e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
Commission
file no 001 - 32622
GLOBAL CASH ACCESS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE
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20-0723270 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer I.D. No.) |
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3525 EAST POST ROAD, SUITE 120
LAS VEGAS, NEVADA
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89120 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code:
(800) 833-7110
Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Sections 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 whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
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 August 8, 2006, there were 82,301,834 shares of the Registrants common stock, $0.001
par value per share, issued and outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except par value)
(unaudited)
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June 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Cash and cash equivalents |
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$ |
58,635 |
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$ |
35,123 |
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Settlement receivables |
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24,943 |
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60,164 |
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Receivables, other |
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7,307 |
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7,355 |
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Prepaid and other assets |
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9,830 |
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10,959 |
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Property, equipment and leasehold improvements, net |
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17,940 |
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10,579 |
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Goodwill, net |
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156,785 |
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156,756 |
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Other intangibles, net |
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20,119 |
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22,006 |
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Deferred income taxes, net |
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199,441 |
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207,476 |
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Total assets |
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$ |
495,000 |
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$ |
510,418 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES: |
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Settlement liabilities |
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$ |
26,832 |
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$ |
59,782 |
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Accounts payable |
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22,844 |
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20,413 |
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Accrued expenses |
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14,563 |
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14,178 |
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Borrowings |
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316,791 |
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321,412 |
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Total liabilities |
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381,030 |
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415,785 |
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COMMITMENTS AND CONTINGENCIES |
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MINORITY INTEREST |
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273 |
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149 |
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STOCKHOLDERS EQUITY |
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Common stock, $0.001 par value, 500,000 shares authorized and
81,688 and 81,554 shares outstanding at June 30, 2006 and December
31, 2005, respectively |
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82 |
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82 |
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Preferred stock, $0.001 par value, 50,000 shares authorized and 0
shares shares outstanding at June 30, 2006 and December 31, 2005,
respectively |
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Additional paid in capital |
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134,484 |
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128,886 |
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Accumulated deficit |
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(22,967 |
) |
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(36,210 |
) |
Accumulated other comprehensive income |
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2,098 |
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1,726 |
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Total stockholders equity |
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113,697 |
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94,484 |
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Total liabilities and stockholders equity |
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$ |
495,000 |
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$ |
510,418 |
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See notes to unaudited condensed consolidated financial statements.
3
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(amounts in thousands, except per share)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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REVENUES: |
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Cash advance |
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$ |
69,143 |
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$ |
57,933 |
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$ |
136,198 |
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$ |
114,710 |
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ATM |
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54,586 |
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45,217 |
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107,746 |
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88,989 |
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Check services |
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7,459 |
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6,734 |
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14,703 |
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13,043 |
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Central Credit and other revenues |
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2,388 |
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2,576 |
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4,764 |
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5,383 |
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Total revenues |
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133,576 |
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112,460 |
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263,411 |
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222,125 |
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Cost of revenues (exclusive of
depreciation and amortization) |
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(94,292 |
) |
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(75,987 |
) |
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(185,643 |
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(148,452 |
) |
Operating expenses |
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(16,636 |
) |
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(12,288 |
) |
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(31,926 |
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(24,301 |
) |
Amortization |
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(1,384 |
) |
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(1,295 |
) |
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(2,886 |
) |
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(2,659 |
) |
Depreciation |
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(1,050 |
) |
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(1,932 |
) |
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(2,115 |
) |
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(3,884 |
) |
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OPERATING INCOME |
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20,214 |
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20,958 |
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40,841 |
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42,829 |
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INTEREST INCOME (EXPENSE), NET |
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Interest income |
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868 |
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181 |
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1,424 |
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633 |
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Interest expense |
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(10,701 |
) |
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(10,828 |
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(20,949 |
) |
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(21,760 |
) |
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Total interest income
(expense), net |
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(9,833 |
) |
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(10,647 |
) |
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(19,525 |
) |
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(21,127 |
) |
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INCOME BEFORE INCOME TAX PROVISION AND
MINORITY OWNERSHIP LOSS |
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10,381 |
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10,311 |
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21,316 |
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21,702 |
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INCOME TAX PROVISION |
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(4,140 |
) |
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(3,712 |
) |
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(8,147 |
) |
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(7,813 |
) |
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INCOME BEFORE MINORITY OWNERSHIP LOSS |
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6,241 |
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6,599 |
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13,169 |
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13,889 |
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MINORITY OWNERSHIP LOSS, NET OF TAX |
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38 |
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|
44 |
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74 |
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|
94 |
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NET INCOME |
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6,279 |
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6,643 |
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13,243 |
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13,983 |
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Foreign currency translation, net of tax |
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319 |
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(55 |
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372 |
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(169 |
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COMPREHENSIVE INCOME |
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$ |
6,598 |
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$ |
6,588 |
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$ |
13,615 |
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$ |
13,814 |
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Earnings per share |
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Basic |
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$ |
0.08 |
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$ |
0.21 |
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$ |
0.16 |
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$ |
0.43 |
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Diluted |
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$ |
0.08 |
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$ |
0.09 |
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$ |
0.16 |
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$ |
0.20 |
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Weighted average number of common shares
outstanding |
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Basic |
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81,619 |
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|
32,175 |
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|
81,588 |
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|
32,175 |
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Diluted |
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82,230 |
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|
71,699 |
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|
81,965 |
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|
71,699 |
|
See notes to unaudited condensed consolidated financial statements.
4
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
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Six Months Ended |
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June 30, |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
13,243 |
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$ |
13,983 |
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Adjustments to reconcile net income to cash provided
by operating activities: |
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Amortization of financing costs |
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|
853 |
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|
990 |
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Amortization of intangibles |
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|
2,886 |
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|
2,659 |
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Depreciation |
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|
2,115 |
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|
3,884 |
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Gain on sale or disposal of assets |
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(5 |
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Provision for bad debts |
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3,011 |
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Deferred income taxes |
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8,035 |
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|
6,780 |
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Minority ownership loss |
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(116 |
) |
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(94 |
) |
Stock-based compensation |
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4,323 |
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Changes in operating assets and liabilities: |
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Settlement receivables |
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35,413 |
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|
10,375 |
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Receivables, other |
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(2,288 |
) |
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|
(312 |
) |
Prepaid and other assets |
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|
447 |
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(1,969 |
) |
Settlement liabilities |
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(33,133 |
) |
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(17,800 |
) |
Accounts payable |
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|
2,425 |
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(3,349 |
) |
Accrued expenses |
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|
173 |
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|
1,369 |
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Net cash provided by operating activities |
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37,382 |
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|
16,516 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, equipment and leasehold improvements |
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(9,453 |
) |
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(2,671 |
) |
Purchase of other intangibles |
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(999 |
) |
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(433 |
) |
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Net cash used in investing activities |
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(10,452 |
) |
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(3,104 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Repayments under credit facility |
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(4,621 |
) |
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(34,286 |
) |
Debt issuance costs |
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(139 |
) |
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(90 |
) |
Proceeds from exercise of stock options |
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1,287 |
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Minority capital contributions |
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|
240 |
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|
280 |
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|
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Net cash used in financing activities |
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(3,233 |
) |
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(34,096 |
) |
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(Continued)
5
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
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|
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Six Months Ended |
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|
June 30, |
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|
2006 |
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|
2005 |
|
NET EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS |
|
$ |
(185 |
) |
|
$ |
75 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
23,512 |
|
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(20,609 |
) |
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CASH AND CASH EQUIVALENTSBeginning of period |
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|
35,123 |
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|
|
49,577 |
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CASH AND CASH EQUIVALENTSEnd of period |
|
$ |
58,635 |
|
|
$ |
28,968 |
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
|
$ |
19,809 |
|
|
$ |
20,585 |
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
537 |
|
|
$ |
1,934 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. |
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BUSINESS AND BASIS OF PRESENTATION |
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BusinessGlobal Cash Access Holdings, Inc. is a holding company, the principal asset of which
is the capital stock of Global Cash Access, Inc. (GCA). 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, to hold all of the outstanding capital stock of GCA and to guarantee the obligations
under GCAs senior secured credit facilities. The accompanying condensed consolidated
financial statements present the operations of the Company as-if Holdings had been in
existence for all periods presented. |
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GCA is a financial services company that provides cash access products and services to the
gaming industry. The Companys 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. GCAs
subsidiaries are: CashCall Systems Inc. (CashCall), GCA Canada Inc. (GCA Canada), Global
Cash Access (BVI), Inc. (BVI), Arriva Card, Inc. (Arriva), Global Cash Access Switzerland
A.G. (Swiss Co) Innovative Funds Transfer, LLC, formerly known as QuikPlay, LLC (IFT),
Global Cash Access (HK) Ltd. (GCA HK) and GCA (Macau), S.A. (GCA Macau). |
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The Company also owns and operates one of the leading credit reporting agencies in the gaming
industry, Central Credit, LLC (Central), and provides credit-information services and
credit-reporting history on gaming patrons to various gaming establishments. Central operates
in both international and domestic gaming markets. |
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The accompanying unaudited condensed consolidated financial statements include the accounts of
Holdings and its consolidated subsidiaries: GCA, CashCall, Central, BVI, Arriva, Swiss Co, GCA
Canada, IFT, GCA HK and GCA Macau. |
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Basis of PresentationThe condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Some of the information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting
principles in the United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary for a fair presentation of results for the
interim periods have been made. The results for the three and six months ended June 30, 2006
are not necessarily indicative of results to be expected for the full fiscal year. Certain
amounts in the prior period financial statements and related notes have been reclassified to
conform to the 2006 presentation. |
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|
These unaudited condensed consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and notes thereto included within the Companys
Annual Report on Form 10-K for the year ended December 31, 2005. |
7
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Principles of Consolidation The unaudited condensed consolidated financial statements
presented for the three and six months ended June 30, 2006 and 2005 and as of December 31,
2005 include the accounts of
Global Cash Access Holdings, Inc., and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. |
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|
|
Earnings Applicable to Common StockIn 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, non-vested shares 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 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Weighted average common shares outstanding -
basic |
|
|
81,619 |
|
|
|
32,175 |
|
|
|
81,588 |
|
|
|
32,175 |
|
Potential dilution from conversion of
preferred shares |
|
|
|
|
|
|
39,325 |
|
|
|
|
|
|
|
39,325 |
|
Potential dilution from equity grants (1) |
|
|
611 |
|
|
|
199 |
|
|
|
377 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding - diluted |
|
|
82,230 |
|
|
|
71,699 |
|
|
|
81,965 |
|
|
|
71,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
- The potential dilution excludes stock options to acquire 3,406,221 and
3,046,930 shares of common stock at June 30, 2006 and June 30, 2005, respectively, as the
application of the treasury stock method, as required by SFAS No. 128, makes them
anti-dilutive. |
Stock-Based CompensationOn January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based
Payment, using the modified prospective transition method. Accordingly, prior period amounts
have not been restated. Prior to the adoption of SFAS No. 123(R), the Company applied
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its employee stock-based compensation. Accordingly,
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.
In the three months and six months ended June 30, 2006, the adoption of SFAS No. 123(R)
resulted in incremental stock-based compensation expense of $2.4 million and $4.3 million,
respectively. The incremental stock-based compensation expense caused income before income
tax provision and minority loss to decrease by $2.4 million and $4.3 million, respectively,
and net income to decrease by $1.7 million and $3.2 million, respectively. In the three
months ended June 30, 2006, basic and diluted earnings per share were decreased by $0.02 per
share, while in the six months ended June 30, 2006 basic and diluted earnings per share were
decreased by $0.04 per share from the expense associated with the incremental stock-based
compensation expense.
