Item 1A. All forward-looking statements and risk factors included in this document are made as of the date of this report, based on information available to us as of such date. We assume no obligation to update any forward-looking statement or risk factor.
Overview
We are a provider of cash access products and related services to the gaming industry in the United States and several international markets. Our products and services provide gaming establishment patrons access to cash through a variety of methods, including ATM cash withdrawals, credit card cash access transactions, POS debit cash access transactions, check cashing and money transfers. We also provide products and services that improve credit decision-making, automate cashier operations and enhance patron marketing activities for gaming establishments. In addition, we manufacture, sell and service cash access devices such as jackpot and redemption kiosks to the gaming industry. These devices also may be enabled to provide our cash access products and services.
We began our operations as a joint venture limited liability company among M&C International, entities affiliated with Bank of America and First Data in July 1998. In September 2000, Bank of America sold its entire ownership interest in us to M&C International and First Data. In March 2004, GCA issued $235 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2012 and borrowed $260 million under senior secured credit facilities. Holdings was formed to hold all of the outstanding ownership interests of GCA and has guaranteed the obligations under the senior secured credit facilities. A substantial portion of the proceeds of these senior subordinated notes and senior secured credit facilities were used to redeem all of First Data’s ownership interest in us and a portion of M&C International’s ownership interest in us through a recapitalization, in which Bank of America reacquired an ownership interest in us. In May 2004, we completed the private equity restructuring in which M&C International sold a portion of its ownership interest in us to a number of private equity investors, including entities affiliated with Summit Partners, and we converted from a limited liability company to a Delaware corporation.
In September 2005, we completed an initial public offering of common stock. In connection with that offering, our various equity securities that were outstanding prior to the offering were converted into common stock. In addition, we became a guarantor, on a subordinated basis, of GCA’s senior subordinated notes. In 2007, M&C International distributed its holdings of our common stock to its two principals, Karim Maskatiya and Robert Cucinotta.
In June 2009, the Company repurchased 5,785,602 shares from Robert Cucinotta, which is believed to be all of the shares previously held by Mr. Cucinotta. In June 2009, Karim Maskatiya disposed of a number of shares in open market transactions, which is believed to be all of the shares previously held by Mr. Maskatiya.
In April 2008, we completed the acquisition of Certegy Gaming Services, Inc. (“CGS”), an enterprise providing cash access and check products and services to the gaming industry similar to GCA. The results of operations of CGS have been reflected in the applicable business segment financial information following this acquisition. In August 2008, we completed the acquisition of Cash Systems, Inc. (“CSI”), a provider of cash access and related services to the retail and gaming industries similar to GCA. The results of operations of CSI have been reflected in the applicable business segment financial information following this acquisition. In May 2010, we completed the acquisition of Western Money, a manufacturer of redemption kiosk devices. The results of operations of Western Money have been reflected in the applicable business segment financial information following this acquisition.
We announced on February 28, 2008 that we intended to exit the Arriva Card, Inc. (“Arriva”) business. The results of operations for the Arriva line of business have been classified to discontinued operations for the six months ended June 30, 2009 and the year ended December 31, 2008. The Company determined that as of July 1, 2009, the results of operations for the Arriva line of business were no longer material and the results of operations for the six months ended December 31, 2009 have been classified in continuing operations.
IFT, formerly know as QuikPlay, LLC, was a joint venture that was formed on December 6, 2000, and owned 60% by GCA and 40% by IGT. IGT is one of the largest manufacturers of gaming equipment in the United States. GCA was the managing member of this entity and IFT was consolidated in the Company’s consolidated financial statements prior to April 19, 2010, at which time GCA and IGT dissolved IFT. The dissolution of IFT did not have a material impact on the condensed consolidated financial statements of the Company.
On March 1, 2011, GCA and Holdings entered into the New Senior Credit Facility, consisting of a $210 million term loan facility and a $35 million revolving credit facility. All $210 million of available borrowings under the term loan facility and $4.0 million of available borrowings under the revolving credit facility were borrowed concurrent with the establishment of the New Senior Credit Facility and the Company used substantially all of these proceeds to repay indebtedness under the Company’s existing senior secured credit facilities and to defease the senior subordinated notes. Specifically, on March 1, 2011, GCA irrevocably deposited into trust with the trustee of the indenture governing the senior subordinated notes an aggregate of $133,711,666 in cash to pay and discharge the senior subordinated notes on March 27, 2011.
Other than insubstantial assets that are immaterial in amount and nature, the sole asset of Holdings is the capital stock of GCA.
Trends
Our strategic planning and forecasting processes include the consideration of economic and industry-wide trends that may impact our business. We have identified the more material positive and negative trends affecting our business as the following:
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The gaming sector in the United States experienced a decline in business as compared to the prior year and is expected to be relatively flat to modestly higher and subject to short term fluctuations over the next year.
