of SFAS No. 140 (“SFAS No. 156”). This Statement requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract; requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value, if practicable; permits an entity
to choose either of the Amortization or Fair Value subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; and requires separate
presentation of servicing assets and servicing liabilities measured at fair value in the statement
of financial position. SFAS No. 156 is effective for fiscal years beginning after September 15,
2006. The Company adopted SFAS No. 156 on January 1, 2007 with no material effect on the
consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 provides
guidance on the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and transition of tax
positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As of
January 1, 2007, the Company has provided a liability for $0.5 million of unrecognized tax benefits
related to various federal and state income tax matters. The FIN 48 liability was reduced to $0 at
December 31, 2007 because the Company elected a change in accounting method. As we have net
operating loss carryforwards that are required to be applied against any taxable income, the
liability associated with the adoption of FIN 48 has been offset against our net operating loss
carryforwards.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”),
which clarifies the definition of fair value whenever another standard requires or permits assets
or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value
should be based on the assumptions market participants would use when pricing the asset or
liability, and establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. SFAS No. 157 does not expand the use of fair value to any new circumstances.
SFAS No. 157 also requires expanded financial statement disclosures about fair value measurements,
including disclosure of the methods used and the effect on earnings. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of
this standard on the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The standard requires that unrealized gains
and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is
effective beginning January 1, 2008. The adoption of SFAS No. 159 is not expected to have a
significant impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent consideration at their
fair value on the acquisition date. It further requires that acquisition-related costs are
recognized separately from the acquisition and expensed as incurred, restructuring costs generally
are expensed in periods subsequent to the acquisition date, and changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. SFAS No. 141(R) is effective for business combinations with an
acquisition date in the first quarter of 2009.
52
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (“SFAS No. 160”), which establishes standards for the accounting and reporting
of noncontrolling interests in subsidiaries (that is, minority interests) in consolidated financial
statements and for the loss of control of subsidiaries. SFAS No. 160 requires: (1) the equity
interest of noncontrolling shareholders, partners, or other equity holders in subsidiaries to be
accounted for and presented in equity, separately from the parent shareholder’s equity, rather than
as liabilities or as “mezzanine” items between liabilities and equity; (2) the amount of
consolidated net income attributable to the parent and to the noncontrolling interests be clearly
identified and presented on the face of the consolidated statement of income; and (3) when a
subsidiary is deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any noncontrolling equity investment rather than the
carrying amount of that retained investment. SFAS No. 160 is effective beginning on January 1,
2009. Early adoption of the Statement is prohibited. The Company is currently evaluating the
potential impact of adopting this statement.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”) to amend
the SEC’s views discussed in Staff Accounting Bulletin No. 107 regarding the use of the simplified
method in developing an estimate of expected life of share options in accordance with SFAS No.
123(R). SAB No. 110 is effective beginning January 1, 2008. Because our stock incentive plan has
only been in place since 2005, we will continue to use the simplified method until we have the
historical data necessary to provide a reasonable estimate of expected life in accordance with
SAB No. 107, as amended by SAB No. 110.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2007 and 2006,
respectively:
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Net cash provided by operating activities |
|
$ |
91,874 |
|
|
$ |
70,079 |
|
Net cash used in investing activities |
|
|
(10,960 |
) |
|
|
(17,061 |
) |
Net cash used in financing activities |
|
|
(49,715 |
) |
|
|
(46,761 |
) |
Net effect of exchange rates on cash and cash equivalents |
|
|
(1,055 |
) |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
30,144 |
|
|
|
5,796 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—Beginning of period |
|
|
40,919 |
|
|
|
35,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—End of period |
|
$ |
71,063 |
|
|
$ |
40,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
principal source of liquidity is cash flows from operating activities, which were $91.9
million and $70.1 million for the years ended December 31, 2007 and 2006, respectively. Changes in
operating assets and liabilities accounted for a net decrease of $20.1 million in cash flow from
operating activities. Offsetting this decrease is the net change in settlement receivables and
liabilities of $30.4 million and an increase of $8.8 million from increases in net income, the add
back of non-cash compensation expense to net income and the net increase in cash tax savings added
back to the deferred income tax asset.
Net cash used in investing activities totaled $11.0 million and $17.1 million for the years
ended December 31, 2007 and 2006, respectively. Included in net cash used in investing activities
for the years ended December 31, 2007 and 2006, respectively, were funds spent on purchased
software and software development in the amounts of $1.4 million and $1.5 million and funds spent
on the procurement of cash access equipment, computer and other hardware in the amounts of
$9.5 million and $14.2 million. We have met our capital requirements to date through cash flows
from operating activities.
Net cash used in financing activities was $49.7 million compared to $46.8 million for the
years ended December 31, 2007 and 2006, respectively. Under terms of the credit facility that we
entered into in the fourth quarter of 2006, our required quarterly principal amortization was
significantly reduced. In the year ended December 31, 2007 we repaid $1.0 million of scheduled
principal on the term loan and $10.0 million of voluntary repayments on the revolving portion of
our credit facilities. Net cash used in financing activities in 2006 is the result of $48.5
million in net repayments on borrowings (which include debt repayments, payments for debt issuance
costs and borrowings under our senior secured credit facility) primarily due to the refinancing of
our Senior Secured Credit Facility in the fourth quarter of 2006. In the years ended December 31,
2007 and 2006, the net cash used also includes payments for debt issuance costs of $23,000 and $1.6
million, respectively. In 2007, the Company’s Board of Directors authorized the repurchase of up
to $50 million worth of shares of common stock. During the year ended December 31, 2007, we
repurchased $40.4 million worth of common stock in open market purchases and employee tax
withholding transactions from vesting of restricted shares under the Company’s equity incentive
programs. Offsetting the cash used was $1.3 million and $1.5 million in proceeds from the exercise
of stock options by our employees in 2007 and 2006, respectively. In the years ended December 31,
2007 and 2006, we also received $0.4 million and $0.2 million, respectively, in capital
contributions from the minority owner of IFT.
53
Borrowings
On November 1, 2006, GCA and Holdings entered into a Second Amended and Restated Credit
Agreement with certain lenders, Bank of America, as Administrative Agent and Wachovia Bank, N.A.,
as Syndication Agent (the “Second Amended and Restated Credit Agreement”). The Second Amended and
Restated Credit Agreement amended and restated the First Amended and Restated Credit Agreement that
previously governed the terms of GCA’s existing senior secured credit facilities to provide for a
$100.0 million term loan facility and a $100.0 million five-year revolving credit facility, with a
$25.0 million letter of credit sublimit and a $5.0 million swingline loan sublimit. The Second
Amended and Restated Credit Agreement also contains an increase option permitting GCA to arrange
with existing lenders and/or new lenders for them to provide up to an aggregate of $150.0 million
in additional term loan or revolving credit commitments.
The Second Amended and Restated Credit Agreement significantly amended and restated the terms
of the First Amended and Restated Credit Agreement to, among other things, reduce the rate at which
interest accrues on certain borrowings under the
senior secured credit facilities and modify certain other terms, conditions, provisions and
covenants in connection with the senior secured credit facilities.
Principal, together with accrued and unpaid interest, is due on the maturity date, November 1,
2011. GCA may prepay the loans and terminate the commitments at any time, without premium or
penalty, subject to certain qualifications set forth in the Second Amended and Restated Credit
Agreement. Furthermore, the Second Amended and Restated Credit Agreement contains mandatory
prepayment provisions which, under certain circumstances, obligate GCA to apply defined portions of
its cash flow to prepayment of the senior secured credit facilities.
Pursuant to the Second Amended and Restated Credit Agreement, the senior secured credit
facilities continue to be secured by substantially all of the assets of the Company, GCA and GCA’s
wholly-owned domestic subsidiaries other than Arriva, and will continue to be guaranteed by the
Company and all of GCA’s wholly-owned domestic subsidiaries other than Arriva.
The Second Amended and Restated Credit Agreement contains customary affirmative and negative
covenants, financial covenants, representations and warranties and events of defaults, which are
subject to important exceptions and qualifications, as set forth in the Second Amended and Restated
Credit Agreement.
The Second Amended and Restated Credit Agreement resulted in the write-off of $3.4 million of
remaining capitalized deferred financing costs associated with the First Amended and Restated
Credit Agreement in the fourth quarter of 2006. As of December 31, 2006, the remaining capitalized
deferred financing costs associated with the Second Amended and Restated Credit Agreement were
$1.4 million.
On March 10, 2004, we completed a private placement offering of $235.0 million of
83/4% senior subordinated notes due 2012 (the “Notes”). All of Global Cash Access,
Inc.’s existing and future domestic wholly owned subsidiaries are guarantors of the Notes on a
senior subordinated basis. In addition, effective upon the closing of our initial public offering
of common stock, Holdings guaranteed, on a subordinated basis, all of Global Cash Access, Inc.’s
obligations under the Notes.
Interest on the Notes accrues based upon a 360-day year comprised of twelve 30-day months and
is payable semiannually on March 15th and September 15th. On October 31,
2005, $82.3 million or 35% of these Notes were redeemed at a price of 108.75% of face, out of the
net proceeds from our initial public offering. The Company may redeem all or a potion of the Notes
at redemption prices of 104.375%, on or after March 15, 2008, 102.188% on or after March 15, 2009,
or 100.00% on or after March 15, 2010.
54
The following is a summary of our contractual cash obligations as of December 31, 2007,
including our senior subordinated notes and our senior secured credit facilities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
2 - 3 |
|
|
4 - 5 |
|
|
After |
|
| Contractual Cash Obligations |
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
| |
|
(amounts in thousands) |
|
Long-term debt obligations |
|
$ |
263,480 |
|
|
$ |
1,000 |
|
|
$ |
2,000 |
|
|
$ |
260,480 |
|
|
$ |
— |
|
Estimated interest obligations (1) |
|
|
84,062 |
|
|
|
19,695 |
|
|
|
39,184 |
|
|
|
25,183 |
|
|
|
— |
|
Operating lease obligations |
|
|
1,824 |
|
|
|
596 |
|
|
|
1,065 |
|
|
|
163 |
|
|
|
— |
|
Purchase obligations (2) |
|
|
14,751 |
|
|
|
2,461 |
|
|
|
4,682 |
|
|
|
4,682 |
|
|
|
2,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations (3) |
|
$ |
364,117 |
|
|
$ |
23,752 |
|
|
$ |
46,931 |
|
|
$ |
290,508 |
|
|
$ |
2,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Estimated interest payments are computed using the interest rate in effect at December
31, 2007 multiplied by the principal balance outstanding after scheduled principal
amortization payments. For the senior secured credit facility and the senior subordinated
notes the rates assumed are 5.72% and 8.75%, respectively. |
| |
| (2) |
|
Included in purchase obligations are minimum transaction processing services from USA
Payments, a company controlled by the principals of M&C and minimum account maintenance
charges under our Fiserv agreement. |
| |
| (3) |
|
We have entered into three year employment contracts with certain of our executive officers
that will expire over the next two years. Significant contract provisions include minimum annual
base salaries, bonus compensation, and non-compete provisions. These contracts are “at will”
employment agreements, under which the employee or we may terminate employment. If we terminate any
of these employees without cause, then we are obligated to pay the employee severance benefits as
specified in their individual contract. We have excluded these obligations under employment
contracts from the totals presented in this table as the amount and timing of the amount settled in
cash is not known. |
Deferred Tax Asset
At December 31, 2007, we had a net deferred income tax asset of a $177.2 million. We
recognized a deferred tax asset upon our conversion from a limited liability company to a
corporation on May 14, 2004. Prior to that time, all tax attributes flowed through to the members
of the limited liability company. The principal component of the deferred tax asset is a
difference between our income for financial accounting and tax purposes. This difference results
from a significant balance of Acquired Goodwill (approximately $686 million), which is recorded for
tax purposes but not for accounting purposes. This asset is amortized over 15 years for tax
purposes, resulting in annual pretax income being $45.7 million lower for tax purposes than for
financial accounting purposes. At an estimated effective tax rate of
36%, this results in tax
payments being approximately $16.5 million less than the provision for income taxes shown on the
income statement for financial accounting purposes. This is an
expected aggregate of $186.6
million in cash savings over the remaining 12-year life of the deferred tax asset related to the
conversion.
Other Liquidity Needs and Resources
On September 23, 2005, we completed an initial public offering of 9.0 million shares of common
stock, and on October 12, 2005, the underwriters exercised their over allotment option to purchase
an additional 1.1 million shares of our common stock. The total proceeds to us from the offering
(after deducting underwriting discounts and commissions) were $130.9 million. We used
$90.3 million of these proceeds to redeem senior subordinated notes (including a redemption premium
and accrued interest), $10.0 million to acquire ownership of the “3-in-1 rollover” patent, and
$20.0 million to voluntarily prepay amounts due under the term loan portion of our senior secured
credit facility. In December 2005, the remaining $10.5 million of the initial public offering
proceeds and cash balances on hand were utilized to prepay an additional $15.0 million of amounts
due under the term loan portion of our senior secured credit facility.
Bank of America supplies us with currency needed for normal operating requirements of our ATMs
pursuant to a Treasury Services Agreement. Under the terms of this agreement, we pay a monthly
cash usage fee based upon the product of the average daily dollars outstanding in all ATMs
multiplied by the average LIBOR one-month United States dollar deposits for each day that rate is
published in that month plus a margin of 25 basis points. We are therefore exposed to interest
rate risk to the extent
that applicable LIBOR increases. As of December 31, 2007, the rate in effect, inclusive of
the 25 basis points margin, was 5.3%, and the currency supplied by Bank of America pursuant to this
agreement was $368.1 million.
55
We need supplies of cash to support our foreign operations. For some foreign jurisdictions,
such as the United Kingdom, applicable law and cross-border treaties allow us to transfer funds
between our domestic and foreign operations efficiently. For other foreign jurisdictions, we must
rely on the supply of cash generated by our operations in those foreign jurisdictions, and the cost
of repatriation is prohibitive. For example, GCA Canada, the subsidiary through which we operate
in Canada, generates a supply of cash that is sufficient to support its operations, and all cash
generated through such operations is retained by GCA Canada. As we expand our operations into new
foreign jurisdictions, we must rely on treaty-favored cross-border transfers of funds, the supply
of cash generated by our operations in those foreign jurisdictions or alternate sources of working
capital.
We operate IFT, a joint venture with IGT. We own 60% of the equity interests of IFT and IGT
owns 40%. The joint venture was formed to develop and market cash access products using slot
tickets. Pursuant to the terms of our agreement with IGT, we are obligated to contribute up to our
pro rata share of $10.0 million in capital to IFT. Our obligation to contribute additional capital
in IFT is conditioned upon capital calls, the necessity of which, are determined in our sole
discretion. As of December 31 2007, we had contributed a total of $4.6 million in IFT, and are
committed to invest up to $1.4 million in additional capital investments if required.
We believe that borrowings available under our senior secured credit facilities, together with
our anticipated operating cash flows, will be adequate to meet our anticipated future requirements
for working capital, capital expenditures and scheduled interest payments on the Notes and under
our senior secured credit facilities for the next 12 months and for the foreseeable future.
Although no additional financing is currently contemplated, we may seek, if necessary or otherwise
advisable and to the extent permitted under the indenture governing the Notes and the terms of the
senior secured credit facilities, additional financing through bank borrowings or public or private
debt or equity financings. We cannot ensure that additional financing, if needed, will be
available to us, or that, if available, the financing will be on terms favorable to us. The terms
of any additional debt or equity financing that we may obtain in the future could impose additional
limitations on our operations and/or management structure. We also cannot ensure that the
estimates of our liquidity needs are accurate or that new business developments or other unforeseen
events will not occur, resulting in the need to raise additional funds.
Off-Balance Sheet Arrangements
Bank of America Amended Treasury Services Agreement. We obtain currency to meet the normal
operating requirements of our domestic ATMs and ACMs pursuant to the Amendment of the Treasury
Services Agreement with Bank of America. Under this agreement, all currency supplied by Bank of
America remains the sole property of Bank of America at all times until it is dispensed, at which
time Bank of America obtains an interest in the corresponding settlement receivable. Because it is
never an asset of ours, supplied cash is not reflected on our balance sheet. At December 31, 2007,
the total currency obtained from Bank of America pursuant to this agreement was $368.1 million.
Because Bank of America obtains an interest in our settlement receivables, there is no liability
corresponding to the supplied cash reflected on our balance sheet. The fees that we pay to Bank of
America for cash usage pursuant to the Amendment of the Treasury Services Agreement are reflected
as interest expense in our financial statements. Foreign gaming establishments supply the currency
needs for the ATMs located on their premises.
Arriva. The Arriva Card is a private-label revolving credit card that provides gaming patrons
with access to credit in gaming establishments. Pursuant to the Receivables Sale Agreement and the
Revolving Loan Product Program Agreement entered into in March 2006 between CIT and Arriva, CIT is
the legal issuer of the Arriva Cards marketed by Arriva. In February 2008, we announced that we
will discontinue offering the Arriva Card.
When a customer uses the Arriva Card for a transaction, CIT extends credit to the patron for
the face amount of transaction and the fee charged by the gaming establishment and acquires the
receivable from the customer. CIT is entitled to receive Interim Interest, which is a fee based on
the average balance of receivables multiplied by an interest rate. The interest rate is computed
based upon the amount of time that CIT has this receivable outstanding. As of December 31, 2007,
the interest is determined as the average of the Annual Percentage Rates (“APR”) assigned to new
accounts, or approximately 18.99%. CIT requires Arriva to purchase the net amount of all
receivables three days from when the receivable was originated (the “Holding Period”). Arriva is
entitled to receive all fees and interest income associated with the receivable. These are
included within other revenues in the consolidated statements of income and the receivables from
the patrons for this revenue are recorded as part of other receivables, net in the consolidated
balance sheets.
56
As of December 31, 2007, CIT had $0.7 million in outstanding receivables from transactions
performed on Arriva Cards.
Additionally, Arriva is required to pay CIT an origination fee for the extension of credit on
receivables. This origination fee is computed as the principal amount of the extension of credit
multiplied by 0.25%.
Senior Secured Credit Facility — As of December 31, 2007, we had $3.2 million in standby
letters of credit outstanding as collateral security for First Data related to a Sponsorship
Indemnification Agreement whereby First Data agreed to continue its guarantee of performance for us
to Bank of America for our sponsorship as a Bank Identification Number and Interbank Card
Association licensee under the applicable VISA and MasterCard rules. GCA has agreed to indemnify
First Data and its affiliates against any and all losses and expenses arising from its
indemnification obligations pursuant to that agreement. Additionally, we had $50,000 in standby
letters of credit issued and outstanding as collateral on surety bonds for certain licenses held
related to our Nevada check cashing licenses.
Effects of Inflation
Our monetary assets, consisting primarily of cash and receivables, are not significantly
affected by inflation. Our non-monetary assets, consisting primarily of our deferred tax asset,
goodwill and other intangible assets, are not affected by inflation. We believe that replacement
costs of equipment, furniture and leasehold improvements will not materially affect our operations.
However, the rate of inflation affects our operating expenses, such as those for salaries and
benefits, armored carrier expenses, telecommunications expenses and equipment repair and
maintenance services, which may not be readily recoverable in the financial terms under which we
provide our cash access products and services to gaming establishments and their patrons.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to foreign currency exchange risk. We
operate and conduct business in foreign countries and, as a result, are exposed to movements in
foreign currency exchange rates. Our exposure to foreign currency exchange risk related to our
foreign operations is not material to our results of operations, cash flows or financial position.
At present, we do not hedge this risk. At present, we do not hold any derivative securities of any
kind.
Bank of America supplies us with currency needed for normal operating requirements of our
domestic ATMs and ACMs pursuant to the Amendment to the Treasury Services Terms and Conditions
Booklet. Under the terms of this agreement, we pay a monthly cash usage fee based upon the product
of the average daily dollars outstanding in all ATMs and ACMs multiplied by the average LIBOR for
one-month United States dollar deposits for each day that rate is published in that month plus a
margin of 25 basis points. We are therefore exposed to interest rate risk to the extent that
applicable LIBOR increases. As of December 31, 2007, the rate in effect, inclusive of the 25 basis
point margin, was 5.3% and the currency supplied by Bank of America pursuant to this agreement was
$368.1 million. Based upon the average outstanding amount of currency to be supplied by Bank of
America pursuant to this agreement during 2007, which was $285.2 million, each 1% increase in
applicable LIBOR would have a $2.9 million impact on income before taxes and minority ownership
loss over a 12-month period.
Our senior secured credit facilities bear interest at rates that can vary over time. We have
the option of having interest on the outstanding amounts under these credit facilities paid based
on a base rate (equivalent to the prime rate) or based on the Eurodollar rate (equivalent to
LIBOR). We have historically elected to pay interest based on the one month United States dollar
LIBOR, and we expect to continue to pay interest based on LIBOR of various maturities. Our
interest expense on these credit facilities is the applicable LIBOR plus a margin of 87.5 basis
points for the term loan portion and LIBOR plus 87.5 basis points for the revolving credit portion.
At December 31, 2007, we had $11.7 million drawn under the revolving credit portion and we had
$99.0 million outstanding under the term loan portion at an interest rate, including the margin, of
approximately 5.7%. Based upon the outstanding balance on the term loan of $110.7 million on
December 31, 2007, each 1% increase in applicable LIBOR would add an additional $1.1 million of
interest expense over a 12-month period.