8
The following table details the effect on net income and earnings per share had the
compensation expense for the employee stock-based awards been recorded based on the fair value
method under SFAS No. 123, Accounting for Stock-Based Compensation, in the three and six
months ended June 30, 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net income, as reported |
|
$ |
6,643 |
|
|
$ |
13,983 |
|
Less: total stock-based compensation
determined under fair-value based
method for all awards, net of tax |
|
|
(947 |
) |
|
|
(1,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
5,696 |
|
|
$ |
12,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average number
of common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
32,175 |
|
|
|
32,175 |
|
Diluted |
|
|
71,699 |
|
|
|
71,699 |
|
|
|
Recently Issued Accounting PronouncementsIn February 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. The provisions of SFAS No. 155
are effective for all financial instruments acquired or issued after the beginning of the
first fiscal year after September 15, 2006. SFAS No. 155 will be effective for the Company
beginning in the first quarter of 2007. This pronouncement primarily resolves certain issues
addressed in the implementation of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, concerning beneficial interests in securitized financial assets. The
Statement is effective for all financial instruments acquired, issued, or subject to a
remeasurement event occurring after the beginning of the 2007 fiscal year. The Company is
evaluating any future effect of this pronouncement. |
|
|
|
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the impact of this standard on the Condensed Consolidated
Financial Statements. |
|
3. |
|
ATM FUNDING AGREEMENTS |
|
|
|
Bank of America Amended Treasury Services Agreement On March 8, 2004, the Company 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 all the Companys ATMs. For use of
these funds, GCA 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. At June 30, 2006,
the outstanding balance of ATM cash utilized by GCA was $356.8 million and the cash usage
interest rate in effect was 5.6%. |
|
|
|
Site Funded ATMs GCA operates some ATMs at customer locations where the customer provides the
cash required for 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 balance sheets and was $12.6
million and $15.6 million as of June 30, 2006 and December 31, 2005, respectively. As of June
30, 2006 and December 31, 2005, GCA operated 299 and 203 devices (ATMs and redemption kiosks),
respectively, that were site funded. |
9
4. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
Litigation Claims and Assessments |
|
|
|
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 customers two locations, that the customer was liable for GST on
commissions it received in connection with the cash advance services provided by CashCall. The
CRAs position is disputed by both CashCall and the customer based upon their interpretation
of the Canadian Excise Tax Act (ETA). |
|
|
|
In December 2004, the Company paid the amount assessed related to the customer, and the
customer remitted such amount 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. |
|
|
|
The Company believes the transactions performed in Canada are financial services transactions
specifically exempted by the ETA and therefore not subject to GST. 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. In the
three and six months ended June 30, 2006 and 2005, the Company has recorded minimal amounts in
operating expenses related to this potential tax exposure in the accompanying consolidated
income statements. |
|
|
|
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 are seeking an injunction against future infringement of the patent and
recovery of damages as a result of past infringement of the patent. In its response, the
defendants have denied infringement and have asserted patent invalidity. In addition, the
defendants have asserted various antitrust and unfair competition counterclaims. |
|
|
|
Compliance Letters from MasterCard International, Inc. and Visa USA In the normal course of
business, the Company routinely receives letters from MasterCard International, Inc. and Visa
USA (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. |
|
|
|
Customer Commission Litigation In March 2006 and thereafter, we were named as a defendant in
actions commenced by the subsidiaries of a former customer alleging commissions were owed
following the expiration of our agreements with such subsidiaries. In July 2006, we settled
all of the claims with an aggregate payment of $200,000 to the subsidiaries and these actions
were dismissed with prejudice. The expense associated with this settlement was recorded in
operating expenses in the second quarter of 2006. |
|
|
|
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. |
|
|
|
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 |
10
|
|
the Securities Act at the Companys 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. |
|
|
|
Arriva Origination Commitments |
|
|
|
Arriva entered into separate agreements with CIT Bank and with Fiserv Solutions, Inc., all of
which are effective as of March 2006, related to the issuance, underwriting and processing of
our private label credit card. Under the terms of the agreements with CIT Bank, Arriva is
committed to pay CIT Bank 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 during the first 18 months of the term
without any additional penalty. Under the terms of the agreement with Fiserv Solutions, Inc.,
Arriva is also committed to pay $0.5 million in termination fees to Fiserv Solutions, Inc. 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 June 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. |
|
5. |
|
BORROWINGS |
|
|
|
Senior Secured Credit Facility In April 2005, GCA and Holdings entered into an Amended and
Restated Credit Facility (the Amended Credit Facility). Borrowings under the Amended Credit
Facility bear interest, at the Companys option, at either i) a base rate plus an applicable
margin or ii) LIBOR plus an applicable margin. In January 2006, the Company received a credit
rating upgrade and had reduced the overall leverage ratio to qualify for a decrease of the
applicable margin applied to the borrowings under the term loan portion and the revolving
portion of the Amended Credit Facility. Beginning April 2006, the applicable margin for LIBOR
loans was reduced from 2.25% to 1.75% while the applicable margin for base rate loans was
reduced from 1.25% to 0.75%. |
|
|
|
At June 30, 2006 and December 31, 2005, borrowings under the term loan portion of the Amended
Credit Facility were $164.0 million and $168.6 million, respectively. In the three and six
months ended June 30, 2006, the Company made repayments on the term loan of $2.3 million and
$4.6 million, respectively. The interest rate in effect at June 30, 2006 was 7.1%. In
addition to scheduled quarterly principal repayments and based upon the Companys leverage
ratio at December 31, 2005, GCA is required to make an annual repayment of 50% of the excess
cash flow as defined in the Amended Credit Facility. As our additional voluntary prepayments
in 2005 exceeded our required excess cash flow payment for 2005, no excess cash flow payment
was required in 2006. |
|
|
|
Under the terms of our Amended Credit Facility we are required to comply with financial
covenants related to our leverage ratio, senior leverage ratio and fixed charge cover ratio.
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 June
30, 2006. We expect that our capital expenditures for 2006 will exceed the maximum allowed by
our covenants. Under terms of the Amended Credit Facility, this would result in an event of
default. If we are unable to obtain from the lenders a written waiver or modification of such
covenant related to this event of default the lenders have several remedies available to them,
up to and including, acceleration of repayment of all outstanding amounts under the senior
secured credit facilities. The Company intends to seek a waiver or modification of this
covenant or to refinance the senior secured credit facility in its entirety prior to December
31, 2006. |
11
|
|
As of June 30, 2006, the Company had $3.1 million in letters of credit issued and outstanding,
which reduced amounts available under the revolving portion of the Amended Credit Facility. |
|
6. |
|
BENEFIT PLANS |
|
|
|
Stock OptionsThe Company has issued stock options to directors, officers and key employees
under the 2005 Stock Incentive Plan (the 2005 Plan). Generally, options 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. Stock options are
issued at the current market price on the date of grant, with a contractual term of 10 years.
The shares to be issued pursuant to option exercises may be authorized, but unissued, or
reacquired common stock. The grant date fair value is calculated using the Black-Scholes
option valuation model. 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. The terms of these options are similar to those found in the 2005 Plan. |
|
|
|
The fair value of the options granted during the three and six months ended June 30, 2006 and
2005 were estimated using the following weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
|
36.9 |
% |
|
|
50.0 |
% |
|
|
42.9 |
% |
|
|
50.0 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
4.0 |
% |
|
|
4.8 |
% |
|
|
3.7 |
% |
Expected life of stock options (in years) |
|
|
6.3 |
|
|
|
6.0 |
|
|
|
6.3 |
|
|
|
6.0 |
|
The expected life (estimated period of time outstanding) of options granted was estimated
using the expected exercise behavior of employees.
|
|
The expected volatility was based on an estimate of the volatility for similar companies
within our industry that have recently completed an initial public offering of common stock.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. |
12
|
|
A summary of award activity under the Companys stock option plans as of June 30, 2006 and
changes during the three and six month periods then ended is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
|
|
|
Exercise |
|
Average Life |
|
Aggregate |
|
|
Options |
|
Prices |
|
Remaining |
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Outstanding December 31, 2005 |
|
|
4,079,145 |
|
|
$ |
12.94 |
|
|
9.0 years |
|
$ |
27,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
55,000 |
|
|
|
15.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(11,650 |
) |
|
|
13.99 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,500 |
) |
|
|
13.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2006 |
|
|
4,119,995 |
|
|
$ |
12.97 |
|
|
8.8 years |
|
$ |
27,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
65,000 |
|
|
|
18.94 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(122,807 |
) |
|
|
9.15 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(33,752 |
) |
|
|
13.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2006 |
|
|
4,028,436 |
|
|
$ |
13.17 |
|
|
8.6 years |
|
$ |
27,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2006 |
|
|
1,309,319 |
|
|
$ |
12.87 |
|
|
8.5 years |
|
$ |
8,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value per share of the options granted during the three
months ended June 30, 2006 and 2005 was $8.64 and $7.33, respectively. The weighted-average
grant-date fair value per share of the options granted during the six months ended June 30,
2006 and 2005 was $8.60 and $7.27, respectively. |
|
|
|
During the three and six months ended June 30, 2006 we received $1.1 million and $1.3 million
in cash from the exercise of stock options, respectively. The total intrinsic value of options
exercised during the three and six months ended June 30, 2006 was $0.6 million and $0.7
million, respectively. There were no stock option exercises in 2005. As of June 30, 2006,
there was $17.4 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 2.5 years. |
|
|
|
Restricted Stock 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 Companys time-based restricted shares as of June 30, 2006 and
changes during the three month period is as follows: |
|
|
|
|
|
|
|
Shares |
|
|
Outstanding |
Balance December 31, 2005 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
619,747 |
|
Vested |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2006 |
|
|
619,747 |
|
|
|
|
|
|
Granted |
|
|
|
|
Vested |
|
|
|
|
Forfeited |
|
|
(7,500 |
) |
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2006 |
|
|
612,247 |
|
|
|
|
|
|
|
|
There were no time-based restricted shares vested during the three and six months ended June
30, 2006 or 2005. As of June 30, 2006, there was $9.0 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 3.6 years. |
13
7. |
|
RELATED PARTY TRANSACTIONS |
|
|
|
M&C International (M&C) is the owner of approximately 24.7% of the outstanding equity
interests of Holdings. An affiliate of Bank of America Corporation owns approximately 3.8% of
the equity interests of Holdings. |
|
|
|
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 unaudited
condensed consolidated balance sheets and the system maintenance is classified in operating
expenses in the unaudited condensed consolidated statements of income. |
|
|
|
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 unaudited condensed 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). |
|
|
|
The Company uses Bank of America, N.A., an affiliate of Bank of America Corporation, for
general corporate banking purposes and is charged monthly servicing fees for these services,
which are included in operating expenses. In connection with the Amendment of the Treasury
Services Agreement, GCA obtains cash for our ATMs from Bank of America, N.A. The fees paid to
Bank of America, N.A. for the preparation of the cash used in our ATMs is included within
operating expenses, while the cash usage fee is included as part of interest expense. |
14
In April 2005, Banc of America Securities LLC, an affiliate of Bank of America Corporation,
acted as financial advisor to the Company in connection with the Amended Credit Facility. As
a fee for those services, we were obligated to pay Banc of America Securities LLC 50% of the
difference between the interest expense we pay under the Amended Credit Facility and what we
would have paid under the prior credit facility. Our obligation to pay this fee ended in
April 2006. For its services as financial advisor in connection with the Amended Credit
Facility, we incurred and paid a total of $0.5 million to Banc of America Securities LLC,
which is included as part of capitalized debt issuance costs in prepaid and other assets in
the accompanying balance sheets. During the three and six months ended June 30, 2006, the
Company incurred approximately $30 thousand and $100 thousand in fees related to the financial
advisory services, respectively.
The following table represents the transactions with related parties for the three and six
months ended June 30, 2006 and 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of |
|
|
|
June 30, |
|
|
June 30, |
|
Related Party |
|
Description of Transaction |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
M&C Affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infonox on the Web |
|
Software development costs and maintenance
expense included in operating expenses and
other intangibles, net |
|
$ |
872 |
|
|
$ |
382 |
|
|
$ |
1,284 |
|
|
$ |
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Payments |
|
Transaction processing charges included in
cost of revenues |
|
|
823 |
|
|
|
809 |
|
|
|
1,676 |
|
|
|
1,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Payments |
|
Pass through billing related to gateway fees,
telecom and other items included in cost of
revenues and operating expenses |
|
|
358 |
|
|
|
309 |
|
|
|
633 |
|
|
|
603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A. |
|
Bank fees and cash preparation fees for cash
accounts maintained included within operating
expenses |
|
|
419 |
|
|
|
431 |
|
|
|
820 |
|
|
|
866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A. |
|
Cash usage fee included within interest expense |
|
$ |
3,991 |
|
|
$ |
2,238 |
|
|
$ |
7,518 |
|
|
$ |
4,220 |
|
15
|
|
The following table details the amounts due from (to) these related parties that are recorded
as part of receivables, other, accounts payable and accrued expenses in the unaudited
condensed consolidated balance sheets (amounts in thousands): |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
M&C and related companies |
|
$ |
31 |
|
|
$ |
11 |
|
Bank of America, N.A. |
|
|
141 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included within receivables, other |
|
$ |
172 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Payments |
|
$ |
(388 |
) |
|
$ |
(345 |
) |
Infonox on the Web |
|
|
(157 |
) |
|
|
(171 |
) |
Bank of America, N.A. |
|
|
(195 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included within accounts payable and
accrued expenses |
|
$ |
(740 |
) |
|
$ |
(666 |
) |
|
|
|
|
|
|
|
8. |
|
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 Companys 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, marketed and sold separately to our customers. |
|
|
|
The Company operates in four distinct business segments: cash advance, ATM, check services and
credit reporting services. These segments are monitored separately by management for
performance against its internal forecast and are consistent with the Companys internal
management reporting. |
|
|
|
Other lines of business, none of which exceed the established materiality for segment
reporting, include Western Union, direct marketing and IFT, among others. |
|
|
|
The Companys business is predominantly domestic, with no specific regional concentrations. |
|
|
|
Major customers On June 13, 2005, our largest customer, Harrahs Entertainment, Inc.
