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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| o | 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)
| Delaware | 20-0723270 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
3525 East Post Road, Suite 120, Las Vegas, Nevada 89120
(Address of principal executive offices including Zip code)
(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:
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class Common Stock, $0.001 par value per share |
Name of Each Exchange on Which Registered New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES þ NO o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” in
Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o |
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, 2006, the aggregate market value of the registrant’s common stock held by
non-affiliates was approximately $671.3 million.
There were 82,968,078 shares of the registrant’s common stock issued and outstanding as of the
close of business on March 15, 2007.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2007 Annual Meeting of
Stockholders to be held on May 4, 2007 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.
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GLOBAL CASH ACCESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2006
FOR FISCAL YEAR ENDED DECEMBER 31, 2006
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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) the trend towards cashless gaming, our efforts to
obtain approval for TODD and EDITH from the appropriate authorities and our plan to submit EDITH
for approval in other gaming jurisdictions in the future; (6) 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; (7) our
belief that almost all gaming establishments outsource their cash access service to third-party
providers; (8) our continuing to implement policies and procedures as well as adapt our business
practices in our 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; (9) 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; (10) our expectation to become subject
to additional gaming regulations and other laws in the jurisdictions into which we expand our
operations; in Item 3, (11) 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, (12) 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; (13)
our belief that the Peer Group Index of companies operates in a similar manner to our operations
for the fifteen months since our initial public offering of common shares; in Item 7, (14) 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; (15) our
expectation that the increase in the average amount disbursed per cash advance transaction is a
trend that will continue; (16) 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; (17) our expectation that commissions will increase as a percentage of revenue as
new contracts are signed or existing contracts are renewed; (18) our expectation that commissions
and interchange will continue to increase, and that in 2007 cost of revenues (exclusive of
depreciation and amortization) will increase at a rate faster than revenues; (19) our expectation
that operating expenses will increase in 2007 at a rate of growth lower than the rate of growth in
cost of revenues (exclusive of depreciation and amortization); (20) our expectation that, assuming
a constant level of LIBOR, interest income (expense), net will decline in 2007 as a result of lower
anticipated levels of outstanding indebtedness; (21) our anticipated effective tax rate for 2007
and our belief that pretax income in 2007 will be higher than it was in 2006; (22) our expectation
that IFT will record a loss in 2007; (23) our estimates about future operating results of our
reporting units to determine their estimated fair value for the annual evaluation of goodwill and
other non-amortizing intangible assets; (24) our belief that it is more likely than not that we
will be able to utilize our deferred tax assets; (25) our estimated effective tax rate of 38%,
resulting in tax payments being approximately $17.4 million less than the provision for income
taxes shown on the income statement for financial accounting purposes, and our expectation that
this will result in an aggregate of $214.4 million in cash savings over the remaining 13 year life
of the deferred tax asset related to our conversion to a corporation; (26) 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; (27) our belief that replacement costs of equipment, furniture
and leasehold improvements will not materially affect our
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operations; (28) our expectation to continue to pay interest based on LIBOR of various
maturities; (29) our expected amortization of the acquisition cost of the “3-in-1 rollover” patent
over its remaining legal life of 13 years; (30) our intent to reinvest the earnings of our foreign
subsidiaries into such subsidiaries; (31) 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; (32)
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 2.15 years; (33) 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 3.1 years; (34) our expectation to defend the Canadian GST
rebate claim through the assessment process, the appeals process and then through court, if
necessary; (35) 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; (36) our expected future use of net
operating losses and foreign tax credits to offset future taxable income; (37) our intention to
remediate the material weaknesses in our internal control over financial reporting and our ability
to obtain an unqualified opinion regarding our internal control over financial reporting in the
future, including (a) our plan to increase the number of people working in our information systems
department, our intention to fill open positions and create and fill new positions in the accounts
payables and financial accounting departments, and our belief that filling such existing and new
positions will assist us in remediating the internal control weakness that results from inadequate
accounting and financing staffing, (b) our belief that the use of specific procedures and
checklists for our financial close process will allow us to more efficiently and predictably manage
our financial close process and to make financial information related to accounting periods
available to management on a more timely basis, (c) our expectation that the integration of the tax
area more closely into our planning activities will allow us to know the tax impact of certain
anticipated activities or events on a more timely basis, and (d) our plan to redesign the system of
controls governing our commission calculations systems; and (38) 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 preclude the collection of data that is
necessary to build patron profiles and add new patron profiles; (5) regulatory or social
responsibility resistance to cashless gaming or unduly burdensome obstacles to obtaining regulatory
approval for our EDITH or TODD products; (6) 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; (7) 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; (8) 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; (9) 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; (10) our inability to expand our operations into
jurisdictions in which we do not currently operate for competitive, regulatory or operational
limitations; (11) uncertainties associated with and our limited ability to control the litigation
process; (12) an unanticipated accumulation of cash or stockholder pressure to declare or pay cash
dividends; (13) differences between our operations and the operations of Peer Group Index companies
resulting from differences in company size, products and services offered and markets served; (14)
unanticipated changes to applicable tax rates or laws or changes in our tax position, including
changes in the amortization of our tax asset as a result of an audit or otherwise; (15) a change in
patron behavior that results in smaller but more frequent cash advance transactions; (16) an
increase in the availability and usage of competitive ATMs nearby gaming establishments that
displaces use of our ATMs; (17) our ability to offer gaming establishments other incentives to
enter into new contracts or renew existing contracts without increasing commission rates; (18) our
inability to control interchange rates and our ability to offer gaming establishments incentives
other than increased commission rates; (19) unanticipated cost savings or larger than anticipated
revenue increases due to market expansion, competitive success or otherwise; (20) our inability to
control LIBOR, our failure to repay existing indebtedness or unanticipated incurrence of additional
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indebtedness; (21) 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; (22) 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;
(23) the inherent uncertainties in estimating the future operating results of our reporting units
as a result of competition, regulatory restrictions, changing gaming establishment patron
preferences and behavior or otherwise; (24) 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; (25) 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; (26) 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; (27) 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; (28) fluctuation in interest rates generally and LIBOR specifically; (29) 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; (30) our need to repatriate the cash earnings of
our foreign subsidiaries to satisfy capital requirements of our operations in the United States;
(31) 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;
(32) our inability to predict employee turnover, control employee option exercise behavior, and
predict stock price volatility, or the unanticipated payment of dividends; (33) our inability to
predict employee turnover that affects the vesting of restricted stock; (34) 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; (35) our inability to predict changes in card association regulations and the
possibility that unanticipated changes materially impair our operations; (36) 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; (37) our failure to remediate the material weaknesses in our
internal control over financial reporting due to (a) our failure to recruit and retain qualified
personnel in our accounts payable and financial accounting departments, (b) the failure of our
personnel to follow the procedures and checklists for our financial close process or flaws in such
procedures and checklists that cause financial information not to be made available to management
on a more timely basis, (c) our inability to integrate our tax area more closely into our planning
activities and our limited ability to analyze the tax impact of certain activities on a more timely
basis notwithstanding such integration, or (d) limitations in our information systems or our
failure to follow controls governing our commission calculation systems; and (38) 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”). Global Cash
Access, Inc. directly or indirectly owns all of the assets and either all or a majority of the
equity interests of the subsidiaries which operate our business. These subsidiaries include
Central Credit, LLC (“Central” or “Central Credit”), CashCall Systems Inc. (“CashCall”), 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 (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.
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 the Arriva Card, a
private-label revolving credit card aimed at consumers who perform cash advance transactions in
gaming establishments.
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We provide cash access products and related services at approximately 1,092 gaming
establishments worldwide. In general, our contracts with gaming establishments are exclusive and
range in duration from three to five years.
In 2006, we processed over 84.7 million transactions which resulted in approximately $19.3
billion in cash being disbursed to gaming patrons. For the year ended December 31, 2006, we
generated revenues and operating income of $548.1 million and $85.2 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.
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, 2006, 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 QuickJack Plus
devices. We own nearly all of these 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.
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 withdraws funds from his or her bank account by swiping an ATM card
through one of our ATM-enabled devices. Our processor then routes the transaction request through
an electronic funds transfer (“EFT”) network to the patron’s bank. Depending upon a number of
factors, including the patron’s account balance and daily withdrawal limit (which is usually $300
to $500 during a 24-hour period and is determined by the patron’s bank), the bank will either
decline or authorize the transaction. If the transaction is authorized, then the ATM-enabled device
dispenses the cash to the customer. 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 our machine. 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.
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 sublimit 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.
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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 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 the United Kingdom. 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, a significant
number of 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: TeleCheck and Central Credit
Check Warranty. TeleCheck is currently the larger of the two platforms as measured by face amount
of checks warranted, although our Central Credit Check Warranty product has been growing more
rapidly. 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-making 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 through our
relationships with 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.
Our Products and Services
Our customer solutions consist of cash access products and services, information services,
cashless gaming products and credit card servicing.
| Cash Access Products and Services | Information Services | Cashless Gaming Products | Credit Card Servicing | |||
• Casino Cash Plus 3-in-1 ATM
|
• Central Credit | • 3-in-1 Enabled QuickJack Plus | • Arriva Card | |||
• QuikCash
|
• QuikCash Plus Web | • TODD | ||||
• ACM
|
• QuikReports | • EDITH | ||||
• Check verification and warranty
|
• QuikMarketing | |||||
• QuikCredit |
||||||
• Money transfers |
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. Statistics show that
approximately 30% of standard ATM transactions taking place in gaming properties are denied because
of bad Personal Identification Numbers (“PIN”), exceeded limits, insufficient funds, and other
miscellaneous reasons. 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.
By providing gaming patrons seamless
access to three different transaction types, our “3-in-1 rollover” functionality provides
gaming establishment patrons ease of access to their money and makes cash available to patrons for
gaming within the gaming establishment. 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 that are located in gaming establishments. As of
December 31, 2006 we had incorporated our “3-in-1 rollover” functionality into 92 Capital One ATMs
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. Available in countertop, wall-mount,
freestanding and handheld models, our QuikCash terminals can be installed or used virtually
anywhere in a gaming establishment. 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, printing the money order, and dispensing cash to the patron. Our terminals
provide gaming patrons with fast, reliable, and easily accessible sources of cash close to the
areas within the gaming establishment where gaming activity is conducted.
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 while allowing gaming establishments to
reduce the dependency on gaming establishment personnel to complete transactions. 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. By eliminating the cashier
interaction requirement, our ACMs have the potential to reduce transaction times, to improve the
customer experience and to reduce a gaming establishment’s cashier labor costs. 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 actively working with the card associations to achieve
broader acceptance of biometric facial recognition as an approved transaction completion protocol.
Some of our largest and most sophisticated customers have migrated to the ACM as the standard cash
access platform in their gaming establishments.
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.
QuikCredit is a service through which we provide lines of credit to patrons in gaming
establishments that choose not to offer in-house credit. Our QuikCredit service allows a gaming
establishment to increase the amount of cash available to the patron within the gaming
establishment without incurring credit risk. To use QuikCredit, a gaming patron deposits a check
payable to us with the gaming establishment. The patron’s check is deposited under deferred
presentment terms, meaning the check will not be presented for payment for a specified period of
time. A gaming establishment using QuikCredit then seeks an authorization from us. We currently
query both our Central Credit database and the TeleCheck database to assess the patron’s credit
risk. If the check and check writer satisfy risk criteria and underwriting guidelines, we issue an
authorization to the gaming establishment to endorse the check over to the gaming establishment and
to dispense the patron’s funds. If any authorized check is subsequently dishonored, we purchase the
check from the gaming establishment for its face amount, thereby eliminating any collection risk to
the gaming establishment. The maximum line of credit we extend is $5,000 per patron.
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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.
Improve Credit Decision-Making
Central Credit is the leading gaming patron credit bureau, and it allows gaming establishments
to improve their credit making 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-making decisions, Central Credit offers a variety of tools, including
underwriting of gaming patron credit requests, pre-approved credit screening 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 through our relationships with
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. Without QCP Web, gaming establishment cage operators are required to access
multiple systems running on disparate hardware and software platforms. QCP Web reduces cage
operating complexity, improves transaction times, saves space by eliminating multiple pieces of
hardware and reduces training requirements for cage operators, resulting in lower 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 necessary to complete required regulatory
reports such as Currency Transaction Reports (“CTRs”) and Suspicious Activity Reports (“SARs”).
Enhance Patron Marketing
Using our proprietary patron transaction database, we provide patron marketing data to gaming
establishments. Gaming establishment marketing professionals can use our patron data to develop,
implement and refine their customer loyalty programs. Since marketing, including providing
complimentary goods and services, is one of a gaming establishment’s largest cost items, we believe
that gaming establishments find our patron marketing services helpful as they try to attract new
patrons and to retain existing ones. 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.
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QuikMarketing. Through our QuikMarketing service, we query our proprietary patron transaction
database using criteria supplied by the gaming establishment. We then distribute 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. As the applicable transaction volume increases, we
continue to build existing patron profiles and add new patron profiles.
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 QuickJack Plus 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 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. The ticket can then be inserted into other
slot machines or exchanged for cash at a QuickJack Plus kiosk. 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
QuickJack Plus, we enjoy the benefit of NRT’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.
Ticket-Out Debit Device (“TODD”) is a cashless gaming product developed by IFT, our joint
venture with IGT, that allows slot machine patrons to access funds without leaving the machines
they are playing. When a slot machine is equipped with TODD technology, a slot machine patron
swipes his or her POS debit card and enters his or her PIN and the requested transaction amount on
a terminal mounted on the slot machine. If the transaction is approved, the patron’s funds are
either credited to the slot machine for play at that machine or a bar-coded ticket is printed that
may be used at any ticket-enabled slot machine. TODD-enabled slot machines offer patrons
convenience and reduce the amounts of cash carried by patrons. Our cashless slot technology also
reduces the cash-handling burden of gaming establishments. Our TODD cashless gaming product has
been approved for use in only one gaming establishment and cannot be used at any other location
until we receive approval from the appropriate authorities.
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 is functionally similar to TODD, but instead of being deployed at an individual slot machine,
EDITH is a compact stand-alone unit that can be placed almost anywhere in the gaming establishment.
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 and an exclusive loyalty program. The Arriva Card also benefits gaming establishments by
providing their patrons with a new source of credit, at no risk to the gaming establishment. 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, 2006, there were approximately 2,900 cardholders of the Arriva Card and more than $12.2 million
in cash access transactions had been completed using the Arriva Card.
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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 two issued United States patents and three 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. We have a total of 45 trademark registrations or pending registrations throughout the world.
However, we rely principally on unregistered copyrights and trade secrets for protection of our
intellectual property.
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 2006, 2005 and 2004, respectively, revenues from our operations
outside the United States comprised 3.0%, 3.4% and 3.2% of our revenues.
Our sales and marketing efforts are directed by 15 sales executives, each with business
development responsibility for the gaming establishments in those regions. These senior 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 senior sales executives are supported by 28 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.
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Competition
We compete with other providers of cash access services to the gaming industry. Our principal
competitors in North America are Game Financial Corporation, a subsidiary of Fidelity National
Information Services Inc. operating as GameCash; 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.
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. To date, we
have not been required to file such an application. 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.
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The expansion of our business or the introduction of new cash access products or services 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 and TODD cashless gaming products,
for example, interact with a gaming establishment’s slot system and operate in close physical
proximity to slot machines, and are 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.
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
identify 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.
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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 disputes
relating to 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.