When a customer uses the Arriva Card for a transaction, CIT extends credit to the patron for
the face amount of transaction and the fee charged by the gaming establishment and acquires the
receivable from the customer. CIT is entitled to receive Interim Interest, which is a fee based on
the average balance of receivables multiplied by an interest rate. The interest rate is computed
based upon the Holding Period. The interest is determined as the average of the Annual Percentage
Rates (“APR”) assigned to new accounts, or approximately 18.99% at December 31, 2007. We are
therefore exposed to interest rate risk to the extent that applicable LIBOR increases. As of
December 31, 2007, CIT had $0.7 million in outstanding receivables from transactions performed on
Arriva Cards. Each 1% increase in applicable LIBOR would have a $7,000 impact on income before
taxes and minority ownership loss over a 12-month period.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Cash Access Holdings, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Global Cash Access Holdings,
Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2007. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Global Cash Access and subsidiaries at December 31, 2007 and
2006, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2007, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2006, the
Company changed its method of accounting for share-based compensation to conform to Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment.
As discussed in Note 10 of the Notes to the Consolidated Financial Statements, effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109.
We have also audited, in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 17, 2008
expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 17, 2008
59
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
(amounts in thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,063 |
|
|
$ |
40,919 |
|
Restricted cash and cash equivalents |
|
|
1,380 |
|
|
|
1,350 |
|
Settlement receivables |
|
|
60,638 |
|
|
|
137,091 |
|
Other receivables, net |
|
|
27,170 |
|
|
|
12,848 |
|
Prepaid and other assets |
|
|
7,492 |
|
|
|
9,488 |
|
Property, equipment and leasehold improvements, net |
|
|
23,523 |
|
|
|
20,454 |
|
Goodwill, net |
|
|
156,889 |
|
|
|
156,755 |
|
Other intangibles, net |
|
|
13,941 |
|
|
|
18,001 |
|
Deferred income taxes, net |
|
|
177,227 |
|
|
|
191,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
539,323 |
|
|
$ |
588,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Settlement liabilities |
|
$ |
93,727 |
|
|
$ |
138,242 |
|
Accounts payable |
|
|
22,463 |
|
|
|
26,282 |
|
Accrued expenses |
|
|
21,222 |
|
|
|
17,383 |
|
Borrowings |
|
|
263,480 |
|
|
|
274,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
400,892 |
|
|
|
456,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
135 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 500,000 shares authorized and
82,981 and 82,313 shares outstanding at December 31, 2007 and 2006, respectively |
|
|
83 |
|
|
|
82 |
|
Convertible preferred stock, $0.001 par value, 50,000 shares authorized
and 0 shares outstanding at December 31, 2007 and 2006, respectively |
|
|
— |
|
|
|
— |
|
Additional paid in capital |
|
|
163,070 |
|
|
|
139,515 |
|
Retained earnings (accumulated deficit) |
|
|
14,103 |
|
|
|
(9,601 |
) |
Accumulated other comprehensive income |
|
|
2,708 |
|
|
|
2,161 |
|
Treasury stock, at cost, 4,563 and 0 shares at December 31, 2007
and 2006, respectively |
|
|
(41,668 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
138,296 |
|
|
|
132,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
539,323 |
|
|
$ |
588,647 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(amounts in thousands, except earnings per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
316,007 |
|
|
$ |
287,053 |
|
|
$ |
235,055 |
|
ATM |
|
|
240,575 |
|
|
|
221,727 |
|
|
|
182,291 |
|
Check services |
|
|
31,213 |
|
|
|
29,166 |
|
|
|
26,376 |
|
Central Credit and other revenues |
|
|
13,094 |
|
|
|
10,202 |
|
|
|
10,358 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
600,889 |
|
|
|
548,148 |
|
|
|
454,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
(434,413 |
) |
|
|
(389,251 |
) |
|
|
(308,481 |
) |
Operating expenses |
|
|
(82,015 |
) |
|
|
(63,812 |
) |
|
|
(51,206 |
) |
Amortization |
|
|
(5,487 |
) |
|
|
(5,520 |
) |
|
|
(5,295 |
) |
Depreciation |
|
|
(6,302 |
) |
|
|
(4,369 |
) |
|
|
(6,814 |
) |
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
72,672 |
|
|
|
85,196 |
|
|
|
82,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
3,669 |
|
|
|
3,484 |
|
|
|
1,815 |
|
Interest expense |
|
|
(38,146 |
) |
|
|
(42,098 |
) |
|
|
(44,165 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
(3,417 |
) |
|
|
(9,529 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net |
|
|
(34,477 |
) |
|
|
(42,031 |
) |
|
|
(51,879 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION AND MINORITY
OWNERSHIP LOSS |
|
|
38,195 |
|
|
|
43,165 |
|
|
|
30,405 |
|
INCOME TAX PROVISION |
|
|
(14,727 |
) |
|
|
(16,739 |
) |
|
|
(7,953 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP LOSS |
|
|
23,468 |
|
|
|
26,426 |
|
|
|
22,452 |
|
MINORITY OWNERSHIP LOSS, NET OF TAX |
|
|
236 |
|
|
|
183 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
23,704 |
|
|
|
26,609 |
|
|
|
22,591 |
|
Foreign currency translation, net of tax |
|
|
547 |
|
|
|
435 |
|
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
24,251 |
|
|
$ |
27,044 |
|
|
$ |
22,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.33 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.29 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
81,108 |
|
|
|
81,641 |
|
|
|
45,643 |
|
Diluted |
|
|
81,377 |
|
|
|
81,921 |
|
|
|
74,486 |
|
See notes to consolidated financial statements.
61
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(amounts in thousands, except shares)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock - |
|
|
Common Stock - |
|
|
Preferred Stock - |
|
|
Preferred Stock - |
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
Series A |
|
|
Series B |
|
|
Series A |
|
|
Series B |
|
|
Additional |
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Paid in |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
Income |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE—December 31, 2004 |
|
|
31,775,250 |
|
|
$ |
32 |
|
|
|
399,750 |
|
|
$ |
— |
|
|
|
31,720,000 |
|
|
$ |
32 |
|
|
|
7,605,000 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
(58,801 |
) |
|
$ |
1,950 |
|
|
$ |
— |
|
|
$ |
(56,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,591 |
|
|
|
— |
|
|
|
— |
|
|
|
22,591 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(224 |
) |
|
|
— |
|
|
|
(224 |
) |
Conversion of all series shares into
common A shares |
|
|
39,724,750 |
|
|
|
40 |
|
|
|
(399,750 |
) |
|
|
— |
|
|
|
(31,720,000 |
) |
|
|
(32 |
) |
|
|
(7,605,000 |
) |
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Offering of common stock |
|
|
10,053,568 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
128,886 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
128,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE—December 31, 2005 |
|
|
81,553,568 |
|
|
$ |
82 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
128,886 |
|
|
$ |
(36,210 |
) |
|
$ |
1,726 |
|
|
$ |
— |
|
|
$ |
94,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,609 |
|
|
|
— |
|
|
|
— |
|
|
|
26,609 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
435 |
|
|
|
— |
|
|
|
435 |
|
Non-cash compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,141 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,141 |
|
Restricted stock grants |
|
|
619,747 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted stock cancellations |
|
|
(10,500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
149,709 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE—December 31, 2006 |
|
|
82,312,524 |
|
|
$ |
82 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
139,515 |
|
|
$ |
(9,601 |
) |
|
$ |
2,161 |
|
|
$ |
— |
|
|
$ |
132,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,704 |
|
|
|
— |
|
|
|
— |
|
|
|
23,704 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
547 |
|
|
|
— |
|
|
|
547 |
|
Non-cash compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,269 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,269 |
|
Restricted stock grants |
|
|
747,000 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted stock cancellations |
|
|
(181,061 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
103,249 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Treasury share repurchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(38,462 |
) |
|
|
(38,462 |
) |
Restricted share vesting withholdings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,287 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,206 |
) |
|
|
(1,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE—December 31, 2007 |
|
|
82,981,712 |
|
|
$ |
83 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
163,070 |
|
|
$ |
14,103 |
|
|
$ |
2,708 |
|
|
$ |
(41,668 |
) |
|
$ |
138,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,704 |
|
|
$ |
26,609 |
|
|
$ |
22,591 |
|
Adjustments to reconcile net income to cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
973 |
|
|
|
1,584 |
|
|
|
1,942 |
|
Amortization of intangibles |
|
|
5,487 |
|
|
|
5,520 |
|
|
|
5,295 |
|
Depreciation |
|
|
6,302 |
|
|
|
4,369 |
|
|
|
6,814 |
|
(Gain)loss on sale or disposal of assets |
|
|
139 |
|
|
|
(6 |
) |
|
|
47 |
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
3,417 |
|
|
|
9,529 |
|
Provision for bad debts |
|
|
11,184 |
|
|
|
6,483 |
|
|
|
4,068 |
|
Deferred income taxes |
|
|
14,514 |
|
|
|
15,899 |
|
|
|
7,228 |
|
Minority ownership loss |
|
|
(368 |
) |
|
|
(287 |
) |
|
|
(218 |
) |
Stock-based compensation |
|
|
22,269 |
|
|
|
9,141 |
|
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
76,737 |
|
|
|
(76,654 |
) |
|
|
(30,029 |
) |
Other receivables, net |
|
|
(22,827 |
) |
|
|
(10,503 |
) |
|
|
(7,097 |
) |
Prepaid and other assets |
|
|
1,071 |
|
|
|
(1,906 |
) |
|
|
(1,093 |
) |
Settlement liabilities |
|
|
(44,797 |
) |
|
|
78,188 |
|
|
|
17,837 |
|
Accounts payable |
|
|
(3,855 |
) |
|
|
5,867 |
|
|
|
(178 |
) |
Accrued expenses |
|
|
1,341 |
|
|
|
2,358 |
|
|
|
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
91,874 |
|
|
|
70,079 |
|
|
|
38,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold improvements |
|
|
(9,502 |
) |
|
|
(14,195 |
) |
|
|
(7,098 |
) |
Purchase of other intangibles |
|
|
(1,428 |
) |
|
|
(1,516 |
) |
|
|
(10,762 |
) |
Changes in restricted cash and cash equivalents |
|
|
(30 |
) |
|
|
(1,350 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(10,960 |
) |
|
|
(17,061 |
) |
|
|
(17,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility and senior subordinated notes |
|
|
— |
|
|
|
121,730 |
|
|
|
— |
|
Repayments under credit facility |
|
|
(11,000 |
) |
|
|
(168,662 |
) |
|
|
(74,588 |
) |
Repayments from early retirement of senior subordinated notes |
|
|
— |
|
|
|
— |
|
|
|
(89,446 |
) |
Debt issuance costs |
|
|
(23 |
) |
|
|
(1,557 |
) |
|
|
(331 |
) |
Proceeds from sale of stock |
|
|
— |
|
|
|
— |
|
|
|
128,895 |
|
Proceeds from exercise of stock options |
|
|
1,287 |
|
|
|
1,488 |
|
|
|
— |
|
Purchase of treasury stock |
|
|
(40,379 |
) |
|
|
— |
|
|
|
— |
|
Minority capital contributions |
|
|
400 |
|
|
|
240 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(49,715 |
) |
|
|
(46,761 |
) |
|
|
(35,190 |
) |
|
|
|
|
|
|
|
|
|
|
(continued)
63
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
NET EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS |
|
$ |
(1,055 |
) |
|
$ |
(461 |
) |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
30,144 |
|
|
|
5,796 |
|
|
|
(14,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—Beginning of period |
|
|
40,919 |
|
|
|
35,123 |
|
|
|
49,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—End of period |
|
$ |
71,063 |
|
|
$ |
40,919 |
|
|
$ |
35,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
37,549 |
|
|
$ |
38,735 |
|
|
$ |
43,610 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,055 |
|
|
$ |
410 |
|
|
$ |
2,334 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
64
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Global Cash Access Holdings, Inc. is a holding company, the principal asset of which is the
capital stock of Global Cash Access, Inc. Unless otherwise indicated, the terms “the Company,”
“Holdings,” “we,” “us” and “our” refer to Global Cash Access Holdings, Inc. together with its
consolidated subsidiaries. Holdings, was formed on February 4, 2004, for the purpose of holding
all of the outstanding capital stock of Global Cash Access, Inc. (“GCA”) and to guarantee the
obligations under our senior secured credit facilities.
GCA is a financial services company that provides cash access products and services to the
gaming industry. The Company’s cash access products and services allow gaming patrons to access
funds through a variety of methods, including credit card cash advances, point-of-sale debit card
cash advances, automated teller machine (“ATM”) withdrawals, check services and money transfers.
These services are provided to patrons at gaming establishments directly by the Company or through
one of its consolidated subsidiaries. GCA’s subsidiaries include: Global Cash Access (Canada) Inc.
(“GCA Canada”) (formerly known as CashCall Systems Inc.), Global Cash Access (BVI), Inc. (“BVI”),
Arriva Card, Inc. (“Arriva”), Global Cash Access Switzerland A.G. (“GCA Switzerland”), Innovative
Funds Transfer, LLC, formerly known as QuikPlay, LLC (“IFT”), Global Cash Access (UK) Ltd. (“GCA
UK”), Global Cash Access (HK) Ltd. (“GCA HK”) and GCA (Macau) S.A. (“GCA Macau”).
The Company also wholly owns and operates one of the leading credit reporting agencies in the
gaming industry, Central Credit, LLC (“Central”), and provides credit reporting information
services to gaming establishments and credit-reporting history on gaming patrons to the various
gaming establishments. Central operates in both international and domestic gaming markets.
Commencing in the third quarter of 2006, the Company, through its subsidiary, Arriva, began
offering a credit card aimed at consumers who perform cash advance transactions in gaming
establishments. In February 2008, the Company announced that it would discontinue offering the
Arriva Card.
The accompanying consolidated financial statements include the accounts of Holdings and its
consolidated subsidiaries: GCA, GCA Canada, Central, BVI, Arriva, GCA Switzerland, IFT, GCA UK, GCA
HK and GCA Macau.
GCA Canada is a corporation incorporated under the laws of Ontario, Canada and is directly
owned by GCA. GCA Canada provides consumer cash access to gaming establishments in Canada through
credit and debit card cash advance transactions. On August 30, 2001, GCA established a United
Kingdom branch to provide credit and debit card cash advance and ATM withdrawal transactions to
gaming patrons in the United Kingdom. The branch did not initiate these transactions until early
2002 when the regulatory approval to perform these types of transactions in gaming establishments
was granted by Parliament. In September 2007, regulatory approval was rescinded and we have
currently ceased operations in the United Kingdom. We are currently
developing a solution to continue our operations in the United
Kingdom.
IFT, formerly known as QuikPlay, LLC, is a joint venture formed on December 6, 2000, owned 60%
by GCA and 40% by International Game Technology (“IGT”). IGT is one of the largest manufacturers
of gaming equipment in the United States. As GCA is the managing member of this entity, IFT has
been consolidated in the Company’s consolidated financial statements for all periods presented.
The Company provides some services in conjunction with companies wholly owned by First Data
Corporation (“First Data”), including Integrated Payment Systems, Inc. and IPS Canada, Inc.
(collectively, “IPS”), TRS Recovery Services, Inc., and TeleCheck Services, Inc., (collectively
“TeleCheck”), and Western Union Financial Services, Inc. (“Western Union”). GCA is a money
transfer agent for Western Union, a wholly owned subsidiary of First Data. Western Union contracts
directly with the gaming establishments and provides GCA commissions on the
transactions processed by the gaming establishment. These commissions are included as part of
other revenues in the accompanying consolidated statements of income.
65
On November 27, 2006, the Company entered into a Master Service Agreement with IPS for a term
of three years. Pursuant to this agreement IPS allows the Company to continue to use and sell IPS
money orders in connection with credit card and point-of-sale debit card transactions consummated
by the Company for patrons of gaming establishments. The Company pays a monthly fee to IPS based
upon the total amount of money orders that were issued and presented for payment. The expenses
incurred related to this portion of the agreement are included within operating expenses in the
accompanying consolidated statements of income. The Company receives interest income from IPS for
money orders used and sold by the Company that have not been paid by IPS. The interest paid by IPS
is included in interest income in the accompanying consolidated statements of income. All
settlement funds from card associations in connection with credit card and point-of-sale debit card
transactions consummated by the Company in which IPS money orders are used or sold are handled in
the manner prescribed by an agreement of even date among the Company, IPS and Wachovia Bank, N.A.
The Master Service Agreement provides that IPS is the Company’s sole and exclusive provider of
money orders within the United States.
The Company markets check authorization services to gaming establishments pursuant to the
TeleCheck Marketing Agreement dated July 9, 1998, as amended. GCA, through TeleCheck, provides
gaming establishments who are merchant subscribers check warranty services. GCA provides marketing
and customer service to the gaming establishment on behalf of TeleCheck. Because GCA controls the
primary customer relationship and GCA can choose to offer check warranty products other than those
of TeleCheck (including our own), we view TeleCheck as our agent with respect to these services.
Under the TeleCheck Marketing Agreement, as amended, GCA receives the monthly fee charged to gaming
establishments, net of actual warranty losses and operating expenses reported by TeleCheck. GCA
records the gross monthly fee charged to the gaming establishments in check services revenue. The
actual warranty losses billed by TeleCheck are recorded as part of cost of revenues (exclusive of
depreciation and amortization). At month end, GCA estimates a liability for unpresented warranty
claims and adjusts the month end accrual and warranty expense as necessary. The operating expenses
invoiced by TeleCheck are recorded as part of operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements presented for the years ended December 31, 2007, 2006
and 2005 and as of December 31, 2007 and 2006 include the accounts of Global Cash Access Holdings,
Inc. and its subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation. Certain reclassifications within the consolidated financial
statements have been made in the prior years in order to conform to the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all balances on deposit in banks and financial
institutions. The Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash and cash equivalents. Such balances may at times exceed
the federal insurance limits. However, the Company periodically evaluates the creditworthiness of
these institutions to minimize risk.
Restricted Cash and Cash Equivalents
As part of certain of our sponsorship agreements in the Caribbean, we are required to maintain
minimum deposits of $350,000 as collateral for any potential chargeback loss activity occurring as
a result of the sponsorship arrangements. Additionally, pursuant to the Revolving Loan Product
Program Agreement and amendments thereto, entered into in March 2006 between CIT Bank (“CIT”) and
Arriva, Arriva agreed to maintain a balance of $1.0 million in cash and cash equivalents at all
times this agreement is in effect.
66
ATM Funding Agreements
The Company obtains all of the cash required to operate its ATMs through various ATM Funding
Agreements more fully described in Note 3. Some gaming establishments provide the cash utilized
within the ATM (“Site-Funded”). The receivables generated for the amount of cash dispensed from
transactions performed at our ATMs
are owned by GCA and GCA is liable to the gaming establishment for the face amount of the cash
dispensed. In the consolidated balance sheets, the amount receivable for transactions processed on
these ATM transactions is included within settlement receivables and the amount due to the gaming
establishment for the face amount of dispensing transactions is included within settlement
liabilities. As of December 31, 2007 and 2006, the Company operated 944 and 626 ATMs, respectively
that were Site-Funded.
For our non-Site Funded locations, GCA obtains the necessary cash to service these machines
through the Amendment to the Treasury Services Terms and Conditions Booklet with Bank of America.
Under the terms of this agreement, neither the cash utilized within the ATMs nor the receivables
generated for the amount of cash dispensed through transactions on the ATMs are owned or controlled
by GCA. Therefore, these amounts have been excluded from the consolidated balance sheets. We are
charged a cash usage fee for the cash used in these ATMs, which is included as interest expense in
the consolidated statements of income.
Settlement Receivables and Settlement Liabilities
In the credit and debit card cash advance transactions provided by GCA and GCA Canada, the
gaming establishment is reimbursed for the cash disbursed to gaming patrons through a check issued
by IPS. IPS is a licensed issuer of payment instruments that is wholly owned by First Data.
Pursuant to the agreement with IPS, GCA indemnifies IPS for any losses incurred in conjunction with
credit and debit card cash advance transactions, and thus, assumes all of the risks and rewards.
GCA receives reimbursement from the patron’s credit or debit card issuer for the transaction in an
amount equal to the check issued to the gaming establishment plus the cash advance fee charged to
the patron. This reimbursement is included within the settlement receivables on the consolidated
balance sheets. GCA then remits to IPS the amount of the check issued to the gaming establishment.
The amount of unpaid checks is included within settlement liabilities on the consolidated balance
sheets.
Warranty Receivables
In the check services transactions provided by Central, Central warrants check cashing
transactions performed at gaming establishments. If a gaming establishment accepts a payroll or
personal check from a patron that we warrant, Central is obligated to reimburse the property for
the full face value of any dishonored checks. All amounts paid out to the gaming establishment
related to these items result in a warranty receivable from the patron. This amount is recorded in
other receivables, net on the consolidated balance sheets. On a monthly basis, Central evaluates
the collectibility of the outstanding balances and establishes a reserve for the face amount of the
expected losses on these receivables. The warranty expense associated with this reserve is
included within cost of revenues (exclusive of depreciation and amortization) in the consolidated
statements of income. Beginning with the quarter ended March 31, 2007, the Company established a
policy of writing off all warranty receivables that are older than one year in age.
A
summary activity of the reserve for warranty losses for the years
ended December 31, 2007, 2006 and 2005, is as
follows (amounts in thousands):
| |
|
|
|
|
Balance,
December 31, 2004 |
|
$ |
30 |
|
Warranty expense provision |
|
|
2,968 |
|
Charge offs against reserve |
|
|
— |
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
2,998 |
|
Warranty expense provision |
|
|
6,483 |
|
Charge offs against reserve |
|
|
— |
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
9,481 |
|
Warranty expense provision |
|
|
6,776 |
|
Charge offs against reserve |
|
|
(8,835 |
) |
|
|
|
|
Balance, December 31, 2007 |
|
$ |
7,422 |
|
|
|
|
|
Unamortized Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of the senior secured credit
facility and the senior subordinated notes are capitalized and amortized to interest expense based
upon the related debt agreements using the straight-line method, which approximates the effective
interest method. Unamortized debt issuance costs are included in prepaid and other assets on the
consolidated balance sheets.