(Harrahs) completed its acquisition of Caesars Entertainment, Inc. (Caesars), another
customer of ours. For the three and six months ended June 30, 2006 and 2005, the combined
revenues from all segments for this customer, assuming it had been combined for all periods
presented, would have been approximately $23.4 million and $46.3 million and $20.5 million and
$41.0 million, respectively representing 17.5% and 17.6% and 18.2% and 18.5% of the Companys
total consolidated revenues, respectively. On a historical basis, the combined revenues from
all segments for Harrahs for the three and six months ended June 30, 2005 was $12.3 million
and $24.9 million representing 10.9% and 11.2% of the Companys total consolidated revenues,
respectively. |
|
|
|
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 our full offering of services to Mandalay. For the three and six months ended June
30, 2006 and 2005, the combined revenues from all segments for MGM, assuming it had been
combined for all periods presented, would have been approximately $13.8 million and $26.6
million, and $7.4 million and $14.9 million, respectively representing 10.4% and 10.1%, and
6.6% and 6.7% of the Companys total consolidated revenues, respectively. On a historical
basis, the combined revenues from all segments for MGM for the three and six months ended June
30, 2005 was $0.1 million and $0.2 million, respectively. |
16
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 for the three and six months
ended June 30, 2006 and 2005 and total assets by operating segment as of June 30, 2006
and December 31, 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
Check |
|
Credit |
|
|
|
|
|
|
Advance |
|
ATM |
|
Services |
|
Reporting |
|
Other |
|
Total |
Three Months Ended June 30,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
69,143 |
|
|
$ |
54,586 |
|
|
$ |
7,459 |
|
|
$ |
2,005 |
|
|
$ |
383 |
|
|
$ |
133,576 |
|
Depreciation and amortization |
|
|
(968 |
) |
|
|
(1,321 |
) |
|
|
(8 |
) |
|
|
(20 |
) |
|
|
(117 |
) |
|
|
(2,434 |
) |
Operating income (loss) |
|
|
10,343 |
|
|
|
7,094 |
|
|
|
1,983 |
|
|
|
1,050 |
|
|
|
(256 |
) |
|
|
20,214 |
|
Interest income |
|
|
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
868 |
|
Interest expense |
|
|
(3,474 |
) |
|
|
(6,733 |
) |
|
|
(375 |
) |
|
|
(101 |
) |
|
|
(18 |
) |
|
|
(10,701 |
) |
Income taxes |
|
|
(3,085 |
) |
|
|
(188 |
) |
|
|
(626 |
) |
|
|
(369 |
) |
|
|
128 |
|
|
|
(4,140 |
) |
Minority ownership loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
38 |
|
Net income (loss) |
|
$ |
4,652 |
|
|
$ |
173 |
|
|
$ |
982 |
|
|
$ |
580 |
|
|
$ |
(108 |
) |
|
$ |
6,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
57,933 |
|
|
$ |
45,217 |
|
|
$ |
6,734 |
|
|
$ |
2,245 |
|
|
$ |
331 |
|
|
$ |
112,460 |
|
Depreciation and amortization |
|
|
(1,083 |
) |
|
|
(1,993 |
) |
|
|
(9 |
) |
|
|
(20 |
) |
|
|
(122 |
) |
|
|
(3,227 |
) |
Operating income |
|
|
11,243 |
|
|
|
6,775 |
|
|
|
2,077 |
|
|
|
864 |
|
|
|
(1 |
) |
|
|
20,958 |
|
Interest income |
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
Interest expense |
|
|
(4,426 |
) |
|
|
(5,692 |
) |
|
|
(514 |
) |
|
|
(171 |
) |
|
|
(25 |
) |
|
|
(10,828 |
) |
Income taxes |
|
|
(2,519 |
) |
|
|
(390 |
) |
|
|
(563 |
) |
|
|
(249 |
) |
|
|
9 |
|
|
|
(3,712 |
) |
Minority ownership loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
44 |
|
Net income |
|
$ |
4,479 |
|
|
$ |
693 |
|
|
$ |
1,000 |
|
|
$ |
444 |
|
|
$ |
27 |
|
|
$ |
6,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
136,198 |
|
|
$ |
107,746 |
|
|
$ |
14,703 |
|
|
$ |
4,080 |
|
|
$ |
684 |
|
|
$ |
263,411 |
|
Depreciation and amortization |
|
|
(1,940 |
) |
|
|
(2,777 |
) |
|
|
(17 |
) |
|
|
(39 |
) |
|
|
(228 |
) |
|
|
(5,001 |
) |
Operating income (loss) |
|
|
20,478 |
|
|
|
14,276 |
|
|
|
4,514 |
|
|
|
2,125 |
|
|
|
(552 |
) |
|
|
40,841 |
|
Interest income |
|
|
1,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,424 |
|
Interest expense |
|
|
(6,945 |
) |
|
|
(13,012 |
) |
|
|
(750 |
) |
|
|
(208 |
) |
|
|
(34 |
) |
|
|
(20,949 |
) |
Income taxes |
|
|
(5,737 |
) |
|
|
(521 |
) |
|
|
(1,427 |
) |
|
|
(727 |
) |
|
|
265 |
|
|
|
(8,147 |
) |
Minority ownership loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
74 |
|
Net income (loss) |
|
$ |
9,220 |
|
|
$ |
743 |
|
|
$ |
2,337 |
|
|
$ |
1,190 |
|
|
$ |
(247 |
) |
|
$ |
13,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
114,710 |
|
|
$ |
88,989 |
|
|
$ |
13,043 |
|
|
$ |
4,599 |
|
|
$ |
784 |
|
|
$ |
222,125 |
|
Depreciation and amortization |
|
|
(2,226 |
) |
|
|
(3,993 |
) |
|
|
(18 |
) |
|
|
(63 |
) |
|
|
(243 |
) |
|
|
(6,543 |
) |
Operating income |
|
|
22,591 |
|
|
|
13,579 |
|
|
|
4,428 |
|
|
|
2,117 |
|
|
|
114 |
|
|
|
42,829 |
|
Interest income |
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633 |
|
Interest expense |
|
|
(9,058 |
) |
|
|
(11,247 |
) |
|
|
(1,030 |
) |
|
|
(363 |
) |
|
|
(62 |
) |
|
|
(21,760 |
) |
Income taxes |
|
|
(5,100 |
) |
|
|
(840 |
) |
|
|
(1,223 |
) |
|
|
(631 |
) |
|
|
(19 |
) |
|
|
(7,813 |
) |
Minority ownership loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
94 |
|
Net income |
|
$ |
9,066 |
|
|
$ |
1,492 |
|
|
$ |
2,175 |
|
|
$ |
1,123 |
|
|
$ |
127 |
|
|
$ |
13,983 |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total Assets |
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
307,004 |
|
|
$ |
320,688 |
|
ATM |
|
|
141,437 |
|
|
|
142,626 |
|
Check services |
|
|
2,484 |
|
|
|
3,886 |
|
Credit reporting |
|
|
44,053 |
|
|
|
43,162 |
|
Other |
|
|
22 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
495,000 |
|
|
$ |
510,418 |
|
|
|
|
|
|
|
|
17
9. |
|
SUBSEQUENT EVENTS |
|
|
|
On July 27, 2006, QuikPlay, LLC changed its name to Innovative Funds Transfer, LLC. |
|
10. |
|
GUARANTOR INFORMATION |
|
|
|
In March 2004, GCA issued $235 million in aggregate principal amount of 8 3/4% senior subordinated
notes due 2012 (the Notes). At June 30, 2006 and December 31, 2005 there were $152.8 million in
Notes that were outstanding. The Notes are guaranteed by all of GCAs existing domestic 100% owned
subsidiaries. In addition, effective upon the closing of the Companys initial public offering of
common stock, Holdings guaranteed, on a subordinated basis, GCAs obligations under the Notes.
These guarantees are full, unconditional, joint and several. CashCall, GCA Canada, BVI , Swiss Co,
GCA HK and GCA Macau, which are 100% owned non-domestic subsidiaries, and IFT, which is a
consolidated joint venture, do not guaranty 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 Companys guarantor subsidiaries and non-guarantor
subsidiaries and affiliate, as of June 30, 2006 and December 31, 2005, and for the three and six
months ended June 30, 2006 and 2005. |
18
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE BALANCE SHEET INFORMATION
JUNE 30, 2006
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
Elimination |
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Entries * |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
54,217 |
|
|
$ |
114 |
|
|
$ |
4,304 |
|
|
$ |
|
|
|
$ |
58,635 |
|
Settlement receivables |
|
|
|
|
|
|
24,478 |
|
|
|
|
|
|
|
465 |
|
|
|
|
|
|
|
24,943 |
|
Receivables, other |
|
|
11 |
|
|
|
10,423 |
|
|
|
26,717 |
|
|
|
28 |
|
|
|
(29,872 |
) |
|
|
7,307 |
|
Prepaid and other assets |
|
|
|
|
|
|
9,828 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
9,830 |
|
Investment in subsidiaries |
|
|
108,097 |
|
|
|
71,034 |
|
|
|
|
|
|
|
|
|
|
|
(179,131 |
) |
|
|
|
|
Property, equipment and
leasehold improvements, net |
|
|
|
|
|
|
17,830 |
|
|
|
21 |
|
|
|
89 |
|
|
|
|
|
|
|
17,940 |
|
Goodwill, net |
|
|
|
|
|
|
116,574 |
|
|
|
39,470 |
|
|
|
741 |
|
|
|
|
|
|
|
156,785 |
|
Other intangibles, net |
|
|
|
|
|
|
19,403 |
|
|
|
481 |
|
|
|
235 |
|
|
|
|
|
|
|
20,119 |
|
Deferred income taxes, net |
|
|
|
|
|
|
199,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
108,108 |
|
|
$ |
523,228 |
|
|
$ |
66,805 |
|
|
$ |
5,862 |
|
|
$ |
(209,003 |
) |
|
$ |
495,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
(DEFICIT) EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement liabilities |
|
$ |
|
|
|
$ |
26,430 |
|
|
$ |
|
|
|
$ |
402 |
|
|
$ |
|
|
|
$ |
26,832 |
|
Accounts payable |
|
|
|
|
|
|
22,680 |
|
|
|
15 |
|
|
|
149 |
|
|
|
|
|
|
|
22,844 |
|
Accrued expenses |
|
|
|
|
|
|
48,957 |
|
|
|
850 |
|
|
|
216 |
|
|
|
(35,460 |
) |
|
|
14,563 |
|
Borrowings |
|
|
|
|
|
|
316,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
414,858 |
|
|
|
865 |
|
|
|
767 |
|
|
|
(35,460 |
) |
|
|
381,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
|
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
108,108 |
|
|
|
108,097 |
|
|
|
65,940 |
|
|
|
5,095 |
|
|
|
(173,543 |
) |
|
|
113,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
108,108 |
|
|
$ |
523,228 |
|
|
$ |
66,805 |
|
|
$ |
5,862 |
|
|
$ |
(209,003 |
) |
|
$ |
495,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Eliminations include intercompany investments and management fees |
19
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE BALANCE SHEET INFORMATION
DECEMBER 31, 2005
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Receivables, other |
|
|
|
|
|
|
136,213 |
|
|
|
22,737 |
|
|
|
37 |
|
|
|
(151,632 |
) |
|
|
7,355 |
|
Prepaid and other assets |
|
|
|
|
|
|
10,946 |
|
|
|
1 |
|
|
|
12 |
|
|
|
|
|
|
|
10,959 |
|
Investment in subsidiaries |
|
|
223,378 |
|
|
|
66,707 |
|
|
|
|
|
|
|
|
|
|
|
(290,085 |
) |
|
|
|
|
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 |
|
$ |
223,378 |
|
|
$ |
661,588 |
|
|
$ |
62,616 |
|
|
$ |
4,553 |
|
|
$ |
(441,717 |
) |
|
$ |
510,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
223,378 |
|
|
|
223,378 |
|
|
|
62,488 |
|
|
|
4,219 |
|
|
|
(418,979 |
) |
|
|
94,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
223,378 |
|
|
$ |
661,588 |
|
|
$ |
62,616 |
|
|
$ |
4,553 |
|
|
$ |
(441,717 |
) |
|
$ |
510,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include intercompany investments and management fees |
20
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF INCOME INFORMATION
THREE MONTHS ENDED JUNE 30, 2006
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
|
|
|
$ |
67,762 |
|
|
$ |
|
|
|
$ |
1,381 |
|
|
$ |
|
|
|
$ |
69,143 |
|
ATM |
|
|
|
|
|
|
54,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,586 |
|
Check services |
|
|
|
|
|
|
4,676 |
|
|
|
2,783 |
|
|
|
|
|
|
|
|
|
|
|
7,459 |
|
Central Credit and other revenues |
|
|
6,279 |
|
|
|
2,259 |
|
|
|
2,007 |
|
|
|
26 |
|
|
|
(8,183 |
) |
|
|
2,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,279 |
|
|
|
129,283 |
|
|
|
4,790 |
|
|
|
1,407 |
|
|
|
(8,183 |
) |
|
|
133,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
|
|
|
|
(91,369 |
) |
|
|
(2,146 |
) |
|
|
(777 |
) |
|
|
|
|
|
|
(94,292 |
) |
Operating expenses |
|
|
|
|
|
|
(15,366 |
) |
|
|
(957 |
) |
|
|
(471 |
) |
|
|
158 |
|
|
|
(16,636 |
) |
Amortization |
|
|
|
|
|
|
(1,338 |
) |
|
|
(28 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
(1,384 |
) |
Depreciation |
|
|
|
|
|
|
(1,037 |
) |
|
|
(2 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
6,279 |
|
|
|
20,173 |
|
|
|
1,657 |
|
|
|
130 |
|
|
|
(8,025 |
) |
|
|
20,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
832 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
868 |
|
Interest expense |
|
|
|
|
|
|
(10,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
|
|
|
|
(9,869 |
) |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
(9,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
6,279 |
|
|
|
10,304 |
|
|
|
1,657 |
|
|
|
166 |
|
|
|
(8,025 |
) |
|
|
10,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
|
|
|
|
(4,063 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(4,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP LOSS |
|
|
6,279 |
|
|
|
6,241 |
|
|
|
1,657 |
|
|
|
89 |
|
|
|
(8,025 |
) |
|
|
6,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, NET OF TAX |
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
6,279 |
|
|
$ |
6,279 |
|
|
$ |
1,657 |
|
|
$ |
89 |
|
|
$ |
(8,025 |
) |
|
$ |
6,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include earnings on subsidiaries and management fees |
21
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF INCOME INFORMATION
SIX MONTHS ENDED JUNE 30, 2006
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Combined Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
|
|
|
$ |
133,535 |
|
|
$ |
|
|
|
$ |
2,663 |
|
|
$ |
|
|
|
$ |
136,198 |
|
ATM |
|
|
|
|
|
|
107,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,746 |
|
Check services |
|
|
|
|
|
|
9,589 |
|
|
|
5,114 |
|
|
|
|
|
|
|
|
|
|
|
14,703 |
|
Central Credit and other revenues |
|
|
13,243 |
|
|
|
4,505 |
|
|
|
4,082 |
|
|
|
48 |
|
|
|
(17,114 |
) |
|
|
4,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
13,243 |
|
|
|
255,375 |
|
|
|
9,196 |
|
|
|
2,711 |
|
|
|
(17,114 |
) |
|
|
263,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
|
|
|
|
(180,368 |
) |
|
|
(3,712 |
) |
|
|
(1,563 |
) |
|
|
|
|
|
|
(185,643 |
) |
Operating expenses |
|
|
|
|
|
|
(29,339 |
) |
|
|
(1,986 |
) |
|
|
(910 |
) |
|
|
309 |
|
|
|
(31,926 |
) |
Amortization |
|
|
|
|
|
|
(2,806 |
) |
|
|
(45 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
(2,886 |
) |
Depreciation |
|
|
|
|
|
|
(2,091 |
) |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
(2,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
13,243 |
|
|
|
40,771 |
|
|
|
3,451 |
|
|
|
181 |
|
|
|
(16,805 |
) |
|
|
40,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
1,424 |
|
Interest expense |
|
|
|
|
|
|
(20,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
|
|
|
|
(19,590 |
) |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
(19,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
13,243 |
|
|
|
21,181 |
|
|
|
3,451 |
|
|
|
246 |
|
|
|
(16,805 |
) |
|
|
21,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
|
|
|
|
(8,012 |
) |
|
|
|
|
|
|
(135 |
) |
|
|
|
|
|
|
(8,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP LOSS |
|
|
13,243 |
|
|
|
13,169 |
|
|
|
3,451 |
|
|
|
111 |
|
|
|
(16,805 |
) |
|
|
13,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, NET OF TAX |
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
13,243 |
|
|
$ |
13,243 |
|
|
$ |
3,451 |
|
|
$ |
111 |
|
|
$ |
(16,805 |
) |
|
$ |