Credit Reporting. Our Central Credit gaming patron credit bureau services and Arriva Card
program are subject to the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions
Act of 2003, which provide patrons rights to access their credit files, dispute information
contained in their credit files and add brief statements to their credit files in the event
disputes are not resolved by our investigation. 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, both our Central Credit gaming patron credit bureau services and
our Arriva Card program 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.
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
are 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 use our cash access
services or apply for the Arriva Card 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, Social Security Numbers and income, credit histories 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 prevent us from
releasing 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. 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 state specific 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.
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Arriva Card. Although the Arriva Card is issued by CIT Bank, Arriva administers and services
the Arriva Card accounts. If our relationship with CIT Bank is discontinued, we would be required
to either find another licensed banking institution to issue
the Arriva Card or we would have to become licensed in each jurisdiction in which we want to
issue the Arriva Card. 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. In those 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.
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. As of June 30, 2006 we were designated as a compliant service provider
under the PCI Data Security Standard.
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 is subject to our 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. We may not receive all of such approvals,
licenses or waivers in a timely manner or at all. If we do not receive all of such approvals,
licenses or waivers we will not be able to undertake all of our proposed 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 wish to enter.
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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, 2006, we had 354 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.
| 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. Most of our contracts have a term ranging from three 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.
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 year ended December 31, 2006, our five largest customers, Harrah’s Entertainment,
Inc., MGM MIRAGE, Boyd Gaming Corporation, Station Casinos, Inc. and Mohegan Tribal Gaming,
accounted for approximately 40.2% of our revenues. In the year ended December 31, 2005, these same
properties accounted for 40.6% of our revenues. Our largest customer, Harrah’s Entertainment, Inc.,
accounted for 18.1% of our revenues in the year ended December 31, 2006. 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.
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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.
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 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. 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, 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 and Western Money Systems, they are generally prohibited from
providing their cash handling services on any device that provides cash access services of other
providers. Upon the expiration or termination of our agreements with NRT and Western Money Systems,
we may face competition from other providers of cash access services to the extent that NRT or
Western Money Systems establishes cooperative relationships with other cash access service
providers.
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.
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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 litigation, we are
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 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.
In 2006 and 2005, 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. The other association has allowed us to conduct a limited pilot test. 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 must continue to comply with the PCI Data Security Standard. 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.
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. 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.
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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. We have introduced EDITH, a new product that dispenses a bar-coded slot ticket based
on a POS debit authorization. It has not yet been determined whether the 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.
We have entered the consumer credit business through the provision of the Arriva Card through
our wholly-owned subsidiary, Arriva. Our credit card is not part of any existing card association
such as the VISA or MasterCard card associations. If, in the future, our card becomes part of a
card association we will become subject to additional rules and regulations of these card
associations.
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 2006. 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. Many 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.
Our substantial indebtedness could materially adversely affect our operations and financial results
and prevent us from obtaining additional financing, if necessary.
We have a significant amount of indebtedness. As of December 31, 2006, we had total
indebtedness of $274.5 million in principal amount (of which $152.8 million consisted of senior
subordinated notes and $121.7 million consisted of senior secured debt). Our substantial
indebtedness could have important consequences. For example, it:
| • | 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; |
||
| • | 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; |
||
| • | limits our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
||
| • | restricts our ability to pay dividends or repurchase our common stock; |
||
| • | places us at a competitive disadvantage compared to our competitors that have less debt; |
||
| • | restricts our ability to acquire businesses or technologies that would benefit our business; |
||
| • | restricts our ability to engage in transactions with affiliates or create liens or guarantees; and |
||
| • | 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 our senior
subordinated 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 restrictions 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 the London
Interbank Offering Rate (“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.
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.
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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.
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.
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 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 TRS Recovery Services, Inc. (formerly known as TeleCheck
Recovery Services, Inc.) (“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 March 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 M&C International, to obtain authorizations for credit card cash advances, POS
debit card transactions, ATM cash withdrawal transactions and to provide settle transaction files
to card associations for some of these transactions.
Card Association Sponsorship. We rely on Bank of America Merchant Services, 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.
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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
$300 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 $300 million limit, we would have an inadequate supply of
cash for our ATMs.
Our agreement with Bank of America for the supply of ATM cash expires in June 2007. Upon the
expiration of this agreement we need to obtain an adequate supply of cash for our ATMs 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 M&C International, for software development and system support. In
addition, we rely on NRT for software development and system support related to 3-in-1 Enabled
QuickJack Plus devices.
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 and Western Money Systems, 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, we could lose our entire investment in IFT.
Money Transfers. We rely on Western Union Financial Services, Inc. to facilitate money
transfers.
Arriva Card. We rely on CIT Bank (“CIT”) and Fiserv Solutions, Inc. (“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.
Certain providers upon whom we are dependent are under common control with M&C International, 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
affiliated with M&C International, to provide many of the financial services that we offer to
patrons. The interests of M&C International or its principals may not coincide with the interests
of the holders of our common stock and such principals may take action that benefits themselves or
these entities to our detriment. For example, M&C International’s principals 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. M&C
International’s principals 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, 2006 and 2005, we incurred costs and
expenses from USA Payments and USA Payment Systems of an aggregate of $4.2 million, and $4.0
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.
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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 our TODD cashless gaming product and 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. TODD required extensive laboratory testing and certification and to date has
only been approved for use in one gaming establishment, and EDITH has been approved by only one
regulatory authority.
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.
We may not be successful in our entry into the consumer credit business through the Arriva Card.
Through our wholly-owned subsidiary, Arriva, and together with CIT, a licensed banking
institution, and Fiserv, a credit processing service organization, we have 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.
Arriva has the option to purchase the originated receivable from CIT at any time between three and
180 days from the date the customer first borrows using the Arriva Card. CIT has the right to
require Arriva to purchase any receivables that have a first payment default, cardholder death or
bankruptcy during the first 180 days from acquisition, and CIT will require Arriva to purchase the
net amount of all such receivables 180 days after acquisition. This means that we will bear the
credit risk of any cardholders’ non-payment.
The provision of the Arriva Card is a different business from the processing of credit card
transactions. In our current credit card cash advance business, we assume no consumer credit risk
other than chargeback risk, which we are exposed to in only an indirect way. Under the terms of our
agreement with CIT, we will effectively bear the credit risk of providing credit to the consumer.
We will bear the risk of making payment to merchants for all transactions using the card within a
very short time of the transaction, and we will generally be able to recover those funds from the
consumer no sooner than the end of the current monthly statement cycle. We may not be able to
collect those funds from consumers due to non-payment of amounts owed, death or bankruptcy of the
cardholder or the cards being used to perpetuate fraud. To the extent that we are unable to recover
those funds we will record a loss, and if the loss is significant it could have a material adverse
effect on our results of operations and financial condition.
The issuance of credit cards involves assessing an applicant’s creditworthiness to determine
his or her ability and inclination to repay any funds borrowed using the card. We will effectively
bear the risk of this assessment for each of the Arriva Cards issued by CIT. We have no experience
in making such credit decisions. We may not be able to attract or retain qualified employees with
consumer credit underwriting experience. Even if we are successful in attracting such employees, we
may not make credit underwriting decisions that will result in tolerable credit losses.
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,
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.
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By providing the Arriva Card to consumers, we are subject to a variety of regulations that
have not affected us in the past. While we have initially contracted with CIT for purposes of card
issuance and receivables acceptance, such relationship may be discontinued at any time in
accordance with the terms of our contract. If that were to happen, we would be required find
another licensed banking institution or to become licensed in those jurisdictions in which we
wanted the Arriva Card to be issued. We may not receive such licenses and, even if we do, we may be
required to provide letters of credit or surety bonds to support our obligations in those markets
and those letters of credit and surety bonds may reduce our overall borrowing capacity. 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 and Regulation Z and the Equal Credit Opportunity Act and
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.
The credit card business is very complex from an operational perspective in that it involves
the mailing of statements and the receipt and posting of credits for many cardholders. We have no
experience in the management of credit accounts. The credit
card business also involves resolving inquiries from and providing customer service to
cardholders. Our experience in doing these functions is on a scale much smaller than we may be
exposed to if use of the Arriva Card grows. We have contracted with Fiserv, a company that has
experience in managing large-scale credit card operations, but we may not be able to sustain such a
relationship.
The credit card business may be perceived differently by investors from the business we
currently perform and, even if we are successful in earning significant profits in the credit card
business, investors may assign a lower valuation multiple to the credit card operations than to our
historical business. This may result in a decrease in valuation of the Company, which may lead to a
decline in the price of our common stock.
Conflicts of interest may arise in connection with the issuance of credit cards by Arriva to our
officers and directors.
We have amended our corporate governance guidelines and code of business conduct to permit our
officers and directors and their immediate family members to hold the Arriva Card. The use of the
Arriva Card by our officers and directors, or their immediate family members, may be viewed as
personal loans made by us to such individuals. The failure of any officer or director to fully and
timely pay the balance on an Arriva Card account may create a conflict between such individual’s
interest as a cardholder-debtor and such individual’s interest as an officer or director of the
card issuer-creditor.
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 for software development and system support of the 3-in-1 Enabled QuickJack Plus devices. 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.
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We may not successfully enter new markets.
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.
Attempting to enter international markets in which we have not previously operated may expose
us to political, economic 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, trade barriers, difficulties in staffing and managing
foreign operations, higher rates of fraud, fluctuations in currency exchange rates, difficulty in
enforcing contracts, political and economic instability and potentially
adverse tax consequences. For example, our proposed entry into Macau SAR is subject to our
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. We may not receive all
of such approvals, licenses or waivers in a timely manner, or at all. If we do not receive all of
such approvals, licenses or waivers we will not be able to undertake all of our proposed 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. 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.
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We depend on key personnel and they would be difficult to replace.
We depend upon the ability and experience of two key members of senior management who have
substantial experience with our operations and the gaming patron cash access industry. We are
highly dependent on the involvement of Kirk Sanford, our President and Chief Executive Officer, and
Harry Hagerty, our Chief Financial Officer. Other than Messrs. Sanford and Hagerty and Kathryn
Lever, our General Counsel, none of our executive officers have employment agreements with us. The
loss of Mr. Sanford or Mr. Hagerty would have a material adverse effect on our business. We
currently have a $2.0 million key-man life insurance policy in effect on Mr. Sanford with the
Company as the beneficiary.
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. In
addition, 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. If
we are unable to attract or retain key personnel, our business, financial condition, operating
results and liquidity could be materially adversely affected.
The loss of our sponsorship into the Visa U.S.A., Visa International and MasterCard card
associations could 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. Bank of America
Merchant Services currently sponsors us into the card associations at no cost to us. Bank of
America Merchant Services began this sponsorship of us into the card associations in 1998 when it
held a significant ownership interest in us. When Bank of America Merchant Services sold its
interest in us in 2000, Bank of America Merchant Services agreed to continue its sponsorship of us
at no cost to us conditioned upon First Data’s continued indemnification of Bank of America
Merchant Services 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 Bank of
America Merchant Services 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.
In the event that First Data terminates its indemnification obligations and as a result we
lose our sponsorship by Bank of America Merchant Services 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 Bank of America
Merchant Services, 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.
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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 Bank of America Merchant
Services, 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.
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 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. 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 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 year ended December 31, 2006 and 2005, we
paid approximately $15.7 million and $10.2 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 year ended December 31, 2006 and 2005, our warranty expenses with
respect to TeleCheck’s check warranty service were $8.4 million and $10.8 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.
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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 gaming patron credit bureau
database, our proprietary patron transaction database, 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.
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 Casino Cash 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.
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.
In 2006, the Company was required for the first time to comply with Section 404. As a result
of our review of our internal reviews in connection with Section 404, we identified material
weaknesses in our internal control over financial reporting. The material weaknesses mean that
there is more than remote risk that a material misstatement of our annual or interim financial
statements would not be prevented or detected
The material weaknesses, as described in Part II, Item 9A, 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.
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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, 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.
Acquisitions and strategic investments involve various risks, such as:
| • | difficulty integrating the technologies, operations and personnel from the acquired business; |
| • | overestimation of potential synergies or a delay in realizing those synergies; |
| • | disruption to our ongoing business, including the diversion of management’s
attention and of resources from our principal business; |
| • | inability to obtain the desired financial and strategic benefits from the acquisition or investment; |
| • | loss of customers of an acquired business; |
| • | assumption of unanticipated liabilities; |
| • | loss of key employees of an acquired business; and |
| • | 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.
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, and due to regulatory concerns, we have elected not
to participate in the Internet gaming market at this time. 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.
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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.
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.
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.
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.
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The United Kingdom (“UK”) Gambling Act 2005 (the “Gambling Act”) has received Royal Assent and
awaits an order of the UK Secretary of State entering it into force as law. As enacted, the
Gambling Act could be interpreted to prohibit our provision of credit card cash advances and POS
debit card transactions to patrons of gaming establishments located in the UK as early as September
2007. Such an interpretation would have a material adverse effect on our business, financial
condition and operating results. We and certain of our gaming establishment customers in the UK are
consulting with the UK Gambling Commission and the UK Department for Culture Media and Sport
regarding the interpretation of the Gambling Act and the nature of any secondary regulations to be
enacted by the Secretary of State for Culture, Media and Sport or conditions that may be imposed
upon operators’ or premises’ licenses with a view to ensuring that services such as ours continue
to be available in UK gambling establishments. If these efforts are not successful, we may be
prohibited from providing one or more of our services in UK gaming establishments upon
implementation of the Gambling Act.
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 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 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
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. 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. 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.
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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 TODD cashless gaming product has to date only been approved for use at one gaming
establishment and cannot be used at any other location 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.
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 and SARs. 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 establishment at which our cash
access services are provided and may be required to additionally file SARs with respect to
transactions completed during the six 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. 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.
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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.
Finally, The UK Gambling Act has received Royal Assent and awaits an order of the UK Secretary
of State entering it into force as law. As enacted, the Gambling Act could be interpreted to
prohibit our provision of credit card cash advances and POS debit card transactions to patrons of
gaming establishments located in the UK as early as September 2007. Such an interpretation would
have a material adverse effect on our business, financial condition and operating results. We and
certain of our gaming establishment customers in the UK are consulting with the UK Gambling
Commission and the UK Department for Culture Media and Sport regarding the interpretation of the
Gambling Act and the nature of any secondary regulations to be enacted by the Secretary of State
for Culture, Media and Sport or conditions that may be imposed upon operators’ or premises’
licenses with a view to ensuring that services such as ours continue to be available in UK gambling
establishments. If these efforts are not successful, we may be prohibited from providing one or
more of our services in UK gaming establishments upon implementation of the Gambling Act.
If consumer privacy laws change, or if we are required to change our business practices, the value
of our patron marketing services may be hampered.
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 applicable privacy legislation 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, we anticipate that such laws will be broadened in their scope
and application, impose additional requirements and restrictions on gathering 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,
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 only 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:
| • | 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; |
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| • | terrorist acts, theft, vandalism, fires, floods or other natural disasters; and |
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| • | 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.
Securities class action litigation is often brought against a company following a decline in
the market price of its securities. The risk is especially acute for us because companies such as
ours have experienced significant share price volatility in the past. As a result, we may in the
future be a target of similar litigation. Securities litigation could result in substantial costs
defending the lawsuit and divert management’s attention and resources, and could seriously harm our
business and negatively impact our stock price.
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.