67
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated
depreciation, computed using the straight-line method over the lesser of the estimated life of the
related assets, generally three to five years, or the related lease term. Amounts charged to
expense for depreciation of property, equipment and leasehold improvements were approximately $6.3
million, $4.4 million, and $6.8 million, for the years ended December 31, 2007, 2006, and 2005,
respectively. Accumulated depreciation was $41.9 million and $36.2 million as of December 31, 2007
and 2006, respectively.
Repairs and maintenance costs are expensed as incurred.
Upon sale or retirement, the costs and related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is reflected in the consolidated statements of income.
Property, equipment and leasehold improvements are reviewed for impairment whenever events or
circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated
when undiscounted future cash flows do not exceed the asset’s carrying value. As of December 31,
2007, the Company does not believe any of its property, equipment, or leasehold improvements are
impaired.
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and
intangible assets acquired plus liabilities assumed arising from business combinations.
The Company accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, which addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially recognized in the
financial statements. The company tests for impairment annually, or more often under certain
circumstances. The Company does not believe that any of its goodwill is impaired as of December
31, 2007 based upon the results of our annual impairment testing.
Goodwill attributable to our principal business lines consists of the following at December
31, (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Cash Advance
(1) |
|
$ |
93,385 |
|
|
$ |
93,252 |
|
ATM |
|
|
24,033 |
|
|
$ |
24,033 |
|
Credit Reporting |
|
|
17,127 |
|
|
|
17,126 |
|
Check Services |
|
|
22,344 |
|
|
|
22,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,889 |
|
|
$ |
156,755 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
— |
Increase is attributable to
a change in the foreign currency translation rates associated with a
portion of a foreign component of goodwill attributable to this
reporting unit. |
Other Intangible Assets
Other intangible assets consist primarily of customer contracts (rights to provide processing
services to clients) acquired through business combinations and acquisitions, capitalized software
development costs and the acquisition cost of our patent related to the “3-in-1 rollover”
technology acquired in 2005. The acquisition cost of the 3-in-1 rollover patent is being amortized
over its remaining legal life of 11 years. Excluding the patent, other intangibles are amortized
on a straight-line basis over periods ranging from 3 to 10 years.
68
Other intangibles consist of the following as of December 31, (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Customer contracts |
|
$ |
34,516 |
|
|
$ |
34,516 |
|
Computer software |
|
|
13,550 |
|
|
|
13,797 |
|
Patents |
|
|
10,000 |
|
|
|
10,000 |
|
Covenants not to compete |
|
|
60 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,126 |
|
|
|
58,373 |
|
Less accumulated amortization |
|
|
(44,185 |
) |
|
|
(40,372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,941 |
|
|
$ |
18,001 |
|
|
|
|
|
|
|
|
Amortization expense related to these intangibles totaled approximately $5.5 million, $5.5
million, and $5.3 million for the years ended December 31, 2007, 2006, and 2005, respectively.
At December 31, 2007 the anticipated amortization expense related to other intangible assets,
assuming no subsequent impairment of the underlying assets, is as follows (in thousands):
| |
|
|
|
|
2008 |
|
$ |
3,668 |
|
2009 |
|
|
2,668 |
|
2010 |
|
|
1,858 |
|
2011 |
|
|
813 |
|
2012 |
|
|
812 |
|
Thereafter |
|
|
4,122 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,941 |
|
|
|
|
|
The Company accounts for the costs related to computer software developed or obtained for
internal use in accordance with the American Institute of Certified Public Accountants Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use
(“SOP 98-1”). SOP 98-1 establishes that computer software costs that are incurred in the
preliminary project stage should be expensed as incurred. Costs incurred in the application
development phase and any upgrades and enhancements that modify the existing software and result in
additional functionality are capitalized and amortized over their useful lives, generally not to
exceed three years. These costs consist of outside professional fees related to the development of
our systems. The Company capitalized $0.9 million, $1.3 million, and $0.6 million, of development
costs for the years ended December 31, 2007, 2006 and 2005, respectively.
Chargebacks
The Company has established an allowance for chargebacks on credit and debit card cash advance
transactions based upon past experience with losses arising from disputed charges by customers.
Management periodically reviews the recorded balance to ensure the recorded amount adequately
covers the expected losses to be incurred from disputed charges. The recorded allowance for
chargebacks is included within accrued expenses on the consolidated balance sheets and had a
balance of $0.3 million and $0.5 million as of December 31, 2007 and 2006, respectively. The
Company expensed $0.3 million, $0.3 million, and $0.8 million in chargeback losses on credit and
debit card cash advance transactions for the years ended December 31, 2007, 2006, and 2005,
respectively.
Net Warranty Liability
The net warranty liability represents the cost to cover the estimated unreceived and
uncollectible returned checks that TeleCheck has warranted as of December 31, 2007 and 2006. GCA
is obligated to reimburse TeleCheck for all warranted items paid on the Company’s behalf. The
Company had $0.5 million accrued for net warranty liability as of December 31, 2007 and 2006.
69
To determine the net warranty liability, the Company determines the estimated gross warranty
liability by applying the historical reimbursement percentage to the actual warranted checks for
the month. The historical loss rate on reimbursed items is then applied to the difference between
the estimated gross warranty liability and the actual warranty reimbursements processed within the
month to arrive at the net warranty liability.
The Company evaluates the recorded balance of the net warranty liability on a monthly basis to
ensure that the recorded amount adequately covers the expected expense that will arise in future
periods from losses on warranty presentments. The Company evaluates this accrual for adequacy
based upon the expected warranty presentments compared to the revenue recorded for the comparable
periods.
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a forced or
liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant
market information about the financial instrument.
The carrying amount of cash and cash equivalents, other receivables, net, settlement
receivables and settlement liabilities approximates fair value due to the short-term maturities of
these instruments. The fair value of GCA’s borrowings are estimated based on quoted market prices
for the same issue or in instances where no market exists the quoted market prices for similar
issues with similar terms are used to estimate fair value. The fair values of all other financial
instruments, including amounts outstanding under the ATM funding agreements, approximate their book
values as the instruments are short-term in nature or contain market rates of interest. The
following table presents the fair value and carrying value of GCA’s borrowings (amounts in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Fair Value |
|
|
Carrying Value |
|
December 31, 2007: |
|
|
|
|
|
|
|
|
Senior secured credit facility (1) |
|
$ |
108,514 |
|
|
$ |
110,730 |
|
Senior subordinated notes |
|
$ |
143,585 |
|
|
$ |
152,750 |
|
|
|
|
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
Senior secured credit facility (2) |
|
$ |
121,730 |
|
|
$ |
121,730 |
|
Senior subordinated notes |
|
$ |
159,815 |
|
|
$ |
152,750 |
|
|
|
|
| (1) |
|
- The senior secured credit facility is not actively traded, fair value has
been estimated using discounted cash flow analyses based on the current
expected market terms for a similar facility. |
| |
| (2) |
|
- GCA completed the financing pursuant to the Second Amended and Restated
Credit Facility in November 2006. Due to proximity to year end, the fair value
of this debt has been estimated to be equal to the par value. |
Revenue Recognition
The Company recognizes revenue when evidence of an arrangement exists, services have been
rendered, the price is fixed or determinable and collectibility is reasonably assured. The Company
evaluates its revenue streams for proper timing of revenue recognition.
Cash advance revenue is comprised of the fee charged to patrons for credit and debit card cash
advances. Revenue recognition occurs at the point an IPS check is generated by the gaming
establishment cage for the patron’s transaction or cash is dispensed from an ATM.
ATM revenue is comprised of upfront patron transaction fees or surcharges assessed at the time
the transaction is initiated and a percentage of interchange fees paid by the patron’s issuing
bank. These issuing banks share the interchange revenue (reverse interchange) with GCA to cover
the cost incurred by GCA to acquire the ATM transaction. Upfront patron transaction fees are
recognized when a transaction is initiated and reverse interchange is recognized on a monthly basis
based on the total transactions occurring during the month.
In general, check service revenue is comprised of a fee based upon a percentage of the face
amount of total checks warranted, and is recognized on a monthly basis.
70
Credit reporting revenue is based upon either a flat monthly, unlimited usage fee or a
variable fee structure driven by the volume of patron credit histories generated. This revenue is
recognized on a monthly basis based on the total transactions occurring during the month. Revenue
derived from our patron marketing products and services is recognized upon completion of services.
Cost of Revenues (Exclusive of Depreciation and Amortization)
The cost of revenues (exclusive of depreciation and amortization), represent the direct costs
required to perform revenue generating transactions. The principal costs included within cost of
revenues (exclusive of depreciation and amortization) are commissions paid to gaming
establishments, interchange fees paid to credit and debit card networks, transaction processing
fees to our transaction processor and check cashing warranties.
Advertising Costs
The Company expenses advertising costs as incurred. Total advertising expense, included in
operating expenses in the consolidated statements of income, was $0.6 million, $0.6 million, and
$1.2 million for the years ended December 31, 2007, 2006, and 2005, respectively.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the provision for U.S.
taxes on undistributed earnings of international subsidiaries not deemed to be permanently
invested. Since it is management’s practice and intent to reinvest the earnings in the
international operations of our foreign subsidiaries, U.S. federal income taxes have not been
provided on the undistributed earnings of any foreign subsidiaries except for GCA Macau. Some
items of income and expense are not reported in tax returns and financial statements in the same
year. The tax effect of such temporary differences is reported as deferred income taxes.
Foreign Currency Translation
Foreign currency denominated assets and liabilities for those foreign entities for which the
local currency is the functional currency are translated into U.S. dollars based on exchange rates
prevailing at the end of each year. Revenues and expenses are translated at average exchange rates
during the year. The effects of foreign exchange gains and losses arising from these translations
are included as a component of other comprehensive income on the consolidated statements of income.
Translation adjustments on intercompany balances of a long-term investment nature are recorded as
a component of accumulated other comprehensive income on the Company’s consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in consolidated financial statements and accompanying notes.
Significant estimates incorporated in the consolidated financial statements include:
| |
• |
|
the estimated reserve for warranty expense associated with our check warranty receivables, |
| |
| |
• |
|
the valuation and recognition of share-based compensation, |
| |
| |
• |
|
the estimated useful lives for depreciable and amortizable assets, |
| |
| |
• |
|
the valuation allowance on
our deferred tax asset, |
| |
| |
• |
|
the estimated cash flows in assessing the recoverability of long-lived assets, and |
| |
| |
• |
|
the estimated reserve for bad debts on Arriva Card receivables purchased from CIT Bank. |
Actual results could differ from these estimates.
71
Earnings Applicable to Common Stock
In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No.
128, Earnings per Share, basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted earnings per share
reflect the effect of potential common stock, which consists of convertible preferred stock and
assumed stock option exercises. The weighted-average number of common shares outstanding used in
the computation of basic and diluted earnings per share is as follows at December 31, (amounts in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding — basic |
|
|
81,108 |
|
|
|
81,641 |
|
|
|
45,643 |
|
Potential dilution from conversion of preferred shares |
|
|
— |
|
|
|
— |
|
|
|
28,551 |
|
Potential dilution from equity grants (1) |
|
|
269 |
|
|
|
280 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding — diluted |
|
|
81,377 |
|
|
|
81,921 |
|
|
|
74,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
- The potential dilution excludes stock options to acquire 2,640,906, 4,016,684, and 3,786,640
shares of common stock at December 31, 2007, 2006 and 2005, respectively, and 321,485, 554,076 and
0 shares of unvested restricted stock at December 31, 2007, 2006 and 2005, respectively, as the
application of the treasury stock method, as required by SFAS No. 128, makes them anti-dilutive. |
Stock-Based Compensation
On January 1, 2006, the Company adopted the Financial Accounting Standards Board (“FASB”) SFAS
No. 123(R), Share Based Payment (“SFAS No. 123(R)”), and SEC Staff Accounting Bulletin No. 107,
Share-Based Payment (“SAB No. 107”). SFAS No. 123(R) is a revision of SFAS No. 123, and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, (“APB
No. 25”) and its related implementation guidance. This statement addresses all forms of
share-based payment awards including shares issued under employer stock purchase plans, stock
options, restricted stock, and stock appreciation rights.
Under SFAS No. 123(R) and SAB No. 107, share-based payment awards result in a cost that will
be measured at fair value on the award’s grant date. Stock options expected to be exercised
currently and in future periods are measured at fair value using the Black-Scholes model with the
expense associated with these awards being recognized on the straight-line basis over the awards’
vesting period. Forfeitures are estimated at the time of grant, with such estimate updated
periodically and with actual forfeitures recognized currently to the extent they differ from the
estimates. The Company used the modified prospective transition method and accordingly, prior
period amounts have not been restated.
Through December 31, 2005, as permitted by SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123, the Company
followed the provisions of APB No. 25 and related interpretations in accounting for its employee
stock-based compensation. Accordingly, the intrinsic value method is used to determine the
compensation expense recognized. No compensation expense was recognized because the exercise price
of the stock options was equal to the market price of the stock on the date of grant. The adoption
of SFAS No. 123(R) resulted in incremental stock-based compensation expense.
72
The following table illustrates the effect on the net income if the Company had applied the
fair-value recognition provisions of SFAS No. 123 to the options granted to our employees and
recorded the compensation expense, for the year ended December 31, 2005 (amounts in thousands):
| |
|
|
|
|
| |
|
2005 |
|
Net income, as reported |
|
$ |
22,591 |
|
Less: total stock-based compensation determined under fair-value
based method for all awards, net of tax |
|
|
3,870 |
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
18,721 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic, as reported |
|
$ |
0.49 |
|
|
|
|
|
Basic, pro forma |
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
0.30 |
|
|
|
|
|
Diluted, pro forma |
|
$ |
0.25 |
|
|
|
|
|
The estimated per share weighted-average fair value of stock options granted during 2007, 2006
and 2005 was $4.22, $7.33 and $7.27, respectively. We have estimated the fair value of options
granted at the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions in the years ended December 31,:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.2 |
% |
|
|
4.8 |
% |
|
|
3.8 |
% |
Expected life of options (in years) |
|
|
6.3 |
|
|
|
6.3 |
|
|
|
6.0 |
|
Expected volatility of Holdings’ stock price |
|
|
33.6 |
% |
|
|
37.3 |
% |
|
|
50.0 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The expected life (estimated period of time outstanding) of options granted was estimated
using the expected exercise behavior of employees. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected volatility for options granted
in 2007 was based upon our historical volatility and was based on an estimate of the volatility for
similar companies within our industry in 2006 and 2005 as our Company did not have a significant
history on a public market. The expected dividend yield is based on the Company’s historical
information of not paying dividends in prior years.
Stock-based compensation related to time-based restricted shares is calculated based on the
closing market price of the Company’s common stock on the date of grant, reduced by the present
value of dividends expected to be paid, if any, on the Company’s common stock prior to vesting of
the restricted stock.
Arriva
The Arriva Card is a private-label revolving credit card that provides gaming patrons with
access to credit in gaming establishments. Pursuant to the Receivables Sale Agreement and the
Revolving Loan Product Program Agreement and amendments thereto, entered into in March 2006 between
CIT and Arriva, CIT is the legal issuer of the Arriva Card marketed by Arriva.
When a customer uses the Arriva Card for a transaction, CIT extends credit to the patron for
the face amount of transaction and the fee charged by the gaming establishment and acquires the
receivable from the customer. On a monthly basis, CIT is entitled to receive Interim Interest,
which is a fee based on the average balance of receivables multiplied by an interest rate. The
interest rate is computed based upon the Holding Period. As of December 31, 2007, the interest is
determined by the average Annual Percentage Rate (“APR”) assigned to new accounts, or 18.99%.
During the years ended December 31, 2007 and 2006, Arriva incurred $0.4 million and $0.1 million,
respectively, in Interim Interest which is included in cost of revenues (exclusive of depreciation
and amortization) in the consolidated income statements.
73
On December 13, 2007, Arriva and GCA entered into the First Amendment to Revolving Loan
Product Program Agreement and the First Amendment to Receivable Sale Agreement (collectively the
“Arriva Agreements”). Under terms of the Arriva Agreements, Arriva is required to purchase the
originated receivable from CIT three days from the date the customer originates the transaction
using the card. Arriva is entitled to receive all fees and interest income associated with the
receivable. These are included within other revenues in the consolidated statements of income and
the receivables from patrons for this revenue are recorded as part of other receivables, net in the
consolidated balance sheets.
Under terms of the Arriva Agreements, the termination provisions were amended to provide for
termination of the Arriva Agreements by Arriva upon not less than 30 days written notice of CIT,
the provisions requiring Arriva to pay minimum origination fees was removed entirely and the
minimum required deposit was increased to $0.1 million.
As of December 31, 2007 and 2006, the total patron receivables related to transactions
performed on Arriva Cards were $15.7 million and
$9.0 million respectively. Arriva evaluates the collectibility
of the outstanding patron receivables and establishes a reserve for
the expected losses on these receivables. The bad debt expense
associated with this reserve is included within cost of revenues in
the consolidated statements of income. A summary activity of the
reserve for bad debt for the years ended December 31, 2007 and
2006, is as follows (amounts in thousands):
| |
|
|
|
|
Balance December 31, 2005 |
|
$ |
— |
|
|
|
|
|
|
Bad debt expense provision |
|
|
796 |
|
Charge offs against reserve |
|
|
— |
|
Recovery of amounts charged off |
|
|
— |
|
|
|
|
|
Balance
December 31, 2006 |
|
|
796 |
|
|
|
|
|
|
Bad debt expense provision |
|
|
4,233 |
|
Charge offs against reserve |
|
|
(2,792 |
) |
Recovery of amounts charged off |
|
|
46 |
|
|
|
|
|
Balance December 31, 2007 |
|
|
2,283 |
|
|
|
|
|
In February 2008, GCA
announced that it would discontinue offering the Arriva Card. Revenues
generated by the Arriva Card for the year ended December 31, 2007
were $2.9 million.
Recently Issued Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an
amendment of SFAS No. 140 (“SFAS No. 156”). This Statement requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract; requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value, if practicable; permits an entity
to choose either of the Amortization or Fair Value subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; and requires separate
presentation of servicing assets and servicing liabilities measured at fair value in the statement
of financial position. SFAS No. 156 is effective for fiscal years beginning after September 15,
2006. The Company adopted SFAS No. 156 on January 1, 2007 with no material effect on the
consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 provides
guidance on the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and transition of tax
positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As of
January 1, 2007, the Company has provided a liability for $0.5 million of unrecognized tax benefits
related to various federal and state income tax matters. The FIN 48 liability was reduced to $0 at
December 31, 2007 because the Company elected a change in accounting method. The recognition of
this amount would not impact the Company’s effective tax rate, if recognized. As we have net
operating loss carryforwards that are required to be applied against any taxable income, the
liability associated with the adoption of FIN 48 has been offset against our net operating loss
carryforwards.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”),
which clarifies the definition of fair value whenever another standard requires or permits assets
or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value
should be based on the assumptions market participants would use when pricing the asset or
liability, and establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. SFAS No. 157 does not expand the use of fair value to any new circumstances.
SFAS No. 157 also requires expanded financial statement disclosures about fair value measurements,
including disclosure of the methods used and the effect on earnings. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of
this standard on the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The standard requires that unrealized gains
and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is
effective beginning January 1, 2008. The adoption of SFAS No. 159 is not expected to have a
significant impact on our consolidated financial statements.
74
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent consideration at their
fair value on the acquisition date. It further requires that acquisition-related costs are
recognized separately from the acquisition and expensed as incurred, restructuring costs generally
are expensed in periods subsequent to the acquisition date, and changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. SFAS No. 141(R) is effective for business combinations with an
acquisition date in the first quarter of 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (“SFAS No. 160”), which establishes standards for the accounting and reporting
of noncontrolling interests in subsidiaries (that is, minority interests) in consolidated financial
statements and for the loss of control of subsidiaries. SFAS No. 160 requires: (1) the equity
interest of noncontrolling shareholders, partners, or other equity
holders in subsidiaries to be accounted for and presented in equity, separately from the
parent shareholder’s equity, rather than as liabilities or as “mezzanine” items between liabilities
and equity; (2) the amount of consolidated net income attributable to the parent and to the
noncontrolling interests be clearly identified and presented on the face of the consolidated
statement of income; and (3) when a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value. The gain or loss
on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling
equity investment rather than the carrying amount of that retained investment. SFAS No. 160 is
effective beginning on January 1, 2009. Early adoption of the Statement is prohibited. The
Company is currently evaluating the potential impact of adopting this statement.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”) to amend
the SEC’s views discussed in Staff Accounting Bulletin No. 107 regarding the use of the simplified
method in developing an estimate of expected life of share options in accordance with SFAS No.
123(R). SAB No. 110 is effective beginning January 1, 2008. Because our stock incentive plan has
only been in place since 2005, we will continue to use the simplified method until we have the
historical data necessary to provide a reasonable estimate of expected life in accordance with
SAB No. 107, as amended by SAB No. 110.