13,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include earnings on subsidiaries and management fees |
22
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF INCOME INFORMATION
THREE MONTHS ENDED JUNE 30, 2005
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
|
|
|
$ |
56,706 |
|
|
$ |
|
|
|
$ |
1,227 |
|
|
$ |
|
|
|
$ |
57,933 |
|
ATM |
|
|
|
|
|
|
45,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,217 |
|
Check services |
|
|
|
|
|
|
6,381 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
6,734 |
|
Central Credit and other revenues |
|
|
6,643 |
|
|
|
1,360 |
|
|
|
2,245 |
|
|
|
24 |
|
|
|
(7,696 |
) |
|
|
2,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,643 |
|
|
|
109,664 |
|
|
|
2,598 |
|
|
|
1,251 |
|
|
|
(7,696 |
) |
|
|
112,460 |
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
|
|
|
|
(74,750 |
) |
|
|
(489 |
) |
|
|
(748 |
) |
|
|
|
|
|
|
(75,987 |
) |
Operating expenses |
|
|
|
|
|
|
(10,840 |
) |
|
|
(1,229 |
) |
|
|
(386 |
) |
|
|
167 |
|
|
|
(12,288 |
) |
Amortization |
|
|
|
|
|
|
(1,272 |
) |
|
|
(17 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(1,295 |
) |
Depreciation |
|
|
|
|
|
|
(1,927 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(1,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
6,643 |
|
|
|
20,875 |
|
|
|
863 |
|
|
|
106 |
|
|
|
(7,529 |
) |
|
|
20,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
181 |
|
Interest expense |
|
|
|
|
|
|
(10,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
|
|
|
|
(10,665 |
) |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
(10,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
6,643 |
|
|
|
10,210 |
|
|
|
863 |
|
|
|
124 |
|
|
|
(7,529 |
) |
|
|
10,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
|
|
|
|
(3,611 |
) |
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
(3,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP
LOSS, NET OF TAX |
|
|
6,643 |
|
|
|
6,599 |
|
|
|
863 |
|
|
|
23 |
|
|
|
(7,529 |
) |
|
|
6,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, NET OF TAX |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
6,643 |
|
|
$ |
6,643 |
|
|
$ |
863 |
|
|
$ |
23 |
|
|
$ |
(7,529 |
) |
|
$ |
6,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include earnings on subsidiaries and management fees |
23
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF INCOME INFORMATION
SIX MONTHS ENDED JUNE 30, 2005
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
|
|
|
$ |
112,290 |
|
|
$ |
|
|
|
$ |
2,420 |
|
|
$ |
|
|
|
$ |
114,710 |
|
ATM |
|
|
|
|
|
|
88,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,989 |
|
Check services |
|
|
|
|
|
|
12,598 |
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
13,043 |
|
Central Credit and other revenues |
|
|
13,983 |
|
|
|
3,284 |
|
|
|
4,599 |
|
|
|
46 |
|
|
|
(16,529 |
) |
|
|
5,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
13,983 |
|
|
|
217,161 |
|
|
|
5,044 |
|
|
|
2,466 |
|
|
|
(16,529 |
) |
|
|
222,125 |
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
|
|
|
|
(146,399 |
) |
|
|
(539 |
) |
|
|
(1,514 |
) |
|
|
|
|
|
|
(148,452 |
) |
Operating expenses |
|
|
|
|
|
|
(21,625 |
) |
|
|
(2,269 |
) |
|
|
(698 |
) |
|
|
291 |
|
|
|
(24,301 |
) |
Amortization |
|
|
|
|
|
|
(2,596 |
) |
|
|
(57 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(2,659 |
) |
Depreciation |
|
|
|
|
|
|
(3,875 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(3,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
13,983 |
|
|
|
42,666 |
|
|
|
2,179 |
|
|
|
239 |
|
|
|
(16,238 |
) |
|
|
42,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
590 |
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
633 |
|
Interest expense |
|
|
|
|
|
|
(21,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense) , net |
|
|
|
|
|
|
(21,170 |
) |
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
(21,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
13,983 |
|
|
|
21,496 |
|
|
|
2,179 |
|
|
|
282 |
|
|
|
(16,238 |
) |
|
|
21,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
|
|
|
|
(7,607 |
) |
|
|
|
|
|
|
(206 |
) |
|
|
|
|
|
|
(7,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP
LOSS, NET OF TAX |
|
|
13,983 |
|
|
|
13,889 |
|
|
|
2,179 |
|
|
|
76 |
|
|
|
(16,238 |
) |
|
|
13,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, NET OF TAX |
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
13,983 |
|
|
$ |
13,983 |
|
|
$ |
2,179 |
|
|
$ |
76 |
|
|
$ |
(16,238 |
) |
|
$ |
13,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include earnings on subsidiaries and management fees |
24
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,243 |
|
|
$ |
13,243 |
|
|
$ |
3,451 |
|
|
$ |
111 |
|
|
$ |
(16,805 |
) |
|
$ |
13,243 |
|
Adjustments to reconcile net income to
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
|
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
853 |
|
Amortization of intangibles |
|
|
|
|
|
|
2,806 |
|
|
|
45 |
|
|
|
35 |
|
|
|
|
|
|
|
2,886 |
|
Depreciation |
|
|
|
|
|
|
2,091 |
|
|
|
2 |
|
|
|
22 |
|
|
|
|
|
|
|
2,115 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Write-off of bad debt |
|
|
|
|
|
|
|
|
|
|
3,011 |
|
|
|
|
|
|
|
|
|
|
|
3,011 |
|
Deferred income taxes |
|
|
|
|
|
|
8,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,035 |
|
Equity income in subsidiaries |
|
|
(13,243 |
) |
|
|
(3,562 |
) |
|
|
|
|
|
|
|
|
|
|
16,805 |
|
|
|
|
|
Minority ownership loss |
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116 |
) |
Stock-based compensation |
|
|
|
|
|
|
4,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
|
|
|
|
34,893 |
|
|
|
|
|
|
|
520 |
|
|
|
|
|
|
|
35,413 |
|
Receivables, other |
|
|
|
|
|
|
(8,103 |
) |
|
|
(6,989 |
) |
|
|
81 |
|
|
|
12,723 |
|
|
|
(2,288 |
) |
Prepaid and other assets |
|
|
|
|
|
|
436 |
|
|
|
(1 |
) |
|
|
12 |
|
|
|
|
|
|
|
447 |
|
Settlement liabilities |
|
|
|
|
|
|
(32,703 |
) |
|
|
|
|
|
|
(430 |
) |
|
|
|
|
|
|
(33,133 |
) |
Accounts payable |
|
|
|
|
|
|
2,576 |
|
|
|
(54 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
2,425 |
|
Accrued expenses |
|
|
|
|
|
|
11,279 |
|
|
|
792 |
|
|
|
825 |
|
|
|
(12,723 |
) |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
36,046 |
|
|
|
257 |
|
|
|
1,079 |
|
|
|
|
|
|
|
37,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include intercompany investments and management fees |
(Continued)
25
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold improvements |
|
$ |
|
|
|
$ |
(9,415 |
) |
|
$ |
(20 |
) |
|
$ |
(18 |
) |
|
$ |
|
|
|
$ |
(9,453 |
) |
Purchase of other intangibles |
|
|
|
|
|
|
(495 |
) |
|
|
(399 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
(999 |
) |
Investments in subsidiaries |
|
|
(1,287 |
) |
|
|
(360 |
) |
|
|
|
|
|
|
|
|
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,287 |
) |
|
|
(10,270 |
) |
|
|
(419 |
) |
|
|
(123 |
) |
|
|
1,647 |
|
|
|
(10,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit facility |
|
|
|
|
|
|
(4,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,621 |
) |
Debt issuance costs |
|
|
|
|
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139 |
) |
Proceeds from equity offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287 |
|
Minority capital contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240 |
|
|
|
240 |
|
Capital contributions |
|
|
|
|
|
|
1,287 |
|
|
|
|
|
|
|
600 |
|
|
|
(1,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,287 |
|
|
|
(3,473 |
) |
|
|
|
|
|
|
600 |
|
|
|
(1,647 |
) |
|
|
(3,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
(323 |
) |
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
|
|
|
|
|
|
21,980 |
|
|
|
(162 |
) |
|
|
1,694 |
|
|
|
|
|
|
|
23,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSBeginning of period |
|
|
|
|
|
|
32,237 |
|
|
|
276 |
|
|
|
2,610 |
|
|
|
|
|
|
|
35,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSEnd of period |
|
$ |
|
|
|
$ |
54,217 |
|
|
$ |
114 |
|
|
$ |
4,304 |
|
|
$ |
|
|
|
$ |
58,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,983 |
|
|
$ |
13,983 |
|
|
$ |
2,179 |
|
|
$ |
76 |
|
|
$ |
(16,238 |
) |
|
$ |
13,983 |
|
Adjustments to reconcile net income to
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of financing costs |
|
|
|
|
|
|
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990 |
|
Amortization of intangibles |
|
|
|
|
|
|
2,596 |
|
|
|
57 |
|
|
|
6 |
|
|
|
|
|
|
|
2,659 |
|
Depreciation |
|
|
|
|
|
|
3,875 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
3,884 |
|
Deferred income taxes |
|
|
|
|
|
|
6,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,780 |
|
Equity income in subsidiaries |
|
|
(13,983 |
) |
|
|
(2,255 |
) |
|
|
|
|
|
|
|
|
|
|
16,238 |
|
|
|
|
|
Minority ownership loss |
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement receivables |
|
|
|
|
|
|
10,290 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
10,375 |
|
Receivables, other |
|
|
|
|
|
|
(2,110 |
) |
|
|
(1,975 |
) |
|
|
|
|
|
|
3,773 |
|
|
|
(312 |
) |
Prepaid and other assets |
|
|
|
|
|
|
(1,978 |
) |
|
|
(3 |
) |
|
|
12 |
|
|
|
|
|
|
|
(1,969 |
) |
Settlement liabilities |
|
|
|
|
|
|
(17,560 |
) |
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
(17,800 |
) |
Accounts payable |
|
|
|
|
|
|
(2,867 |
) |
|
|
(371 |
) |
|
|
(111 |
) |
|
|
|
|
|
|
(3,349 |
) |
Accrued expenses |
|
|
|
|
|
|
4,549 |
|
|
|
72 |
|
|
|
521 |
|
|
|
(3,773 |
) |
|
|
1,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
|
|
|
|
16,199 |
|
|
|
(41 |
) |
|
|
358 |
|
|
|
|
|
|
|
16,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold
improvements |
|
|
|
|
|
|
(2,519 |
) |
|
|
(4 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
(2,671 |
) |
Purchase of other intangibles |
|
|
|
|
|
|
(170 |
) |
|
|
(183 |
) |
|
|
(80 |
) |
|
|
|
|
|
|
(433 |
) |
Investments in subsidiaries |
|
|
(700 |
) |
|
|
(700 |
) |
|
|
|
|
|
|
|
|
|
|
1,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(700 |
) |
|
|
(3,389 |
) |
|
|
(187 |
) |
|
|
(228 |
) |
|
|
1,400 |
|
|
|
(3,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminations include intercompany investments and management fees |
(Continued)
27
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations * |
|
|
Consolidated |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit facility |
|
$ |
|
|
|
$ |
(34,286 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(34,286 |
) |
Debt issuance costs |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
Minority capital contributions |
|
|
|
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280 |
|
Capital contributions |
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
700 |
|
|
|
(1,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
|
|
|
|
(33,396 |
) |
|
|
|
|
|
|
700 |
|
|
|
(1,400 |
) |
|
|
(34,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS |
|
|
(700 |
) |
|
|
(20,457 |
) |
|
|
(228 |
) |
|
|
776 |
|
|
|
|
|
|
|
(20,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSBeginning
of period |
|
|
700 |
|
|
|
45,037 |
|
|
|
662 |
|
|
|
3,178 |
|
|
|
|
|
|
|
49,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSEnd
of period |
|
$ |
|
|
|
$ |
24,580 |
|
|
$ |
434 |
|
|
$ |
3,954 |
|
|
$ |
|
|
|
$ |
28,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements
included in this Quarterly Report, other than statements that are purely historical, are
forward-looking statements. Words such as anticipate, contemplate, expect, intend,
plan, believe, seek, estimate, will, will continue to be, or the negative of the
foregoing and similar expressions regarding beliefs, plans, expectations or intentions
regarding the future also identify forward-looking statements. Forward-looking statements in
this Quarterly Report include, without limitation: in Part I, Item 1, (1) our opinion that all
of the issues raised by the card associations will be resolved in the ordinary course of
business and that related changes to the bankcard transaction processing will not result in a
material adverse impact on us; (2) our opinion that the final resolution of pending or
threatened litigation in the aggregate is not likely to have a material adverse effect on our
business, cash flow, results of operations or financial position (3) our intention to seek a
waiver or modification of debt covenants or our ability to refinance the senior secured credit
facility in its entirety prior to December 31, 2006; (4) our expectations relevant to the
vesting of our stock options and our restricted stock and the recognition of those cost on a
straight-line basis over a weighted average period of 2.5 years and 3.6 years, respectively;
in Part I, Item 2, (5) statements regarding our recognition and enjoyment of a net tax asset
in connection with our conversion to a taxable corporate entity and the pro forma effect of
such conversion; (6) our expectation that commissions, interchange and warranty expenses will
continue to increase, and that, in the balance of 2006, cost of revenues (excluding
depreciation and amortization) will increase at a rate faster than revenues; (7) our estimate
that the effective tax rate for 2006 will be 37.9% for the purposes of determining the
provision for income taxes; (8) our expectation that capital expenditures for 2006 will exceed
the maximum allowed by our debt covenants and our intention or ability to obtain a waiver of
this capital expenditure restriction or to refinance our senior secured debt; (9) our
intention to use our revolving credit facility to provide ongoing working capital and for
other general corporate purposes; (10) our belief that borrowings under our 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 facility for the next
twelve months and for the foreseeable future; (11) our plan, if necessary, to seek additional
financing through bank borrowings or public or private debt or equity financings; (12) our
believe that replacement costs of equipment, furniture and leasehold improvements will not
materially affect our operations; in Part I, Item 3, (13) our expectation that we will
continue to pay interest on borrowings under our senior secured credit facilities based on
LIBOR of various maturities; and in Part II, Item 1, (14) our ability to obtain an injunction
against future infringement of the patent and recovery of damages as a result of past
infringement of the patent and recovery of damages as a result of past infringement of the
patent.