M&C International 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, 2006, M&C International and entities affiliated with Summit Partners owned
or controlled shares representing, in the aggregate, approximately 43.4% of the outstanding shares
of our common stock. Accordingly, M&C International 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. M&C International’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.
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Conflicts of interest may arise because some of our directors are also principals or partners of
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; |
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| • | 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; |
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| • | 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; |
||
| • | 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.
38
Table of Contents
| 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.
| ITEM 3. | LEGAL PROCEEDINGS |
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 15,
2007, 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 | |||||||
2005: |
||||||||
Third Quarter (commencing September 23, 2005) |
$ | 15.00 | $ | 14.01 | ||||
Fourth Quarter |
14.93 | 12.65 | ||||||
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 15, 2007, the closing sale price of our common stock on the New York Stock
Exchange was $15.45.
39
Table of Contents
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.
Common Stock Repurchase Program
On February 6, 2007, the Company’s Board of Directors authorized the repurchase of up to $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.
Stock Performance Graph
The line graph below compares the cumulative total stockholder return on our common stock
with the cumulative total return of the Standard & Poor’s 500 Index and a Peer Group Index of
companies that we believe operate in a similar manner to our operations for the fifteen months
since our Company’s initial public offering of common shares. Our Peer Group Index is comprised of
the common shares of the following companies: Euronet Worldwide Inc, Fidelity National Information
Services, Inc., First Data Corporation, Global Payments Inc, International Game Technology and
Shuffle Master Inc. The graph and table assume that $100 was invested on September 23, 2005 (the
first day our common stock was publicly traded) in each of our common stock, the S&P 500 Index and
our Peer Group Index, and that all dividends were reinvested. Research Data Group, Inc. furnished
this data. Cumulative total stockholder returns for our common stock, the S&P 500 Index and our
Peer Group are based on the calendar month end closing prices of the respective index.
40
Table of Contents
| 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, 2006, 2005, 2004, 2003 and 2002 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.
| For the Years Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| Income Statement Data: | (amounts in thousands, except per share) | |||||||||||||||||||
Revenues |
||||||||||||||||||||
Cash advance |
$ | 287,053 | $ | 235,055 | $ | 209,962 | $ | 186,547 | $ | 182,754 | ||||||||||
ATM |
221,727 | 182,291 | 158,433 | 132,341 | 119,424 | |||||||||||||||
Check services |
29,166 | 26,376 | 23,768 | 26,326 | 29,412 | |||||||||||||||
Central Credit and other revenues |
10,202 | 10,358 | 10,840 | 10,500 | 10,303 | |||||||||||||||
Total revenues |
548,148 | 454,080 | 403,003 | 355,714 | 341,893 | |||||||||||||||
Cost of revenues (exclusive of depreciation and amortization) |
(389,251 | ) | (308,481 | ) | (270,095 | ) | (232,457 | ) | (216,649 | ) | ||||||||||
Operating expenses |
(63,812 | ) | (51,206 | ) | (45,339 | ) | (45,436 | ) | (57,658 | ) | ||||||||||
Depreciation and amortization |
(9,889 | ) | (12,109 | ) | (13,548 | ) | (14,061 | ) | (11,820 | ) | ||||||||||
Operating income |
85,196 | 82,284 | 74,021 | 63,760 | 55,766 | |||||||||||||||
Interest expense, net (1) |
(42,031 | ) | (51,879 | ) | (32,025 | ) | (5,450 | ) | (4,933 | ) | ||||||||||
Income before income tax (provision) benefit and minority ownership
loss |
43,165 | 30,405 | 41,996 | 58,310 | 50,833 | |||||||||||||||
Income tax (provision) benefit |
(16,739 | ) | (7,953 | ) | 212,422 | (321 | ) | (1,451 | ) | |||||||||||
Income before minority ownership loss |
26,426 | 22,452 | 254,418 | 57,989 | 49,382 | |||||||||||||||
Minority ownership loss, net of tax (2) |
183 | 139 | 137 | 400 | 1,040 | |||||||||||||||
Net income |
$ | 26,609 | $ | 22,591 | $ | 254,555 | $ | 58,389 | $ | 50,422 | ||||||||||
Earnings per share |
||||||||||||||||||||
Basic |
$ | 0.33 | $ | 0.49 | $ | 7.91 | $ | 1.81 | $ | 1.57 | ||||||||||
Diluted |
$ | 0.32 | $ | 0.30 | $ | 3.56 | $ | 0.82 | $ | 0.71 | ||||||||||
Weighted average number of common shares outstanding: |
||||||||||||||||||||
Basic |
81,641 | 45,643 | 32,175 | 32,175 | 32,175 | |||||||||||||||
Diluted |
81,921 | 74,486 | 71,566 | 71,500 | 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 | $ | 41,996 | $ | 58,310 | $ | 50,833 | ||||||||||||
Income tax provision—historical, exclusive of one-time tax benefit (3) |
N/A | N/A | (10,443 | ) | (321 | ) | (1,451 | ) | ||||||||||||
Pro forma income tax provision—unaudited (4) |
N/A | N/A | (4,600 | ) | (20,741 | ) | (16,940 | ) | ||||||||||||
Minority ownership loss — historical loss, net of tax |
N/A | N/A | 137 | 400 | 1,040 | |||||||||||||||
Pro forma net income |
N/A | N/A | $ | 27,090 | $ | 37,648 | $ | 33,482 | ||||||||||||
Pro forma earnings per share |
||||||||||||||||||||
Basic |
N/A | N/A | $ | 0.84 | $ | 1.17 | $ | 1.04 | ||||||||||||
Diluted |
N/A | N/A | $ | 0.38 | $ | 0.53 | $ | 0.47 | ||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
(at end of period) |
||||||||||||||||||||
Cash and cash equivalents |
$ | 40,919 | $ | 35,123 | $ | 49,577 | $ | 23,423 | $ | 57,584 | ||||||||||
Total assets |
588,647 | 510,418 | 496,625 | 243,627 | 287,039 | |||||||||||||||
Total borrowings |
274,480 | 321,412 | 478,250 | — | — | |||||||||||||||
Stockholders’ equity (deficiency) and members’ capital |
132,157 | 94,484 | (56,779 | ) | 199,247 | 202,271 | ||||||||||||||
Other Data: |
||||||||||||||||||||
Net cash provided by operating activities |
$ | 70,079 | $ | 38,585 | $ | 75,212 | $ | 33,471 | $ | 81,964 | ||||||||||
Net cash used in investing activities (5) |
(17,061 | ) | (17,860 | ) | (4,861 | ) | (7,047 | ) | (9,750 | ) | ||||||||||
Net cash used in financing activities |
(46,761 | ) | (35,190 | ) | (43,950 | ) | (63,067 | ) | (52,333 | ) | ||||||||||
41
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| For the Years Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Other Data (unaudited): |
||||||||||||||||||||
| Aggregate dollar amount processed (in billions): | ||||||||||||||||||||
Cash advance |
$ | 5.7 | $ | 4.7 | $ | 4.2 | $ | 3.8 | $ | 3.6 | ||||||||||
ATM |
$ | 12.3 | $ | 9.9 | $ | 8.4 | $ | 6.9 | $ | 6.2 | ||||||||||
Check warranty |
$ | 1.3 | $ | 1.1 | $ | 0.9 | $ | 1.0 | $ | 1.2 | ||||||||||
| Number of transactions completed (in millions): | ||||||||||||||||||||
Cash advance |
10.4 | 9.1 | 8.8 | 8.1 | 8.2 | |||||||||||||||
ATM |
69.2 | 58.9 | 53.2 | 45.7 | 42.5 | |||||||||||||||
Check warranty |
5.1 | 4.7 | 4.3 | 4.9 | 6.4 | |||||||||||||||
| (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 Restructuring of Ownership and the Securities Purchase and Exchange
Agreement. 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 unaudited 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 unaudited 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, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Income before income taxes, as reported |
N/A | N/A | $ | 41,996 | $ | 58,310 | $ | 50,833 | ||||||||||||
Effective pro forma income tax rate |
N/A | N/A | 36.00 | % | 36.12 | % | 36.18 | % | ||||||||||||
Pro forma income tax expense |
N/A | N/A | $ | 15,119 | $ | 21,062 | $ | 18,391 | ||||||||||||
| (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.
42
Table of Contents
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.
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.
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Table of Contents
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.
44
Table of Contents
Results of Operations
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 and minority ownership loss |
43,165 | 7.9 | 30,405 | 6.7 | |||||||||||||||
Income tax provision |
(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.
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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.
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. We expect that commissions and interchange will continue to increase, and
we expect that in 2007 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, 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 Statement of Financial Accounting Standards (“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. We expect that operating expenses will increase in 2007 at a
rate of growth lower than the rate of growth in cost of revenues (exclusive of depreciation and
amortization).
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 $42.1 million, 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. Assuming a constant level of LIBOR, we
expect that interest income (expense), net will decline in 2007 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 $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.
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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. Based on our belief that pretax income in 2007 will be
higher than it was in 2006, we anticipate an effective tax rate of approximately 38.0% in 2007.
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 thousand, an increase of $44 thousand or 31.7% from
$139 thousand for the year ended December 31, 2005. We expect that IFT will record a loss in 2007
as well.
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.
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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The following table sets forth the condensed consolidated results of operations for the years
ended December 31, 2005 and December 31, 2004 (amounts in thousands):
| December 31, 2005 | December 31, 2004 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Cash advance |
$ | 235,055 | 51.8 | % | $ | 209,962 | 52.1 | % | ||||||||
ATM |
182,291 | 40.1 | 158,433 | 39.3 | ||||||||||||
Check services |
26,376 | 5.8 | 23,768 | 5.9 | ||||||||||||
Central Credit and other revenues |
10,358 | 2.3 | 10,840 | 2.7 | ||||||||||||
Total revenues |
454,080 | 100.0 | 403,003 | 100.0 | ||||||||||||
Cost of revenues (exclusive of depreciation and amortization) |
(308,481 | ) | (67.9 | ) | (270,095 | ) | (67.0 | ) | ||||||||
Operating expenses |
(51,206 | ) | (11.3 | ) | (45,339 | ) | (11.3 | ) | ||||||||
Depreciation and amortization |
(12,109 | ) | (2.7 | ) | (13,548 | ) | (3.4 | ) | ||||||||
Operating income |
82,284 | 18.1 | 74,021 | 18.4 | ||||||||||||
Interest income (expense), net |
(51,879 | ) | (11.4 | ) | (32,025 | ) | (7.9 | ) | ||||||||
Income before income tax (provision) benefit and minority ownership loss |
30,405 | 6.7 | 41,996 | 10.4 | ||||||||||||
Income tax (provision) benefit |
(7,953 | ) | (1.8 | ) | 212,422 | 52.7 | ||||||||||
Income before minority ownership loss |
22,452 | 4.9 | 254,418 | 63.1 | ||||||||||||
Minority ownership loss, net of tax |
139 | 0.0 | 137 | 0.0 | ||||||||||||
Net income |
$ | 22,591 | 5.0 | % | $ | 254,555 | 63.2 | % | ||||||||
Income before income tax (provision) benefit and minority ownership loss |
$ | 41,996 | 10.4 | % | ||||||||||||
Pro forma provision for income taxes |
(15,043 | ) | (3.7 | ) | ||||||||||||
Minority ownership loss, net of tax |
137 | 0.0 | ||||||||||||||
Pro forma net income |
$ | 27,090 | 6.7 | % | ||||||||||||
Total Revenues
Total revenues for the year ended December 31, 2005 were $454.1 million, an increase of $51.1
million, or 12.7%, as compared to the year ended December 31, 2004. This increase was primarily due
to the reasons described below.
Cash Advance. Cash advance revenue for the year ended December 31, 2005 was $235.1 million, an
increase of $25.1 million, or 12.0%, as compared to the year ended December 31, 2004. This increase
was primarily due to a 12.7% increase in credit card cash advance revenue and a 5.6% increase in
POS debit card transaction revenue. The total amount of cash disbursed increased 10.5% from $4.2
billion to $4.7 billion and the number of transactions completed increased 3.2% from 8.8 million to
9.1 million. Revenue per cash advance transaction increased 8.5%, from $23.76 to $25.78.
ATM. ATM revenue for the year ended December 31, 2005 was $182.3 million, an increase of $23.9
million, or 15.1%, as compared to the year ended December 31, 2004. The increase was primarily
attributable to a 10.8% increase in the number of transactions from 53.2 million to 58.9 million.
Revenue per ATM transaction increased 3.7% from $2.98 to $3.09. There was a 17.7% increase in the
total amount of cash disbursed from $8.4 billion to $9.9 billion.
Check Services. Check services revenue for the year ended December 31, 2005 was $26.4 million,
an increase of $2.6 million, or 11.0%, as compared to the year ended December 31, 2004. The face
amount of checks warranted increased 20.0% from $0.9 billion to $1.1 billion. The number of checks
warranted increased 7.7% from 4.3 million to 4.7 million, while the average face amount per check
increased from $217.20 to $242.08. Revenue as a percent of face amount was 2.19% in 2005 as
compared to 2.40% for the year ended December 31, 2004, and revenue per transaction increased 1.9%
from $5.21 to $5.31. The increases in our check services business were directly attributable to
the Central Credit Check Warranty product that was introduced in 2005. This product expands upon
the services offered in our existing TeleCheck warranty product, and has allowed us to obtain some
larger check cashing accounts.
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Central Credit and Other. Central Credit and other revenues for the year ended December 31,
2005, were $10.4 million, a decrease of $0.5 million, or 4.4%, as compared to the year ended
December 31, 2004. 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.
Costs and Expenses
Cost of Revenues (exclusive of Depreciation and Amortization). Cost of revenues (exclusive of
depreciation and amortization) increased 14.2% from $270.1 million to $308.5 million. The largest
component of cost of revenues (exclusive of depreciation and amortization) is commissions, and
commissions increased 11.4% in 2005 as contracts were signed or renewed at higher commission rates
than experienced in 2004. Included within commission expense is $1.6 million in commission
payments to two customers regarding contract terms and conditions that we consider to be unusual in
nature. The second-largest component of cost of revenues (exclusive of depreciation and
amortization) is interchange; interchange expenses increased 19.8%. Warranty expenses, the
third-largest component of cost of revenues (exclusive of depreciation and amortization) increased
35.6%. This increase was primarily the result of the introduction of the Central Credit Check
Warranty Product that began full scale operations in 2005.
Operating Expenses. Operating expenses for the year ended December 31, 2005 were $51.2
million, an increase of $5.9 million, or 12.9%, as compared to the year ended December 31, 2004.
This increase was primarily due to additional staffing requirements to support the Company’s
additional responsibilities of being a publicly traded entity. Operating expenses for 2005 also
included significant legal expenses associated with the Company’s patent infringement lawsuit
regarding its “3-in-1 rollover” patent. For year ended December 31, 2005, legal fees incurred in
this effort were $2.1 million.
Depreciation and Amortization. Depreciation expense for the year ended December 31, 2005 was
$6.8 million, a decrease of $1.1 million, or 13.5%, as compared to the year ended December 31,
2004. The decrease was primarily due to a certain fixed assets acquired as part of various
acquisitions in 2000 becoming fully depreciated in 2005 yet remaining in service. Amortization
expense, which relates principally to computer software and customer contracts, decreased $0.4
million from $5.7 million to $5.3 million, as a result of certain capitalized software projects
becoming fully amortized.