3. ATM FUNDING AGREEMENTS
Bank of America Amended Treasury Services Agreement
On December 19, 2007, GCA entered into an Amendment of the Treasury Services Terms and
Conditions Booklet with Bank of America, N.A. that allowed for the Company to utilize up to $360
million in funds owned by Bank of America to provide the currency needed for normal operating
requirements for the Company’s ATMs. The amount provided by Bank of America can be increased above
$360 million at the option of Bank of America. For use of these funds, the Company pays Bank of
America a cash usage fee equal to the average daily balance of funds utilized multiplied by the
one-month LIBOR rate plus 25 basis points. Prior to this agreement, GCA operated on another
Amendment of the Treasury Services Agreement dated March 8, 2004 that provided for $300 million in
available funds and a cash usage fee that was equal to the average daily balance of funds utilized
multiplied by the one-month LIBOR rate plus 25 basis points.
At December 31, 2007 and 2006, the outstanding balance of ATM cash utilized by GCA from Bank
of America was $368.1 million and $396.8 million, respectively. For the years ended December 31,
2007, 2006 and 2005, the cash usage fees incurred by the Company were $15.9 million, $15.7 million
and $10.2 million, respectively. The cash usage fee is included within interest expense on the
Company’s consolidated statements of income. The rate in effect at December 31, 2007, to compute
the cash usage fee was 5.3%.
The Company is required to maintain insurance to protect the Company and Bank of America from
risk of loss on the cash utilized in the ATMs. The Company is self insured related to this risk.
For the years ended December 31, 2007, 2006, and 2005 the Company has incurred no losses related to
this self insurance.
On March 13, 2008, the Company entered into an Agreement to Amend the Amendment of the
Treasury Services Terms and Conditions Booklet. Pursuant to this Agreement to Amend, the limit on
the maximum allowable currency to be provided by Bank of America was increased to $410 million.
All other terms of the Amendment of the Treasury Services Terms and Conditions Booklet remain in
full force and effect.
75
Site Funded ATMs
The Company operates ATMs at certain customer gaming establishments where the gaming
establishment provides the cash required for the ATM operational needs. GCA is required to
reimburse the customer for the amount of cash dispensed from these Site Funded ATMs. The Site
Funded ATM liability is included within settlement liabilities in the accompanying consolidated
balance sheets and was $58.1 million and $53.7 million as of December 31, 2007 and 2006,
respectively. The Company operated 944 and 626 ATMs, as of December 31, 2007 and 2006,
respectively, Site Funded ATMs.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following as of December 31, (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
ATM equipment |
|
$ |
51,124 |
|
|
$ |
44,866 |
|
Cash advance equipment |
|
|
7,099 |
|
|
|
6,733 |
|
Office, computer and other equipment |
|
|
4,696 |
|
|
|
2,791 |
|
Leasehold and building improvements |
|
|
2,486 |
|
|
|
2,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,405 |
|
|
|
56,616 |
|
Less accumulated depreciation |
|
|
(41,882 |
) |
|
|
(36,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,523 |
|
|
$ |
20,454 |
|
|
|
|
|
|
|
|
5. BENEFIT PLANS
Defined Contribution Plan
The Company has a retirement savings plan (the “401(k) Plan”) under Section 401(k) of the
Internal Revenue Code covering its employees. The 401(k) Plan allows employees to defer up to the
lesser of the Internal Revenue Code prescribed maximum amount or 100% of their income on a pre-tax
basis through contributions to the plan. As a benefit to employees, the Company matches a
percentage of these employee contributions. Expenses related to the matching portion of the
contributions to the 401(k) plan were $0.5 million, $0.4 million and $0.3 million for the years
ended December 31, 2007, 2006, and 2005, respectively.
Equity Incentive Awards
In January 2005, the Company adopted the 2005 Stock Incentive Plan (the “2005 Plan”) to
attract and retain the best available personnel, to provide additional incentives to employees,
directors and consultants and thus to promote the success of the Company’s business. The 2005
Plan is administered by the Compensation Committee but may be administered by our Board of
Directors or a committee thereof. The administrator has the authority to select individuals who
are to receive options or other equity incentive awards under the 2005 Plan and to specify the
terms and conditions of grants of options or other equity incentive awards, the vesting provisions,
the term and the exercise price.
Generally, stock options and restricted stock granted under the 2005 Plan (other than those
granted to non-employee directors) will vest at a rate of 25% of the shares underlying the option
after one year and the remaining shares vest in equal portions over the following 36 months, such
that all shares are vested after four years. Unless otherwise provided by the administrator, an
option granted under the 2005 Plan generally expires 10 years from the date of grant. Stock
options are issued at the closing market price on the date of grant.
As of December 31, 2007, the Company had reserved 8,757,598 shares of common stock for the
grant of stock options and other equity incentive awards under the 2005 Plan. On the first
business day of each fiscal year beginning with the fiscal year commencing on January 1, 2006,
annual increases will be added to the 2005 Plan equal to the lesser of: 3,800,000 shares, 3% of all
outstanding shares of our common stock immediately prior to such increase, or a lesser amount
determined by our Board of Directors.
76
A summary of award activity under the Company’s 2005 Plan as of December 31, 2007 and changes
during the two years then ended are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Option - |
|
|
Number of Common Shares |
|
| |
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Equity Awards |
|
| |
|
Exercise Price |
|
|
Stock Options |
|
|
Restricted Stock |
|
|
Available for |
|
| |
|
(Per Share) |
|
|
Granted |
|
|
Granted |
|
|
Grant |
|
Balance outstanding — December
31, 2005 |
|
$ |
13.99 |
|
|
|
3,356,930 |
|
|
|
— |
|
|
|
484,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional authorized shares |
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
2,446,607 |
|
Granted |
|
$ |
16.01 |
|
|
|
375,000 |
|
|
|
619,747 |
|
|
|
(994,747 |
) |
Exercised |
|
$ |
13.99 |
|
|
|
(49,709 |
) |
|
|
(6,250 |
) |
|
|
— |
|
Forfeited or canceled |
|
$ |
13.99 |
|
|
|
(57,086 |
) |
|
|
(10,500 |
) |
|
|
67,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding — December
31, 2006 |
|
$ |
14.20 |
|
|
|
3,625,135 |
|
|
|
602,997 |
|
|
|
2,004,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional authorized shares |
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
2,469,376 |
|
Granted |
|
$ |
10.21 |
|
|
|
1,050,000 |
|
|
|
747,000 |
|
|
|
(1,797,000 |
) |
Exercised |
|
$ |
16.33 |
|
|
|
(76,248 |
) |
|
|
(771,652 |
) |
|
|
— |
|
Forfeited or canceled |
|
$ |
14.30 |
|
|
|
(315,731 |
) |
|
|
(181,561 |
) |
|
|
497,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding — December
31, 2007 |
|
$ |
13.21 |
|
|
|
4,283,156 |
|
|
|
396,784 |
|
|
|
3,173,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the 2005 Plan, the Company granted our former Chief Financial Officer an option
to acquire 722,215 shares of common stock as part of his employment agreement in 2004 (“Hagerty
Option”). This option has an exercise price of $8.05 per share and would expire 10 years from the
date of grant. Under the terms of the Hagerty Option, 25% of the shares subject to the Hagerty
Option vested on July 12, 2005 and 1/48 of the shares subject to the Hagerty Option vested on the
12th day of each month thereafter. Upon termination of Mr. Hagerty’s employment with the Company
in July 2007, all of the shares subject to the Hagerty Option immediately vested. During the years
ended December 31, 2007 and 2006, Mr. Hagerty exercised his option to acquire 27,000 and 100,000
shares of common stock. At December 31, 2007, Mr. Hagerty had the option to acquire 595,215 shares
of common stock. This option expired in January 2008.
In February 2008, our Board of Directors approved the grant of options to acquire 4.1 million
shares of common stock to existing employees, newly hired employees and certain non-employee
members of the Company’s Board of Directors. These shares will vest over a four-year period. The
estimated total fair value of the awards at the date of grant was $13.5 million.
Stock Options
Stock options granted typically vest at a rate of 25% of the shares underlying the option
after one year and the remaining shares vest in equal portions over the following 36 months, such
that all shares are vested after four years and allow the option holder to purchase stock over
specified periods of time, generally ten years, from the date of grant, at a fixed price equal to
the market value on date of grant.
77
The following tables summarize additional information regarding the options that have been
granted under the 2005 Plan and the option grant to our former Chief Financial Officer upon
commencement of his employment in 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Avg. |
|
|
Weighted |
|
|
|
|
| |
|
Number of |
|
|
Exercise Price |
|
|
Average Life |
|
|
Aggregate |
|
| |
|
Common Shares |
|
|
(Per Share) |
|
|
Remaining |
|
|
Intrinsic Value |
|
| |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding — December 31, 2006 |
|
|
4,247,350 |
|
|
$ |
13.30 |
|
|
|
|
|
|
$ |
29,103 |
|
Granted |
|
|
1,050,000 |
|
|
$ |
10.21 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(103,248 |
) |
|
$ |
15.04 |
|
|
|
|
|
|
|
|
|
Cancelled or forfeited |
|
|
(315,731 |
) |
|
$ |
14.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding — December 31, 2007 |
|
|
4,878,371 |
|
|
$ |
12.58 |
|
|
7.7 years |
|
$ |
30,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable — December 31, 2007 |
|
|
3,423,600 |
|
|
$ |
13.03 |
|
|
7.1 years |
|
$ |
23,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance expected to be exercised |
|
|
1,749,988 |
|
|
$ |
11.94 |
|
|
8.93 years |
|
$ |
9,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| Range of |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
| Exercise |
|
|
|
Number |
|
|
Contract |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
| Prices |
|
|
|
Outstanding |
|
|
Life |
|
|
Prices |
|
|
Exercisable |
|
|
Price |
|
| $8.05 |
|
|
|
|
595,215 |
|
|
6.7 years |
|
$ |
8.05 |
|
|
|
595,215 |
|
|
$ |
8.05 |
|
| $9.00 - $9.99 |
|
|
|
|
1,000,000 |
|
|
9.8 years |
|
$ |
9.99 |
|
|
|
— |
|
|
|
N/A |
|
| $13.00 - $13.99 |
|
|
|
|
2,815,135 |
|
|
7.1 years |
|
$ |
13.99 |
|
|
|
2,653,702 |
|
|
$ |
13.99 |
|
| $14.00 - $14.99 |
|
|
|
|
160,000 |
|
|
8.4 years |
|
$ |
14.22 |
|
|
|
59,583 |
|
|
$ |
14.04 |
|
| $15.00 - $15.99 |
|
|
|
|
151,667 |
|
|
8.5 years |
|
$ |
15.22 |
|
|
|
56,457 |
|
|
$ |
15.26 |
|
| $16.00 - $16.99 |
|
|
|
|
107,500 |
|
|
8.8 years |
|
$ |
16.06 |
|
|
|
33,124 |
|
|
$ |
16.08 |
|
| $18.00 - $18.99 |
|
|
|
|
48,854 |
|
|
8.8 years |
|
$ |
18.94 |
|
|
|
25,519 |
|
|
$ |
18.94 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
4,878,371 |
|
|
|
|
|
|
|
|
|
|
|
3,423,600 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value per share of the options granted during the years
ended December 31, 2007, 2006 and 2005 was $4.22, $7.33 and $7.27, respectively.
During the year ended December 31, 2007, we received $1.3 million in cash from the exercise of
stock options. The total intrinsic value of options exercised during the year ended December 31,
2007, was $1.8 million. During the year ended December 31, 2007, we recorded $10.5 million in
non-cash compensation expense related to options granted that are
expected to vest.
Included within the non-cash compensation expense
for 2007 was $4.0 million related to the accelerated vesting of stock
options for the purchase of 0.6 million shares of common stock for
terminated senior management employees.
As of December
31, 2007, there was $9.2 million in unrecognized compensation expense related to options expected
to vest. That cost is expected to be recognized on a straight-line basis over a weighted average
period of 2.6 years. There were no stock option exercises in 2005.
During the year ended December 31, 2006, we received $1.5 million in cash from the exercise of
stock options. The total intrinsic value of options exercised during the year ended December 31,
2006, was $0.8 million. During the year ended December 31, 2006, we recorded $7.0 million in
non-cash compensation expense related to options granted that are expected to vest.
There were no stock option exercises in 2005.
78
Restricted Stock
The Company began issuing restricted stock to employees in the first quarter of 2006. The
vesting provisions are similar to those applicable to stock options. Because these restricted
shares are issued primarily to employees of the Company, many of the shares issued will be withheld
by the Company to satisfy the statutory withholding requirements applicable to the restricted stock
grants. Therefore, as these awards vest the actual number of shares outstanding as a result of the
restricted stock awards is reduced. These shares will vest over a period of four years. Prior to
vesting, the restricted stock has rights to the dividends declared and voting rights, therefore
they are considered issued and outstanding.
A summary of non-vested share awards for the Company’s time-based restricted shares as of
December 31, 2007 and changes during the years then ended are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
Shares |
|
|
Grant Date Fair |
|
|
Aggregate Fair |
|
| |
|
Outstanding |
|
|
Value |
|
|
Value |
|
| |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2005 |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
619,747 |
|
|
$ |
16.95 |
|
|
$ |
10,505 |
|
Vested |
|
|
(6,250 |
) |
|
$ |
16.95 |
|
|
$ |
(106 |
) |
Forfeited |
|
|
(10,500 |
) |
|
$ |
16.95 |
|
|
$ |
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2006 |
|
|
602,997 |
|
|
$ |
16.95 |
|
|
$ |
10,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
747,000 |
|
|
$ |
16.19 |
|
|
$ |
12,094 |
|
Vested |
|
|
(771,652 |
) |
|
$ |
16.72 |
|
|
$ |
(12,902 |
) |
Forfeited |
|
|
(181,561 |
) |
|
$ |
16.52 |
|
|
$ |
(2,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2007 |
|
|
396,784 |
|
|
$ |
16.18 |
|
|
$ |
6,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no time-based restricted shares vested during the year ended December 31, 2005.
During the years ended December 31, 2007 and 2006, we recorded $11.8 million and $2.1 million in
non-cash compensation expense, respectively, related to the restricted stock granted that is
expected to vest. Included within the non-cash compensation expense for 2007 was $7.6 million
related the accelerated vesting of 0.5 million of restricted shares for terminated senior
management employees. As of December 31, 2007, there was $5.8 million in unrecognized compensation
expense related to time-based restricted shares expected to vest. That cost is expected to be
recognized on a straight-line basis over a weighted average period of 2.8 years.
6. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office facilities and operating equipment under cancelable and
non-cancelable agreements. Total rent expense was approximately $0.6 million, $0.5 million, and
$0.5 million, for the years ended December 31, 2007, 2006, and 2005, respectively.
79
At December 31, 2007, the minimum aggregate rental commitment under all non-cancelable
operating leases for the years then ending was (in thousands):
| |
|
|
|
|
2007 |
|
$ |
596 |
|
2008 |
|
|
549 |
|
2009 |
|
|
516 |
|
2010 |
|
|
163 |
|
2011 |
|
|
— |
|
Thereafter |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,824 |
|
|
|
|
|
Litigation Settlement Award
Visa Check/MasterMoney Antitrust Litigation. The Visa Check/MasterMoney Antitrust Litigation
began in October 1996 with the filing of lawsuits by certain retailers and retail trade
associations against Visa U.S.A. Inc. (“Visa”) and MasterCard International Incorporated
(“MasterCard”).
In the Action against Visa and MasterCard, Plaintiffs claimed, among other things, that Visa
and MasterCard, individually, and in conspiracy with each other and with their member banks, have
violated the federal antitrust laws by forcing merchants who accept Visa and/or MasterCard-branded
credit cards for payment also to accept Visa and/or MasterCard-branded debit cards for payment (the
“Honor All Cards Policy”), and by conspiring and attempting to monopolize a market for general
purpose point of sale debit cards. Plaintiffs claimed that Defendants’ actions have caused
merchants to pay excessive fees on Visa and MasterCard signature debit and credit transactions and
on on-line PIN debit transactions, and have injured competition, merchants and consumers.
On June 4, 2003 Plaintiffs entered into separate settlement agreements with Visa and
MasterCard. Under terms of the settlements, Visa and MasterCard agreed to eliminate their “Honor
All Cards Policy”, to lower debit card fees for an interim period by one-third and to refund over
$3 billion to merchants who accepted their cards from October 1992 through June 2003. As the
Company accepted Visa and MasterCard branded debit cards during this covered period,
we were members of the covered class and entitled to settlement
under the agreement.
In December 2007, the Company’s claim award was affirmed by the court. We engaged a third
party to assist us in the preparation of the claim and collection of any award due to us in this
action. For this service we agreed to a collection fee that would be deducted from any amounts
received. The net recovery of $2.6 million is included as a
reduction of operating expenses in the
accompanying consolidated statement of income for the year ended December 31, 2007.
Litigation Claims and Assessments
The Company is threatened with or named as a defendant in various lawsuits in the ordinary
course of business. It is not possible to determine the ultimate disposition of these matters;
however, management is of the opinion that the final resolution of any threatened or pending
litigation is not likely to have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
Internal
Investigation.
On November 14, 2007, the Company announced that it had commenced an internal
investigation into allegations made by an individual whose identity has
not been made known to the Company. The internal investigation was
conducted by the Company’s Audit Committee with the assistance
of externally engaged legal counsel and accounting advisory services.
On December 21, 2007, the Company announced that the Audit Committee
had completed its internal investigation and that the internal
investigation uncovered no evidence of fraud or intentional
misconduct to substantiate any of the allegations.
As
a result of inquiries made during the internal investigation, the Company
reviewed and considered the interpretation of contract clauses relating to
the calculation of commissions payable to certain of the Company’s
customers in connection with certain types of transactions, and the
reporting of certain types of transactions to certain of the Company’s
customers. As a result of this review, the Company may provide certain
customers with augmented monthly transaction reporting for period from
2005 through 2007 for transactions completed on ATMs and automated
cashier machines. In reviewing the commission computation provisions
of the customer contracts, the Company has identified a number of
customer contracts during the period from 2005 through 2007 that
contain commission computation provisions that may be subject to
varying interpretations. While the Company does believe that
commissions have been computed and paid in accordance with
our business understanding with the relevant customers, we believe
that it is probable that there will be disputes between us and the
relevant customers surrounding the amounts we actually paid. Based
upon our analysis, we believe it is probable we will incur $2.9
million of additional expense to settle commission disputes. We
have recorded these costs as additional commission expense, which
is a cost of revenue, for the year ended December 31, 2007. Of this
amount, $1.9 million relates to transactions completed in 2005 and 2006.
Prior period amounts have not been restated as the amounts are not material.
It
is reasonably possible that we will be required to pay additional
amounts to settle commission disputes related to our reporting of
commissionable transactions. We cannot currently estimate the
ultimate cost to resolve these issues, but do not expect these to
have a material adverse effect on our business, cash flows, results of
operations or financial position.
Derivative
Action. On December 12, 2007, a derivative action was filed by a stockholder on behalf of the Company
in the United States District Court, District of Nevada, against our current directors, one of our
former directors, our former chief executive officer and our former chief financial officer,
alleging breach of fiduciary duties, waste of corporate assets, unjust enrichment and violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. On February 8, 2008,
an additional derivative action was filed by a stockholder on behalf of the Company in the United
States District Court, District of Nevada, against our current directors, one of our former
directors, our former chief executive officer and our former chief financial officer, alleging
breach of fiduciary duties, insider trading and waste of corporate assets. These actions include
claims for, among other things, damages in favor of the Company, certain corporate actions to
purportedly improve the Company’s corporate governance, and an award of costs and expenses to the
plaintiff stockholders including attorneys’ fees. The Company has indemnification agreements with
each of the individual defendants that may cause the Company to incur expenses associated with the
defense of these actions and that may also protect such individuals from liability to the Company.
Canadian Goods and Services Tax (“GST”). In April 2004, GCA Canada was notified through one
of its customers that the Canadian Revenue Agency (“CRA”) Appeals Division had taken a position, on
audit of the customer’s two locations, that the customer was liable for GST tax on commissions it
received in connection with the cash advance services provided by GCA Canada. The CRA’s position
is disputed, by both GCA Canada and the customer based upon their interpretation of the Canadian
Excise Tax Act (“ETA”). Under the ETA, a supply of goods or services is taxable unless it is
specifically identified as an exempt transaction specifically in the ETA. Included within this
listing of exempt transactions are “financial services” transactions.
The preliminary position taken by CRA is that the advancement of funds by the gaming
establishment to gaming patrons in consideration for receipt of a negotiable instrument issued by
GCA Canada is not an exempt financial services transaction. Therefore, the ETA would require the
customer to collect Goods and Services Tax (“GST”) from GCA Canada and remit it to the CRA. On
audit the CRA assessed GST of $0.6 million on one of the customer’s locations and $1.1 million on
the other customer location. In December 2004, the Company paid the amount assessed to the
customer, and the customer remitted the tax to the CRA. In February 2005, the Company filed a
refund claim for taxes paid in error with CRA. This claim was denied as expected, and the Company
is currently defending the rebate claim through the assessment process, the appeals process and
then through court, if necessary.
80
The Company believes the transactions performed in Canada are financial services transactions
specifically exempted by the ETA and therefore not GST taxable. As the Company has paid these
obligations and as there is uncertainty related to the ability to recover these amounts through the
refund claim and appeals process, the Company has deemed it appropriate to expense this payment and
accrue for a liability related to future payments for this customer. Accordingly, in the years
ended December 31, 2007 and 2006, the Company has recorded $45,000 and $43,000, respectively, in
operating expenses related to this potential tax exposure in the accompanying consolidated income
statements.