Our expectations, beliefs, objectives, anticipations, intentions and strategies regarding the
future, including, without limitation, those concerning expected operating results, revenues
and earnings are not guarantees of future performance and are subject to risks and
uncertainties that could cause actual results to differ materially from results contemplated
by the forward-looking statements including, but not limited to: (1) our inability to predict
the severity of issues raised by card associations, our limited ability to make changes to the
bankcard transaction processing, and our reliance on third parties for bankcard transaction
processing; (2) the uncertainty of the outcome of any pending or threatened litigation; (3)
our inability to request or obtain a waiver from our lenders or our ability to refinance any
of our debt; (4) our inability to control the cessation of employment of recipients of our
stock options and our restricted stock; (5) 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; (6) our inability to control interchange rates and our
ability to offer gaming establishments incentives other than increased commission rates and
unanticipated cost savings or larger than anticipated revenue increases due to market
expansion, competitive success or otherwise; (7) unanticipated changes to applicable tax rates
or laws or changes in our tax position, including changes in the amortization of our deferred
tax asset; (8) our inability to obtain a waiver of capital expenditure restrictions or to
refinance our senior secured debt; (9) our inability to use our revolving credit facility to
provide ongoing working capital and for other general corporate purposes; (10) unanticipated
needs for working capital, capital expenditures, our inability to satisfy conditions precedent
to our ability to borrow additional funds under our senior secured credit facilities or our
failure to accurately estimate our operating cash flows as a result of competitive pressures
or otherwise; (11) our inability to obtain additional financings through bank borrowings or
debt or equity financing at all or on terms that are favorable to us; (12) unanticipated loss
of or damage to our
29
equipment or the need to replace our equipment as a result of
unanticipated obsolescence, regulatory changes
or otherwise; (13) unanticipated interest as a result of interest based upon rates other than
LIBOR of various maturities; and (14) our inability to protect our intellectual property
rights.
We assume no obligation to update any forward-looking statements. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the date of this
Quarterly Report on Form 10-Q. Readers should also review the cautionary statements and
discussion of the risks of our business set forth elsewhere herein under the heading Risk
Factors under Part II, Item 1A and our other filings with the Securities and Exchange
Commission (SEC), including our Registration Statement on Form S-1 (No. 333-133996) filed on
May 24, 2006 and our Current Reports on Form 8-K.
Overview
We are a provider of cash access products and related services to the gaming industry in the
United States, the United Kingdom, Canada, the Caribbean, Switzerland and Belgium. Our
products and services provide gaming establishment patrons access to cash through a variety of
methods, including ATM cash withdrawals, credit card cash advances, point-of-sale 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 Delaware limited liability company owned by M&C International and
entities affiliated with Bank of America Corporation and First Data Corporation in July 1998.
In September 2000, Bank of America Corporation sold its entire ownership interest in us to M&C
International and First Data Corporation. In March 2004, Global Cash Access, Inc. issued $235
million in aggregate principal amount of 8 3/4% senior subordinated notes due 2012 (the Notes)
and borrowed $260 million under senior secured credit facilities. Global Cash Access Holdings,
Inc. was formed to hold all of the outstanding capital stock of Global Cash Access, Inc. and
to guarantee 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 Corporations interest in us and a portion of M&C
Internationals 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, Holdings completed an initial
public offering of common stock. In connection with that offering, the various equity
securities of Holdings that had been outstanding prior to the offering were converted into
common stock. In addition, Holdings became a guarantor, on a subordinated basis, of GCAs
senior subordinated notes.
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.
30
Three months ended June 30, 2006 compared to three months ended June 30, 2005
The following table sets forth the unaudited condensed consolidated results of operations for
the three months ended (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
69,143 |
|
|
|
51.8 |
% |
|
$ |
57,933 |
|
|
|
51.5 |
% |
ATM |
|
|
54,586 |
|
|
|
40.9 |
% |
|
|
45,217 |
|
|
|
40.2 |
% |
Check services |
|
|
7,459 |
|
|
|
5.6 |
% |
|
|
6,734 |
|
|
|
6.0 |
% |
Central Credit and other revenues |
|
|
2,388 |
|
|
|
1.8 |
% |
|
|
2,576 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
133,576 |
|
|
|
100.0 |
% |
|
|
112,460 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and
amortization) |
|
|
(94,292 |
) |
|
|
(70.6 |
)% |
|
|
(75,987 |
) |
|
|
(67.6 |
)% |
Operating expenses |
|
|
(16,636 |
) |
|
|
(12.5 |
)% |
|
|
(12,288 |
) |
|
|
(10.9 |
)% |
Amortization |
|
|
(1,384 |
) |
|
|
(1.0 |
)% |
|
|
(1,295 |
) |
|
|
(1.2 |
)% |
Depreciation |
|
|
(1,050 |
) |
|
|
(0.8 |
)% |
|
|
(1,932 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
20,214 |
|
|
|
15.1 |
% |
|
|
20,958 |
|
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
868 |
|
|
|
0.6 |
% |
|
|
181 |
|
|
|
0.2 |
% |
Interest expense |
|
|
(10,701 |
) |
|
|
(8.0 |
)% |
|
|
(10,828 |
) |
|
|
(9.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net |
|
|
(9,833 |
) |
|
|
(7.4 |
)% |
|
|
(10,647 |
) |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION AND MINORITY
OWNERSHIP LOSS |
|
|
10,381 |
|
|
|
7.8 |
% |
|
|
10,311 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
(4,140 |
) |
|
|
(3.1 |
)% |
|
|
(3,712 |
) |
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY OWNERSHIP LOSS |
|
|
6,241 |
|
|
|
4.7 |
% |
|
|
6,599 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, net of tax |
|
|
38 |
|
|
|
0.0 |
% |
|
|
44 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
6,279 |
|
|
|
4.7 |
% |
|
$ |
6,643 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate dollar amount processed (in billions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
1.4 |
|
|
|
|
|
|
$ |
1.1 |
|
|
|
|
|
ATM |
|
|
3.0 |
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
Check warranty |
|
$ |
0.3 |
|
|
|
|
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions completed (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
|
2.5 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
ATM |
|
|
17.0 |
|
|
|
|
|
|
|
14.7 |
|
|
|
|
|
Check warranty |
|
|
1.3 |
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
31
Total Revenues
Total revenues for the quarter ended June 30, 2006 were $133.6 million, an increase of $21.1
million, or 18.8%, as compared to the quarter ended June 30, 2005.
The increase in revenues from the second quarter of 2005 to the second quarter of 2006 was
primarily due to the reasons described below.
Cash Advance. Cash advance revenue for the quarter ended June 30, 2006 was $69.1 million, an
increase of $11.2 million, or 19.3%, as compared to the quarter ended June 30, 2005. The total
amount of cash disbursed increased 19.9% from $1.1 billion to $1.4 billion and the number of
transactions completed increased 11.7% from 2.3 million to 2.5 million. Revenue per cash
advance transaction increased 6.9% from $25.43 to $27.18.
ATM. ATM revenue for the quarter ended June 30, 2006 was $54.6 million, an increase of
$9.4 million, or 20.7%, as compared to the quarter ended June 30, 2005. The increase was
primarily attributable to a 15.4% increase in the number of transactions from 14.7 million to
17.0 million. Revenue per ATM transaction increased 4.9% from $3.07 to $3.22. There was a
22.7% increase in the total amount of cash disbursed from $2.5 billion to $3.0 billion.
Check Services. Check services revenue for the quarter ended June 30, 2006 was $7.5 million,
an increase of $0.7 million, or 10.8%, as compared to the quarter ended June 30, 2005. The
face amount of checks warranted increased 21.0% from $280.1 million to $339.0 million. The
number of checks warranted increased 8.2% from 1.2 million to 1.3 million, while the average
face amount per check warranted increased from $235.65 to $263.51. Check warranty revenue as a
percent of face amount warranted was 2.11% in the 2006 quarter as compared to 2.27% for the
quarter ended June 30, 2005, and revenue per check warranty transaction increased 3.9% from
$5.35 to $5.56.
Central Credit and Other. Central Credit and other revenues for the quarter ended June 30,
2006, were $2.4 million, a decrease of $0.2 million, or 7.3%, from $2.6 million in the quarter
ended June 30, 2005.
Costs and Expenses
Cost of Revenues (Exclusive of Depreciation and Amortization). Cost of revenues (exclusive of
depreciation and amortization) increased 24.1% from $75.9 million to $94.3 million. The
largest component of cost of revenues (exclusive of depreciation and amortization) is
commissions, and commissions increased 26.2% in the 2006 quarter as contracts were signed or
renewed at higher commission rates than experienced in the 2005 quarter. The second-largest
component of cost of revenues (exclusive of depreciation and amortization) is interchange;
interchange expenses increased 20.9%. The third major component of cost of revenues (exclusive
of depreciation and amortization) is warranty expenses. Warranty expenses increased 21.9%. We
expect that commissions, interchange and warranty expenses will continue to increase, and we
expect that for the remaining quarters of 2006 cost of revenues (exclusive of depreciation and
amortization) will increase at a rate faster than revenues.
Operating Expenses. Operating expenses for the quarter ended June 30, 2006 were $16.6 million,
an increase of $4.3 million or 35.4%, as compared to the quarter ended June 30, 2005.
Operating expenses in the 2006 quarter included $2.4 million in non-cash compensation expenses
related to our adoption of SFAS No. 123(R), Share-Based Payment, for equity awards issued to
our employees. The additional increase in operating expenses in the 2006 quarter is
primarily attributable to increased payroll and related benefits and taxes from the addition
of several employees as the infrastructure of the organization has been expanded to meet the
new demands of operating as a stand alone public entity. The Company also recognized expense
of $0.7 million for charges incurred in connection with the secondary offering of common stock
on behalf of certain shareholders, and $0.2 million in charges related to settlement of
litigation with a former customer.
Depreciation and Amortization. Depreciation expense for the quarter ended June 30, 2006 was
$1.1 million, a decrease of $0.9 million, or 45.7% compared to the 2005 quarter. The decrease
in depreciation expense is principally related to the equipment acquired in the 2001
InnoVentry acquisition becoming fully depreciated in the third quarter of 2005. Amortization
expense, which relates principally to computer software, customer
32
contracts and our 3-in-1
patent, increased from $1.3 million to $1.4 million, as a result of the acquisition of our
3-in-1 patent in the third quarter of FY 2005.
Primarily as a result of the factors described above, operating income for the quarter ended
June 30, 2006 was $20.2 million, a decrease of $0.8 million, or 3.5%, as compared to the
quarter ended June 30, 2005.
Interest Income (Expense), Net. Interest income was $868 thousand in the second quarter of
2006, an increase of 379.6% from the second quarter of 2005, due primarily to higher average
cash balances and higher interest rates in the second quarter of 2006.
Interest expense for the quarter ended June 30, 2006, was $10.7 million, a decrease of $0.1
million, or 1.2%, as compared to the quarter ended June 30, 2005. Higher interest rates on
our senior secured credit facilities were offset by lower average borrowings in the second
quarter of 2006. Interest expense on borrowings (including amortization of deferred financing
costs) was $6.7 million in the 2006 quarter as compared to $8.6 million in the 2005 quarter.
The cash usage fee for cash used in our ATMs is included in interest expense. ATM cash usage
fees were $4.0 million in the second quarter of 2006 as compared to $2.2 million in the same
quarter of 2005. This increase was a result of an increase in the average amount of
outstanding ATM cash from $266.1 million in the second quarter of 2005 to $296.0 million in
the second quarter of 2006 and an increase in the effective interest rate for the quarter from
3.37% to 5.41% for the same periods, respectively.
Primarily as a result of the foregoing, income before income tax provision and minority
ownership loss was $10.4 million for the quarter ended June 30, 2006, an increase of $0.1
million, or 0.7%, as compared to the 2005 quarter.
Income Tax. The provision for income taxes in the second quarter of 2006 represents our
estimate of the effective tax rate for the full year of 37.9%. This rate is higher than the
effective rate in the same period in 2005. The higher expected rate in 2006 results
principally from i) the non-deductible income tax treatment of certain components of the
non-cash compensation expense related to incentive stock options granted to employees which we
commenced expensing in 2006 pursuant to the adoption of FAS 123(R) and ii) the
non-deductibility of the secondary stock offering costs paid on behalf of certain of our
shareholders in the second quarter of 2006. Due to the amortization of our deferred tax
assets for income tax purposes, actual cash taxes paid on pretax income generated in the
second quarter of 2006 will be substantially lower than the provision.
Primarily as a result of the foregoing, income before minority ownership loss was $6.2 million
for the quarter ended June 30, 2006, a decrease of $0.4 million, or 5.4%, as compared to the
2005 quarter.
Minority Ownership Loss, Net of Tax. Minority ownership loss, net of tax attributable to
Innovative Funds Transfer, LLC formerly known as QuikPlay, LLC (IFT) for the quarter ended
June 30, 2006 was $38 thousand as compared to $44 thousand in the comparable period of 2005.