Primarily as a result of the factors described above, operating income for the year ended
December 31, 2005 was $82.3 million, an increase of $8.3 million, or 11.2%, as compared to the year
ended December 31, 2004.
Interest Income (Expense), Net. Interest Income (Expense), net, was $51.9 million in 2005, an
increase of $19.9 million, or 62.0%, from $32.0 million in 2004. Interest income was $1.8 million
in 2005, an increase of $0.5 million, or 37.7%, as compared to 2004. Interest expense for the year
ended December 31, 2005, was $44.2 million, an increase of $10.8 million, or 32.5%, as compared to
December 31, 2004. Interest expense on borrowings (including amortization of deferred financing
costs) was $33.9 million in 2005 as compared to $27.6 million in 2004. The cash usage fee for cash
used in our ATMs is included in interest expense. ATM cash usage fees were $10.2 million in 2005
as compared to $5.7 million in 2004, an increase of $4.5 million or 79.0%. The increase resulted
primarily from increases in LIBOR on which those funds are priced. The loss on early extinguishment
of debt of $9.5 million in 2005 was a result of the $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 these borrowings.
Primarily as a result of the foregoing, income before income tax benefit (provision) and
minority ownership loss was $30.4 million for the year ended December 31, 2005, a decrease of $11.6
million, or 27.6%, as compared to the prior year.
Income Tax. Income tax expense of $8.0 million for the year ended December 31, 2005,
represents foreign income tax expense of $1.2 million, United States state and federal income tax
expense of $9.9 million, and the benefit associated with the final adjustment to the value of the
deferred tax asset created by the Recapitalization and the Private Equity Restructuring of $3.1
million.
Our determination of the amount of the deferred tax asset depended upon the gain reported by
the sellers in both the Recapitalization and the Private Equity Restructuring. 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.
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Primarily as a result of the foregoing, income before minority ownership loss was $22.5
million for the year ended December 31, 2005, a decrease of $232.0 million, or 91.2%, as compared
to the prior year.
Minority Ownership Loss, net of Tax. Minority ownership loss attributable to IFT for the year
ended December 31, 2005 was $139 thousand, an increase of $2 thousand from $137 thousand for the
year ended December 31, 2004.
Primarily as a result of the foregoing, net income was $22.6 million for the year ended
December 31, 2005, a decrease of $232.0 million, or 91.1%, 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 $156.8 million in net unamortized goodwill on our consolidated
balance sheet at December 31, 2006 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, 2006 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.
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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 December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R),
Share-Based Payment, which establishes accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. We adopted SFAS No. 123(R) on January 1,
2006. SFAS No. 123(R) requires us to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of the award on the date of the grant.
The standard requires grant date fair value to be estimated using either an option-pricing model,
which is consistent with the terms of the award, or a market observed price, if such a price
exists. Such cost must be recognized over the period during which an employee is required to
provide service in exchange for the award, that is, the requisite service period (which is usually
the vesting period). The standard also requires us to estimate the number of instruments that will
ultimately be issued, rather than accounting for forfeitures as they occur. As a result of adopting
SFAS No. 123(R) in 2006 we recognized $7.0 million of non-cash stock option expense, which is
recorded in operating expenses in the 2006 consolidated statements of income.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, amending APB
29 (“SFAS No. 153”), which treated nonmonetary exchanges of similar productive assets as an
exception from fair value measurement. SFAS No. 153 replaces this exception with a general
exception from fair value measurement for exchanges of nonmonetary assets that do not have
commercial substance. Nonmonetary exchanges have commercial substance if the future cash flows of
an entity are expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company adopted this standard in 2006 and it did not have a material impact on our
results of operations, financial position or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No.
154”), requiring retrospective application to prior-period financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 also redefines “restatement” as the revising of
previously issued financial statements to reflect correction of errors made. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company adopted SFAS No. 154 in 2006 and it did not have a material impact
on our results of operations, financial position or cash flows.
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. The Company is
currently evaluating the impact of this standard on the consolidated financial statements.
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.
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In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(“SAB No. 108”). SAB No. 108 eliminates the diversity in practice surrounding how public companies
quantify financial statement misstatements and establishes an approach that requires quantification
and assessment of misstatements based on the effects of the misstatements on each of the Company’s
financial statements and the related footnote disclosures. Adoption of SAB No. 108 by the Company,
which was effective for fiscal years ending after November 15, 2006, did not have a material impact
on the consolidated financial statements.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2006 and 2005,
respectively:
| Years Ended December 31, | ||||||||
| 2006 | 2005 | |||||||
Net cash provided by operating activities |
$ | 70,079 | $ | 38,585 | ||||
Net cash used in investing activities |
(17,061 | ) | (17,860 | ) | ||||
Net cash used in financing activities |
(46,761 | ) | (35,190 | ) | ||||
Net effect of exchange rates on cash and cash equivalents |
(461 | ) | 11 | |||||
Net increase (decrease) in cash and cash equivalents |
5,796 | (14,454 | ) | |||||
CASH AND CASH EQUIVALENTS—Beginning of period |
35,123 | 49,577 | ||||||
CASH AND CASH EQUIVALENTS—End of period |
$ | 40,919 | $ | 35,123 | ||||
Our principal source of liquidity is cash flows from operating activities, which were
$70.1 million and $38.6 million for the years ended December 31, 2006 and 2005, respectively. The
2006 increase in net income of $4.0 million contributed to the increase in cash from operating
activities, along with the change in our settlement receivables (net of settlement payables) of
$13.7 million in 2006. Our cash flows from operating activities are influenced by changes in
settlement and receivables and the timing of payments related to settlement liabilities. As a
result, our cash flows from operating activities have changed and may in the future change
substantially based upon the timing of our settlement liability payments. The change in accrued
expenses and accounts payable was $6.6 million for 2006 and cash from operating activities included
$9.1 million in non-cash stock based compensation as a result of non cash compensation expense
recorded from our restricted stock awards and from adoption of SFAS No. 123(R) in 2006.
Additionally, $8.7 million of the change in operating cash flows was the result of changes in our
deferred income tax asset and $2.4 million in increases to our provision for bad debts was
principally the result of increases in the warranty expense reserves related to our Central Credit
check warranty product.
Net cash used in investing activities totaled $17.1 million and $17.9 million for the years
ended December 31, 2006 and 2005, respectively. Included in net cash used in investing activities
were funds spent on software and software development in the amounts of $1.5 million and $0.6
million, and funds spent on the procurement of cash access equipment, computer and other hardware
in the amounts of $14.2 million and $6.5 million for the years ended December 31, 2006 and 2005,
respectively. Additionally in 2006, we had $1.4 million in cash and cash equivalents that was
reclassified as restricted cash and cash equivalents as a result minimum deposit requirements of
$0.4 million for certain of our sponsorship agreements in the Caribbean, and $1.0 million in
minimum cash balances required pursuant to the Revolving Loan Product Program Agreement entered
into in March
2006 between CIT and Arriva. In 2005 we paid $10.0 million for the purchase of the “3-in-1
rollover” patent from USA Payments. We have met our capital requirements to date through cash flows
from operating activities.
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Net cash used in financing activities was $46.8 million and $35.2 million for the years ended
December 31, 2006 and 2005, respectively. 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 in the fourth quarter of 2006. Additionally, in 2006, we received proceeds of $1.5
million from employees related to stock options exercises under our equity compensation programs
and $0.2 million in minority capital contributions. In 2005, we completed an initial public
offering of our common stock that resulted in net proceeds, after underwriting discounts and
commissions, of $128.9 million. We utilized these proceeds and existing cash balances to repay
$157.2 million in scheduled and voluntary debt principal and debt issuance costs incurred in
connection with the amendment of our senior secured credit facility.
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, $82.25 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 100.000% on or after March 15, 2010.
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The following is a summary of our contractual cash obligations as of December 31, 2006,
including our senior subordinated notes and our senior secured credit facilities:
| Contractual Cash Obligations | 2 - 3 | 4 - 5 | After | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||
Long-term debt obligations |
$ | 274,480 | $ | 1,000 | $ | 2,000 | $ | 118,730 | $ | 152,750 | ||||||||||
Estimated interest obligations (1) |
112,372 | 21,526 | 42,874 | 41,289 | 6,683 | |||||||||||||||
Operating lease obligations |
2,126 | 518 | 974 | 634 | — | |||||||||||||||
Purchase obligations (2) |
17,362 | 2,731 | 4,682 | 4,682 | 5,267 | |||||||||||||||
Total cash obligations (3) |
$ | 406,340 | $ | 25,775 | $ | 50,530 | $ | 165,335 | $ | 164,700 | ||||||||||
(1) Estimated interest payments are computed using the interest rate in effect at December 31, 2006
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 6.73% 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, minimum volume originations and operating expenses under
our agreements with CIT 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. As of December 31, 2006, minimum aggregate severance benefits totaled $1.8
million. 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, 2006, we had a net deferred income tax asset of a $191.7 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 38%, this results in tax
payments being approximately $17.4 million less than the provision for income taxes shown on the
income statement for financial accounting purposes. This is an expected aggregate of $214.4 million
in cash savings over the remaining 13 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.
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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, 2006, the rate in effect, inclusive of
the 25 basis points margin, was 5.7%, and the currency supplied by Bank of America pursuant to this
agreement was $396.8 million.
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, CashCall, 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 CashCall. 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 2006, we had contributed a total of $4.0 million in IFT.
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, 2006,
the total currency obtained from Bank of America pursuant to this agreement was $396.8 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.
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 amount of time that CIT has this receivable outstanding.
As of December 31, 2006, the interest is determined as the one-month LIBOR plus 225 basis points,
or approximately 7.6 %. Arriva has the option to
purchase the originated receivable from CIT at any time between three and 180 days (the
“Holding Period”) from the date the customer first borrows using the card. CIT has the right to
require Arriva to purchase any receivables that have a first payment default, cardholder death or
bankruptcy during the first 180 days from acquisition, and CIT will require Arriva to purchase the
net amount of all such receivables 180 days after acquisition. 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.
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As of December 31, 2006, CIT had $9.9 million in outstanding receivables from transactions
performed on Arriva Cards. For the year ended December 31, 2006, Arriva has purchased $0.1 million
in receivables from CIT for customer receivables that have had a first payment default, cardholder
death or bankruptcy during the first 180 days from acquisition.
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%. In the first year of the program Arriva is committed to paying $100 thousand
in minimum origination fees. In each subsequent year, this minimum origination fee is increased to
$200 thousand.
Senior Secured Credit Facility — As of December 31, 2006, we have $3.0 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 $0.1 million 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 of the 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 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, 2006, the rate in effect, inclusive of the 25 basis points margin,
was 5.7% and the currency supplied by Bank of America pursuant to this agreement was $396.8
million. Based upon the average outstanding amount of currency to be supplied by Bank of America
pursuant to this agreement during 2006, which was $289.2 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. Foreign gaming establishments supply the currency needs for the ATMs located on
their premises.
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 137.5 basis points for
the term loan portion and LIBOR plus 137.5 basis points
for the revolving credit portion. At December 31, 2006, we had $21.7 million drawn under the
revolving credit portion and we had $100.0 million outstanding under the term loan portion at an
interest rate, including the margin, of approximately 6.7%. Based upon the outstanding balance on
the term loan of $121.7 million on December 31, 2006, each 1% increase in applicable LIBOR would
add an additional $1.2 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. 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. The interest is determined as the
one-month LIBOR plus 225 basis points, or approximately 7.6 % at December 31, 2006. We are
therefore exposed to interest rate risk to the extent that applicable LIBOR increases. As of
December 31, 2006, CIT had $9.9 million in outstanding receivables from transactions performed on
Arriva Cards. Each 1% increase in applicable LIBOR would have a $0.1 million impact on income
before taxes and minority ownership loss over a 12-month period.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 58 | ||||
| 59 | ||||
| 60-61 | ||||
| 62 | ||||
| 63-64 | ||||
| 65-99 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Cash Access Holdings, Inc.
Las Vegas, Nevada
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, 2006 and 2005, and the related
consolidated statements of income and comprehensive income, stockholders’ (deficiency) equity, and
cash flows for each of the three years in the period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these 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 Holdings, Inc. and Subsidiaries as of
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006 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.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006, 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 30, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial reporting and an
adverse opinion on the effectiveness of the Company’s internal control over financial reporting
because of material weaknesses.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 30, 2007
March 30, 2007
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(amounts in thousands, except share amounts)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(amounts in thousands, except share amounts)
| 2006 | 2005 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
40,919 | 35,123 | ||||||
Restricted cash and cash equivalents |
1,350 | — | ||||||
Settlement receivables |
137,091 | 60,164 | ||||||
Other receivables, net |
12,848 | 7,355 | ||||||
Prepaid and other assets |
9,488 | 10,959 | ||||||
Property, equipment and leasehold improvements, net |
20,454 | 10,579 | ||||||
Goodwill, net |
156,755 | 156,756 | ||||||
Other intangibles, net |
18,001 | 22,006 | ||||||
Deferred income taxes, net |
191,741 | 207,476 | ||||||
Total assets |
$ | 588,647 | $ | 510,418 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
LIABILITIES |
||||||||
Settlement liabilities |
$ | 138,242 | $ | 59,782 | ||||
Accounts payable |
26,282 | 20,413 | ||||||
Accrued expenses |
17,383 | 14,178 | ||||||
Borrowings |
274,480 | 321,412 | ||||||
Total liabilities |
456,387 | 415,785 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 6) |
||||||||
MINORITY INTEREST |
103 | 149 | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
Common stock, $0.001 par value, 500,000 shares authorized and
82,313 and 81,554 shares outstanding at December 31, 2006 and 2005, respectively |
82 | 82 | ||||||
Convertible preferred stock, $0.001 par value, 50,000 shares
authorized and 0 shares outstanding at December 31, 2006 and 2005, respectively |
— | — | ||||||
Additional paid in capital |
139,515 | 128,886 | ||||||
Accumulated deficit |
(9,601 | ) | (36,210 | ) | ||||
Accumulated other comprehensive income |
2,161 | 1,726 | ||||||
Total stockholders’ equity |
132,157 | 94,484 | ||||||
Total liabilities and stockholders’ equity |
$ | 588,647 | $ | 510,418 | ||||
See notes to consolidated financial statements.