Compliance Letters from MasterCard International, Inc. and Visa U.S.A. In the normal course
of business, the Company routinely receives letters from MasterCard International, Inc. and Visa
U.S.A. (the “Associations”) regarding non-compliance with various aspects of the respective
Associations bylaws and regulations as they relate to transaction processing. The Company is
periodically involved in discussions with its sponsoring bank and the Associations to resolve these
issues. It is the opinion of management that all of the issues raised by the Associations will be
resolved in the normal course of business and related changes to the bankcard transaction
processing, if any, will not result in material adverse impact to the financial results of the
Company.
Commitments
Registration Agreement. The Company and some of its stockholders are party to a Registration
Agreement. The Registration Agreement provides the stockholders with rights to cause the Company
to register their shares of Common Stock on a registration statement filed with the Securities and
Exchange Commission. Under the terms of this agreement, some holders of registration rights may
require the Company to file a registration statement under the Securities Act at the Company’s
expense with respect to their shares of Common Stock. Under this agreement, the Company has agreed
to bear all registration and offering expenses (other than underwriting discounts and commissions
and fees), and specific fees and disbursements of counsel of the holders of registration rights.
The Company has agreed to indemnify the holders of registration rights against specific liabilities
under the Securities Act.
USA Payments Processing Commitments. The Company obtains transaction processing services from
USA Payments, a company controlled by M&C International (“M&C”), pursuant to the Amended and
Restated Agreement for Electronic Payment Processing. Two of our directors are principals of M&C.
Under terms of this agreement, GCA is obligated to pay USA Payments $2.3 million annually in fixed
monthly processing fees and minimum annual transaction volume fees through the termination of this
agreement in March 2014.
Fiserv
Processing Commitments. Arriva entered into an agreement with Fiserv Solutions, Inc.
(“Fiserv”), which was effective August 10, 2006. This agreement governs the processing of our
private label credit card. Under the terms of the agreement with Fiserv, Arriva is committed to
pay $0.5 million in monthly operating expenses if the arrangement is terminated during the first
18 months of the term.
Innovative Funds Transfer, LLC Required Capital Investment. Pursuant to the terms of our
agreement with International Game Technology (“IGT”), we are obligated to invest up to our pro rata
share of $10.0 million in capital to IFT. Our obligation to invest additional capital in IFT is
conditioned upon capital calls, which are in our sole discretion. As of December 31, 2007, we had
invested a total of $4.6 million in IFT, and are committed to invest up to $1.4 million in
additional capital investments if required.
First Data Sponsorship Indemnification Agreement. On March 10, 2004, GCA and First Data
entered into a Sponsorship Indemnification Agreement whereby First Data agreed to continue their
guarantee of performance for us to Bank of America for our sponsorship as a Bank Identification
Number and Interbank Card Association licensee under the applicable
VISA and MasterCard rules through September 2010. GCA
has agreed to indemnify First Data and its affiliates against any and all losses and expenses
arising from its indemnification obligations pursuant to that agreement. As collateral security
for prompt and complete performance if GCA’s obligations under this agreement GCA was required to
cause a letter a credit in the amount of $3.0 million to be issued to First Data to cover any
indemnified amounts not paid under terms of this agreement. The required amount of this letter of
credit will be adjusted annually based upon the underlying cash advance volume covered by the
Sponsorship Indemnification Agreement. As of December 31, 2007, GCA maintained a letter of credit
in the amount of $3.2 million to cover this indemnity obligation.
81
7. BORROWINGS
Senior Secured Credit Facility
On November 1, 2006, GCA and Holdings entered into a Second Amended and Restated Credit
Agreement with certain lenders, Bank of America, N.A., as Administrative Agent and Wachovia Bank,
N.A., as Syndication Agent, (the “Second Amended and Restated Credit Agreement”).
The Second Amended and Restated Credit Agreement significantly amended and restated the terms
of GCA’s existing senior secured credit facilities to provide for a $100.0 million term loan
facility and a $100.0 million five-year revolving credit facility, with a $25.0 million letter of
credit sublimit and a $5.0 million swingline loan sublimit. The Second Amended and Restated Credit
Agreement also contains an increase option permitting GCA to arrange with existing lenders and/or
new lenders to provide up to an aggregate of $150.0 million in additional term loan or revolving
credit commitments.
Borrowings under the Second Amended and Restated Credit Agreement bear interest at LIBOR plus
an Applicable Margin, which is based on the Company’s Senior Leverage Ratio (as defined). At
December 31, 2007 and 2006, the Applicable Margin was 87.5 basis points and 137.5 basis points and
the effective rate of interest was 5.72% and 6.70%, respectively. Principal, together with accrued
and unpaid interest, is due on the maturity date, November 1, 2011. GCA may prepay the loans and
terminate the commitments at any time, without premium or penalty, subject to certain
qualifications set forth in the agreement. Furthermore, the Second Amended and Restated Credit
Agreement contains mandatory prepayment provisions which, under certain circumstances, obligate GCA
to apply portions of its Excess Cash Flow (as defined) to prepayment of the senior secured credit
facilities. No mandatory prepayments were made during the year ended
December 31, 2007.
As of December 31, 2007, the scheduled quarterly amortization payments on the term loan
portion of the Second Amended and Restated Credit Agreement are $250,000 through September 30, 2010
with the remaining balance of the term loan and any outstanding amounts under the revolving credit
loans due to be repaid on November 1, 2011.
Pursuant to the Second Amended and Restated Credit Agreement, the senior secured credit
facility continues to be secured by substantially all of the assets of the Company, GCA and GCA’s
wholly-owned domestic subsidiaries other than Arriva, and will continue to be guaranteed by the
Company and all of GCA’s wholly-owned domestic subsidiaries other than Arriva.
The Second Amended and Restated Credit Agreement contains customary affirmative and negative
covenants, financial covenants, representations and warranties and events of defaults, which are
subject to important exceptions and qualifications, as set forth in the Second Amended and Restated
Credit Agreement. Additionally, we have a covenant related to our allowable capital expenditures.
The Company believes it was in compliance with all of its debt covenants that were applicable as of
December 31, 2007.
As of December 31, 2007 and 2006, the Company had $99.0 million and $100.0 million,
respectively, in borrowings under the term loan, $11.7 million and $21.7 million, respectively,
under the revolving portion and $3.2 million and $3.1 million, respectively, in letters of credit
issued and outstanding. The letters of credits issued and outstanding reduce amounts available
under the revolving portion of the Second Amended and Restated Credit Agreement. On February 19,
2008, we drew down $84.0 million on the revolving portion of the Credit Facility.
Prior to November 1, 2006, the Company’s senior secured credit facility was provided pursuant
to the Amended and Restated Credit Agreement (the “First Amended and Restated Credit Agreement”).
This facility provided for a term loan portion of borrowings and a revolving loan portion of
borrowings. Interest expense, under the terms of the First Amended and Restated Credit Agreement,
was generally determined based upon LIBOR plus an applicable margin.
82
Senior Subordinated Notes
On March 10, 2004, GCA completed a private placement offering of $235 million 8.75% Senior
Subordinated Notes due March 15, 2012 (the “Notes Offering”). On October 14, 2004, we completed an
exchange offer of the notes for registered notes of like tenor and effect. The Notes Offering
resulted in proceeds to the Company of $228.3 million net of issuance costs and offering expenses.
Interest on the notes accrues based upon a 360-day year comprised of twelve 30-day months and is
payable semiannually on March 15th and September 15th. Proceeds of the Notes Offering were
utilized to finance in part the redemption of ownership interests in us by First Data Corp and pay
related fees and expenses.
All of the Company’s existing and future domestic wholly owned subsidiaries are guarantors of
the notes on a senior subordinated basis. Under terms of the indenture, up to 35% of these notes
may have been redeemed before March 15, 2007, at a price of 108.75% of face, out of the net
proceeds from an equity offering. In October 2005, the Company redeemed $82.25 million of these
notes plus $7.2 million of redemption premium, with the proceeds of its initial public offering
(“IPO”) of equity securities (see discussion on initial public offering in Note 8). The Company
may redeem all or a portion of the notes at redemption prices of 104.375% on or after March 15,
2008, 102.188% on or after March 15, 2009 or 100.000% on or after March 15, 2010.
As of December 31, 2007 and 2006, the Company had $152.8 million in borrowings outstanding
under the Notes Offering. At December 31, 2007, we believe that we were in compliance with all of
our covenants under the Notes offering except our requirement to file our Quarterly Report on Form
10-Q for the quarter ended September 30, 2007 within 45 days after the end of the fiscal quarter.
We filed this Quarterly Report on Form 10-Q with the SEC on January 30, 2008 and cured this breach.
Loss on Early Extinguishment of Debt
In November 2006, completion of the refinancing related to the Second Amended and Restated
Credit Agreement resulted in the write-off of $3.4 million, representing all of the remaining
capitalized deferred financing costs associated with the First Amended and Restated Credit
Agreement. These amounts have been included within the loss on early extinguishment of debt.
In October 2005, the Company completed the redemption of $82.25 million of the senior
subordinated notes. The redemption premium of $7.2 million and the write-off of the $2.3 million
of capitalized debt issuance costs associated with this portion of the senior subordinated notes
have been included within the loss on early extinguishment of debt.
Minimum Aggregate Repayment Schedule
At December 31, 2007, the minimum aggregate repayment (excluding excess cash flow payments)
for all borrowings for the years then ending was (in thousands):
| |
|
|
|
|
2008 |
|
$ |
1,000 |
|
2009 |
|
|
1,000 |
|
2010 |
|
|
1,000 |
|
2011 |
|
|
107,730 |
|
2012 |
|
|
152,750 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
263,480 |
|
|
|
|
|
83
8. CAPITAL STOCK
In September 2005, the Company completed an initial public offering of 16,064,157 shares of
common stock at $14.00 per share. Existing stockholders sold 7,064,157 of these shares and the
remaining 9,000,000 shares were
sold by the Company. In October 2005, the underwriters exercised their option to purchase an
additional 1,053,568 shares of stock from the Company and 1,165,656 shares of stock from the
existing stockholders. The net proceeds to the Company from this combined equity offering were
$130.9 million after deducting underwriting discounts. On October 31, 2005, the Company used
$90.3 million of the net proceeds to repay $82.25 million of Senior Subordinated Notes and to pay a
redemption premium and accrued interest on the repaid notes. Also on October 31, 2005, the Company
used $20.0 million of the IPO proceeds to repay $20.0 million of the term loan portion of the First
Amended and Restated Credit Agreement.
Preferred Stock. The amended and restated certificate of incorporation allows our Board of
Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred
stock in one or more series and to fix the designations, powers, preferences, privileges and
relative participating, optional, or special rights as well as the qualifications, limitations or
restrictions of the preferred stock, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences. As of December 31, 2007 we had no shares of
preferred stock outstanding.
Common Stock. Subject to the preferences that may apply to shares of preferred stock that may
be outstanding at the time, the holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available at the times and in the amounts as our Board of
Directors may from time to time determine. All dividends are non-cumulative. In the event of the
liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to
share ratably in all assets remaining after the payment of liabilities, subject to the prior
distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to
one vote for each share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking
fund provisions applicable to the common stock. Each outstanding share of common stock is fully
paid and non-assessable. As of December 31, 2007 we had 82,981,212 shares of common stock
outstanding (including 396,784 shares of non-vested restricted stock).
Common Stock Repurchase Program. On February 6, 2007, the Company’s Board of Directors
authorized the repurchase of up $50.0 million of the Company’s issued and outstanding common stock,
subject to compliance with any contractual limitations on such repurchases under the Company’s
financing agreements in effect from time to time, including but not limited to those relating to
the Company’s senior secured indebtedness and senior subordinated notes. As of December 31, 2007,
the Company had $8.3 million remaining under the Common Stock Repurchase Program.
Treasury Stock. In addition to open market purchases of common stock authorized under the
Common Stock Repurchase Program, employees may direct the Company to withhold vested shares of
restricted stock to satisfy the minimum statutory withholding requirements applicable to their
restricted stock vesting. The following table provides the treasury stock activity occurring in
2007 (number of shares and cost in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Number |
|
|
|
|
|
|
|
| |
|
of Shares |
|
|
Average Price per |
|
|
Cost of Shares |
|
| |
|
Purchased or |
|
|
Share Purchased or |
|
|
Purchased or |
|
| |
|
Withheld |
|
|
Withheld |
|
|
Withheld |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchase |
|
|
4,305 |
|
|
$ |
8.93 |
|
|
|
38,462 |
|
Shares withheld from restricted stock vesting |
|
|
258 |
|
|
$ |
12.43 |
|
|
|
3,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
4,563 |
|
|
$ |
9.13 |
|
|
$ |
41,668 |
|
|
|
|
|
|
|
|
|
|
|
|
84
9. RELATED PARTY TRANSACTIONS
The two members of our Board of Directors who are the principals of M&C, Karim Maskatiya and
Robert Cucinotta, are the owners of approximately 24.9% of the outstanding equity interests of the
Company. The Company made payments for software development costs and system maintenance to
Infonox on the Web (“Infonox”) pursuant to agreements with Infonox. At the time we entered into
these agreements and during the periods presented, Infonox was controlled by two members of our
Board of Directors and family members of one of those directors. These family members now own a
majority of the ownership interests, and hold two of the three director seats, of Infonox. The
Company obtains transaction processing services from USA Payments, a company controlled by Messrs.
Maskatiya and Cucinotta, pursuant to the Amended and Restated Agreement for Electronic Payment
Processing.
On October 9, 2006, GCA and Infonox, entered into a Joint Amendment to the Amended and
Restated Software License Agreement and the Consulting Agreement that have been in effect since
May 31, 2000 (collectively the “Infonox Agreements”). Under terms of the Infonox Agreements, both
parties have agreed that they will comply with and adhere to the payment card industry (“PCI”) data
security standard (“DSS”) in effect from time to time and shall implement and maintain appropriate
measures designed to meet the objectives of PCI DSS.
The Company obtains transaction processing services from USA Payments, a company controlled by
the principals of M&C, pursuant to the Amended and Restated Agreement for Electronic Payment
Processing. Under terms of this agreement, GCA pays a fee to USA Payments for transaction
processing services, which is reflected in cost of revenues (exclusive of depreciation and
amortization), and pays other directly identifiable operating expenses that are included within
operating expenses in the consolidated statements of income. Pursuant to this agreement, GCA is
obligated to pay USA Payments a monthly, fixed processing fee and transaction fees that total
$2.3 million annually through the termination of this agreement in March 2014. Additionally, we
reimburse USA Payments for invoices related mainly to gateway fees and other processing charges
incurred on behalf of the Company from unrelated third parties. These expenses are also classified
as part of cost of revenues (exclusive of depreciation and amortization). In September 2005, the
Company acquired the 3-in-1 patent from USA Payments for $10.0 million.
The following table represents the transactions with related parties for the years ended
December 31, (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Description of Transaction |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infonox on the Web: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs and maintenance expense |
|
$ |
3,594 |
|
|
$ |
1,976 |
|
|
$ |
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Payments & USA Payments Systems: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction processing charges |
|
|
3,010 |
|
|
|
2,908 |
|
|
|
2,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass through billing related to gateway fees,
telecom and other items |
|
|
1,384 |
|
|
|
1,312 |
|
|
|
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease income earned for leasing out corporate
office space for backup servers |
|
|
(18 |
) |
|
|
(18 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of 3-in-1 Patent |
|
|
— |
|
|
|
— |
|
|
|
10,000 |
|
85
The following table details the amounts receivable from or (liabilities to) these related
parties that are recorded as part of other receivables, net, accounts payable or accrued expenses
in the consolidated balance sheets as of December 31, (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
M&C and related companies |
|
$ |
31 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included within receivables, other |
|
$ |
31 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Payment Systems |
|
$ |
(193 |
) |
|
$ |
(149 |
) |
Infonox on the Web |
|
|
(372 |
) |
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included within accounts payable and
accrued expenses |
|
$ |
(565 |
) |
|
$ |
(782 |
) |
|
|
|
|
|
|
|
10. INCOME TAXES
In July 2006, the FASB issued FIN 48, which clarifies the accounting and disclosure for
uncertainty in tax positions, as defined. FIN 48 provides that a tax benefit from an uncertain tax
position may be recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the
technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. This
interpretation also provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company was subject to the
provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in all of the federal
and state jurisdictions where it is required to file income tax returns, as well as all open tax
years in these jurisdictions. The Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments that will result in a
material change to its financial position. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48. Upon adoption of FIN
48 on January 1, 2007, the Company determined that it had uncertain
tax positions totaling $0.5 million related to depreciation and
accrued expenses. Because these items are temporary in nature and the
Company has net operating loss carryforwards, no interest or
penalties were associated with these uncertain tax positions.
Accordingly, there was no cumulative effect of adoption. Subsequent
to adoption, the Company requested a change in accounting method from
the Internal Revenue Service, which eliminated the Company’s tax
exposure with respect to these items.
We may from time to time be assessed interest or penalties by tax jurisdictions, although any
such assessments historically have been minimal and immaterial to our financial results. The
Company’s policy for recording interest and penalties associated with audits and unrecognized tax
benefits is to record such items as a component of income tax expense.
Pursuant to the Securities Purchase and Exchange Agreement, the Company was required to
convert from a limited liability company, which was a pass-through entity for U.S. income tax
purposes, to a corporation. The conversion of the Company was completed on May 14, 2004.
The result of this conversion was to recognize deferred tax assets and liabilities from the
expected tax consequences of temporary differences between the book and tax basis of the Company’s
assets and liabilities at the date of conversion into a taxable entity. The net tax asset recorded
was principally generated from the step up in tax basis created from the implied value of the
Restructuring of Ownership and the Securities Purchase and Exchange Agreement.
For the year ended December 31, 2004, the Company recorded a net tax benefit of $212.4 million
from establishing a net deferred tax asset and recording income tax expense on operations since we
became a taxable entity. This benefit was estimated based upon information provided by the
partners at the time of the transactions, and was updated throughout 2004 and 2005 as additional
information surrounding the transaction was made known. For the year ended December 31, 2005, the
Company recorded a $3.1 million income tax benefit. This adjustment
was derived from information contained in the former partners’ final 2004 partnership income
tax returns filed with the Internal Revenue Service in the fourth quarter of 2005.
86
The following table presents the domestic and foreign components of pretax income and recorded
income tax expense for the years ended December 31, (amounts are in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Components of pretax income: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
34,406 |
|
|
$ |
38,275 |
|
|
$ |
24,967 |
|
Foreign |
|
|
3,789 |
|
|
|
4,890 |
|
|
|
5,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
38,195 |
|
|
$ |
43,165 |
|
|
$ |
30,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(14,036 |
) |
|
$ |
(15,585 |
) |
|
$ |
(6,770 |
) |
Foreign |
|
|
(823 |
) |
|
|
(1,257 |
) |
|
|
(1,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1) |
|
$ |
(14,859 |
) |
|
$ |
(16,842 |
) |
|
$ |
(8,032 |
) |
Income tax benefit from minority ownership loss |
|
|
132 |
|
|
|
103 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes, as reported |
|
$ |
(14,727 |
) |
|
$ |
(16,739 |
) |
|
$ |
(7,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
– The consolidated provision for income tax total includes the income tax
benefit from minority ownership loss of $0.1 million for each of the years
ended December 31, 2007, 2006 and 2005. |
The Company’s income tax provision consists of the following components as of
December 31, (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current |
|
$ |
(858 |
) |
|
$ |
(1,257 |
) |
|
$ |
(1,262 |
) |
Deferred |
|
|
(14,001 |
) |
|
|
(15,585 |
) |
|
|
(6,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
(14,859 |
) |
|
$ |
(16,842 |
) |
|
$ |
(8,032 |
) |
|
|
|
|
|
|
|
|
|
|
The items accounting for the difference between income taxes computed at the federal statutory
rate and the provision for income taxes for the years ended December 31, are:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Federal statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign provision |
|
|
(0.32 |
) |
|
|
(0.07 |
) |
|
|
(0.51 |
) |
State/Province income tax |
|
|
0.98 |
|
|
|
1.05 |
|
|
|
0.98 |
|
Non-deductible compensation cost |
|
|
4.11 |
|
|
|
2.13 |
|
|
|
0.00 |
|
Final adjustment to 2004 incorporation tax asset |
|
|
— |
|
|
|
— |
|
|
|
(9.95 |
) |
Increase in valuation allowance |
|
|
3.45 |
|
|
|
— |
|
|
|
— |
|
Non-deductible expenses and other items |
|
|
0.72 |
|
|
|
0.65 |
|
|
|
0.75 |
|
Adjustment to carrying values |
|
|
(5.04 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
38.90 |
% |
|
|
38.76 |
% |
|
|
26.27 |
% |
|
|
|
|
|
|
|
|
|
|
87
The following table outlines the principal components of deferred tax items at December 31,
(amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Deferred tax assets related to: |
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements |
|
$ |
919 |
|
|
$ |
603 |
|
Sales allowances |
|
|
4,283 |
|
|
|
3,857 |
|
Foreign tax credits |
|
|
4,297 |
|
|
|
3,872 |
|
Net operating losses |
|
|
4,469 |
|
|
|
3,939 |
|
Stock options FAS 123(R) expense |
|
|
4,973 |
|
|
|
2,269 |
|
Intangibles |
|
|
160,446 |
|
|
|
178,190 |
|
Accrued and prepaid expenses |
|
|
— |
|
|
|
45 |
|
Other |
|
|
262 |
|
|
|
— |
|
Valuation allowance |
|
|
(1,319 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
178,330 |
|
|
|
192,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities related to: |
|
|
|
|
|
|
|
|
Basis differences related to foreign currency translation adjustments |
|
|
514 |
|
|
|
— |
|
Accrued and prepaid expenses |
|
|
314 |
|
|
|
— |
|
Other |
|
|
275 |
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
1,103 |
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net |
|
$ |
177,227 |
|
|
$ |
191,741 |
|
|
|
|
|
|
|
|
For all of our investments in foreign subsidiaries, except for GCA Macau, deferred taxes have
not been provided on unrepatriated earnings in the amount of approximately $6.4 million. These
earnings are considered permanently reinvested, as it is management’s intention to reinvest foreign
profits to finance foreign operations.