Primarily as a result of the foregoing, net income was $6.3 million for the quarter ended June
30, 2006, a decrease of $0.4 million as compared to the 2005 quarter.
33
Six months ended June 30, 2006 compared to six months ended June 30, 2005
The following table sets forth the unaudited condensed consolidated results of operations for
the six months ended (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
136,198 |
|
|
|
51.7 |
% |
|
$ |
114,710 |
|
|
|
51.6 |
% |
ATM |
|
|
107,746 |
|
|
|
40.9 |
% |
|
|
88,989 |
|
|
|
40.1 |
% |
Check services |
|
|
14,703 |
|
|
|
5.6 |
% |
|
|
13,043 |
|
|
|
5.9 |
% |
Central Credit and other revenues |
|
|
4,764 |
|
|
|
1.8 |
% |
|
|
5,383 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
263,411 |
|
|
|
100.0 |
% |
|
|
222,125 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and
amortization) |
|
|
(185,643 |
) |
|
|
(70.5 |
)% |
|
|
(148,452 |
) |
|
|
(66.8 |
)% |
Operating expenses |
|
|
(31,926 |
) |
|
|
(12.1 |
)% |
|
|
(24,301 |
) |
|
|
(10.9 |
)% |
Amortization |
|
|
(2,886 |
) |
|
|
(1.1 |
)% |
|
|
(2,659 |
) |
|
|
(1.2 |
)% |
Depreciation |
|
|
(2,115 |
) |
|
|
(0.8 |
)% |
|
|
(3,884 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
40,841 |
|
|
|
15.5 |
% |
|
|
42,829 |
|
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME (EXPENSE), NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,424 |
|
|
|
0.5 |
% |
|
|
633 |
|
|
|
0.3 |
% |
Interest expense |
|
|
(20,949 |
) |
|
|
(8.0 |
)% |
|
|
(21,760 |
) |
|
|
(9.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net |
|
|
(19,525 |
) |
|
|
(7.4 |
)% |
|
|
(21,127 |
) |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX PROVISION
AND MINORITY OWNERSHIP LOSS |
|
|
21,316 |
|
|
|
8.1 |
% |
|
|
21,702 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
(8,147 |
) |
|
|
(3.1 |
)% |
|
|
(7,813 |
) |
|
|
(3.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE MINORITY
OWNERSHIP LOSS |
|
|
13,169 |
|
|
|
5.0 |
% |
|
|
13,889 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY OWNERSHIP LOSS, net of tax |
|
|
74 |
|
|
|
0.0 |
% |
|
|
94 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
13,243 |
|
|
|
5.0 |
% |
|
$ |
13,983 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate dollar amount processed (in billions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
$ |
2.7 |
|
|
|
|
|
|
$ |
2.3 |
|
|
|
|
|
ATM |
|
|
5.9 |
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
Check warranty |
|
$ |
0.7 |
|
|
|
|
|
|
$ |
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions completed (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash advance |
|
|
5.1 |
|
|
|
|
|
|
|
4.6 |
|
|
|
|
|
ATM |
|
|
33.6 |
|
|
|
|
|
|
|
29.1 |
|
|
|
|
|
Check warranty |
|
|
2.5 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
34
Total Revenues
Total revenues for the six months ended June 30, 2006 were $263.4 million, an increase of
$41.3 million, or 18.6%, as compared to the six months ended June 30, 2005.
The increase in revenues from the six month period of 2005 to the comparable period of 2006
was primarily due to the reasons described below.
Cash Advance. Cash advance revenue for the six months ended June 30, 2006 was $136.2 million,
an increase of $21.5 million, or 18.7%, as compared to the six months ended June 30, 2005. The
total amount of cash disbursed increased 19.6% from $2.3 billion to $2.7 billion and the
number of transactions completed increased 10.5% from 4.6 million to 5.1 million. Revenue per
cash advance transaction increased 7.5% from $25.03 to $26.91.
ATM. ATM revenue for the six months ended June 30, 2006 was $107.7 million, an increase
of $18.8 million, or 21.1%, as compared to the six months ended June 30, 2005. The increase
was primarily attributable to a 15.8% increase in the number of transactions from 29.1 million
to 33.6 million. Revenue per ATM transaction increased 4.6% from $3.06 to $3.20. There was a
23.5% increase in the total amount of cash disbursed from $4.8 billion to $5.9 billion.
Check Services. Check services revenue for the six months ended June 30, 2006 was $14.7
million, an increase of $1.7 million, or 12.7%, as compared to the six months ended June 30,
2005. The face amount of checks warranted increased 23.2% from $537.3 million to $661.8
million. The number of checks warranted increased 10.5% from 2.3 million to 2.5 million, while
the average face amount per check warranted increased from $233.13 to $259.83. Check warranty
revenue as a percent of face amount warranted was 2.11% in the six months ended June 30, 2006
as compared to 2.30% for the six months ended June 30, 2005, and revenue per check warranty
transaction increased 2.4% from $5.36 to $5.49.
Central Credit and Other. Central Credit and other revenues for the six months ended June 30,
2006, were $4.8 million, a decrease of $0.6 million, or 11.5%, from $5.4 million in the six
months ended June 30, 2005.
Costs and Expenses
Cost of Revenues (Exclusive of Depreciation and Amortization). Cost of revenues (exclusive of
depreciation and amortization) increased 25.1% from $148.5 million to $185.6 million. The
largest component of cost of revenues (exclusive of depreciation and amortization) is
commissions, and commissions increased 26.2% in the 2006 period as contracts were signed or
renewed at higher commission rates than experienced in the comparable period of 2005. The
second-largest component of cost of revenues (exclusive of depreciation and amortization) is
interchange; interchange expenses increased 23.8%. The third major component of cost of
revenues (exclusive of depreciation and amortization) is warranty expenses. Warranty expenses
increased 23.1%. We expect that commissions, interchange and warranty expenses will continue
to increase, and we expect that for the rest of 2006 cost of revenues (exclusive of
depreciation and amortization) will increase at a rate faster than revenues.
Operating Expenses. Operating expenses for the six months ended June 30, 2006 were $31.9
million, an increase of $7.6 million or 31.4%, as compared to the six months ended June 30,
2005. Operating expenses in the six months ended June 30, 2006 included $4.3 million in
non-cash compensation expenses related to our adoption of SFAS No. 123(R), Share-Based
Payment, for equity awards issued to our employees. The additional increase in operating
expenses in the 2006 period is primarily attributable to increased payroll and related
benefits and taxes from the addition of several employees as the infrastructure of the
organization has been expanded to meet the new demands of operating as a stand alone public
entity. The Company also recognized expense of $0.7 million for charges incurred in
connection with the secondary offering of common stock on behalf of certain shareholders, and
$0.2 million in charges related to settlement of litigation with a former customer.
Depreciation and Amortization. Depreciation expense for the six months ended June 30, 2006 was
$2.1 million, a decrease of $1.8 million, or 45.5% compared to the 2005 period. The decrease
in depreciation expense is principally related to the equipment acquired in the 2001
InnoVentry acquisition becoming fully
35
depreciated in the third quarter of 2005. Amortization
expense, which relates principally to computer software,
customer contracts and our 3-in-1 patent, increased from $2.7 million to $2.9 million, as a
result of the acquisition of our 3-in-1 patent in the third quarter of FY 2005.
Primarily as a result of the factors described above, operating income for the six months
ended June 30, 2006 was $40.8 million, a decrease of $2.0 million, or 4.6%, as compared to the
six months ended June 30, 2005.
Interest Income (Expense), Net. Interest income was $1.4 million in the six month period of
2006, an increase of 125% from the same period of 2005, due primarily to higher average cash
balances and higher interest rates in the six month period of 2006.
Interest expense for the six months ended June 30, 2006, was $20.9 million, a decrease of $0.8
million, or 3.7%, as compared to the six months ended June 30, 2005. Higher interest rates on
our senior secured credit facilities were offset by lower average borrowings in the six month
period of 2006. Interest expense on borrowings (including amortization of deferred financing
costs) was $13.4 million in the 2006 period as compared to $17.5 million in the comparable
period of 2005. The cash usage fee for cash used in our ATMs is included in interest expense.
ATM cash usage fees were $7.5 million in the six month period of 2006 as compared to $4.2
million in the same period of 2005. This increase was a result of an increase in the average
amount of outstanding ATM cash from $269.2 million in the six month period of 2005 to $293.2
million in the comparable period of 2006 and an increase in the effective interest rate for
the quarter from 3.16% to 5.17% for the same periods, respectively.
Primarily as a result of the foregoing, income before income tax provision and minority
ownership loss was $21.3 million for the six months ended June 30, 2006, a decrease of $0.4
million, or 1.8%, as compared to the 2005 period.
Income Tax. The provision for income taxes in the six months ended June 30, 2006 represents
our estimate of the effective tax rate for the full year of 37.9%. This rate is higher than
the effective rate in the same period in 2005. The higher expected rate in 2006 results
principally from i) the non-deductible income tax treatment of certain components of the
non-cash compensation expense related to incentive stock options granted to employees which we
commenced expensing in 2006 pursuant to the adoption of FAS 123(R) and ii) the
non-deductibility of the secondary stock offering costs paid on behalf of certain of our
shareholders in Q2 2006. Due to the amortization of our deferred tax assets for income tax
purposes, actual cash taxes paid on pretax income generated in the six month period of 2006
will be substantially lower than the provision.
Primarily as a result of the foregoing, income before minority ownership loss was $13.2
million for the six months ended June 30, 2006, a decrease of $0.7 million, or 5.2%, as
compared to the 2005 period.
Minority Ownership Loss, Net of Tax. Minority ownership loss, net of tax attributable to IFT
for the six months ended June 30, 2006 was $74 thousand as compared to $94 thousand in the
comparable period of 2005.
Primarily as a result of the foregoing, net income was $13.2 million for the six months ended
June 30, 2006, a decrease of $0.7 million as compared to the six months ended June 30, 2005.
36
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2006 and 2005,
respectively (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Net cash provided by operating activities |
|
$ |
37,382 |
|
|
$ |
16,516 |
|
|
|
|
Net cash used in investing activities |
|
|
(10,452 |
) |
|
|
(3,104 |
) |
|
|
|
Net cash used in financing activities |
|
|
(3,233 |
) |
|
|
(34,096 |
) |
|
|
|
Net effect of exchange rate changes on cash
and cash equivalents |
|
|
(185 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
23,512 |
|
|
|
(20,609 |
) |
|
|
|
Cash and cash equivalents, beginning of period |
|
|
35,123 |
|
|
|
49,577 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
58,635 |
|
|
$ |
28,968 |
|
|
|
|
|
|
|
|
|
|
Our principal source of liquidity is cash flows from operating activities, which were $37.4
million and $16.5 million, for the six months ended June 30, 2006 and 2005, respectively. Our
cash from operating activities was greater than in the first six months of 2006 when compared
to 2005. Changes in settlement receivables and settlement payables account for $9.7 million
of the change, while $4.3 million is the result of stock based compensation. Additionally,
accrual of warranty expense reserves related to our Central Credit check cashing product
accounted for $3.0 million and $1.3 million is the result of changes in the deferred income
tax asset included in the six months of 2006 that were not present in the comparable period of
2005. |
|
|
|
Net cash used in investing activities totaled $10.5 million and $3.1 million for the six
months ended June 30, 2006 and 2005, respectively. Included in net cash used in investing
activities were funds spent on purchased software and software development in the amounts of
$0.9 million and $0.4 million, funds spent on the procurement of cash access equipment,
computer and other hardware in the amounts of $9.4 million and $2.7 million for the six months
ended June 30, 2006 and 2005, respectively. We have met our capital requirements to date
through cash flows from operating activities. We currently expect that capital expenditures in
2006 will exceed the annual limit allowed under our senior secured credit facilities. We will
seek to obtain a waiver or modification of this restriction or to refinance our senior secured
debt, but if we are unsuccessful in doing so, we could be in breach of this provision at the
end of 2006. |
|
|
|
Net cash used in financing activities was $3.2 million and $34.1 million for the six months
ended June 30, 2006 and 2005, respectively. In the six months ended June 30, 2006 and 2005, we
repaid $4.6 million and $34.3 million of principal on our credit facilities. In the six
months ended June 30, 2006 and 2005, the net cash used also includes payments for debt
issuance costs of $0.1 million and $0.1 million, respectively. Cash provided by financing
activities includes $0.2 million and $0.3 million in capital contributions IFT from our
minority investor in the six months ended June 30, 2006 and 2005, respectively. Additionally,
in the first six months of 2006 we obtained proceeds from the exercising of employee options
under our equity compensation programs totaling $1.3 million. |
37
Indebtedness
On March 10, 2004 we entered into senior secured credit facilities arranged by Banc of
America Securities LLC, with Bank of America, N.A. as administrative agent, in an aggregate
principal amount of $280.0 million, consisting of a five-year revolving credit facility of
$20.0 million and a six-year term loan facility of $260.0 million. The revolving credit
facility may be used to provide ongoing working capital and for other general corporate
purposes. Amounts available under this revolving credit were reduced by $3.1 million of
letters of credit outstanding at June 30, 2006. The terms of our senior secured credit
facilities require that a significant portion of our excess cash flow be devoted to reducing
amounts outstanding under these facilities. Under the terms of our senior secured credit
facilities we are required to maintain financial covenants related to our leverage ratio,
senior leverage ratio and fixed charge cover ratio. Additionally, we have a covenant related
to our allowable capital expenditures. We believe we were in compliance with all of our debt
covenants that were applicable as of June 30, 2006.