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Gaming activity continues to expand into more domestic and international markets.
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The rate of decline in the volume and face amount of credit card cash access transactions by patrons who use our services has continued to exceed the rate of decline of the volume and face amount of ATM and POS debit transactions, suggesting a migration from credit card cash access transactions to ATM and POS debit transactions.
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There continues to be a migration from the use of traditional paper checks and cash to electronic payments.
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The credit markets in the United States and around the world have been volatile and unpredictable.
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The Company is facing increased competition from smaller competitors in the gaming cash access market and may face additional competition from gaming equipment manufacturers and systems providers such as Bally Technologies, who recently announced its intention to acquire a competing cash access provider who is focused on the gaming industry.
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The cash access industry in the gaming sector has become increasingly competitive and is having an adverse effect on the Company’s operating margins with respect to new customers and existing customers that have renewed their cash access agreements with the Company.
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There is increasing governmental oversight related to the cost of transaction processing and related fees to the consumer.
Principal Sources of Revenues and Expenses
Our principal sources of revenues include:
Cash advance revenues that are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card transactions at the time the transactions are authorized. Such fees are based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card transaction amount.
ATM revenues that are comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons’ issuing banks. Cardholder surcharges are recognized as revenue when a transaction is initiated and reverse interchange is recognized as revenue on a monthly basis based on the total transactions occurring during the month. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.
Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments. In some cases, gaming establishments pass on the fees to patrons.
Other revenues consist of Central Credit revenues that are based upon either a flat monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated. Also included in Other revenues are revenues generated from Casino Marketing Services and revenues generated from Global Recovery Service revenues (“GRS”). This revenue results from a fee collected from GCA clients for research and investigation, using GCA’s proprietary data base to identify funds associated with individual credit card cash access and POS debit card transaction money transfers that were issued upon the completion of such a transaction for which a charge or debit was made to a cardholder’s account but the bank draft was not successfully deposited by GCA’s client. In addition, Other revenues consist of revenue derived from Western Money’s operations. Western Money derives substantially all of its revenue from the sale of cash access devices such as redemption kiosks and derives the balance of its revenue from the provision of certain professional services, software licensing, and certain other ancillary fees associated with the sale, installation and operation of those devices.
Our principal costs and expenses include:
Cost of revenues are costs and expenses directly related to the generation of revenue and exclude depreciation and amortization. For credit card cash access and POS debit card transactions, ATM transactions and, to a much lesser extent, check services, we pay a commission to the gaming establishment at which the transaction occurs. Commissions are the largest component of cost of revenues (exclusive of depreciation and amortization). We expect commissions to increase as a percentage of revenue as new contracts are signed or existing contracts are renewed. We pay credit card associations and payment networks interchange fees for services they provide in routing transactions through their networks. In addition, we pay fees to participate in various payment networks to support our ATM services. The amounts of these interchange fees are determined by the card associations and payment networks in their sole discretion, and are subject to increase in their discretion from time to time. Many of our cash access contracts enable us to pass through the amount of any increase in interchange or processing fees to our gaming establishment customers, who may in turn pass through these increases to patrons. In the past, the major card associations and payment networks have increased interchange rates at least annually, and they may do so in the future. We pay connectivity and processing fees to our network services providers. We incur warranty expense when checks that we have warranted through our Central Credit Check Warranty service or that TeleCheck has warranted through its check warranty service are dishonored upon presentment for payment. Our contract with TeleCheck limits our warranty expense for checks warranted by TeleCheck to a maximum percentage of the total face amount of dishonored checks. We have no limits on warranty expense for our Central Credit check warranty service. Other cost of revenues (exclusive of depreciation and amortization) consists primarily of costs related to delivering our Central Credit service and our patron marketing activities.
Operating expenses consist primarily of salaries and benefits, armored carrier expenses, the cost of repair and maintenance on our cash access devices, legal expenses, telecommunications expenses and bank fees.
We generate interest income on the amount of cash in our bank accounts and on cash that is deposited into accounts to settle our credit card cash access and POS debit card transactions.
Interest expense includes interest incurred on our senior secured credit facilities and our senior subordinated notes, and the amortization of deferred financing costs. Interest expense also includes the cash usage fees associated with the cash used in our ATMs.
Our earnings are subject to taxation under the tax laws of the jurisdictions in which we operate.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The following table sets forth the condensed consolidated results of operations and percentages of total revenue for the years ended December 31, 2010 and December 31, 2009 (amounts in thousands):
Total Revenues
Total revenues for the year ended December 31, 2010, were $605.6 million as compared to $667.7 million for the prior year, a decrease of $62.1 million, or 9.3%, as compared to the year ended December 31, 2009. The primary driver of the decreased revenue in 2010 was a same store revenue decline of 8.3%. Revenue generated from a gaming establishment we serve is included in same-store revenues if it contributed cash advance or ATM revenue during both the current and prior year reference periods. Same-store revenue does not include reverse interchange revenue generated in connection with ATM transactions, check services revenue or other revenue. Segment changes in revenue are further discussed below.