As of December 31, 2007 the Company has approximately $13.0 million accumulated federal net
operating losses. The net operating losses can be carried forward and applied to offset taxable
income for 20 years and will expire starting in 2024.
As of December 31, 2007, the Company had approximately $4.3 million in foreign tax credits
available. Foreign tax credits can be offset against future taxable income subject to certain
limitations for a period of 10 years. Approximately $0.6 million, $1.2 million, $1.0 million, $0.9
million and $0.6 million will expire in 2013, 2014, 2015, 2016 and 2017, respectively. During the
year ended December 31, 2007, the Company recorded a valuation allowance related to foreign tax
credit deferred tax assets of approximately $1.3 million, due to the expected expiration of a
portion of the foreign tax credit carryforwards, which begin to expire in 2013. Realization of the
deferred tax assets is dependent on generating sufficient taxable income in future periods or
within applicable carryback periods. Although realization is not assured, management has recorded
a net deferred tax asset for the amount it believes is more likely than not to be realized. The
amount of the deferred tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced.
88
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the
year, (in thousands):
| |
|
|
|
|
Unrecognized
Tax Benefit — Balance January 1, 2007 |
|
$ |
500 |
|
|
|
|
|
|
Gross decreases — tax positions in prior period |
|
|
(500 |
) |
Settlements |
|
|
— |
|
Lapse of statute of limitations |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefit — Balance December 31, 2007 |
|
$ |
— |
|
|
|
|
|
During the year ended December 31, 2007 the Company filed changes in accounting method with
the Internal Revenue Service related to two income tax return methods that gave rise to
unrecognized tax benefits at the beginning of the period. The change in accounting methods that
were filed with the Internal Revenue Service resulted in decreasing of the unrecognized tax benefit
to zero.
The Company does not anticipate that the total amount of its unrecognized tax benefits will
significantly change during the next twelve months.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations by tax authorities for years before
2004. With respect to state
and local jurisdictions and countries outside of the United States, with limited exceptions, the
Company and its subsidiaries are no longer subject to income tax audits for years before 2001. The
Company has not undergone any recent examinations by the Internal Revenue Service.
11. SEGMENT INFORMATION
Operating segments as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The Company’s chief
operating decision-making group consists of the Chief Executive Officer and Chief Financial
Officer. The operating segments are reviewed separately because each represents products that can
be, and often are, sold separately to our customers.
The Company operates in four distinct business segments: (i) cash advance, (ii) ATM, (iii)
check services, and (iv) credit reporting services. The “Other” lines of business category, none
of which exceed the established materiality for segment reporting, include private label credit
card operations, Western Union, direct marketing and IFT, among others.
These segments are monitored separately by the Chief Executive Officer and Chief Financial
Officer for performance against our internal forecast and are consistent with our internal
management reporting. The Company’s internal management reporting does not allocate overhead or
depreciation and amortization expenses to the respective business segments. For the segment
information presented below, these amounts have been allocated to the respective segments based
upon relation to the business segment (where identifiable) or on respective revenue contribution.
The Company’s business is predominantly domestic, with no specific regional concentrations and
no significant assets in foreign locations.
Major customers– On June 13, 2005, our largest customer, Harrah’s Entertainment, Inc.
(“Harrah’s”) completed its acquisition of Caesars Entertainment, Inc. (“Caesars”), another customer
of ours. For the years ended December 31, 2007, 2006, and 2005, the combined revenues from all
segments for this customer, assuming it had been combined for all periods presented, would have
been approximately $115.2 million, $97.9 million, and $81.3 million, respectively, representing
19.5%, and 18.1% and 17.9% of the Company’s total consolidated revenues, respectively.
89
The accounting policies of the operating segments are generally the same as those described in
the summary of significant accounting policies. The tables below present the results of operations
and total assets by operating segment as of, and for the years ended (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cash |
|
|
|
|
|
|
Check |
|
|
Credit |
|
|
|
|
|
|
|
|
|
|
| |
|
Advance |
|
|
ATM |
|
|
Services |
|
|
Reporting |
|
|
Other |
|
|
Corporate |
|
|
Total |
|
December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
316,007 |
|
|
$ |
240,575 |
|
|
$ |
31,213 |
|
|
$ |
8,771 |
|
|
$ |
4,214 |
|
|
$ |
109 |
|
|
$ |
600,889 |
|
Operating income
exclusive
of depreciation and
amortization |
|
|
77,328 |
|
|
|
45,635 |
|
|
|
14,255 |
|
|
|
6,065 |
|
|
|
(4,480 |
) |
|
|
(66,131 |
) |
|
|
72,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
287,053 |
|
|
$ |
221,727 |
|
|
$ |
29,166 |
|
|
$ |
8,511 |
|
|
$ |
1,394 |
|
|
$ |
297 |
|
|
$ |
548,148 |
|
Operating income
exclusive of depreciation and
amortization |
|
|
74,222 |
|
|
|
43,347 |
|
|
|
10,192 |
|
|
|
4,928 |
|
|
|
(2,318 |
) |
|
|
(45,175 |
) |
|
|
85,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues |
|
$ |
235,055 |
|
|
$ |
182,291 |
|
|
$ |
26,376 |
|
|
$ |
8,867 |
|
|
$ |
1,144 |
|
|
$ |
347 |
|
|
$ |
454,080 |
|
Operating income
exclusive of depreciation and
amortization |
|
|
65,375 |
|
|
|
39,024 |
|
|
|
8,036 |
|
|
|
5,310 |
|
|
|
300 |
|
|
|
(35,761 |
) |
|
|
82,284 |
|
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| Total Assets |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Cash advance |
|
$ |
153,017 |
|
|
$ |
205,233 |
|
ATM |
|
|
68,627 |
|
|
|
94,521 |
|
Check services |
|
|
29,749 |
|
|
|
28,840 |
|
Credit reporting |
|
|
21,204 |
|
|
|
22,468 |
|
Other |
|
|
19,297 |
|
|
|
1,995 |
|
Corporate |
|
|
247,429 |
|
|
|
235,590 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
539,323 |
|
|
$ |
588,647 |
|
|
|
|
|
|
|
|
12. SUBSEQUENT EVENTS
TeleCheck Marketing Agreement. On January 23, 2008, GCA and TRS Recovery Services, Inc.
entered into an agreement to extend the term of the TeleCheck Marketing Agreement dated as of July
9, 1998, between TRS Recovery Services, Inc. and Global Cash Access, Inc. on behalf of itself and
its affiliates, as amended, through June 30, 2008.
Stock Option Grants. On February 7, 2008, our Board of Directors approved the grant of
options to acquire 4.1 million shares of common stock to existing employees, newly hired employees
and certain non-employee members of the Company’s Board of Directors. These shares will vest over
a four-year period. The total fair value of the awards at the date of grant is $13.5 million.
90
Discontinuation of Arriva Card. On February 28, 2008, the Company announced that as part of
its strategy of focusing on its core electronic payments business, it will discontinue offering the
Arriva Card, a consumer credit card offered by Arriva.
Acquisition of Certegy Gaming Services. On February 28, 2008, the Company entered into a
Stock Purchase Agreement (the “Agreement”) with Fidelity National Transaction Services, Inc.
(“FIS”) and Certegy Gaming Services, Inc. (“CGS”) to acquire all of the outstanding shares of
capital stock of CGS.
The Agreement provides the terms and conditions pursuant to which GCA will purchase all of the
capital stock from FIS for an aggregate purchase price of $25,000,000 in cash, subject to a net
working capital adjustment. Further, GCA will reimburse to FIS, in a lump sum cash payment, an
amount equal to all of the cash and cash equivalents owned by FIS or CGS located or contained
within, in transit to, or held by a third party for placement into, automated teller machines
and/or cash cages at CGS’ gaming establishment customers as of the closing of the transaction
(collectively, the “Customer Premises Cash”). The total amount of cash paid to Seller upon the
closing of the transaction, including the purchase price, as adjusted, and the Customer Premises
Cash, will not exceed $100,000,000. We expect to consummate the transaction in April 2008.
Bank of America Amended Treasury Services Agreement. On March 13, 2008, GCA entered into an
Agreement to Amend the Amendment of Treasury Services Agreement with Bank of America, N.A. that
increased the limit on the aggregate allowed currency that Bank of America would provide to the
Company from $360 million to $410 million. All other terms and conditions of the Amendment to the
Treasury Services Agreement remain in full force and effect.
Borrowings
on Senior Secured Credit Facility. On February 19, 2008, we
drew down $84.0 million on the revolving portion of the Credit
Facility.
91
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Year |
|
| |
|
(amounts in thousands, except earnings per share) |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
148,744 |
|
|
$ |
151,530 |
|
|
$ |
156,572 |
|
|
$ |
144,043 |
|
|
$ |
600,889 |
|
Operating income |
|
|
21,326 |
|
|
|
22,525 |
|
|
|
17,188 |
(2) |
|
|
11,633 |
(3) |
|
|
72,672 |
|
Net income |
|
|
7,900 |
|
|
|
8,568 |
|
|
|
5,323 |
|
|
|
1,913 |
|
|
|
23,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.29 |
|
Diluted |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
129,835 |
|
|
$ |
133,576 |
|
|
$ |
142,852 |
|
|
$ |
141,885 |
|
|
$ |
548,148 |
|
Operating income |
|
|
20,627 |
|
|
|
20,214 |
|
|
|
22,163 |
|
|
|
22,192 |
|
|
|
85,196 |
|
Net income |
|
|
6,963 |
|
|
|
6,279 |
|
|
|
7,815 |
|
|
|
5,552 |
|
|
|
26,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
$ |
0.33 |
|
Diluted |
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
109,666 |
|
|
$ |
112,460 |
|
|
$ |
116,595 |
|
|
$ |
115,359 |
|
|
$ |
454,080 |
|
Operating income |
|
|
21,872 |
|
|
|
20,958 |
|
|
|
18,170 |
|
|
|
21,284 |
|
|
|
82,284 |
|
Net income |
|
|
7,340 |
|
|
|
6,643 |
|
|
|
4,486 |
|
|
|
4,122 |
|
|
|
22,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
0.21 |
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
0.49 |
|
Diluted |
|
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
|
$ |
0.30 |
|
|
|
|
| (1) |
— |
The sum of the quarterly per share amounts may not equal the annual amount reported, as per
share amounts are computed independently for each quarter and for the full year. |
| |
|
|
| (2) |
— |
Operating income has been
reduced by $3.3 million in operating expense related to the
acceleration of equity incentive awards to our former Chief Financial
Officer. |
| |
|
|
| (3) |
— |
Operating income has been
reduced by $4.3 million in operating expense from costs incurred in
connection with the internal investigation and $8.8 million in
termination benefits to our former Chief Executive Officer and other
executives. |
14. GUARANTOR INFORMATION
In March 2004, GCA issued $235 million in aggregate principal amount of 83/4% senior
subordinated notes due 2012 (the “Notes”). There were $152.8 million in Notes outstanding at
December 31, 2007 and 2006. The Notes are guaranteed by all of the GCA’s existing domestic
wholly-owned subsidiaries. In addition, effective upon the closing of the Company’s initial public
offering of common stock, Holdings guaranteed, on a subordinated basis, GCA’s obligations under
these Notes. These guarantees are full, unconditional, joint and several. GCA Canada, BVI, GCA
Switzerland, GCA HK, and GCA Macau; all wholly owned non-domestic subsidiaries, and IFT, a
consolidated joint venture, do not guarantee the Notes. The following consolidating schedules
present separate unaudited condensed financial statement information on a combined basis for the
parent only, the issuer, as well as the Company’s guarantor subsidiaries and non-guarantor
subsidiaries and affiliate, as of and for the years ended December 31, 2007 and December 31, 2006.
92
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — BALANCE SHEET INFORMATION
DECEMBER 31, 2007
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined |
|
|
Elimination |
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Entries * |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
54,411 |
|
|
$ |
5,411 |
|
|
$ |
11,241 |
|
|
$ |
— |
|
|
$ |
71,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents |
|
|
— |
|
|
|
380 |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,380 |
|
Settlement receivables |
|
|
— |
|
|
|
56,344 |
|
|
|
207 |
|
|
|
4,722 |
|
|
|
(635 |
) |
|
|
60,638 |
|
Other receivables, net |
|
|
928 |
|
|
|
18,010 |
|
|
|
57,070 |
|
|
|
121 |
|
|
|
(48,959 |
) |
|
|
27,170 |
|
Prepaid and other assets |
|
|
— |
|
|
|
6,786 |
|
|
|
590 |
|
|
|
116 |
|
|
|
— |
|
|
|
7,492 |
|
Investment in subsidiaries |
|
|
138,296 |
|
|
|
97,306 |
|
|
|
— |
|
|
|
— |
|
|
|
(235,602 |
) |
|
|
— |
|
Property, equipment and
leasehold improvements, net |
|
|
— |
|
|
|
22,213 |
|
|
|
172 |
|
|
|
1,138 |
|
|
|
— |
|
|
|
23,523 |
|
Goodwill, net |
|
|
— |
|
|
|
116,574 |
|
|
|
39,471 |
|
|
|
844 |
|
|
|
— |
|
|
|
156,889 |
|
Other intangibles, net |
|
|
— |
|
|
|
13,290 |
|
|
|
344 |
|
|
|
307 |
|
|
|
— |
|
|
|
13,941 |
|
Deferred income taxes, net |
|
|
— |
|
|
|
177,199 |
|
|
|
— |
|
|
|
28 |
|
|
|
— |
|
|
|
177,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
139,224 |
|
|
$ |
562,513 |
|
|
$ |
104,265 |
|
|
$ |
18,517 |
|
|
$ |
(285,196 |
) |
|
$ |
539,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement liabilities |
|
$ |
— |
|
|
$ |
85,751 |
|
|
$ |
635 |
|
|
$ |
7,976 |
|
|
$ |
(635 |
) |
|
$ |
93,727 |
|
Accounts payable |
|
|
— |
|
|
|
21,947 |
|
|
|
167 |
|
|
|
349 |
|
|
|
— |
|
|
|
22,463 |
|
Accrued expenses |
|
|
928 |
|
|
|
52,904 |
|
|
|
12,817 |
|
|
|
3,532 |
|
|
|
(48,959 |
) |
|
|
21,222 |
|
Borrowings |
|
|
— |
|
|
|
263,480 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
263,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
928 |
|
|
|
424,082 |
|
|
|
13,619 |
|
|
|
11,857 |
|
|
|
(49,594 |
) |
|
|
400,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
— |
|
|
|
135 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
138,296 |
|
|
|
138,296 |
|
|
|
90,646 |
|
|
|
6,660 |
|
|
|
(235,602 |
) |
|
|
138,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
139,224 |
|
|
$ |
562,513 |
|
|
$ |
104,265 |
|
|
$ |
18,517 |
|
|
$ |
(285,196 |
) |
|
$ |
539,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
93
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — BALANCE SHEET INFORMATION
DECEMBER 31, 2006
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
Elimination |
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Entries * |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
35,022 |
|
|
$ |
2,176 |
|
|
$ |
3,721 |
|
|
$ |
— |
|
|
$ |
40,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents |
|
|
— |
|
|
|
350 |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,350 |
|
Settlement receivables |
|
|
— |
|
|
|
138,145 |
|
|
|
445 |
|
|
|
3,554 |
|
|
|
(5,053 |
) |
|
|
137,091 |
|
Other receivables, net |
|
|
— |
|
|
|
18,513 |
|
|
|
31,060 |
|
|
|
445 |
|
|
|
(37,170 |
) |
|
|
12,848 |
|
Prepaid and other assets |
|
|
— |
|
|
|
9,403 |
|
|
|
2 |
|
|
|
83 |
|
|
|
— |
|
|
|
9,488 |
|
Investment in subsidiaries |
|
|
121,365 |
|
|
|
72,353 |
|
|
|
— |
|
|
|
— |
|
|
|
(193,718 |
) |
|
|
— |
|
Property, equipment and
leasehold improvements, net |
|
|
— |
|
|
|
20,046 |
|
|
|
26 |
|
|
|
382 |
|
|
|
— |
|
|
|
20,454 |
|
Goodwill, net |
|
|
— |
|
|
|
116,573 |
|
|
|
39,471 |
|
|
|
711 |
|
|
|
— |
|
|
|
156,755 |
|
Other intangibles, net |
|
|
— |
|
|
|
17,274 |
|
|
|
527 |
|
|
|
200 |
|
|
|
— |
|
|
|
18,001 |
|
Deferred income taxes, net |
|
|
— |
|
|
|
191,741 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
191,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
121,365 |
|
|
$ |
619,420 |
|
|
$ |
74,707 |
|
|
$ |
9,096 |
|
|
$ |
(235,941 |
) |
|
$ |
588,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement liabilities |
|
$ |
— |
|
|
$ |
136,217 |
|
|
$ |
5,053 |
|
|
$ |
2,025 |
|
|
$ |
(5,053 |
) |
|
$ |
138,242 |
|
Accounts payable |
|
|
— |
|
|
|
25,656 |
|
|
|
59 |
|
|
|
567 |
|
|
|
— |
|
|
|
26,282 |
|
Accrued expenses |
|
|
— |
|
|
|
61,435 |
|
|
|
1,087 |
|
|
|
1,660 |
|
|
|
(46,799 |
) |
|
|
17,383 |
|
Borrowings |
|
|
— |
|
|
|
274,480 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
274,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
— |
|
|
|
497,788 |
|
|
|
6,199 |
|
|
|
4,252 |
|
|
|
(51,852 |
) |
|
|
456,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
— |
|
|
|
103 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
121,365 |
|
|
|
121,529 |
|
|
|
68,508 |
|
|
|
4,844 |
|
|
|
(184,089 |
) |
|
|
132,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
121,365 |
|
|
$ |
619,420 |
|
|
$ |
74,707 |
|
|
$ |
9,096 |
|
|
$ |
(235,941 |
) |
|
$ |
588,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
94
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2007
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
— |
|
|
$ |
307,776 |
|
|
$ |
— |
|
|
$ |
8,231 |
|
|
$ |
— |
|
|
$ |
316,007 |
|
ATM |
|
|
— |
|
|
|
240,318 |
|
|
|
— |
|
|
|
257 |
|
|
|
— |
|
|
|
240,575 |
|
Check services |
|
|
— |
|
|
|
15,137 |
|
|
|
16,076 |
|
|
|
— |
|
|
|
— |
|
|
|
31,213 |
|
Central Credit and other revenues |
|
|
23,704 |
|
|
|
9,393 |
|
|
|
11,720 |
|
|
|
117 |
|
|
|
(31,840 |
) |
|
|
13,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
23,704 |
|
|
|
572,624 |
|
|
|
27,796 |
|
|
|
8,605 |
|
|
|
(31,840 |
) |
|
|
600,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and
amortization) |
|
|
— |
|
|
|
(415,216 |
) |
|
|
(13,974 |
) |
|
|
(5,223 |
) |
|
|
— |
|
|
|
(434,413 |
) |
Operating expenses |
|
|
— |
|
|
|
(73,885 |
) |
|
|
(5,924 |
) |
|
|
(2,795 |
) |
|
|
589 |
|
|
|
(82,015 |
) |
Amortization |
|
|
— |
|
|
|
(5,078 |
) |
|
|
(262 |
) |
|
|
(147 |
) |
|
|
— |
|
|
|
(5,487 |
) |
Depreciation |
|
|
— |
|
|
|
(6,062 |
) |
|
|
(37 |
) |
|
|
(203 |
) |
|
|
— |
|
|
|
(6,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
23,704 |
|
|
|
72,383 |
|
|
|
7,599 |
|
|
|
237 |
|
|
|
(31,251 |
) |
|
|
72,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
— |
|
|
|
3,480 |
|
|
|
38 |
|
|
|
151 |
|
|
|
— |
|
|
|
3,669 |
|
Interest expense |
|
|
— |
|
|
|
(38,078 |
) |
|
|
— |
|
|
|
(68 |
) |
|
|
— |
|
|
|
(38,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
— |
|
|
|
(34,598 |
) |
|
|
38 |
|
|
|
83 |
|
|
|
— |
|
|
|
(34,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
23,704 |
|
|
|
37,785 |
|
|
|
7,637 |
|
|
|
320 |
|
|
|
(31,251 |
) |
|
|
38,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
— |
|
|
|
(14,317 |
) |
|
|
— |
|
|
|
(410 |
) |
|
|
— |
|
|
|
(14,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE MINORITY
OWNERSHIP LOSS |
|
|
23,704 |
|
|
|
23,468 |
|
|
|
7,637 |
|
|
|
(90 |
) |
|
|
(31,251 |
) |
|
|
23,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS |
|
|
— |
|
|
|
236 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
23,704 |
|
|
$ |
23,704 |
|
|
$ |
7,637 |
|
|
$ |
(90 |
) |
|
$ |
(31,251 |
) |
|
$ |
23,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include earnings on subsidiaries and management fees |
95
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
— |
|
|
$ |
281,733 |
|
|
$ |
— |
|
|
$ |
5,320 |
|
|
$ |
— |
|
|
$ |
287,053 |
|
ATM |
|
|
— |
|
|
|
221,727 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
221,727 |
|
Check services |
|
|
— |
|
|
|
18,345 |
|
|
|
10,821 |
|
|
|
— |
|
|
|
— |
|
|
|
29,166 |
|
Central Credit and other revenues |
|
|
26,609 |
|
|
|
6,851 |
|
|
|
8,887 |
|
|
|
98 |
|
|
|
(32,243 |