On April 14, 2005, we entered into an Amended and Restated Credit Agreement pursuant to which
some of the terms in our original senior secured credit facility was modified. These
modifications provided for the reduction in the Applicable Margin if our credit rating was
upgraded and our leverage ratio was below certain thresholds. In April 2006, the Applicable
Margin over the London Interbank Offered Rate (LIBOR) on which our interest expense is
based, was reduced from 225 basis points to 175 basis points
On March 10, 2004, we completed a private placement offering of the Notes. All of GCAs
existing and future domestic wholly owned subsidiaries are guarantors of the Notes on a senior
subordinated basis. In addition, effective upon the closing of the Companys initial public
offering of common stock, Holdings guaranteed, on a subordinated basis, GCAs 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 equity offering. On or after March 15, 2008, 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.
Other Liquidity Needs and Resources
Bank of America, N.A. supplies us with currency needed for normal operating requirements of
our ATMs 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 multiplied by 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 the applicable LIBOR
increases. As of June 30, 2006, the rate in effect, inclusive of the 25 basis points margin,
was 5.6%, and the currency supplied by Bank of America, N.A. pursuant to this agreement was
$356.8 million.
We need supplies of cash to support our foreign operations that involve the dispensing of
currency. For some foreign jurisdictions, applicable law and cross-border treaties allow us to
transfer funds between our domestic and foreign operations efficiently. The income from the
United Kingdom branch operation is taxed as earned in the United States and United Kingdom.
This double taxation is removed through tax treaty and the subsequent use of the United States
foreign tax credit. As a result, transfer of funds between our domestic and United Kingdom
operations can be handled efficiently with no restrictive repatriation considerations.
For other foreign jurisdictions, we must rely on the supply of cash generated by our
operations in those foreign jurisdictions, as the costs of repatriation are prohibitive. For
example, CashCall Systems Inc., 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 Systems Inc. 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.
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 June 30, 2006, we had invested a total of $4.0 million in IFT.
38
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 assure you 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 assure you 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
We obtain currency to meet the normal operating requirements of our domestic ATMs and
automated cashier machines (ACM) pursuant to the Amendment of the Treasury Services
Agreement with Bank of America, N.A. Under this agreement, all currency supplied by Bank of
America, N.A. remains the sole property of Bank of America, N.A. at all times until it is
dispensed, at which time Bank of America, N.A. 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 June 30, 2006, the total currency obtained from Bank of America, N.A.
pursuant to this agreement was $356.8 million. Because Bank of America, N.A. 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, N.A. 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.
As of June 30, 2006, we have $3.0 million in standby letters of credit outstanding as a
collateral security for First Data Corporation related to 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 Corporation 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.
Critical Accounting Policies
The preparation of our financial statements in conformity with U.S. 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 companys 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.
There were no newly identified significant accounting estimates in the three and six months
ended June 30, 2006, nor
were there any material changes to the critical accounting policies and estimates discussed in
the Companys audited consolidated financial statements for the year ended December 31, 2005,
included in the Companys Annual Report on Form 10-K (No. 001-32622) filed on March 23, 2006.
39
ITEM 3. 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, but continue to evaluate such foreign
currency translation risk exposure. At present, we do not hold any derivative securities of
any kind.
Bank of America, N.A. 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
the applicable LIBOR rate increases. As of June 30, 2006, the rate in effect, inclusive of the
25 basis points margin, was 5.6% and the currency supplied by Bank of America, N.A. pursuant
to this agreement was $356.8 million. Based upon the average outstanding amount of currency to
be supplied by Bank of America, N.A. pursuant to this agreement during the first three and six
months of 2006, which was $293.2 million, each 1% change in the applicable LIBOR rate 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 175 basis points for the term loan portion and LIBOR plus 175 basis points
for the revolving credit portion. At June 30, 2006, we had $0 drawn under the revolving credit
portion and we had $164.0 million outstanding under the term loan portion at an interest rate,
including the margin, of 7.1%. Based upon the outstanding balance on the term loan of $164.0
million on June 30, 2006, each 1% increase in the applicable LIBOR would add an additional
$1.6 million of interest expense over a 12-month period.
40
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. While our disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives, the design of any system of controls is based in part
upon assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions
regardless of how remote. However, based on the evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined by the SEC in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting (as defined by the
SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
that occurred during our most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial reporting.
41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 are
seeking an injunction against future infringement of the patent and recovery of damages as a
result of past infringement of the patent. In its response, the defendants have denied
infringement and have asserted patent invalidity. In addition, the defendants have asserted
various antitrust and unfair competition counterclaims.
In March 2006 and thereafter, we were named as a defendant in actions commenced by the
subsidiaries of a former customer alleging commissions were owed following the expiration of
our agreements with such subsidiaries. In July 2006, we settled all of the claims with an
aggregate payment of $200,000 to the subsidiaries and these actions were dismissed with
prejudice. The expense associated with this settlement was recorded
in operating expenses in the second quarter of 2006.
We are threatened with or named as a defendant in various lawsuits in the ordinary course of
business, such as personal injury claims and employment-related claims. It is not possible to
determine the ultimate disposition of these matters; however, we are of the opinion that the
final resolution of any such threatened or pending litigation, individually or in the
aggregate, is not likely to have a material adverse effect on our business, cash flow, results
of operations or financial position.
42
ITEM 1A. RISK FACTORS
Substantially all of the risk factors set forth below have been updated and modified from
prior versions of these risk factors set forth in our Annual Report on Form 10-K for the
period ended December 31, 2005.
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. Our contracts are often global, in that they cover all of the gaming establishments
of a particular operator wherever they are located around the world. So, 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.
In the six months ended June 30, 2006, our five largest customers, Harrahs Entertainment,
Inc., MGM MIRAGE, Boyd Gaming Corporation, Station Casinos, Inc. and Mohegan Tribal Gaming,
accounted for approximately 41.0% of our revenues. In the year ended December 31, 2005, these
same properties accounted for 40.6% of our revenues. Our largest customer, Harrahs
Entertainment, Inc. acquired Caesars Entertainment, Inc. in June 2005. The combined entity
would have accounted for 17.9% of our revenues for the year ended December 31, 2005 and 17.6%
in the six months ended June 30, 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.
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 ATM machines on the premises of gaming
establishments. 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
Corporation, that may choose
43
to enter the gaming patron cash services market. In connection with our redemption of First
Data Corporations interest in us, First Data Corporation agreed not to compete with us prior
to March 10, 2007. This agreement not to compete, however, is limited to the United States and
Canada and is subject to a number of exceptions. 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 Corporation could be a significant competitive threat upon
the expiration of this covenant not to compete. In addition, we may in the future face
potential competition from new entrants into the market for cash access products and related
services. 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 Technology Corporation (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 six 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 on the
Web. 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 on the Web, it could have a material adverse effect on the value of our intellectual
property, our reputation, our business and our operating results.
We may have to rely on litigation to enforce our intellectual property rights and contractual
rights. For example, we are pursuing a patent infringement action against U.S. Bancorp,
Fidelity National Information Services Inc. and Game Financial Corporation to discontinue what
we believe to be their infringement of the rights arising under our patent to the ''3-in-1
rollover functionality. By pursuing this litigation, we are exposed to the risk that the
defendants will attempt to invalidate the patent or otherwise limit its scope. If litigation
that we initiate is unsuccessful, including the litigation described above, we may not be able
to
44
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 the litigation referred to above, the defendants have
asserted various antitrust and unfair competition claims. 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 2005 and through the first six months of 2006, a substantial portion of our revenues were
derived from transactions subject to the extensive rules and regulations of the leading card
associations, Visa International and Visa U.S.A. (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 bank that sponsors 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. To date, we have
not seen increased chargebacks on these transactions. However, 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. As a result, we are
currently not able to use this feature of our ACMs to process credit card cash advances or POS
debit card transactions involving that card association at all of our locations. Therefore,
patrons still must complete these transactions at the cashier, which is inconvenient 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
Payment Card Industry (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
associations 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 bank determine that the manner in which we process certain types of card
transactions is not in compliance with existing rules and regulations, or if the card
associations adopt new rules or regulations that prohibit or restrict the manner in which we
process certain types of card transactions, we may be forced to pay a fine, modify the manner
in which we operate our business or stop processing certain types of cash access transactions
altogether, any of which could have a material negative impact on our business and operating
results.
In both our credit card and POS debit card cash advance businesses, patrons are generally
issued a negotiable instrument which is surrendered to the casino in exchange for cash. These
are classified by the card associations as ''quasi-cash transactions, and these transactions
are identified to the associations as such by
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the use of a specific Merchant Category Code (MCC), which the associations and the issuing
banks use 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 MCC, and the use of a different MCC may result in
lower approval rates than we experience with quasi-cash transactions. If approval rates for
EDITH transactions are lower than approval rates for quasi-cash transactions, casino 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 Discover Card and the American Express
card. 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 a private label credit
card through our wholly-owned subsidiary, Arriva Card, Inc. Initially, our credit card will
not be 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 2005. Also, in 2004, VISAs 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.
We receive fees from the issuers of ATM cards that are used in our ATM machines, 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. Unlike credit card association interchange fees, our contracts 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 June 30, 2006, we had total indebtedness
of $316.8 million in principal amount (of which $152.8 million consisted of senior
subordinated notes and $164.0 million consisted of senior secured debt). Our substantial
indebtedness could have important consequences. For example, it:
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makes it more difficult for us to satisfy our obligations with respect to either
our senior secured debt or our senior subordinated notes, which, if we fail to do,
could result in the acceleration of all of our debt; |
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increases our vulnerability to general adverse economic and industry conditions; |
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requires us to dedicate a substantial portion (in the case of our senior secured
debt, up to 75% of our excess cash flow, depending upon our total leverage ratio) of
our cash flow from operations to |
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payments on our indebtedness, which would reduce the availability of our cash flow to
fund working capital, capital expenditures, expansion efforts and other general
corporate purposes; |
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limits our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate; |
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restricts our ability to pay dividends or repurchase our common stock; |
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places us at a competitive disadvantage compared to our competitors that have less debt; |
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prohibits us from acquiring businesses or technologies that would benefit our business; |
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restricts our ability to engage in transactions with affiliates or create liens or guarantees; and |
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limits, along with the financial and other restrictive covenants in our other
indebtedness, among other things, our ability to borrow additional funds. |
In addition, our senior secured credit facilities and the indenture for 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, we expect that our capital
expenditures in 2006 will exceed the amounts allowed under the credit facilities due to
capital expenditures we expect to incur in connection with commencing operations under one of
our contracts. As another 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 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 effect 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 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.
47
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.
Money order instruments. We currently rely on Integrated Payment Systems, Inc. and Integrated
Payment Systems Canada Inc. 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 Integrated Payment
Systems, Inc. and Integrated Payment Systems Canada Inc., each of whom holds money transmitter
licenses. Our current contract with Integrated Payment Systems, Inc. and Integrated Payment
Systems Canada Inc. expires on December 31, 2006. We are 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 contracts
with Integrated Payment Systems, Inc. and Integrated Payment Systems Canada Inc., 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 use when cashing patron checks. Unless extended pursuant to
its terms, our contract with TeleCheck expires on March 31, 2007 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 check warranty 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 settle 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. We also rely on a
foreign bank in each foreign jurisdiction in which we operate to process transactions
conducted in these jurisdictions through the Visa International and MasterCard card
associations.
ATM cash supply. We rely on Bank of America, N.A., which is affiliated with Bank of America
Strategic Investments Corporation, to supply cash for substantially all of our ATMs.
Software development and system support. We generally rely on Infonox on the Web, which is
controlled by family members of our director Karim Maskatiya, 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
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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.
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 Internationals principals
could cause any of these entities to take actions that impair the ability of these entities to
provide us with the license or services they provide today or that reduce the importance of us
to them in the future. M&C Internationals 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. The loss of the
license or any loss of the services of these entities could adversely impact our business.
During the year ended December 31, 2005 and the three and six months ended June 30, 2006, we
incurred costs and expenses from USA Payments and USA Payment Systems of an aggregate of $4.0
million, $1.2 million and $2.3 million, respectively. We also depend on services provided by
Infonox on the Web, which is controlled by family members of our director Karim Maskatiya.
These familial relationships may provide Mr. Maskatiya with influence over Infonox on the Web,
presenting the same risks with respect to Infonox on the Web as those described above with
respect to USA Payments and USA Payment Systems.
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 ticket-out debit device (TODD) cashless gaming
product, and our electronic debit interactive terminal housing (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 casino, and EDITH has not yet been approved for
use in any location.
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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 issuance
of a private label credit card.
Through our wholly-owned subsidiary, Arriva Card, Inc., and together with a licensed banking
institution, we have entered the consumer credit business through the issuance of a private
label credit card. We have entered into an agreement with a licensed banking institution
whereby it issues the card, extends the credit to the cardholder, and maintains a revolving
credit account for the cardholder. Arriva Card, Inc. is obligated to purchase the receivables
from the licensed banking institution upon default by cardholders. This means that we will
bear the credit risk of the cardholders non-payment. We believe that there are a number of
commercial opportunities available to us through the issuance of such a card, and we believe
that the private label credit card business could be a source of significant revenue and
earnings.
The provision of a private label credit 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 the licensed banking institution, 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 at the end of the current monthly statement cycle. We may not be able to collect
those funds from consumers. 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 applicants 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 our private label cards issued by the
licensed banking institution. We have no experience in making such credit decisions. Although
we will seek to hire employees with consumer credit underwriting experience, we may not be
able to attract or retain qualified candidates. 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.
By providing a private label credit 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 a
licensed banking institution for purposes of card issuance and receivables acceptance, such
relationship may be discontinued at any time. If that were to happen, we would be required to
become licensed in those jurisdictions in which we wanted to issue cards. 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 a private label credit 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 a private label credit 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 potentially millions of
cardholders. We have no
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experience in the management of credit accounts. The credit card business also involves
resolving inquires from and providing customer service to cardholders. While we have
experience in doing these functions, it is on a scale much smaller than we would be exposed to
in connection with a full-scale credit card initiative. We have contracted with a company that
has experience in managing large-scale credit card operations, but there can be no assurance
that we will 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 overall
entity, 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 Arriva cards. The use of
Arriva cards 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
individuals interest as a cardholder-debtor and such individuals 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 on the Web, whom we do not
control. We rely on Infonox on the Web 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, whom 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, that 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 vulnerable to
computer viruses, physical or electronic break-ins, natural disasters and similar disruptions,
which could lead to interruptions, delays, loss of data, public release of confidential data
or the inability to complete patron transactions. The occurrence of these errors or failures,
disruptions or unauthorized access could adversely affect our sales to customers, diminish the
use of our cash access products and services by patrons, cause us to incur significant repair
costs, result in our liability to gaming establishments or their patrons, divert the attention
of our development personnel from product development efforts, and cause us to lose
credibility with current or prospective customers or patrons.