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands, except earnings per share amounts)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands, except earnings per share amounts)
| 2006 | 2005 | 2004 | ||||||||||
REVENUES: |
||||||||||||
Cash advance |
$ | 287,053 | $ | 235,055 | $ | 209,962 | ||||||
ATM |
221,727 | 182,291 | 158,433 | |||||||||
Check services |
29,166 | 26,376 | 23,768 | |||||||||
Central Credit and other revenues |
10,202 | 10,358 | 10,840 | |||||||||
Total revenues |
548,148 | 454,080 | 403,003 | |||||||||
Cost of revenues (exclusive of depreciation and amortization) |
(389,251 | ) | (308,481 | ) | (270,095 | ) | ||||||
Operating expenses |
(63,812 | ) | (51,206 | ) | (45,339 | ) | ||||||
Amortization |
(5,520 | ) | (5,295 | ) | (5,672 | ) | ||||||
Depreciation |
(4,369 | ) | (6,814 | ) | (7,876 | ) | ||||||
OPERATING INCOME |
85,196 | 82,284 | 74,021 | |||||||||
INTEREST INCOME (EXPENSE), NET |
||||||||||||
Interest income |
3,484 | 1,815 | 1,318 | |||||||||
Interest expense |
(42,098 | ) | (44,165 | ) | (33,343 | ) | ||||||
Loss on early extinguishment of debt |
(3,417 | ) | (9,529 | ) | — | |||||||
Total interest income (expense), net |
(42,031 | ) | (51,879 | ) | (32,025 | ) | ||||||
INCOME BEFORE INCOME TAX (PROVISION)
BENEFIT AND MINORITY OWNERSHIP LOSS |
43,165 | 30,405 | 41,996 | |||||||||
INCOME TAX (PROVISION) BENEFIT |
(16,739 | ) | (7,953 | ) | 212,422 | |||||||
INCOME BEFORE MINORITY OWNERSHIP LOSS |
26,426 | 22,452 | 254,418 | |||||||||
MINORITY OWNERSHIP LOSS, NET OF TAX |
183 | 139 | 137 | |||||||||
NET INCOME |
26,609 | 22,591 | 254,555 | |||||||||
Foreign currency translation |
435 | (224 | ) | 209 | ||||||||
COMPREHENSIVE INCOME |
$ | 27,044 | $ | 22,367 | $ | 254,764 | ||||||
Earnings per share |
||||||||||||
Basic |
$ | 0.33 | $ | 0.49 | $ | 7.91 | ||||||
Diluted |
$ | 0.32 | $ | 0.30 | $ | 3.56 | ||||||
Weighted average number of common shares outstanding: |
||||||||||||
Basic |
81,641 | 45,643 | 32,175 | |||||||||
Diluted |
81,921 | 74,486 | 71,566 | |||||||||
See notes to consolidated financial statements.
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(amounts in thousands, except earnings per share amounts)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(amounts in thousands, except earnings per share amounts)
| 2004 | ||||
PRO FORMA COMPUTATION RELATED TO CONVERSION TO CORPORATION FOR INCOME TAX PURPOSES |
||||
Income before income tax (provision) benefit and minority ownership loss — historical |
$ | 41,996 | ||
Income tax provision — historical, exclusive of tax benefit, net |
(10,443 | ) | ||
Pro forma income tax provision (unaudited) |
(4,600 | ) | ||
Minority ownership loss — historical loss, net of tax |
137 | |||
PRO FORMA NET INCOME (UNAUDITED) |
$ | 27,090 | ||
Pro forma earnings per share: |
||||
Basic |
$ | 0.84 | ||
Diluted |
$ | 0.38 | ||
Pro forma weighted average number of common shares outstanding |
||||
Basic |
32,175 | |||
Diluted |
71,566 | |||
See notes to consolidated financial statements.
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(amounts in thousands, except shares)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(amounts in thousands, except shares)
| Common Stock - | Common Stock - | Preferred Stock - | Preferred Stock - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series A | Series B | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Number of | Paid in | Accumulated | Comprehensive | Members' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Capital | Total | ||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2003 |
— | $ | — | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | 1,741 | $ | 197,506 | $ | 199,247 | ||||||||||||||||||||||||||||||
Net income before change in tax
status |
227,121 | 227,121 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
209 | 209 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to members |
(73,028 | ) | (73,028 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Deemed distributions to members |
(3,166 | ) | (3,166 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Deemed contributions from members |
964 | 964 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Redemption of membership units |
(435,560 | ) | (435,560 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Change in tax status from a limited
liability company to a corporation
on May 14, 2004 |
31,775,250 | 32 | 399,750 | — | 31,720,000 | 32 | 7,605,000 | 8 | — | (86,235 | ) | 86,163 | — | |||||||||||||||||||||||||||||||||||||||
Net income after change in tax status |
— | — | — | — | — | — | — | — | — | 27,434 | — | — | 27,434 | |||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||
See notes to consolidated financial statements.
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands)
| 2006 | 2005 | 2004 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 26,609 | $ | 22,591 | $ | 254,555 | ||||||
Adjustments to reconcile net income to cash provided by
operating activities: |
||||||||||||
Amortization of financing costs |
1,584 | 1,942 | 1,618 | |||||||||
Amortization of intangibles |
5,520 | 5,295 | 5,672 | |||||||||
Depreciation |
4,369 | 6,814 | 7,876 | |||||||||
(Gain)loss on sale or disposal of assets |
(6 | ) | 47 | 179 | ||||||||
Loss on early extinguishment of debt |
3,417 | 9,529 | — | |||||||||
Provision for bad debts |
6,483 | 4,068 | — | |||||||||
Deferred income taxes |
15,899 | 7,228 | (214,665 | ) | ||||||||
Minority ownership loss |
(287 | ) | (218 | ) | (213 | ) | ||||||
Stock-based compensation |
9,141 | — | — | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Settlement receivables |
(76,654 | ) | (30,029 | ) | (9,815 | ) | ||||||
Other receivables, net |
(10,503 | ) | (7,097 | ) | (659 | ) | ||||||
Prepaid and other assets |
(1,906 | ) | (1,093 | ) | (475 | ) | ||||||
Settlement liabilities |
78,188 | 17,837 | 18,995 | |||||||||
Accounts payable |
5,867 | (178 | ) | 2,588 | ||||||||
Accrued expenses |
2,358 | 1,849 | 9,556 | |||||||||
Net cash provided by operating activities |
70,079 | 38,585 | 75,212 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property, equipment and leasehold improvements |
(14,195 | ) | (7,098 | ) | (3,261 | ) | ||||||
Purchase of other intangibles |
(1,516 | ) | (10,762 | ) | (1,600 | ) | ||||||
Changes in restricted cash and cash equivalents |
(1,350 | ) | — | — | ||||||||
Net cash used in investing activities |
(17,061 | ) | (17,860 | ) | (4,861 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Borrowings under credit facility and senior subordinated notes |
121,730 | — | 484,087 | |||||||||
Repayments under credit facility |
(168,662 | ) | (74,588 | ) | (16,750 | ) | ||||||
Repayments from early retirement of senior subordinated notes |
— | (89,446 | ) | — | ||||||||
Debt issuance costs |
(1,557 | ) | (331 | ) | (3,000 | ) | ||||||
Proceeds from sale of stock |
— | 128,895 | — | |||||||||
Proceeds from exercise of stock options |
1,488 | — | — | |||||||||
Minority capital contributions |
240 | 280 | 300 | |||||||||
Redemption of membership interests and distributions to partners |
— | — | (508,587 | ) | ||||||||
Net cash used in financing activities |
(46,761 | ) | (35,190 | ) | (43,950 | ) | ||||||
(continued)
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(amounts in thousands)
| 2006 | 2005 | 2004 | ||||||||||
NET EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS |
$ | (461 | ) | $ | 11 | $ | (247 | ) | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
5,796 | (14,454 | ) | 26,154 | ||||||||
CASH AND CASH EQUIVALENTS—Beginning of period |
35,123 | 49,577 | 23,423 | |||||||||
CASH AND CASH EQUIVALENTS—End of period |
$ | 40,919 | $ | 35,123 | $ | 49,577 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during year for: |
||||||||||||
Interest |
$ | 38,735 | $ | 43,610 | $ | 25,689 | ||||||
Income taxes |
$ | 410 | $ | 2,334 | $ | 407 | ||||||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES: |
||||||||||||
Contribution related to forgiveness of related party payable |
$ | 964 | ||||||||||
Distribution related to forgiveness of related party receivable |
$ | 3,166 | ||||||||||
Debt issuance costs treated as a reduction of credit facility proceeds |
$ | 10,913 | ||||||||||
See notes to consolidated financial statements.
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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. (formerly known as Global Cash Access,
L.L.C.) (“GCA”) and to guarantee the obligations under our senior secured credit facilities (see
further discussion at Note 7). On May 14, 2004, the Company converted from a limited liability
company to a corporation under the laws of Delaware and became known as Global Cash Access
Holdings, Inc. Prior to May 14, 2004, the Company operated as a limited liability company and was
known as Global Cash Access Holdings L.L.C. The accompanying consolidated financial statements
present the operations of the Company as if Holdings had been in existence for all periods
presented.
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 cashing transactions 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: CashCall Systems Inc.
(“CashCall”), 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 (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.
The accompanying consolidated financial statements include the accounts of Holdings and
its consolidated subsidiaries: GCA, CashCall, Central, BVI, Arriva, GCA Switzerland, IFT, GCA HK
and GCA Macau.
CashCall is a corporation incorporated under the laws of Ontario, Canada and is directly owned
by GCA. CashCall 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.
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”). Prior to March 10,
2004, First Data owned 67% of the Company (see further
discussion at Restructuring of Ownership below). 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.
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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 March 10, 2004 and further amended
effective November 20, 2006. 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.
Restructuring of Ownership
On December 10, 2003, the principal owners of GCA, First Data Financial Services, LLC (“FDFS”)
and FDFS Holdings, LLC (both of which are subsidiaries of First Data) and M&C International
(“M&C”), entered into a restructuring agreement with the principals of M&C. This restructuring
agreement and the subsequent amendments provided for the recapitalization of GCA’s membership so
that all of the membership units in GCA were contributed to Holdings. GCA is a wholly owned
subsidiary of Holdings.
Pursuant to the Restructuring of Ownership, all of the membership units in Holdings owned by
FDFS Holdings, LLC were redeemed for an aggregate amount of $435.6 million. Additionally, some of
M&C’s membership units in Holdings were redeemed for $38.0 million.
Immediately prior to the redemption of First Data’s and M&C’s membership units in Holdings,
M&C sold to Bank of America Corporation a portion of M&C’s membership units in Holdings for an
aggregate purchase price of $20.2 million. Additionally as part of the Restructuring of Ownership,
a $12.1 million distribution was made to M&C that was paid directly to Bank of America for
settlement of a loan between Bank of America and M&C.
Upon the consummation of the restructuring transaction, which was completed on March 10, 2004,
Holdings was approximately 95% owned by M&C and approximately 5% owned by a wholly owned subsidiary
of Bank of America Corporation.
Securities Purchase and Exchange Agreement
On April 21, 2004, and as amended on May 13, 2004, Holdings and the owners of Holdings entered
into a Securities Purchase and Exchange Agreement (“Securities Purchase Agreement”) whereby equity
interests in Holdings were sold to private equity investors for an aggregate purchase price of
$316.4 million. Under the terms of
the Securities Purchase Agreement, approximately 55% of the equity interests in Holdings held
by M&C were sold to the investors. The Company did not receive any proceeds under the private
equity restructuring.
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Additionally, Holdings agreed, among other things, to convert from a limited liability company
to a corporation organized under the laws of Delaware (the “Conversion”), and the members of
Holdings agreed to exchange membership units in Holdings for various classes of common and
preferred stock. Upon the consummation of the security purchase transaction, Holdings was
approximately 55% owned by the private equity investors, 40% owned by M&C and 5% owned by Bank of
America.
On May 14, 2004, the Company changed its tax classification from a limited liability company
to a taxable corporation organized under the laws of Delaware. In accordance with generally
accepted accounting principles, upon conversion to a taxable entity the Company recorded an income
tax benefit to establish a net deferred tax asset attributed to differences between the financial
reporting and the income tax basis of assets and liabilities (see further discussion in Note 10).
The consolidated statements of income have been expanded to reflect the unaudited pro forma impact
had the Company been a taxable entity for all periods presented.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The consolidated financial statements presented for the years ended December 31, 2006, 2005
and 2004 and as of December 31, 2006 and 2005 include the accounts of Global Cash Access Holdings,
Inc. and its subsidiaries. As part of the Restructuring of Ownership on March 10, 2004, an
affiliated company, CashCall, was contributed to GCA by the former owners. The financial
statements also include CashCall as a combined entity for the period prior to its contribution on
March 10, 2004 because it was under common control.
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 thousand as collateral for any potential chargeback loss activity
occurring as a result of the se sponsorship arrangements. Additionally, pursuant to the Revolving
Loan Product Program Agreement 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.
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 location for the face amount of dispensing transactions is
included within settlement liabilities. As of December 31, 2006 and 2005, the Company operated 626
and 203 ATMs, respectively that were Site-Funded.
For our non-Site Funded locations, GCA obtains the necessary cash to service these machines
through an Amended Treasury Services Agreement 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.
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Settlement Receivables and Settlement Liabilities
In the credit and debit card cash advance transactions provided by GCA and CashCall, 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 the dishonored check. 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 returned items. The warranty expense associated with this reserve is
included within cost of revenues (exclusive of depreciation and amortization) in the consolidated
statements of income.
A summary activity of the reserve for warranty losses as of December 31, 2006 and 2005 is as
follows (amounts in thousands):
Balance, December 31, 2003 |
$ | — | ||
Warranty expense provision |
30 | |||
Charge offs against reserve |
— | |||
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 | ||
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.
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 $4.4
million, $6.8 million, and $7.9 million, for the years ended December 31, 2006, 2005, and 2004,
respectively. Accumulated depreciation was $36.2 million and $31.8 million as of December 31, 2006
and 2005, respectively.
Repairs and maintenance costs are expensed as incurred.
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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,
2006, 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 adopted 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. In 2002, in
connection with its initial application, the Company ceased amortization of goodwill, and tested
the goodwill balances for impairment. The Company does not believe that any of its goodwill is
impaired as of December 31, 2006 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):
| 2006 | 2005 | |||||||
Cash Advance |
$ | 93,252 | $ | 93,253 | ||||
Credit Reporting |
39,470 | 39,470 | ||||||
ATM |
24,033 | 24,033 | ||||||
Total |
$ | 156,755 | $ | 156,756 | ||||
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 will be amortized
over its remaining legal life of 12 years. Excluding the patent, other intangibles are amortized on
a straight-line basis over periods ranging from 3 to 10 years.
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Other intangibles consist of the following as of December 31, (in thousands):
| 2006 | 2005 | |||||||
Customer contracts |
$ | 34,516 | $ | 34,516 | ||||
Computer software |
13,797 | 12,342 | ||||||
Patents |
10,000 | 10,000 | ||||||
Covenants not to compete |
60 | 1,180 | ||||||
| 58,373 | 58,038 | |||||||
Less accumulated amortization |
(40,372 | ) | (36,032 | ) | ||||
Total |
$ | 18,001 | $ | 22,006 | ||||
Amortization expense related to these intangibles totaled approximately $5.5 million,
$5.3 million, and $5.7 million for the years ended December 31, 2006, 2005, and 2004, respectively.
At December 31, 2006 the anticipated amortization expense related to other intangible assets,
assuming no subsequent impairment of the underlying assets, is as follows (in thousands):
2007 |
$ | 5,187 | ||
2008 |
3,173 | |||
2009 |
2,223 | |||
2010 |
1,675 | |||
2011 |
811 | |||
Thereafter |
4,932 | |||
Total |
$ | 18,001 | ||
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 $1.3 million, $0.6 million, and $0.6 million, of development
costs for the years ended December 31, 2006, 2005 and 2004, 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 $0.5 million and $0.5 million as of December 31, 2006 and 2005, respectively. The
Company expensed $0.3 million, $0.8 million, and $0.1 million in chargeback losses on credit and
debit card cash advance transactions for the years ended December 31, 2006, 2005, and 2004,
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, 2006 and 2005. 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, 2006 and 2005.
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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, 2006: |
||||||||
Senior secured credit facility (1) |
$ | 121,730 | $ | 121,730 | ||||
Senior subordinated notes |
$ | 159,815 | $ | 152,750 | ||||
December 31, 2005: |
||||||||
Senior secured credit facility |
$ | 170,770 | $ | 168,662 | ||||
Senior subordinated notes |
$ | 162,488 | $ | 152,750 | ||||
(1) - 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.