) |
|
|
10,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
26,609 |
|
|
|
528,656 |
|
|
|
19,708 |
|
|
|
5,418 |
|
|
|
(32,243 |
) |
|
|
548,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and
amortization) |
|
|
— |
|
|
|
(377,114 |
) |
|
|
(9,069 |
) |
|
|
(3,068 |
) |
|
|
— |
|
|
|
(389,251 |
) |
Operating expenses |
|
|
— |
|
|
|
(57,002 |
) |
|
|
(5,451 |
) |
|
|
(1,930 |
) |
|
|
571 |
|
|
|
(63,812 |
) |
Amortization |
|
|
— |
|
|
|
(5,259 |
) |
|
|
(167 |
) |
|
|
(94 |
) |
|
|
— |
|
|
|
(5,520 |
) |
Depreciation |
|
|
— |
|
|
|
(4,317 |
) |
|
|
(7 |
) |
|
|
(45 |
) |
|
|
— |
|
|
|
(4,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
26,609 |
|
|
|
84,964 |
|
|
|
5,014 |
|
|
|
281 |
|
|
|
(31,672 |
) |
|
|
85,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
— |
|
|
|
3,325 |
|
|
|
7 |
|
|
|
152 |
|
|
|
— |
|
|
|
3,484 |
|
Interest expense |
|
|
— |
|
|
|
(42,098 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,098 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
(3,417 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
— |
|
|
|
(42,190 |
) |
|
|
7 |
|
|
|
152 |
|
|
|
— |
|
|
|
(42,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
26,609 |
|
|
|
42,774 |
|
|
|
5,021 |
|
|
|
433 |
|
|
|
(31,672 |
) |
|
|
43,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
— |
|
|
|
(16,348 |
) |
|
|
— |
|
|
|
(391 |
) |
|
|
— |
|
|
|
(16,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE MINORITY
OWNERSHIP LOSS |
|
|
26,609 |
|
|
|
26,426 |
|
|
|
5,021 |
|
|
|
42 |
|
|
|
(31,672 |
) |
|
|
26,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS |
|
|
— |
|
|
|
183 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
26,609 |
|
|
$ |
26,609 |
|
|
$ |
5,021 |
|
|
$ |
42 |
|
|
$ |
(31,672 |
) |
|
$ |
26,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include earnings on subsidiaries and management fees |
96
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
— |
|
|
$ |
230,157 |
|
|
$ |
— |
|
|
$ |
4,898 |
|
|
$ |
— |
|
|
$ |
235,055 |
|
ATM |
|
|
— |
|
|
|
182,291 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,291 |
|
Check services |
|
|
— |
|
|
|
22,716 |
|
|
|
3,660 |
|
|
|
— |
|
|
|
— |
|
|
|
26,376 |
|
Central Credit and other revenues |
|
|
22,591 |
|
|
|
8,193 |
|
|
|
8,867 |
|
|
|
85 |
|
|
|
(29,378 |
) |
|
|
10,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
22,591 |
|
|
|
443,357 |
|
|
|
12,527 |
|
|
|
4,983 |
|
|
|
(29,378 |
) |
|
|
454,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and
amortization) |
|
|
— |
|
|
|
(302,104 |
) |
|
|
(3,287 |
) |
|
|
(3,090 |
) |
|
|
— |
|
|
|
(308,481 |
) |
Operating expenses |
|
|
— |
|
|
|
(46,971 |
) |
|
|
(3,404 |
) |
|
|
(1,449 |
) |
|
|
618 |
|
|
|
(51,206 |
) |
Amortization |
|
|
— |
|
|
|
(5,167 |
) |
|
|
(90 |
) |
|
|
(38 |
) |
|
|
— |
|
|
|
(5,295 |
) |
Depreciation |
|
|
— |
|
|
|
(6,788 |
) |
|
|
(1 |
) |
|
|
(25 |
) |
|
|
— |
|
|
|
(6,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
22,591 |
|
|
|
82,327 |
|
|
|
5,745 |
|
|
|
381 |
|
|
|
(28,760 |
) |
|
|
82,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET
|
|
Interest income |
|
|
— |
|
|
|
1,713 |
|
|
|
— |
|
|
|
102 |
|
|
|
— |
|
|
|
1,815 |
|
Interest expense |
|
|
— |
|
|
|
(44,165 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44,165 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
(9,529 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net |
|
|
— |
|
|
|
(51,981 |
) |
|
|
— |
|
|
|
102 |
|
|
|
— |
|
|
|
(51,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
22,591 |
|
|
|
30,346 |
|
|
|
5,745 |
|
|
|
483 |
|
|
|
(28,760 |
) |
|
|
30,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
— |
|
|
|
(7,894 |
) |
|
|
— |
|
|
|
(59 |
) |
|
|
— |
|
|
|
(7,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE MINORITY
OWNERSHIP LOSS |
|
|
22,591 |
|
|
|
22,452 |
|
|
|
5,745 |
|
|
|
424 |
|
|
|
(28,760 |
) |
|
|
22,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS |
|
|
— |
|
|
|
139 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
22,591 |
|
|
$ |
22,591 |
|
|
$ |
5,745 |
|
|
$ |
424 |
|
|
$ |
(28,760 |
) |
|
$ |
22,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include earnings on subsidiaries and management fees |
97
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
23,704 |
|
|
$ |
23,704 |
|
|
$ |
7,637 |
|
|
$ |
(90 |
) |
|
$ |
(31,251 |
) |
|
$ |
23,704 |
|
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
— |
|
|
|
973 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
973 |
|
Amortization of intangibles |
|
|
— |
|
|
|
5,078 |
|
|
|
262 |
|
|
|
147 |
|
|
|
— |
|
|
|
5,487 |
|
Depreciation |
|
|
— |
|
|
|
6,062 |
|
|
|
37 |
|
|
|
203 |
|
|
|
— |
|
|
|
6,302 |
|
Loss on disposal of assets |
|
|
— |
|
|
|
139 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
139 |
|
Provision for bad debts |
|
|
— |
|
|
|
— |
|
|
|
11,184 |
|
|
|
— |
|
|
|
— |
|
|
|
11,184 |
|
Deferred income taxes |
|
|
— |
|
|
|
14,542 |
|
|
|
— |
|
|
|
(28 |
) |
|
|
— |
|
|
|
14,514 |
|
Equity income |
|
|
(23,704 |
) |
|
|
(7,547 |
) |
|
|
— |
|
|
|
— |
|
|
|
31,251 |
|
|
|
— |
|
Minority ownership loss |
|
|
— |
|
|
|
(368 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(368 |
) |
Stock-based compensation |
|
|
— |
|
|
|
22,269 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,269 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
— |
|
|
|
81,867 |
|
|
|
236 |
|
|
|
(948 |
) |
|
|
(4,418 |
) |
|
|
76,737 |
|
Other receivables, net |
|
|
36 |
|
|
|
11,796 |
|
|
|
(37,194 |
) |
|
|
375 |
|
|
|
2,160 |
|
|
|
(22,827 |
) |
Prepaid and other assets |
|
|
— |
|
|
|
1,676 |
|
|
|
(588 |
) |
|
|
(17 |
) |
|
|
— |
|
|
|
1,071 |
|
Settlement liabilities |
|
|
— |
|
|
|
(50,545 |
) |
|
|
(4,418 |
) |
|
|
5,748 |
|
|
|
4,418 |
|
|
|
(44,797 |
) |
Accounts payable |
|
|
— |
|
|
|
(3,709 |
) |
|
|
108 |
|
|
|
(254 |
) |
|
|
— |
|
|
|
(3,855 |
) |
Accrued expenses |
|
|
(360 |
) |
|
|
(9,558 |
) |
|
|
11,731 |
|
|
|
1,688 |
|
|
|
(2,160 |
) |
|
|
1,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
(used in) provided by operating activities |
|
|
(324 |
) |
|
|
96,379 |
|
|
|
(11,005 |
) |
|
|
6,824 |
|
|
|
— |
|
|
|
91,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold
improvements |
|
|
— |
|
|
|
(8,364 |
) |
|
|
(183 |
) |
|
|
(955 |
) |
|
|
— |
|
|
|
(9,502 |
) |
Purchase of other intangibles |
|
|
— |
|
|
|
(1,094 |
) |
|
|
(77 |
) |
|
|
(257 |
) |
|
|
— |
|
|
|
(1,428 |
) |
Changes in restricted cash and cash equivalents |
|
|
— |
|
|
|
(30 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
Investments in subsidiaries |
|
|
39,416 |
|
|
|
(15,100 |
) |
|
|
— |
|
|
|
— |
|
|
|
(24,316 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) investing activities |
|
|
39,416 |
|
|
|
(24,588 |
) |
|
|
(260 |
) |
|
|
(1,212 |
) |
|
|
(24,316 |
) |
|
|
(10,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
(Continued) |
98
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit facility |
|
$ |
— |
|
|
$ |
(11,000 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(11,000 |
) |
Debt issuance costs |
|
|
— |
|
|
|
(23 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
Exercise of stock options |
|
|
1,287 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,287 |
|
Purchase of treasury stock |
|
|
(40,379 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40,379 |
) |
Minority capital contributions |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
400 |
|
|
|
400 |
|
Capital contributions |
|
|
— |
|
|
|
(39,416 |
) |
|
|
14,500 |
|
|
|
1,000 |
|
|
|
23,916 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(39,092 |
) |
|
|
(50,439 |
) |
|
|
14,500 |
|
|
|
1,000 |
|
|
|
24,316 |
|
|
|
(49,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
— |
|
|
|
(1,963 |
) |
|
|
— |
|
|
|
908 |
|
|
|
— |
|
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
— |
|
|
|
19,389 |
|
|
|
3,235 |
|
|
|
7,520 |
|
|
|
— |
|
|
|
30,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—Beginning
of period |
|
|
— |
|
|
|
35,022 |
|
|
|
2,176 |
|
|
|
3,721 |
|
|
|
— |
|
|
|
40,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—End
of period |
|
$ |
— |
|
|
$ |
54,411 |
|
|
$ |
5,411 |
|
|
$ |
11,241 |
|
|
$ |
— |
|
|
$ |
71,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
99
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
26,609 |
|
|
$ |
26,609 |
|
|
$ |
5,021 |
|
|
$ |
42 |
|
|
$ |
(31,672 |
) |
|
$ |
26,609 |
|
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
— |
|
|
|
1,584 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,584 |
|
Amortization of intangibles |
|
|
— |
|
|
|
5,259 |
|
|
|
167 |
|
|
|
94 |
|
|
|
— |
|
|
|
5,520 |
|
Depreciation |
|
|
— |
|
|
|
4,317 |
|
|
|
7 |
|
|
|
45 |
|
|
|
— |
|
|
|
4,369 |
|
Gain on sale or disposal of assets |
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
3,417 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,417 |
|
Provision for bad debts |
|
|
— |
|
|
|
|
|
|
|
6,483 |
|
|
|
— |
|
|
|
— |
|
|
|
6,483 |
|
Deferred income taxes |
|
|
— |
|
|
|
15,899 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
15,899 |
|
Equity income |
|
|
(26,609 |
) |
|
|
(5,063 |
) |
|
|
— |
|
|
|
— |
|
|
|
31,672 |
|
|
|
— |
|
Minority ownership loss |
|
|
— |
|
|
|
(287 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(287 |
) |
Stock-based compensation |
|
|
— |
|
|
|
9,141 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,141 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
— |
|
|
|
(78,621 |
) |
|
|
(2,186 |
) |
|
|
(2,639 |
) |
|
|
6,792 |
|
|
|
(76,654 |
) |
Other receivables, net |
|
|
— |
|
|
|
(19,211 |
) |
|
|
(15,141 |
) |
|
|
(858 |
) |
|
|
24,707 |
|
|
|
(10,503 |
) |
Prepaid and other assets |
|
|
— |
|
|
|
(1,833 |
) |
|
|
(1 |
) |
|
|
(72 |
) |
|
|
— |
|
|
|
(1,906 |
) |
Settlement liabilities |
|
|
— |
|
|
|
76,965 |
|
|
|
5,053 |
|
|
|
1,223 |
|
|
|
(5,053 |
) |
|
|
78,188 |
|
Accounts payable |
|
|
— |
|
|
|
5,552 |
|
|
|
(10 |
) |
|
|
325 |
|
|
|
— |
|
|
|
5,867 |
|
Accrued expenses |
|
|
— |
|
|
|
22,950 |
|
|
|
3,103 |
|
|
|
2,751 |
|
|
|
(26,446 |
) |
|
|
2,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
— |
|
|
|
66,672 |
|
|
|
2,496 |
|
|
|
911 |
|
|
|
— |
|
|
|
70,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold
improvements |
|
|
— |
|
|
|
(13,830 |
) |
|
|
(30 |
) |
|
|
(335 |
) |
|
|
— |
|
|
|
(14,195 |
) |
Purchase of other intangibles |
|
|
— |
|
|
|
(820 |
) |
|
|
(566 |
) |
|
|
(130 |
) |
|
|
— |
|
|
|
(1,516 |
) |
Changes in restricted cash and cash equivalents |
|
|
— |
|
|
|
(350 |
) |
|
|
(1,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,350 |
) |
Investments in subsidiaries |
|
|
(1,488 |
) |
|
|
(1,360 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,848 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,488 |
) |
|
|
(16,360 |
) |
|
|
(1,596 |
) |
|
|
(465 |
) |
|
|
2,848 |
|
|
|
(17,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
(Continued) |
100
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
$ |
— |
|
|
$ |
121,730 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
121,730 |
|
Repayments under credit facility |
|
|
— |
|
|
|
(168,662 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(168,662 |
) |
Debt issuance costs |
|
|
— |
|
|
|
(1,557 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,557 |
) |
Exercise of stock options |
|
|
1,488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,488 |
|
Minority capital contributions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
240 |
|
|
|
240 |
|
Capital contributions |
|
|
— |
|
|
|
1,488 |
|
|
|
1,000 |
|
|
|
600 |
|
|
|
(3,088 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,488 |
|
|
|
(47,001 |
) |
|
|
1,000 |
|
|
|
600 |
|
|
|
(2,848 |
) |
|
|
(46,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
— |
|
|
|
(526 |
) |
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
— |
|
|
|
2,785 |
|
|
|
1,900 |
|
|
|
1,111 |
|
|
|
— |
|
|
|
5,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—Beginning
of period |
|
|
— |
|
|
|
32,237 |
|
|
|
276 |
|
|
|
2,610 |
|
|
|
— |
|
|
|
35,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—End
of period |
|
$ |
— |
|
|
$ |
35,022 |
|
|
$ |
2,176 |
|
|
$ |
3,721 |
|
|
$ |
— |
|
|
$ |
40,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
101
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
22,591 |
|
|
$ |
22,591 |
|
|
$ |
5,745 |
|
|
$ |
424 |
|
|
$ |
(28,760 |
) |
|
$ |
22,591 |
|
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
— |
|
|
|
1,942 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,942 |
|
Amortization of intangibles |
|
|
— |
|
|
|
5,167 |
|
|
|
90 |
|
|
|
38 |
|
|
|
— |
|
|
|
5,295 |
|
Depreciation |
|
|
— |
|
|
|
6,788 |
|
|
|
1 |
|
|
|
25 |
|
|
|
— |
|
|
|
6,814 |
|
Loss on sale or disposal of assets |
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
Loss on early extinguisment of debt |
|
|
— |
|
|
|
9,529 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,529 |
|
Write-off of bad debt |
|
|
— |
|
|
|
4,068 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,068 |
|
Deferred income taxes |
|
|
— |
|
|
|
6,645 |
|
|
|
— |
|
|
|
583 |
|
|
|
— |
|
|
|
7,228 |
|
Equity income |
|
|
(22,591 |
) |
|
|
(6,169 |
) |
|
|
— |
|
|
|
— |
|
|
|
28,760 |
|
|
|
— |
|
Minority ownership loss |
|
|
— |
|
|
|
(218 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(218 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
— |
|
|
|
(29,681 |
) |
|
|
— |
|
|
|
(348 |
) |
|
|
— |
|
|
|
(30,029 |
) |
Other receivables, net |
|
|
864 |
|
|
|
(5,649 |
) |
|
|
(5,786 |
) |
|
|
(18 |
) |
|
|
3,492 |
|
|
|
(7,097 |
) |
Prepaid and other assets |
|
|
— |
|
|
|
(1,092 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,093 |
) |
Settlement liabilities |
|
|
— |
|
|
|
17,685 |
|
|
|
— |
|
|
|
152 |
|
|
|
— |
|
|
|
17,837 |
|
Accounts payable |
|
|
— |
|
|
|
202 |
|
|
|
(306 |
) |
|
|
(74 |
) |
|
|
— |
|
|
|
(178 |
) |
Accrued expenses |
|
|
— |
|
|
|
7,161 |
|
|
|
58 |
|
|
|
(1,878 |
) |
|
|
(3,492 |
) |
|
|
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities |
|
|
864 |
|
|
|
39,016 |
|
|
|
(199 |
) |
|
|
(1,096 |
) |
|
|
— |
|
|
|
38,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold
improvements |
|
|
— |
|
|
|
(6,962 |
) |
|
|
(4 |
) |
|
|
(132 |
) |
|
|
— |
|
|
|
(7,098 |
) |
Purchase of other intangibles |
|
|
— |
|
|
|
(10,393 |
) |
|
|
(183 |
) |
|
|
(186 |
) |
|
|
— |
|
|
|
(10,762 |
) |
Investments in subsidiaries |
|
|
(130,459 |
) |
|
|
(700 |
) |
|
|
— |
|
|
|
— |
|
|
|
131,159 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(130,459 |
) |
|
|
(18,055 |
) |
|
|
(187 |
) |
|
|
(318 |
) |
|
|
131,159 |
|
|
|
(17,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
(Continued) |
102
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit facility |
|
$ |
— |
|
|
$ |
(74,588 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(74,588 |
) |
Repayments from early retirement of senior subordinated notes |
|
|
— |
|
|
|
(89,446 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(89,446 |
) |
Debt issuance costs |
|
|
— |
|
|
|
(331 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(331 |
) |
Proceeds from equity offering |
|
|
128,895 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
128,895 |
|
Minority capital contributions |
|
|
— |
|
|
|
280 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
280 |
|
Capital contributions |
|
|
— |
|
|
|
130,459 |
|
|
|
— |
|
|
|
700 |
|
|
|
(131,159 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
128,895 |
|
|
|
(33,626 |
) |
|
|
— |
|
|
|
700 |
|
|
|
(131,159 |
) |
|
|
(35,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
— |
|
|
|
(135 |
) |
|
|
— |
|
|
|
146 |
|
|
|
— |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(700 |
) |
|
|
(12,800 |
) |
|
|
(386 |
) |
|
|
(568 |
) |
|
|
— |
|
|
|
(14,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—Beginning
of period |
|
|
700 |
|
|
|
45,037 |
|
|
|
662 |
|
|
|
3,178 |
|
|
|
— |
|
|
|
49,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS—End
of period |
|
$ |
— |
|
|
$ |
32,237 |
|
|
$ |
276 |
|
|
$ |
2,610 |
|
|
$ |
— |
|
|
$ |
35,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Eliminations include intercompany investments and management fees |
103
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management’s Assessment of Internal Control over Financial Reporting
We maintain disclosure controls and procedures that are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Securities Exchange Act of 1934
is recorded, processed, summarized, and reported within the time period specified in the Securities
and Exchange Commission’s rules and forms and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and
operating effectiveness as of December 31, 2007 of our disclosure controls and procedures, as
defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2007. The Company’s
independent registered accounting firm has issued an audit report on
our internal control over financial reporting. This report appears
under “Report of Independent Registered Public Accounting
Firm” on page 107.
Changes in Internal Control over Financial Reporting during the Quarter Ended December 31, 2007
During the year ended December 31, 2007, management designed and implemented steps to remediate the
material weaknesses reported in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006, as described below. These remediation steps were developed following investigation and
review of the processes and activities surrounding the material weaknesses and include changes to
these processes to prevent or detect similar future occurrences.
Previously Reported Material Weaknesses in Internal Control over Financial Reporting at December
31, 2006
Ineffective controls related to staffing in finance and accounting. During 2006, we had a high
level of turnover of personnel in our finance and accounting staff, which resulted in certain
controls not operating effectively as of December 31, 2006. This condition led to the following
internal control deficiencies, each of which was considered to be a material weakness:
| |
• |
|
Ineffective control related to the reconciliation and analysis of accounts: The control
designed to ensure the timely and accurate preparation, review and approval of account
analyses and reconciliations did not operate effectively. Specifically, certain
reconciliations and analyses were not performed in a timely manner. |
| |
| |
• |
|
Ineffective controls related to the financial reporting close process: Certain controls
designed to ensure the timely and accurate preparation, review and approval of our accounts
and financial statements did not operate effectively. Specifically, 1) systematic controls
were not in place to segregate the preparation and review of journal entries, 2) certain
journal entries were not properly reviewed and approved in accordance with Company policy,
3) certain checklists were not maintained or reviewed and approved by appropriate finance
and accounting personnel, and 4) we were unable to adhere to our pre-determined closing and
reporting calendar.
|
104
| |
• |
|
Ineffective controls related to income taxes: Certain controls designed to ensure the
timely and accurate calculation of our provision for income taxes did not operate
effectively. Certain matters affecting our income tax provision were not identified on a
timely basis by finance and accounting personnel. Further, our process to timely and
accurately quantify temporary differences did not operate effectively. |
| |
| |
• |
|
Ineffective controls related to the accounts payable process: Certain controls designed
to ensure the timely and accurate disbursement of Company funds did not operate
effectively. Specifically, 1) certain disbursements were not properly reviewed for
appropriate coding and cut-off and 2) the vendor master file was not reviewed by finance
and accounting management for pertinence and accuracy. |
Inadequate controls related to commissions. During 2006, we did not have an appropriate internal
control design related to how we calculate the amount of commissions we pay our customers.