We may not successfully enter new markets and therefore not achieve all of our strategic
growth objectives.
We intend to enter new and developing domestic markets. If and as these markets continue to
develop, competition among providers of cash access products and services will intensify and
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.
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We also intend to enter new and developing international markets, including markets in which
we have not previously operated. Our strategy of entering foreign markets 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 Macau Monetary Authority. We may not
receive such approvals, licenses or waivers in a timely manner, or at all. If we do not
receive such approvals, licenses or waivers we will not be able to undertake operations in
Macau SAR. Similar difficulties in obtaining approvals, licenses or waivers from the monetary
authorities of other jurisdictions, in addition to other potential regulatory issues that we
have not yet ascertained, may arise in other international jurisdictions into which we wish 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. We have entered into an agreement with an overseas
representative to assist us in the sales and marketing of our cash access services to gaming
establishments in Eastern Europe and Russia, and we are attempting to form relationships with
foreign banks to assist us in the processing of transactions originating from these markets.
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 are
attempting 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.
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
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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.
Our future success depends upon our ability to attract, train and retain key managers involved
in the development 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 Corporations 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 Corporations ownership interest in us in
2004, First Data Corporation 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 Corporation 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 Corporation, 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 Corporations consent.
In the event that First Data Corporation 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 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 and POS debit card 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
Corporation 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 operate, new card security features have been developed
as a fraud deterrent. In the United Kingdom, for example, this feature known as chip-and-pin
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, with our regional sponsor in the United Kingdom, we are in the process of upgrading
our point-of-sale terminals to accept this new technology. In the interim, we are exposed to
potential additional chargeback risk on identified fraudulent transactions performed on a
chip-and-pin enabled card for which we are unable to read the embedded microchip or accept the
patrons personal identification number.
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, N.A. Pursuant to our contract
with Bank of America, N.A., 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, 2005 and the three and six months ended June 30, 2006, we paid
approximately $10.2 million, $4.0 million and $7.5 million, respectively, in aggregate fees to
Bank of America, N.A. 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 ATM machines, the
location of ATM machines and our ability to surcharge cardholders who use our ATM machines.
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 in 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 patrons check. If the patrons 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 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, 2005 and the three and six months ended
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June 30, 2006, our warranty expenses with respect to TeleChecks check warranty service were
$10.8 million, $2.3 million and $4.4 million, respectively. We have no control over
TeleChecks decision to warrant payment on a particular check and we have limited visibility
into TeleChecks collection activities. As a result, we may incur an unexpectedly high level
of check warranty expenses at any time, and if we do, we may suffer a material adverse effect
to our business or results of operations.
As an alternative to TeleChecks 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 ATM
machines, 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 anticipate
that our revenues and results of operations in Louisiana and Mississippi will be reduced in
2006 and perhaps in subsequent years from what we would otherwise have expected as a result of
Hurricanes Katrina and Rita. Although we cannot predict the extent of any such reduction, any
interruption to our business resulting from a natural disaster will adversely affect our
revenues and results of operations.
We will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a
report on our internal control over financial reporting as of the end of 2006.
Based on current laws and regulations, we will be required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404), as of the end of 2006. Section 404 requires us to
assess and attest to the adequacy of our internal control over financial reporting and
requires our independent auditors to opine as to the adequacy of our assessment and internal
control over financial reporting. Our efforts to comply with Section 404 will result in us
incurring significant expenses in 2006.
Even with those expenditures, we may not receive an unqualified opinion from our independent
auditors. In connection with its audit of our financial statements for the year ended December
31, 2005, our independent auditors identified a number of control deficiencies involving our
internal control over financial reporting for the year ended December 31, 2005. We cannot
assure you that we will be able to remedy these control deficiencies or that we or our
independent auditors will not discover additional control deficiencies, significant
deficiencies or material weaknesses in our internal control over financial reporting in the
future. The existence of a material weakness in our internal control over financial reporting
could result in errors in our financial statements that could require us to restate our
financial statements, cause us to fail to meet our reporting obligations and cause investors
to lose confidence in our reported financial information, all of which could lead to a decline
in the trading price of our common stock.
To execute our growth strategy, 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
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forming a bank or other financial services company for the purpose of, among other
things, issuing our own credit cards and/or using that banks vault cash to supply cash to our
ATMs.
Acquisitions and strategic investments involve various risks, such as:
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disruption to our ongoing business, including the diversion of managements
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inability to obtain the desired financial and strategic benefits from the acquisition or investment; |
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loss of customers of an acquired business; |
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assumption of unanticipated liabilities; |
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loss of key employees of an acquired business; and |
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entering into new markets in which we have limited prior experience. |
Acquisitions and strategic investments could also result in substantial cash expenditures, the
dilutive issuance of our equity securities, the incurrence of additional debt and contingent
liabilities, and amortization expenses related to other intangible assets that could adversely
affect our business, operating results and financial condition. Acquisitions and strategic
investments may also be highly dependent upon the retention and performance of existing
management and employees of acquired businesses for the day-to-day management and future
operating results of these businesses.
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 gaming activities altogether 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
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prevailing social mores and changes in social mores could result in reduced acceptance of
gaming as a leisure activity. To the extent that the popularity of gaming in traditional
gaming establishments declines as a result of either of these factors, the demand for our cash
access services may decline and our business may be harmed.
Aside from the general popularity of gaming, the demographic profile of gaming patrons changes
over time. The gaming habits and use of cash access services varies with the demographic
profile of gaming patrons. For example, a local patron may visit a gaming establishment
regularly but limit his or her play to the amount of cash that he or she brings to the gaming
establishment. In contrast, a vacationing gaming patron that visits the gaming establishment
infrequently may play much larger amounts and have a greater need to use cash access services.
To the extent that the demographic profile of gaming patrons in the markets we serve either
narrows or migrates towards patrons who use cash access services less frequently or for lesser
amounts of cash, the demand for our cash access services may decline and our business may be
harmed.
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 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
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operations into new markets. A failure by the gaming industry to expand at the rate that we
expect could have a material adverse effect on our business, growth rates, financial condition, operating results and cash flows.
The United Kingdom (UK) Gambling Act 2005 (the Gambling Act) 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 casinos 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 our gaming establishment customers in the UK are
consulting with the UK Gambling Commission regarding the interpretation of the Gambling Act
and the nature of any secondary regulations to be passed by the UK Secretary of State 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 suppliers or vendors 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 suppliers or vendors 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
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of which could have a material adverse effect on our business, financial condition and
operating results. Any new gaming license or related approval that may be required in the
future may not be granted, and our existing licenses may not be renewed or may be revoked,
suspended or limited. If additional gaming regulations are adopted in a jurisdiction in which
we operate, such regulations could impose restrictions or costs that could have a material
adverse effect on our business. From time to time, various proposals are introduced in the
legislatures of some of the jurisdictions in which we have existing or planned operations
that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of
the gaming industry or cash access in the gaming industry. Legislation of this type may be
enacted in the future.
In addition, some of the new products and services that we may develop cannot be offered in
the absence of regulatory approval of the product or service or licensing of us, or both. For
example, our TODD cashless gaming product has to date only been approved for use at one casino
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 gaming regulatory body. The New Jersey State government closed
all of its non-essential governmental agencies because the legislature had not adopted a new
budget by the constitutional deadline. One such non-essential governmental agency was the
Casino Control Commission, which regulates gaming in Atlantic Citys casinos. New Jersey State
law prohibits the operation of casinos without the supervision of Casino Control Commission
employees, so the casinos were forced to suspend their gaming operations. Another shutdown of
the 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 TeleChecks and our collection practices in connection with
dishonored checks with respect to which TeleCheck or Central Credit has issued authorizations
pursuant to TeleChecks or Central Credits 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 ATM machines, the
location of ATM machines and our ability to surcharge cardholders who use our ATM machines.
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
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establishment is required to file Currency Transaction Reports (CTRs) or Suspicious Activity
Reports (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 or SARs on a timely basis. If we fail to file these
CTRs or SARs on a timely basis or 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 a private label credit card through our Arriva Card, Inc. subsidiary subjects us
to compliance with a number of additional laws, regulations and card association rules. In
addition, our relationship with Integrated Payment Systems, Inc. and Integrated Payment
Systems Canada Inc. expires on December 31, 2006, and 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.
In the event that any regulatory authority determines that the manner in which we provide cash
access services, patron marketing services or gaming patron credit bureau services 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 or gaming patron credit bureau services, we may be forced to modify
the manner in which we operate, or stop processing certain types of cash access transactions
or providing patron marketing services or gaming patron credit bureau services 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 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 GCAs provision of credit card cash advances and POS debit card transactions to
patrons of casinos 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 our gaming establishment customers in the UK are consulting with the UK Gambling
Commission regarding the interpretation of the Gambling Act and the nature of any secondary
regulations to be passed by the UK Secretary of State 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 casinos 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
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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.
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, or obtaining required regulatory
approvals for new products or services, 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:
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our failure to maintain our current customers, including because of consolidation
in the gaming industry; |
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increases in commissions paid to gaming establishments as a result of competition; |
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increases in interchange rates or processing or other fees paid by us or decreases
in reverse interchange rates; |
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actual or anticipated fluctuations in our or our competitors revenue, operating
results or growth rate; |
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our inability to adequately protect or enforce our intellectual property rights; |
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any adverse results in litigation initiated by us or by others against us; |
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our inability to make payments on our outstanding indebtedness as they become due
or our inability to undertake actions that might otherwise benefit us based on the
financial and other restrictive covenants contained in our senior secured credit
facilities and the indenture for our senior subordinated notes; |
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the loss of a significant supplier or strategic partner, or the failure of a
significant supplier or strategic partner to provide the goods or services that we
rely on them for; |
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our inability to introduce successful, new products and services in a timely manner
or the introduction of new products or services by our competitors that reduce the
demand for our products and services; |
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our failure to successfully enter new markets or the failure of new markets to
develop in the time and manner that we anticipate; |
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announcements by our competitors of significant new contracts or contract renewals
or of new products or services; |
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changes in general economic conditions, financial markets, the gaming industry or
the payments processing industry; |
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the trading volume of our common stock; |
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sales of common stock or other actions by our current officers, directors and stockholders; |
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acquisitions, strategic alliances or joint ventures involving us or our competitors; |
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future sales of our common stock or other securities; |
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the failure of securities analysts to cover our common stock after this offering 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 occasionally 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 managements 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.
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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 become
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.
M&C International and entities affiliated with Summit Partners own or control shares
representing, in the aggregate, approximately 46.5% 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 Internationals and these entities ownership may have the effect of
delaying or preventing a change of control of our company or discouraging others from making
tender offers for our shares, which could prevent stockholders from receiving a premium for
their shares. These actions may be taken even if other stockholders oppose them and even if
they are not in the interests of other stockholders.
Conflicts of interest may arise because some of our directors are also 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
licenses and 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:
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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; |
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eliminate the right of stockholders to act by written consent so that all
stockholder actions must be effected at a duly called meeting; |
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provide that directors may only be removed for cause with the approval of
stockholders holding a majority of our outstanding voting stock; |
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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; |
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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 |
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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 you of
the opportunity to sell your 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 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, but the loss of
any one independent director would result in less than a majority of our directors being
independent. All but one of the members of our audit committee satisfy the applicable
independence requirements, and we currently rely on an exemption for newly public companies
that requires all of the members of our audit committee to satisfy the applicable independence
requirements by the first anniversary of our initial public offering, which will be September
2006. We are currently looking for an individual that satisfies the applicable independence
requirements to join our Board of Directors and Audit Committee. If we fail to maintain a
Board of Directors consisting of a majority of independent directors or if we fail to attract
an additional director that satisfies the applicable independence requirements, we will fail
to comply with the corporate governance listing requirements of the New York Stock Exchange,
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 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.
We do not intend to pay dividends in the future.
We have never declared or paid any cash dividends on our capital stock. We currently intend to
retain all available funds and any future earnings for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable future. In
addition, the terms of our current senior secured credit facilities limit our ability to pay
dividends, and our future debt or credit facilities may preclude us from paying any dividends.
As a result, capital appreciation, if any, of our common stock will be your sole source of
potential gain for the foreseeable future.
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ITEM 6. EXHIBITS
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Exhibit No. |
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Description. |
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10.1(1)
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Amendment No. 1 to Registration Agreement, dated as of May 17,
2006, by and among Global Cash Access Holdings, Inc. and the other
parties thereto. |
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31.1*
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Certification of Kirk E. Sanford, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of Harry C. Hagerty, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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32.1*
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Certification of Kirk E. Sanford, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Harry C. Hagerty, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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(1) |
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Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K (File
No. 001-32622) filed May 17, 2006. |
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Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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August 14, 2006 |
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GLOBAL CASH ACCESS HOLDINGS, INC.
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(Registrant) |
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/s/ Harry C. Hagerty
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Harry C. Hagerty |
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Chief Financial Officer
(For the Registrant and as
Principal Financial Officer
and as Chief Accounting Officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description. |
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10.1(1)
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Amendment No. 1 to Registration Agreement, dated as of May 17,
2006, by and among Global Cash Access Holdings, Inc. and the other
parties thereto. |
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31.1*
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Certification of Kirk E. Sanford, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of Harry C. Hagerty, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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32.1*
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Certification of Kirk E. Sanford, Chief Executive Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Harry C. Hagerty, Chief Financial Officer of
Global Cash Access Holdings, Inc. dated August 14, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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(1) |
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Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K (File
No. 001-32622) filed May 17, 2006 |
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Filed herewith |
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