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.
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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, $1.2 million, and
$0.7 million for the years ended December 31, 2006, 2005, and 2004, respectively.
Income Taxes
As a result of the change in tax classification resulting from the conversion of the Company’s
organization as a limited liability company to a corporation in 2004, the Company is no longer a
pass-through entity for U.S. income tax purposes. 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 those
subsidiaries. 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
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. Actual results could differ from these estimates.
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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):
| 2006 | 2005 | 2004 | ||||||||||
Weighted average number of common shares outstanding — basic |
81,641 | 45,643 | 32,175 | |||||||||
Potential dilution from conversion of preferred shares |
— | 28,551 | 39,325 | |||||||||
Potential dilution from equity grants (1) |
280 | 292 | 66 | |||||||||
Weighted average number of common shares outstanding — diluted |
81,921 | 74,486 | 71,566 | |||||||||
(1) — The potential dilution excludes stock options to acquire 4,016,684, 3,786,640, and
655,731 shares of common stock at December 31, 2006, 2005 and 2004, respectively, and 554,076
shares of unvested restricted stock at December 31, 2006 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 is using 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. For
the year ended December 31, 2006, the incremental stock-based compensation expense caused income
before income tax provision and minority loss to decrease by $9.1 million and net income to
decrease by $6.8 million. For the year ended December 31, 2006, basic and diluted earnings per
share were decreased by $0.08 per share. In addition, SFAS No. 123(R) requires the excess tax
benefits from stock option exercises, tax deductions in excess of the tax benefits recorded for
compensation cost recognized, to be classified as a financing activity. There were no excess tax
benefits recognized in 2006 because of the utilization of our net operating loss carryforward.
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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 years ended December 31, 2005 and 2004 (amounts in
thousands):
| 2005 | 2004 | |||||||
Net income, as reported |
$ | 22,591 | $ | 254,555 | ||||
Less: total stock-based compensation determined
under fair-value based method for all awards, net
of tax |
3,870 | 206 | ||||||
Pro forma net income |
$ | 18,721 | $ | 254,349 | ||||
Earnings per share: |
||||||||
Basic, as reported |
$ | 0.49 | $ | 7.91 | ||||
Basic, pro forma |
$ | 0.41 | $ | 7.91 | ||||
Diluted, as reported |
$ | 0.30 | $ | 3.56 | ||||
Diluted, pro forma |
$ | 0.25 | $ | 3.56 | ||||
The estimated per share weighted-average fair value of stock options granted during 2006,
2005 and 2004 was $7.33, $7.27 and $4.27, 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,:
| 2006 | 2005 | 2004 | ||||||||||
Risk-free interest rate |
4.8 | % | 3.8 | % | 4.4 | % | ||||||
Expected life of options (in years) |
6.3 | 6.0 | 6.0 | |||||||||
Expected volatility of Holdings’ stock price |
37.3 | % | 50.0 | % | 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 was based on an estimate of the
volatility for similar companies within our industry. The expected dividend yield is based on
historical information, that the Company did not have 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. The Company granted 619,747 shares of common stock to employees and
non-employees directors in 2006. The weighted-average per share fair value of these time-based
restricted stock grants was $16.95 per share during the year ended December 31, 2006.
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 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, 2006, the interest is
determined as the one-month London InterBank Offered Rate (“LIBOR”) plus 225 basis points, or
approximately 7.6 %. During the year ended December 31, 2006, Arriva incurred $0.1 million in
Interim Interest which is included in cost of revenues (exclusive of depreciation and amortization)
in the consolidated income
statements. Arriva has the option to purchase the originated receivable from CIT at any time
between three and 180 days from the date the customer first borrows using the card. CIT has the
right to require Arriva to purchase any receivables that have a first payment default, cardholder
death or bankruptcy during the first 180 days from acquisition, and CIT will require Arriva to
purchase the net amount of all such receivables 180 days after acquisition. 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.
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As of December 31, 2006, CIT had $9.9 million in outstanding receivables from transactions
performed on Arriva Cards. For the year ended December 31, 2006, Arriva has purchased $0.1 million
in receivables from CIT for customer receivables that have had a first payment default, cardholder
death or bankruptcy during the first 180 days from acquisition.
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%. In the first year of the program Arriva is committed to paying $100 thousand
in minimum origination fees. In each subsequent year, this minimum origination fee is increased to
$200 thousand.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), which establishes accounting standards for
all transactions in which an entity exchanges its equity instruments for goods and services. We
adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) requires us to measure the cost of
employee services received in exchange for an award of equity instruments based on the fair value
of the award on the date of the grant. The standard requires grant date fair value to be estimated
using either an option-pricing model, which is consistent with the terms of the award, or a market
observed price, if such a price exists. Such cost must be recognized over the period during which
an employee is required to provide service in exchange for the award, that is, the requisite
service period (which is usually the vesting period). The standard also requires us to estimate the
number of instruments that will ultimately be issued, rather than accounting for forfeitures as
they occur. As a result of adopting SFAS No. 123(R) in 2006 we recognized $7.0 million of non-cash
stock option expense, which is recorded in operating expenses in the 2006 consolidated statements
of income.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, amending APB
29 (“SFAS No. 153”), which treated nonmonetary exchanges of similar productive assets as an
exception from fair value measurement. SFAS No. 153 replaces this exception with a general
exception from fair value measurement for exchanges of nonmonetary assets that do not have
commercial substance. Nonmonetary exchanges have commercial substance if the future cash flows of
an entity are expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company adopted this standard in 2006 and it did not have a material impact on our
results of operations, financial position or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No.
154”), requiring retrospective application to prior-period financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 also redefines “restatement” as the revising of
previously issued financial statements to reflect correction of errors made. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company adopted SFAS No. 154 in 2006 and it did not have a material impact
on our results of operations, financial position or cash flows.
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.
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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. The Company is
currently evaluating the impact of this standard on the consolidated financial statements.
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 September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(“SAB No. 108”). SAB No. 108 eliminates the diversity in practice surrounding how public companies
quantify financial statement misstatements and establishes an approach that requires quantification
and assessment of misstatements based on the effects of the misstatements on each of the Company’s
financial statements and the related footnote disclosures. Adoption of SAB No. 108 by the Company,
which was effective for fiscal years ending after November 15, 2006, did not have a material impact
on the consolidated financial statements.
| 3. | ATM FUNDING AGREEMENTS |
Bank of America Amended Treasury Services Agreement
On March 8, 2004, GCA entered into an Amendment of the Treasury Services Agreement with Bank
of America, N.A. that allowed for the Company to utilize up to $300 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 $300 million at the option of Bank
of America. At December 31, 2006 and 2005, the outstanding balance of ATM cash utilized by GCA
from Bank of America was $396.8 million and $377.1 million, respectively. 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. For the years ended December
31, 2006, 2005 and 2004, the cash usage fees incurred by the Company were $15.7 million, $10.2
million and $5.7 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, 2006, to
compute the cash usage fee was 5.67%.
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, 2006, 2005, and 2004 the Company has incurred no losses related to
this self insurance.
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 $53.7 million and $16.6 million as of
December 31, 2006 and 2005, respectively. The Company operated 626 and 203 ATMs, respectively,
at those Site Funded ATMs.
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| 4. | PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Property, equipment and leasehold improvements consist of the following as of December 31, (in
thousands):
| 2006 | 2005 | |||||||
ATM equipment |
$ | 44,866 | $ | 32,505 | ||||
Cash advance equipment |
6,733 | 5,405 | ||||||
Office, computer and other equipment |
2,791 | 2,274 | ||||||
Leasehold and building improvements |
2,226 | 2,150 | ||||||
| 56,616 | 42,334 | |||||||
Less accumulated depreciation |
(36,162 | ) | (31,755 | ) | ||||
Total |
$ | 20,454 | $ | 10,579 | ||||
| 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 $0.4 million, $0.3 million and $0.3 million for the years
ended December 31, 2006, 2005, and 2004, 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. As of December
31, 2006, the Company had reserved 6,288,222 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.
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 options or other equity incentive awards granted, the vesting
provisions, the term and the exercise price.
Generally, 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.
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A summary of award activity under the Company’s 2005 Plan as of December 31, 2006 and changes
during the years then ended are as follows:
| Stock Option – | Number of Common Shares | |||||||||||||||
| Weighted Average | Equity Awards | |||||||||||||||
| Exercise Price | Stock Options | Restricted Stock | Available | |||||||||||||
| (Per Share) | Granted | Granted | for Grant | |||||||||||||
Adoption of 2005 Plan — January 6, 2005 |
N/A | — | — | 3,841,615 | ||||||||||||
Stock options granted |
$ | 13.99 | 3,504,430 | — | (3,504,430 | ) | ||||||||||
Stock options exercised |
N/A | — | — | — | ||||||||||||
Stock options canceled |
$ | 13.99 | (147,500 | ) | — | 147,500 | ||||||||||
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 | |||||||||||
In addition to the 2005 Plan, the Company has granted our Chief Financial Officer options
to acquire 722,215 shares of common stock as part of his employment agreement in 2004 (“Hagerty
Option). These options have an exercise price of $8.05 per share and 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 vest on the 12th day
of each month thereafter. In the event of the termination of Mr. Hagerty’s employment with the
Company without “cause” or for “good reason”, all of the shares subject to the Hagerty Option shall
immediately vest. In addition, all of the shares subject to the Hagerty Option will immediately
vest upon the acquisition or change in control of the Company.
During 2006, Mr. Hagerty exercised vested options to acquire 100,000 shares of common stock.
At December 31, 2006, there are options to acquire 622,215 shares of common stock outstanding under
the Hagerty Option.
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.
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The following tables summarize additional information regarding the options that have been
granted under the 2005 Plan and the option grants to our Chief Financial Officer upon commencement
of his employment in 2004:
| Number of | Weighted Avg. | Weighted | ||||||||||||||
| Common | Exercise Price | Average Life | Aggregate | |||||||||||||
| Shares | (Per Share) | Remaining | Intrinsic Value | |||||||||||||
Balance outstanding — December 31, 2004 |
722,215 | $ | 8.05 | |||||||||||||
Granted |
3,504,430 | $ | 13.99 | |||||||||||||
Exercised |
— | N/A | ||||||||||||||
Canceled |
(147,500 | ) | $ | 13.99 | ||||||||||||
Balance outstanding — December 31, 2005 |
4,079,145 | $ | 12.94 | $ | 27,502 | |||||||||||
Granted |
375,000 | $ | 16.01 | |||||||||||||
Exercised |
(149,709 | ) | $ | 10.02 | ||||||||||||
Canceled |
(57,086 | ) | $ | 13.99 | ||||||||||||
Balance outstanding — December 31, 2006 |
4,247,350 | $ | 13.30 | 8.2 years | $ | 29,103 | ||||||||||
Balance exercisable — December 31, 2006 |
1,804,324 | $ | 12.90 | 8.0 years | $ | 12,281 | ||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Number | Contract | Exercise | Number | Exercise | ||||||||||||||||
| Range of Exercise Prices | Outstanding | Life | Prices | Exercisable | Price | |||||||||||||||
$8.05 |
622,215 | 7.7 years | $ | 8.05 | 336,338 | $ | 8.05 | |||||||||||||
$13.00 - $13.99 |
3,180,135 | 8.1 years | $ | 13.99 | 1,436,736 | $ | 13.99 | |||||||||||||
$14.00 - $14.99 |
110,000 | 8.8 years | $ | 14.07 | 31,250 | $ | 14.00 | |||||||||||||
$15.00 - $15.99 |
155,000 | 9.5 years | $ | 15.22 | — | N/A | ||||||||||||||
$16.00 - $16.99 |
115,000 | 9.8 years | $ | 16.08 | — | N/A | ||||||||||||||
$18.00 - $18.99 |
65,000 | 9.3 years | $ | 18.94 | — | N/A | ||||||||||||||
| 4,247,350 | 1,804,324 | |||||||||||||||||||
The weighted-average grant-date fair value per share of the options granted during the years
ended December 31, 2006, 2005 and 2004 was $7.33, $7.27 and $4.27, respectively.
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. As of December
31, 2006, there was $14.4 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 2.15 years. There were no stock option exercises in 2005.
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. Prior to vesting, the restricted stock has rights to the
dividends declared and voting rights, therefore they are considered issued and outstanding.
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In March 2006, the Company awarded 619,747 shares of time-based restricted common stock to
employees. These shares will vest over a period of four years. A summary of non-vested share awards
for the Company’s time-based restricted shares as of December 31, 2006 and changes during the year
is as follows:
| Weighted | ||||||||
| Shares | Average Grant | |||||||
| Outstanding | Date Fair Value | |||||||
Balance — December 31, 2005 |
— | — | ||||||
Granted |
619,747 | $ | 16.95 | |||||
Vested |
(6,250 | ) | $ | 16.95 | ||||
Canceled |
(10,500 | ) | $ | 16.95 | ||||
Balance — December 31, 2006 |
602,997 | $ | 16.95 | |||||
During the year ended December 31, 2006, 6,250 shares of time-based restricted shares vested.
There were no time-based restricted shares vested during the years ended December 31, 2005 or 2004.
During the years ended December 31, 2006, we recorded $2.1 million in non-cash compensation expense
related to the restricted stock granted that is expected to vest. As of December 31, 2006, there
was $7.7 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 3.1 years.
On February 6, 2007, our Board of Directors approved the grant of an additional 0.7 million
shares of restricted stock to employees and certain non-employee members of the Company’s Board of
Directors. These shares will vest over a four year period. The total value of the award at the
date of grant is $11.3 million.
| 6. | COMMITMENTS AND CONTINGENCIES |
Lease Obligations
The Company leases office facilities and operating equipment under cancelable and
noncancelable agreements. Total rent expense was approximately $0.5 million, $0.5 million, and
$0.6 million, for the years ended December 31, 2006, 2005, and 2004, respectively.
At December 31, 2006, the minimum aggregate rental commitment under all non-cancelable
operating leases for the years then ending was (in thousands):
2007 |
$ | 518 | ||
2008 |
499 | |||
2009 |
475 | |||
2010 |
475 | |||
2011 |
159 | |||
Thereafter |
— | |||
Total |
$ | 2,126 | ||
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.
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Canadian Goods and Services Tax (“GST”). In April 2004, CashCall 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 CashCall. The CRA’s position is
disputed by both CashCall 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
CashCall is not an exempt financial services transaction. Therefore, the ETA would require the
customer to collect Goods and Services Tax (“GST”) from CashCall 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.
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, 2006 and 2005, the Company has recorded $43 thousand and $83 thousand,
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.
Patent Infringement Litigation. On October 22, 2004, we and USA Payments, as co-plaintiffs,
filed a complaint in United States District Court, District of Nevada against U.S. Bancorp d/b/a
U.S. Bank, Certegy Inc., Certegy Check Services, Inc., Game Financial Corporation and GameCash,
Inc. alleging the infringement of the patented “3-in-1 rollover” functionality. In this litigation,
we were seeking an injunction against future infringement of the patent and recovery of damages as
a result of past infringement of the patent. Effective August 31, 2006, all ongoing lawsuits
between us, U.S. Bancorp d/b/a U.S. Bank, Certegy Inc., Certegy Check Services, Inc., Game
Financial Corporation and GameCash, Inc. were settled. The parties entered into a confidential
Settlement and Patent License Agreement and Release, whereby no party is obligated to pay money and
the claims and counterclaims were released.