Specifically, 1) internal controls over commission set-up did not include a comparison of
commission rates to contractual terms and 2) there was an ineffective process to determine the
appropriate commission type and amount. In addition, some of the databases and applications used
to maintain transaction records and perform certain commission computations were maintained by a
third party, and appropriate controls to monitor and approve changes and to limit access were not
in place.
None of these material weaknesses resulted in a material adjustment to our 2006 consolidated
financial statements.
During the year ended December 31, 2007 we completed certain remediation initiatives including:
Remediation of Material Weakness Relating to Staffing in Finance and Accounting Existing at
December 31, 2006
| |
• |
|
Increased the quantity, experience, skill set and compensation of the accounting and
finance staff, which led to low turnover during 2007. The lower turnover in turn led to
the finance and accounting staff being better trained and more efficient in their duties.
Permanent employees or qualified temporary consultants filled all positions at year-end. |
As of December 31, 2007, we are able to conclude that we have remediated this material weakness.
Remediation of Material Weaknesses Relating to the Reconciliation and Analysis of Accounts and the
Financial Reporting Close Process Existing at December 31, 2006
| |
• |
|
Established specific checklists within our financial close process to identify the key
tasks needing completion and the applicable employee responsible for each task.
Implemented key control to summarize the accounting for significant non-routine events
occurring each quarter. |
| |
| |
• |
|
Management emphasized the reconciliation of all material balance sheet accounts on a
timely basis and following Company policy for the proper preparation, support and approval
of journal entries. Automated the support and reconciliation for a key balance sheet
account. |
| |
| |
• |
|
Implemented a new accounting software system on April 1, 2007 with significantly more
capabilities versus our former accounting software system, which greatly enhanced the
productivity of our staff in finance and accounting. |
As of December 31, 2007, we are able to conclude that the controls related to the reconciliation
and analysis of accounts and the financial reporting close process were operating effectively and
that we have remediated this material weakness.
Remediation of Material Weakness Relating to Income Taxes Existing at December 31, 2006
| |
• |
|
Due to the remediation of the material weakness related to staffing in finance and
accounting, finance and accounting management was able to perform more timely reviews of
the tax impact of certain key events in computing our provision for income taxes.
Additionally, on an as needed basis, the Company engaged highly qualified, external tax
consultants to perform a timely and detailed review of our income tax provision. |
105
As of December 31, 2007, we are able to conclude that the controls related to the preparation of
our income tax provision were operating effectively and that we have remediated this material
weakness.
Remediation of Material Weakness Relating to Accounts Payable Existing at December 31, 2006
| |
• |
|
Reduced turnover in the accounts payable department during the year, including no
turnover in the accounts payable supervisor position. Implemented a new accounting
software system on April 1, 2007, which added many systematic accounts payable control
capabilities, such as not being able to generate a check without the input of a password
from management personnel. Designed and implemented new controls within the accounts
payable process, such as the reconciliation of vendor statements to our source system data
and various input/reconciliation controls around the vendor master file. |
As of December 31, 2007, we are able to conclude that the controls related to our account payable
process were operating effectively and that we have remediated this material weakness.
Remediation of Material Weakness Relating to Commissions
Due to the significant turnover in our senior management during 2007, and the potential for new
senior management having different views on how to manage the commission process, we did not
permanently redesign, or bring in-house, the databases and applications used to maintain
transaction records and perform certain commission computations, nor did we implement a new
template for our contracts. However, the Company initiated the following steps and procedures to
ensure that commissions paid to our customers were accurately calculated and recorded:
| |
• |
|
Significantly upgraded our commission analysis and audit capabilities by hiring our
current Senior Commissions Analyst. |
| |
| |
• |
|
Created enhanced monthly commission reporting for management. |
| |
| |
• |
|
Performed quarterly audits of contractual data included in our databases and
applications used to maintain transaction records and perform certain commission
computations, the results of which were reviewed and approved by finance and accounting
management. |
| |
| |
• |
|
Performed independent recalculation of commission amounts calculated by our databases
and applications used to maintain transaction records and perform certain commission
computations. |
As of December 31, 2007, we are able to conclude that the controls related to commissions were
operating effectively and that we have remediated this material weakness.
106
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Cash Access, Inc.
Las Vegas, Nevada
We have audited the internal control over financial reporting of Global Cash Access Holdings,
Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2007 of the Company and our report dated March 17, 2008 expressed an unqualified
opinion on those financial statements and includes explanatory paragraphs related to the adoption
of Statement of Financial Accounting Standards No. 123R, Share-Based Payment and the adoption of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB
Statement No. 109.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 17, 2008
107
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors, executive officers and corporate governance required by
this Item is incorporated by reference to the section entitled “Proposal One — Election of Class II
Directors” in the Company’s Definitive Proxy Statement in connection with the 2008 Annual Meeting
of Stockholders (the “Proxy Statement”), which will be filed with the Securities and Exchange
Commission within 120 days after the fiscal year ended December 31, 2006. Information required by
Item 405 of Regulation S-K is incorporated by reference to the section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information required by
10A-3(d) of the Exchange Act is incorporated by reference to the section entitled “Board and
Corporate Governance Matters” in the Proxy Statement.
We have adopted a Code of Business Conduct and Ethics that is designed to qualify as a “code
of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated there under. The Code of Business Conduct and Ethics is available on our website at
www.globalcashaccess.com. To the extent required by law, any amendments to, or waivers from, any
provision of the Code of Conduct will be promptly disclosed to the public. To the extent permitted
by such legal requirements, we intend to make such public disclosure by posting the relevant
material on our website in accordance with SEC rules.
On
March 30, 2007, our Chief Executive Officer certified to the New York Stock Exchange that
he was not aware of any violation by us of the New York Stock Exchange Corporate Governance listing
standards as of that date.
We have filed, as an exhibit to this Annual Report on Form 10-K, the certifications required
by Section 302 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under regarding
the quality of our public disclosure.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to the section entitled
“Executive Compensation,” “Directors’ Compensation” and “Report of Compensation Committee” in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information regarding security ownership of certain beneficial owners and management is
incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners
and Management” in the Proxy Statement.
EQUITY COMPENSATION PLANS
The following table sets forth information about shares of the Company’s Common Stock that may
be issued under the Company’s equity compensation plans, including compensation plans that were
approved by the Company’s stockholders as well as compensation plans that were not approved by the
Company’s stockholders. Information in the table is as of December 31, 2007. The amounts in columns
(a) do not include shares of restricted stock issued and outstanding under the Company’s 2005 Stock
Incentive Plan.
108
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
| |
|
|
|
|
|
|
|
|
|
Remaining Available |
|
| |
|
Number of Securities |
|
|
|
|
|
|
for Future Issuance |
|
| |
|
to be Issued Upon |
|
|
Weighted-Average |
|
|
Under Equity |
|
| |
|
Exercise of |
|
|
Exercise Price |
|
|
Compensation |
|
| |
|
Outstanding |
|
|
of Outstanding |
|
|
Plans (Excluding |
|
| |
|
Options, Warrants |
|
|
Options, Warrants |
|
|
Securities Reflected |
|
| |
|
and Rights |
|
|
and Rights |
|
|
in Column (a)) |
|
| Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved
by stockholders(1) |
|
|
4,283,156 |
|
|
$ |
13.21 |
|
|
|
3,173,799 |
(2) |
Equity compensation plans not
approved by stockholders |
|
|
595,215 |
|
|
$ |
8.05 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average/Total |
|
|
4,878,371 |
|
|
$ |
12.58 |
|
|
|
3,173,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Represents shares of the Company’s Common Stock issuable upon exercise of options outstanding under the Company’s 2005 Stock
Incentive Plan. |
| |
| (2) |
|
Under the annual refresh provisions of the Company’s 2005 Stock Incentive Plan, the total number of shares reserved for
issuance upon exercise of stock options was increased by 2,501,369 on January 1, 2008. |
109
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference to the section entitled
“Transactions with Related Persons” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference to the section entitled “Audit
and Non-Audit Fees” in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
| |
1. |
|
Financial Statements |
| |
| |
|
|
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |
| |
| |
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006 |
| |
| |
|
|
Consolidated Statements of Income and Comprehensive Income for the three years
ended December 31, 2007 |
| |
| |
|
|
Consolidated Statement of Stockholders’ Equity (Deficiency) for the three years
ended December 31, 2007 |
| |
| |
|
|
Consolidated Statements of Cash Flows for the three years ended December 31, 2007 |
| |
| |
|
|
Notes to Consolidated Financial Statements |
| |
| |
2. |
|
Financial Statement Schedules |
| |
| |
|
|
All schedules have been omitted as they are either not required or not
applicable or the required information is included in the consolidated financial
statements or notes thereto. |
| |
| |
3. |
|
See Item 15(b) |
110
(b) Exhibits:
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
|
|
|
3.1(1)
|
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2(6)
|
|
Amended and Restated Bylaws |
|
|
|
4.2(1)
|
|
Indenture relating to $235,000,000 aggregate principal
amount of 8 3/4% Senior Subordinated Notes due 2012 |
|
|
|
4.3(1)
|
|
Form of 8 3/4% Senior Subordinated Notes due 2012 |
|
|
|
4.4(1)
|
|
Assumption Agreement, dated as of June 7, 2004, by Global
Cash Access, Inc. and the Subsidiary Guarantors named
therein |
|
|
|
4.5(1)
|
|
Supplemental Indenture by and among Global Cash Access
Holdings, Inc., Global Cash Access, Inc., GCA Access Card,
Inc., Central Credit, LLC and The Bank of New York Trust
Company, N.A. and form of notation of Guarantee by Global
Cash Access Holdings, Inc. |
|
|
|
4.6(1)
|
|
Supplemental Indenture by and among Global Cash Access,
Inc., GCA Access Card, Inc., Central Credit, LLC and The
Bank of New York Trust Company, N.A. and notation of
Guarantee by GCA Access Card, Inc. |
|
|
|
10.1(1)
|
|
Lease Agreement, dated as of March 8, 2000, by and between
Global Cash Access, L.L.C. and American Pacific Capital
Gateway Bldg D Co., L.L.C. |
|
|
|
10.4(1)
|
|
Guaranty, dated as of March 10, 2004, among GCA Holdings,
L.L.C., the guarantors from time to time party hereto and
Bank of America, N.A., as Administrative Agent |
|
|
|
10.5(1)
|
|
Security Agreement including First and Second Amendments
thereto, dated as of March 10, 2004, among the loan parties
from time to time party thereto and Bank of America, N.A.,
as Collateral Agent |
|
|
|
10.6(1)
|
|
Pledge Agreement, dated as of March 10, 2004, among the loan
parties from time to time party thereto and Bank of America,
N.A., as Collateral Agent |
|
|
|
10.7(1)
|
|
Membership Unit Redemption Agreement, dated as of March 10,
2004, between FDFS Holdings, LLC and GCA Holdings, L.L.C. |
|
|
|
10.8(1)
|
|
Sponsorship Agreement, dated as of November 1999, by and
between BA Merchant Services, Inc. and Global Cash Access,
L.L.C., as amended by Amendment Number 1 to the Sponsorship
Agreement, dated as of September 2000, among BA Merchant
Services, Global Cash Access, L.L.C. and First Data
Corporation |
|
|
|
10.9(1)
|
|
Sponsorship Indemnification Agreement, dated as of March 10,
2004, by and between Global Cash Access, L.L.C. and First
Data Corporation |
|
|
|
10.10(1)
|
|
Amended and Restated Software License Agreement, dated as of
March 10, 2004, between Infonox on the Web and Global Cash
Access, L.L.C. |
|
|
|
10.11(1)
|
|
Professional Services Agreement, dated as of March 10, 2004,
between Infonox on the Web and Global Cash Access, L.L.C. |
|
|
|
10.12(1)
|
|
Patent License Agreement, dated as of March 10, 2004,
between USA Payments and Global Cash Access, L.L.C. |
111
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
|
|
|
10.13(1)
|
|
Amended and Restated Electronic Payment Processing
Agreement, dated as of March 10, 2004, between Global Cash
Access, L.L.C., USA Payments Inc. and USA Payment Systems,
Inc. |
|
|
|
10.14(1)
|
|
Letter Agreement Relating to Technology, dated May 13, 2004,
among Global Cash Access, L.L.C., USA Payments, USA Payment
Systems and Infonox on the Web |
|
|
|
10.15(1)
|
|
Automated Teller Machine Sponsorship Agreement by and
between Global Cash Access, L.L.C. and Western Union Bank,
dated as of November 12, 2002, and First Amendment to
Automated Teller Machine Sponsorship Agreement, dated as of
March 10, 2004, between Global Cash Access, L.L.C. and First
Financial Bank |
|
|
|
10.16(1)
|
|
Membership Unit Purchase Agreement, dated as of March 10,
2004, by and among Bank of America Corporation, M&C
International and GCA Holdings, L.L.C. |
|
|
|
10.17(1)
|
|
Amendment to Treasury Services Terms and Conditions
Booklet—ATM Cash Services, dated as of March 8, 2004, by and
between Global Cash Access, L.L.C. and Bank of America, N.A. |
|
|
|
10.18(1)
|
|
Limited Liability Company Agreement of QuikPlay, LLC, dated
as of December 6, 2000, between Global Cash Access, L.L.C.
and IGT |
|
|
|
10.19(1)
|
|
Registration Agreement, dated as of May 13, 2004, by and
among GCA Holdings, L.L.C., the Investors named therein, M&C
International and Bank of America Corporation |
|
|
|
10.20(1)
|
|
Stockholders Agreement, dated as of May 13, 2004, by and
among GCA Holdings, L.L.C., the Investors named therein, M&C
International and Bank of America Corporation |
|
|
|
10.21(1)
|
|
Investor Rights Agreement, dated as of May 13, 2004, by and
among GCA Holdings, L.L.C., the Investors named therein and
M&C International |
|
|
|
10.22(1)
|
|
Noncompete Agreement, dated as of May 14, 2004, by and
between GCA Holdings, Inc. and Kirk Sanford |
|
|
|
*10.23(1)
|
|
Global Cash Access Holdings, Inc. 2005 Stock Incentive Plan |
|
|
|
*10.24(1)
|
|
Employment Agreement, dated as of March 22, 2005, by and
between Global Cash Access, Inc. and Kirk Sanford |
|
|
|
*10.25(1)
|
|
Form of Indemnification Agreement between Global Cash Access
Holdings, Inc. and each of its executive officers and
directors |
|
|
|
10.26(1)
|
|
Patent Purchase and License Agreement, dated as of March 22,
2005, by and between Global Cash Access, Inc. and USA
Payments |
|
|
|
10.27(1)
|
|
Termination and Consent, dated as of March 16, 2005, by and
among Global Cash Access Holdings, Inc. and the other
parties thereto |
|
|
|
10.28(1)
|
|
Amended and Restated Credit Agreement, dated as of April 13,
2005, by and among Global Cash Access Holdings, Inc., Global
Cash Access, Inc., the banks and other financial
institutions from time to time party thereto, and Bank of
America, N.A., as Administrative Agent, Swingline Lender and
L/C Issuer, as amended by Amendment No. 1 thereto |
|
|
|
*10.29(1)
|
|
Employment Agreement, dated as of September 12, 2005, by and
between Global Cash Access, Inc. and Kathryn S. Lever |
112
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
|
|
|
*10.30(2)
|
|
Amendment No. 1 to Employment Agreement, dated as of March
16, 2006, by and between Global Cash Access, Inc. and Kirk
E. Sanford |
|
|
|
*10.31(4)
|
|
Amendment No. 1 to Employment Agreement, dated as of March
16, 2006, by and between Global Cash Access, Inc. and
Kathryn S. Lever |
|
|
|
+10.32
|
|
Master Service Agreement, dated as of November 27, 2006, by
and between Global Cash Access, Inc. and Integrated Payment
Systems, Inc. |
|
|
|
10.33(5)
|
|
Second Amended and Restated Credit Agreement, dated as of
November 1, 2006, by and among Global Cash Access Holdings,
Inc., Global Cash Access, Inc., the banks and other
financial institutions from time to time party thereto, Bank
of America, N.A., as Administrative Agent, and Wachovia
Bank, N.A., as Syndication Agent |
|
|
|
10.34(7)
|
|
Second Amendment to Security Agreement, dated as of
January 25, 2007, by and among Global Cash Access Holdings,
Inc., Global Cash Access, Inc., Central Credit, LLC, and
Bank of America, N.A., as Administrative Agent. |
|
|
|
10.35(8)
|
|
Amendment No. 1 to Second Amended and Restated Credit
Agreement dated as of June 22, 2007, by and among Global
Cash Access Holdings, Inc., Global Cash Access, Inc., and
Bank of America, N.A., as Administrative Agent |
|
|
|
10.36(9)
|
|
Amendment to Treasury Services Terms and Conditions Booklet,
dated December 19, 2007, by and between Global Cash Access,
Inc. and Bank of America, N.A. |
|
|
|
*10.37(10)
|
|
Employment Agreement with Scott Betts, dated October 31, 2007 |
|
|
|
*10.38(11)
|
|
Notices of Stock Option Award and Stock Option Award
Agreements with Scott Betts, dated October 31, 2007 |
|
|
|
10.39(12)
|
|
Amendment to Treasury Services Terms and Conditions Booklet,
dated as of December 19, 2007, by and between Global Cash
Access, Inc. and Bank of America, N.A. |
|
|
|
10.40(13)
|
|
Amendment to Treasury Services Terms and Conditions Booklet,
dated December 19, 2007, by and between Global Cash Access,
Inc. and Bank of America, N.A. |
|
|
|
*10.41(14)
|
|
Employment Agreement with George
Gresham, dated February 25, 2008 |
|
|
|
*10.42(15)
|
|
Notice of Stock Option Award and
Stock Option Award Agreement with February 25, 2008 |
|
|
|
10.43
|
|
Amendment to Treasury Services
Terms and Conditions Booklet, dated as of March 13, 2008, by and
between Global Cash Access, Inc. and Bank of America, N.A. |
|
|
|
12.1
|
|
Computation of ratio of earnings to fixed charges |
|
|
|
21.1
|
|
Subsidiaries of the Registrant |
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP |
|
|
|
24.1
|
|
Power of Attorney (see page 115) |
|
|
|
31.1
|
|
Certification of Scott Betts, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of George Gresham, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1
|
|
Certification of Scott Betts, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of George Gresham, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
113
|
|
|
| (1) |
|
Incorporated by reference to the same numbered exhibit of the Company’s Registration
Statement on Form S-1 (Registration No. 333-123514) filed September 22, 2005. |
| |
| (2) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
March 17, 2006. |
| |
| (3) |
|
Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
March 17, 2006. |
| |
| (4) |
|
Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed
March 17, 2006. |
| |
| (5) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
November 7, 2006. |
| |
| (6) |
|
Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
December 26, 2007. |
| |
| (7) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
January 25, 2007. |
| |
| (8) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
June 26, 2007. |
| |
| (9) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
August 9, 2007. |
| |
| (10) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
November 2, 2007. |
| |
| (11) |
|
Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
November 2, 2007. |
| |
| (12) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
December 19, 2007. |
| |
| (13) |
|
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
December 26, 2007. |
| |
| (14) |
|
Incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
February 25, 2008. |
| |
| (15) |
|
Incorporated by reference to
Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
February 25, 2008. |
| |
| * |
|
Management contracts or compensatory plans or arrangements. |
| |
| + |
|
Confidential treatment has been requested with regard to certain portions of this document. |
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
GLOBAL CASH ACCESS HOLDINGS, INC.
|
|
| |
By: |
/s/ Scott Betts
|
|
| |
|
Scott Betts |
|
| |
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
| |
Dated: March 17, 2008
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Scott Betts and George Gresham, and each of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments to this Annual
Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed by the following persons on behalf of the registrant in the capacities and on
the date indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Scott Betts
Scott Betts
|
|
President and Chief Executive Officer (Principal
Executive Officer)
and Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ George Gresham
George Gresham
|
|
Chief Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Karim Maskatiya
Karim Maskatiya
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Robert Cucinotta
Robert Cucinotta
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Walter G. Kortschak
Walter G. Kortschak
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Charles J. Fitzgerald
Charles J. Fitzgerald
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ E. Miles Kilburn
E. Miles Kilburn
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Geoff Judge
Geoff Judge
|
|
Director
|
|
March 17, 2008 |
|
|
|
|
|
/s/ Fred C. Enlow
Fred C. Enlow
|
|
Director
|
|
March 17, 2008 |
115
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
|
|
|
10.43 |
|
Amendment to Treasury Services Terms and Conditions Booklet,
dated as of March 13, 2008, by and between Global Cash Access, Inc. and Bank of America, N.A. |
|
|
|
12.1 |
|
Computation of ratio of earnings to fixed charges |
|
|
|
21.1 |
|
Subsidiaries of the Registrant |
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP |
|
|
|
24.1
|
|
Power of Attorney (see page 115) |
|
|
|
31.1
|
|
Certification of Scott Betts, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of George Gresham, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Scott Betts, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of George Gresham, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated March 17, 2008 in
accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
116