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 the principals of M&C, pursuant to the Amended and Restated
Agreement for Electronic Payment Processing. 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.
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Arriva Origination Commitments. Arriva entered into separate agreements with CIT and with
Fiserv Solutions, Inc. (“Fiserv”), which were effective March 14, 2006 and August 10, 2006,
respectively. These agreements govern the issuance, underwriting and processing of our private
label credit card. Under the terms of the agreements with CIT, Arriva is committed to pay CIT a
minimum of $0.2 million in consumer origination fees and $0.1 million in other operating expenses
during the first 18 months of the term. After meeting these commitments, Arriva may cancel these
agreements at any time during the first 18 months of the term without any additional penalty. Under
the terms of the agreement with Fiserv, Arriva is also 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 September 30, 2006, we had
invested a total of $4.0 million in IFT, and are committed to invest up to $2.0 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. 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.
| 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, 2006, the Applicable Margin was 137.5 basis points and the effective rate of interest
was 6.70%. 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.
As of December 31, 2006, the scheduled quarterly amortization payments on the term loan
portion of the Second Amended and Restated Credit Agreement are $250 thousand 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.
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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, 2006.
As of December 31, 2006, the Company had $100.0 million in borrowings under the term loan,
$21.7 million under the revolving portion and $3.1 million in letters of credits 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.
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. As of December 31, 2005, the Company had $168.6 million in borrowings under the term
loan and $3.1 million in letters of credits issued and outstanding, which reduced amounts available
under the revolving portion of the First Amended and Restated Credit Agreement. Interest expense,
under the terms of the First Amended and Restated Credit Agreement, was generally determined based
upon LIBOR plus an applicable margin. As of December 31, 2005, the applicable margin was 175 basis
points and the interest rate applicable to the term loan was 6.64%.
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 Restructuring of Ownership 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 be 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, 2006 and 2005, the Company had $152.8 million in borrowings outstanding
under the Notes Offering.
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.
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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, 2006, the minimum aggregate repayment (excluding excess cash flow payments)
for all borrowings for the years then ending was (in thousands):
2007 |
$ | 1,000 | ||
2008 |
1,000 | |||
2009 |
1,000 | |||
2010 |
1,000 | |||
2011 |
117,730 | |||
Thereafter |
152,750 | |||
Total |
$ | 274,480 | ||
At December 31, 2006, the Company believes it is in compliance with all debt covenants related
to the Second Amended and Restated Credit Agreement and the Senior Subordinated Notes.
| 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.
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, 2006 we had 82,312,524 shares of common stock
outstanding (including 602,997 shares of nonvested restricted stock) and had no shares of
preferred stock outstanding.
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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.
| 9. | RELATED PARTY TRANSACTIONS |
M&C International (“M&C”) is the owner of approximately 23.5% of the outstanding equity
interests of the Company. Two members of our Board of Directors are principals of M&C. 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 the principals of M&C and family members of
one of our directors. These family members now own approximately 60% of the ownership interests,
and hold two of the three director seats, of Infonox. The software development costs are
capitalized and reflected in intangible assets in the consolidated balance sheets and the system
maintenance is classified in operating expenses in the consolidated statements of income.
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.
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The following table represents the transactions with related parties for the years ended
December 31, (amounts in thousands):
| Description of Transaction | 2006 | 2005 | 2004 | |||||||||
Infonox on the Web: |
||||||||||||
Software development costs and maintenance expense |
$ | 1,976 | $ | 1,588 | $ | 1,624 | ||||||
USA Payments & USA Payments Systems: |
||||||||||||
Transaction processing charges |
2,908 | 2,835 | 2,513 | |||||||||
Pass through billing related to gateway fees,
telecom and other items |
1,312 | 1,206 | 1,533 | |||||||||
Sublease income earned for leasing out corporate
office space for backup servers |
(18 | ) | (18 | ) | (18 | ) | ||||||
Acquisition of 3-in-1 Patent |
— | 10,000 | — | |||||||||
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):
| 2006 | 2005 | |||||||
M&C and related companies |
$ | 42 | $ | 11 | ||||
Total included within receivables, other |
$ | 42 | $ | 11 | ||||
USA Payment Systems |
$ | (149 | ) | $ | (345 | ) | ||
Infonox on the Web |
(633 | ) | (171 | ) | ||||
Total included within accounts payable and
accrued expenses |
$ | (782 | ) | $ | (516 | ) | ||
| 10. | INCOME TAXES |
Pursuant to the Securities Purchase and Exchange Agreement, the Company was required to
convert from 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.
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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):
| 2006 | 2005 | 2004 | ||||||||||
Components of pretax income: |
||||||||||||
Domestic |
$ | 38,275 | $ | 24,967 | $ | 37,690 | ||||||
Foreign |
4,890 | 5,438 | 4,306 | |||||||||
Consolidated, before minority ownership loss |
$ | 43,165 | $ | 30,405 | $ | 41,996 | ||||||
(Provision) benefit for income taxes: |
||||||||||||
Domestic |
$ | (15,585 | ) | $ | (6,770 | ) | $ | 214,084 | ||||
Foreign |
(1,257 | ) | (1,262 | ) | (1,738 | ) | ||||||
Consolidated (1) |
$ | (16,842 | ) | $ | (8,032 | ) | $ | 212,346 | ||||
Income tax benefit from minority ownership loss |
103 | 79 | 76 | |||||||||
(Provision) benefit for income taxes, before minority ownership loss |
$ | (16,739 | ) | $ | (7,953 | ) | $ | 212,422 | ||||
(1) -
The consolidated (provision) benefit 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, 2006, 2005 and 2004.
The
Company’s income tax (provision) benefit consists of the
following components as of December 31, (amounts are in
thousands):
| 2006 | 2005 | 2004 | ||||||||||
Current |
$ | (1,257 | ) | $ | (1,262 | ) | $ | (1,738 | ) | |||
Deferred |
(15,585 | ) | (6,770 | ) | 214,084 | |||||||
Total
(provision) benefit for income taxes |
$ | (16,842 | ) | $ | (8,032 | ) | $ | 212,346 | ||||
As of December 31, 2006 the Company has approximately $11.6 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 in 2025.
As of December 31, 2006, the Company had approximately $3.9 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 $1.9 million, $1.0 million and
$1.0 million will expire in 2014, 2015 and 2016, respectively.
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, 2006 and 2005 are as
follows:
| 2006 | 2005 | |||||||
Federal statutory rate |
35.00 | % | 35.00 | % | ||||
Effect of: |
||||||||
Foreign provision |
(0.07 | ) | (0.51 | ) | ||||
State/Province income tax |
1.05 | 0.98 | ||||||
Non-deductible compensation cost |
2.13 | 0.00 | ||||||
Final adjustment to 2004 incorporation tax asset |
0.00 | (9.95 | ) | |||||
Non-deductible expenses and other items |
0.65 | 0.75 | ||||||
Effective tax rate |
38.76 | % | 26.27 | % | ||||
Substantially all of the difference between our statutory tax rate of 35% and our effective
tax rate of (505.6)% for the year ended December 31, 2004 resulted from the recognition of the net
deferred tax asset recorded in connection with our change in tax classification to a corporation in
2004.
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The following table outlines the principal components of deferred tax items at December 31,
(amounts in thousands):
| 2006 | 2005 | |||||||
Deferred tax assets related to: |
||||||||
Property, equipment and leasehold improvements |
$ | 603 | $ | 991 | ||||
Sales allowances |
3,857 | 1,198 | ||||||
Foreign tax credits |
3,872 | 3,158 | ||||||
Net operating losses |
3,939 | 7,690 | ||||||
Stock options FAS 123(R) expense |
2,269 | — | ||||||
Intangibles |
178,190 | 195,793 | ||||||
Total deferred income tax assets |
192,730 | 208,830 | ||||||
Deferred tax liabilities related to: |
||||||||
Accrued expenses |
(45 | ) | 347 | |||||
Other |
1,034 | 1,007 | ||||||
Total deferred income tax liabilities |
989 | 1,354 | ||||||
Deferred income taxes, net |
$ | 191,741 | $ | 207,476 | ||||
Deferred taxes have not been provided on unrepatriated earnings in the amount of approximately
$4.4 million of our investments in our foreign subsidiaries. These earnings are considered
permanently reinvested, as it is management’s intention to reinvest foreign profits to finance
foreign operations.
| 11. | PRO FORMA INCOME TAX INFORMATION (UNAUDITED) |
The pro forma unaudited income tax adjustments represent the tax effects that would have been
reported had the Company been subject to U.S. 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 U.S. federal and state income taxes for all periods
presented. Therefore, the unaudited 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 U.S. federal
and state income taxes as a corporation for all periods presented.
The following table presents the computation of the unaudited pro forma income tax expense for
the year ended December 31, (amounts in thousands):
| 2004 | ||||
Income before income taxes, as reported |
$ | 41,996 | ||
Effective pro forma income tax rate |
36.00 | % | ||
Pro forma income tax expense |
$ | 15,119 | ||
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| 12. | 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 addition in 2006 of the Arriva Card, a
private-label credit card, will likely become a separate business line when it becomes significant.
Currently the Arriva operations are included in the “Other” column. Also in the “Other” lines of
business category, none of which exceed the established materiality for segment reporting, include
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, 2006, 2005, and 2004, the combined revenues from all
segments for this customer, assuming it had been combined for all periods presented, would have
been approximately $97.9 million, $81.3 million, and $82.2 million, respectively, representing
18.1%, and 17.9% and 20.4% of the Company’s total consolidated revenues, respectively. On a
historical basis, the combined revenues from all segments from Harrah’s only, for the year ended
December 31, 2004, was $47.2 million, representing 11.7% of the Company’s total revenues.
On April 25, 2005, MGM MIRAGE (“MGM”) acquired Mandalay Resort Group (“Mandalay”). Prior to
December 2005, the Company did not have any cash advance revenue or ATM revenue from MGM, but did
provide services to Mandalay. For the years ended December 31, 2006, 2005 and 2004, the combined
revenues from all segments for MGM, assuming it had been combined for all periods presented, would
have been approximately $53.8 million, $30.8 million and $28.0 million, respectively, representing
9.9%, 6.8% and 7.0%, of the Company’s total consolidated revenues, respectively.
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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,
total assets, and long-lived assists by operating segment as of, and for the years ended (amounts
in thousands):
| Cash | Check | Credit | ||||||||||||||||||||||
| Advance | ATM | Services | Reporting | Other | Total | |||||||||||||||||||
December 31, 2006 |
||||||||||||||||||||||||
Revenues |
$ | 287,053 | $ | 221,727 | $ | 29,166 | $ | 8,511 | $ | 1,691 | $ | 548,148 | ||||||||||||
Depreciation and amortization |
(3,904 | ) | (5,283 | ) | (21 | ) | (78 | ) | (603 | ) | (9,889 | ) | ||||||||||||
Operating income (loss) |
43,142 | 31,161 | 9,110 | 4,482 | (2,699 | ) | 85,196 | |||||||||||||||||
Interest income |
3,484 | — | — | — | — | 3,484 | ||||||||||||||||||
Interest expense |
(13,842 | ) | (29,775 | ) | (1,406 | ) | (410 | ) | (82 | ) | (45,515 | ) | ||||||||||||
Income taxes |
(12,771 | ) | (590 | ) | (2,981 | ) | (1,576 | ) | 1,179 | (16,739 | ) | |||||||||||||
Minority ownership loss |
— | — | — | — | 183 | 183 | ||||||||||||||||||
Net income (loss) |
$ | 20,013 | $ | 796 | $ | 4,723 | $ | 2,496 | $ | (1,419 | ) | $ | 26,609 | |||||||||||
December 31, 2005 |
||||||||||||||||||||||||
Revenues |
$ | 235,055 | $ | 182,291 | $ | 26,376 | $ | 8,867 | $ | 1,491 | $ | 454,080 | ||||||||||||
Depreciation and amortization |
(4,283 | ) | (7,191 | ) | (36 | ) | (103 | ) | (496 | ) | (12,109 | ) | ||||||||||||
Operating income |
41,246 | 28,579 | 7,437 | 4,959 | 63 | 82,284 | ||||||||||||||||||
Interest income |
1,815 | — | — | — | — | 1,815 | ||||||||||||||||||
Interest expense |
(17,569 | ) | (33,380 | ) | (1,971 | ) | (663 | ) | (111 | ) | (53,694 | ) | ||||||||||||
Income taxes |
(7,401 | ) | 2,865 | (1,968 | ) | (1,547 | ) | 98 | (7,953 | ) | ||||||||||||||
Minority ownership loss |
— | — | — | — | 139 | 139 | ||||||||||||||||||
Net income (loss) |
$ | 18,091 | $ | (1,936 | ) | $ | 3,498 | $ | 2,749 | $ | 189 | $ | 22,591 | |||||||||||
December 31, 2004 |
||||||||||||||||||||||||
Revenues |
$ | 209,962 | $ | 158,433 | $ | 23,768 | $ | 9,368 | $ | 1,472 | $ | 403,003 | ||||||||||||
Depreciation and amortization |
(4,803 | ) | (7,869 | ) | (17 | ) | (364 | ) | (495 | ) | (13,548 | ) | ||||||||||||
Operating income |
39,981 | 20,256 | 9,681 | 4,100 | 3 | 74,021 | ||||||||||||||||||
Interest income |
1,318 | — | — | — | — | 1,318 | ||||||||||||||||||
Interest expense |
(14,394 | ) | (16,576 | ) | (1,630 | ) | (642 | ) | (101 | ) | (33,343 | ) | ||||||||||||
Income taxes |
129,020 | 87,434 | (2,899 | ) | (1,245 | ) | 112 | 212,422 | ||||||||||||||||
Minority ownership loss |
— | — | — | — | 137 | 137 | ||||||||||||||||||
Net income |
$ | 155,925 | $ | 91,114 | $ | 5,152 | $ | 2,213 | $ | 151 | $ | 254,555 | ||||||||||||
| December 31, | December 31, | |||||||
| Total Assets | 2006 | 2005 | ||||||
Cash advance |
$ | 359,024 | $ | 320,688 | ||||
ATM |
177,278 | 142,626 | ||||||
Check services |
5,310 | 3,886 | ||||||
Credit reporting |
46,872 | 43,162 | ||||||
Other |
164 | 56 | ||||||
Total assets |
$ | 588,647 | $ | 510,418 | ||||
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| 13. | SUBSEQUENT EVENTS |
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.
Restricted Share Grants. On February 6, 2007, our Board of Directors approved the grant of 0.7
million shares of restricted stock to employees and certain non-employee members of the Company’s
Board of Directors. These shares will vest over a four year period. The total value of the award
at the date of grant was $11.3 million.
| 14. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
| First | Second | Third | Fourth | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
| (amounts in thousands, except earnings per share) | ||||||||||||||||||||
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 | ||||||||||
2004 |
||||||||||||||||||||
Revenue |
$ | 97,370 | $ | 97,711 | $ | 106,170 | $ | 101,752 | $ | 403,003 | ||||||||||
Operating income |
18,069 | 14,944 | 21,645 | 19,363 | 74,021 | |||||||||||||||
Net income |
14,103 | 214,462 | 6,694 | 19,296 | 254,555 | |||||||||||||||
Earnings per share: (1) |
||||||||||||||||||||
Basic |
$ | 0.44 | $ | 6.67 | $ | 0.21 | $ | 0.60 | $ | 7.91 | ||||||||||
Diluted |
$ | 0.20 | $ | 3.00 | $ | 0.09 | $ | 0.27 | $ | 3.56 | ||||||||||
(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.
| 15. | 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, 2006 and 2005. 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. CashCall, 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, 2006 and December 31, 2005.
91
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — BALANCE SHEET INFORMATION
DECEMBER 31, 2006
(amounts in thousands)
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
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — BALANCE SHEET INFORMATION
DECEMBER 31, 2005
(amounts in thousands)
CONDENSED CONSOLIDATING SCHEDULE — BALANCE SHEET INFORMATION
DECEMBER 31, 2005
(amounts in thousands)
| Combined | ||||||||||||||||||||||||
| Combined | Non- | Elimination | ||||||||||||||||||||||
| Parent | Issuer | Guarantors | Guarantors | Entries * | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | — | $ | 32,237 | $ | 276 | $ | 2,610 | $ | — | $ | 35,123 | ||||||||||||
Settlement receivables |
— | 59,236 | — | 928 | — | 60,164 | ||||||||||||||||||
Other receivables, net |
— | 7,318 | 22,737 | 37 | (22,737 | ) | 7,355 | |||||||||||||||||
Prepaid and other assets |
— | 10,947 | — | 12 | — | 10,959 | ||||||||||||||||||
Investment in subsidiaries |
94,484 | 66,707 | — | — | (161,191 | ) | — | |||||||||||||||||
Property, equipment and
leasehold improvements, net |
— | 10,485 | 3 | 91 | — | 10,579 | ||||||||||||||||||
Goodwill, net |
— | 116,574 | 39,471 | 711 | — | 156,756 | ||||||||||||||||||
Other intangibles, net |
— | 21,714 | 128 | 164 | — | 22,006 | ||||||||||||||||||
Deferred income taxes, net |
— | 207,476 | — | — | — | 207,476 | ||||||||||||||||||
TOTAL |
$ | 94,484 | $ | 532,694 | $ | 62,615 | $ | 4,553 | $ | (183,928 | ) | $ | 510,418 | |||||||||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||||||||||||||||||
LIABILITIES: |
||||||||||||||||||||||||
Settlement liabilities |
$ | — | $ | 59,017 | $ | — | $ | 765 | $ | — | $ | 59,782 | ||||||||||||
Accounts payable |
— | 20,103 | 70 | 240 | — | 20,413 | ||||||||||||||||||
Accrued expenses |
— | 37,529 | 58 | (671 | ) | (22,738 | ) | 14,178 | ||||||||||||||||
Borrowings |
— | 321,412 | — | — | — | 321,412 | ||||||||||||||||||
Total liabilities |
— | 438,061 | 128 | 334 | (22,738 | ) | 415,785 | |||||||||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||||||||||||||
MINORITY INTEREST |
— | 149 | — | — | — | 149 | ||||||||||||||||||
STOCKHOLDERS’ EQUITY
(DEFICIT) |
94,484 | 94,484 | 62,487 | 4,219 | (161,190 | ) | 94,484 | |||||||||||||||||
TOTAL |
$ | 94,484 | $ | 532,694 | $ | 62,615 | $ | 4,553 | $ | (183,928 | ) | $ | 510,418 | |||||||||||
* Eliminations include intercompany investments and management fees
93
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
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
94
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
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
95
Table of Contents
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
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) |
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
(amounts in thousands)
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 | (3,100 | ) | — | ||||||||||||||||||
Net cash provided by (used in) financing activities |
1,488 | (47,001 | ) | 1,000 | 600 | (2,860 | ) | (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
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
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 extinguishment of debt |
— | 9,529 | — | — | — | 9,529 | ||||||||||||||||||
Provision for bad debts |
— | 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) |
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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE — STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
(amounts in thousands)
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
99
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e)
and 15d — 15(e)) that are designed to provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC’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. In designing and
evaluating the disclosure controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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 of our disclosure controls and procedures as of December 31, 2006, 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, because of the material weaknesses
in our internal control over financial reporting described below, as of December 31, 2006 our
disclosure controls and procedures were not effective.
Notwithstanding management’s assessment that our internal control over financial reporting was
ineffective as of December 31, 2006 and the material weaknesses described below, we believe that
the consolidated financial statements included in this Annual Report on Form 10-K correctly present
in all material respects our financial position, results of operations and cash flows for the
fiscal years covered therein.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of an issuer’s financial statements for
external purposes in accordance with accounting principles generally accepted in the United States
of America (“GAAP”). Internal control over financial reporting includes policies and procedures
that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of an issuer’s assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that an issuer’s receipts
and expenditures are being made only in accordance with authorizations of its management
and directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of an issuer’s assets that could have a material effect on
the financial statements. |
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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, the application of any evaluation of effectiveness to future periods
is subject to the risk that
controls may become inadequate because of changes in conditions, or that compliance with the
policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our internal control over financial reporting as of December 31, 2006.
Management’s assessment was based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated Framework. Our assessment
identified deficiencies that were determined to be material weaknesses.
A material weakness is a significant control deficiency, or combination of significant control
deficiencies, that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. Because of the material
weaknesses described below, management concluded that our internal control over financial reporting
was not effective as of December 31, 2006.
The specific material weaknesses identified by management as of December 31, 2006 are
described as follows:
| • | 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 material
weakness did not result in a material adjustment to our 2006 consolidated financial
statements but did contribute significantly to the following internal control deficiencies
each of which is 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. |
||
| • | 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: We did not have 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. |
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Our independent registered public accounting firm, Deloitte & Touche LLP, has issued a report
on management’s assessment of our internal control over financial reporting which is set forth
below.
Changes in Internal Control
Based on the evaluation required by Rule 13a-15(d) of the Exchange Act, there were no changes
to our internal control over financial reporting during the quarter ended December 31, 2006 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Remediation Plan
We have undertaken efforts to remediate the material weaknesses identified in our internal
control over financial reporting described above, including developing the specific remediation
initiatives described below. The implementation of these initiatives is a priority in 2007. Even
though we have commenced these efforts, there can be no assurance that we will complete the
remediation, that we will do so on a timely basis, and, even if we do so that the remediation
efforts will eliminate the identified material weaknesses. In addition, it is possible that we or
our independent auditors may identify other material weaknesses in future periods.
Inadequate Staffing in Finance and Accounting
We have undertaken to increase both the number of people and the experience and training of
our finance and accounting staff. We are also planning to increase the number of people working in
our information systems department, since much of the data used by the finance and accounting staff
is generated by our information systems. We filled the vacancy in our Assistant Controller position
in November 2006, and during 2007 have filled other vacancies in accounts payables and in financial
accounting. We intend to fill all other open positions as quickly as possible. In addition, we
plan to create and fill several new positions. We believe that filling the existing and new
positions will assist us in remediating the control weaknesses identified that resulted from
inadequate accounting and finance staffing.
We will put in place specific procedures and checklists for our financial close process. Those
procedures will identify what information needs to be made available to specific individuals in
finance and accounting and the timetable for that information availability. Those procedures will
also define specific review and approval procedures for routine closing activities, including
reconciliation of all material balance sheet accounts. We believe that the use of these procedures
and checklists will allow us to more efficiently and predictably manage our financial close process
and to make financial information related to accounting periods available to management on a more
timely basis.
We are in the process of converting to a new accounting software system that has capabilities
unavailable in our former system. The availability of these capabilities should increase the
productivity of our staff in finance and accounting, as they will be required to spend less time on
tasks that will be automated by the new system.
With respect to the material weakness in computing our provision for income taxes, we will
review our capabilities with respect to income taxes. We will also integrate the tax area more
closely into our planning activities so that the tax impact of certain anticipated activities or
events might be known on a more timely basis.
Additionally, with respect to the ineffective controls related to the accounts payable
process, we have hired a new supervisor of our accounts payable department who has, in turn, hired
new staff. In addition, we expect our accounts payable department to benefit from the conversion
to our new accounting system.
Inadequate Controls Related to Commissions
During 2007, we plan to redesign the system of controls governing our commission calculation
systems. Specifically, we plan to standardize to the extent practical the language in customer
agreements. We plan to bring the management of the commission system and responsibility for the
databases and applications containing customer information in house. We plan to enhance the design
of control procedures for the entry or change of data in the commission database. We also plan to
institute regular reporting comparing the amount of commissions calculated to the amounts paid, and
review those reports regularly for accuracy. Finally, we plan to implement periodic audits of our
controls over commission payments.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Cash Access Holdings, Inc.
Las Vegas, Nevada
Las Vegas, Nevada
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Global Cash Access Holdings, Inc. and Subsidiaries
(the “Company”) did not maintain effective internal control over financial reporting as of December
31, 2006, because of the effect of the material weaknesses identified in management’s assessment
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission(“COSO”). 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. Our responsibility is
to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
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.
A material weakness is a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The following material weaknesses have been
identified and included in management’s assessment:
Ineffective controls related to staffing in finance and accounting: During 2006, the Company had a
high level of turnover of personnel in its finance and accounting staff, which resulted in certain controls not operating effectively as of December 31, 2006. This material weakness did not result in a material
adjustment to its 2006 consolidated financial statements but did contribute significantly to the following internal control deficiences each of which is
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) the Company was unable to adhere to their
pre-determined closing and reporting calendar.
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Ineffective controls related to income taxes: Certain controls designed to ensure the timely
and accurate calculation of the Company’s provision for income taxes did not operate effectively. Certain
matters affecting its income tax provision were not identified on a timely basis by finance and
accounting personnel. Further, the Company’s 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: The Company did not have appropriate internal
control design related to how they calculate the amount of commissions they pay to their 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 to limit access 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.
These material weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the consolidated financial statements as of and for the year
ended December 31, 2006, of the Company and this report does not affect our report on such
consolidated financial statements.
In our opinion, management’s assessment that the Company did not maintain effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of
the effect of the material weaknesses described above on the achievement of the objectives of the
control criteria, the Company has not maintained effective internal control over financial
reporting as of December 31, 2006, 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, 2006 of the Company and our report dated March 30, 2007, expressed an unqualified
opinion, and included an explanatory paragraph related to the adoption of SFAS No. 123(R),
Share-Based Payment, on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 30, 2007
March 30, 2007
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| 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 2007 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 thereunder. 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. On March 23, 2006, 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 certification required by
Section 302 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder 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. Information regarding the Company’s equity compensation
plans is incorporated by reference to the section entitled “Equity Compensation Plans” in the Proxy
Statement.
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| 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, 2006 and 2005 Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2006 Consolidated Statement of Stockholders’ Equity (Deficiency) for the three years ended December 31, 2006 Consolidated Statements of Cash Flows for the three years ended December 31, 2006 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) |
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| (b) | Exhibits: |
| Exhibit | ||||
| Number | Exhibit Description | |||
| 3.1 | (1) | Amended and Restated Certificate of Incorporation |
||
| 3.2 | (1) | 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. |
||
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| 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) | Employment Agreement, dated as of July 12, 2004, by and
between Global Cash Access, Inc. and Harry C. Hagerty |
||
| *10.24 | (1) | Notice of Stock Option Award and Stock Option Award
Agreement, dated as of September 1, 2004, by and between
GCA Holdings, Inc. and Harry C. Hagerty |
||
| *10.25 | (1) | Global Cash Access Holdings, Inc. 2005 Stock Incentive Plan |
||
| *10.26 | (1) | Employment Agreement, dated as of March 22, 2005, by and
between Global Cash Access, Inc. and Kirk Sanford |
||
| *10.27 | (1) | Form of Indemnification Agreement between Global Cash
Access Holdings, Inc. and each of its executive officers
and directors |
||
| 10.28 | (1) | Patent Purchase and License Agreement, dated as of March
22, 2005, by and between Global Cash Access, Inc. and USA
Payments |
||
| 10.29 | (1) | Termination and Consent, dated as of March 16, 2005, by and
among Global Cash Access Holdings, Inc. and the other
parties thereto |
||
| 10.30 | (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 |
||
| *10.32 | (1) | Employment Agreement, dated as of September 12, 2005, by
and between Global Cash Access, Inc. and Kathryn S. Lever |
||
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Table of Contents
| Exhibit | ||||
| Number | Exhibit Description | |||
| *10.33 | (2) | Amendment No. 1 to Employment Agreement, dated as of March
16, 2006, by and between Global Cash Access, Inc. and Kirk
E. Sanford |
||
| *10.34 | (3) | Amendment No. 1 to Employment Agreement, dated as of March
16, 2006, by and between Global Cash Access, Inc. and Harry
C. Hagerty |
||
| *10.35 | (4) | Amendment No. 1 to Employment Agreement, dated as of March
16, 2006, by and between Global Cash Access, Inc. and
Kathryn S. Lever |
||
| +10.36 | Master Service Agreement, dated as of November 27, 2006, by
and between Global Cash Access, Inc. and Integrated Payment
Systems, Inc. |
|||
| 10.37 | (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 |
||
| 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 110) |
|||
| 31.1 | Certification of Kirk E. Sanford, Chief Executive Officer
of Global Cash Access Holdings, Inc. dated March 30, 2007
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 Harry C. Hagerty, Chief Financial Officer
of Global Cash Access Holdings, Inc. dated March 30, 2007
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 Kirk E. Sanford, Chief Executive Officer
of Global Cash Access Holdings, Inc. dated March 30, 2007
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 Harry C. Hagerty, Chief Financial Officer
of Global Cash Access Holdings, Inc. dated March 30, 2007
in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
| (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. |
| * | Management contracts or compensatory plans or arrangements. |
|
| + | Confidential treatment has been requested with regard to certain portions of this document. |
| (c) | See Item 15(a)(2). |
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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/ Kirk Sanford | |||
| Kirk Sanford | ||||
| President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: March 30, 2007
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Kirk Sanford and Harry C. Hagerty, 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/ Kirk Sanford
|
President and Chief Executive Officer (Principal Executive Officer) and Director | March 30, 2007 | ||
| /s/ Harry C. Hagerty
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 30, 2007 | ||
| /s/ Karim Maskatiya
|
Director | March 30, 2007 | ||
| /s/ Robert Cucinotta
|
Director | March 30, 2007 | ||
| /s/ Walter G. Kortschak
|
Director | March 30, 2007 | ||
| /s/ Charles J. Fitzgerald
|
Director | March 30, 2007 | ||
| /s/ E. Miles Kilburn
|
Director | March 30, 2007 | ||
| /s/ William H. Harris
|
Director | March 30, 2007 | ||
| /s/ Geoff Judge
|
Director | March 30, 2007 | ||
| /s/ Fred C. Enlow
|
Director | March 30, 2007 |
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Table of Contents
EXHIBIT INDEX
| Exhibit | ||
| Number | Exhibit Description | |
| 10.36 | Master Service Agreement, dated as of November 27, 2006, by and between Global Cash Access, Inc. and Integrated Payment Systems, Inc. | |
| 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 110) | |
| 31.1 | Certification of Kirk E. Sanford, Chief Executive Officer of Global Cash Access Holdings, Inc. dated March 30, 2007 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 Harry C. Hagerty, Chief Financial Officer of Global Cash Access Holdings, Inc. dated March 30, 2007 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 Kirk E. Sanford, Chief Executive Officer of Global Cash Access Holdings, Inc. dated March 30, 2007 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 Harry C. Hagerty, Chief Financial Officer of Global Cash Access Holdings, Inc. dated March 30, 2007 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
111