Cash advance revenue for the year ended December 31, 2010, was $244.1 million, a decrease of $45.2 million, or 15.6%, as compared to the year ended December 31, 2009. This decrease was primarily due to lower credit usage by patrons at gaming establishments. This had a negative impact on our financial results as revenue generated from a credit card cash access transaction is generally more profitable than revenue generated from an ATM transaction. The number of credit card cash access transactions declined by approximately 1.6 million or 13.8% in 2010 and the average revenue per transaction decreased by 2.1%.
ATM revenue for the year ended December 31, 2010, was $314.6 million, a decrease of $11.3 million, or 3.5%, as compared to the year ended December 31, 2009. This decrease was primarily due to continued decline in attendance by patrons to gaming establishments. The number of ATM transactions declined by approximately 5.1 million or 6.1% in 2010, while the revenue per transaction increased by approximately 2.8%.
Check services revenue for the year ended December 31, 2010, was $28.4 million, a decrease of $10.2 million, or 26.4%, as compared to the year ended December 31, 2009. This decrease was primarily attributable to the decrease in the number of check services transactions by 1.4 million or 21.7% largely driven by location closures. Some of the locations that were closed were unprofitable.
Other revenues for the year ended December 31, 2010, were $18.5 million, an increase of $4.5 million, or 32.6%, as compared to the year ended December 31, 2009. This increase was primarily due to the inclusion of the operating results from Western Money that was acquired as of May 2010, which was partially offset by the decrease in revenue from Global Recovery Services and Casino Marketing Services.
We provide our cash access products and related services almost exclusively to gaming establishments for the purpose of enabling gaming patrons to access cash. As a result, our business depends on consumer demand for gaming.
Costs and Expenses
Cost of revenues (exclusive of depreciation and amortization) for the year ended December 31, 2010, was $463.0 million, a decrease of $38.8 million, or 7.7%, as compared to the year ended December 31, 2009. This decrease was primarily correlated with revenue. There was a gross increase in interchange expense as a percentage of revenue of 5.4% for the year ended December 31, 2010.
Operating expenses exclusive of depreciation and amortization for the year ended December 31, 2010 were $73.7 million, a decrease of $2.3 million, or 3.0%, as compared to the year ended December 31, 2009. The decrease in operating expenses is primarily due to lower employee-related costs, lower ATM-related expenses and the decline in cash advance related operating expenses.
During the fourth quarter of 2010, we received an additional settlement check for the VISA Check/Master Money Antitrust Litigation for $0.4 million, and in 2009, we received $2.8 million related to the same matter. Amounts received for the VISA Check/Master Money Antitrust Litigation in 2010 and 2009 have been recognized as a reduction to operating expenses.
Depreciation and amortization expense for the year ended December 31, 2010 was $16.2 million, a decrease of $1.7 million, or 9.3%, as compared to the year ended December 31, 2009. This decrease was due primarily to a decrease in amortization of assets fully amortized.
Primarily as a result of the factors described above, operating income for the year ended December 31, 2010 was $52.6 million, a decrease of $19.4 million or 27.0% as compared to the year ended December 31, 2009.
Interest expense, net, was $16.3 million in 2010, a decrease of $1.6 million, or 9.1%, as compared to 2009. The decrease resulted from lower average outstanding borrowings. Interest income was also lower due to lower interest rates earned on invested cash balances during 2010 as compared to 2009.
For the year ended December 31, 2010, income tax expense was $18.8 million, a decrease of $1.8 million as compared to the year ended December 31, 2009. The provision for income tax reflected an effective income tax rate of 51.7% for 2010 as compared to 38% for 2009. The increase in the effective tax rate for the year ended December 31, 2010 was primarily the result of the following factors; The Company repatriated funds that had been accumulating in our foreign subsidiaries, which resulted in a one-time increase in the Company’s tax provision of approximately $2.2 million. The second factor that impacted the tax provision was the re-evaluation of the Company’s ability to fully realize the foreign tax credit deferred tax asset. It was determined that the Company would be unable to fully utilize these credits and this determination combined with an election to deduct foreign taxes resulted in a one time provision adjustment of $1.7 million. Additionally, the Company’s effective tax rate also experienced upward pressure related to differences between GAAP and income tax treatment of equity based compensation which increased the income tax provision by $0.8 million, as well as other non-deductible expenses. The provision for income taxes without the effect of the one time increase related to repatriating funds and deducting foreign taxes paid rather than claiming foreign tax credits would yield an income tax rate of 41.0% which would be approximately $14.9 million.
Primarily as a result of the foregoing, net income was $17.6 million for the year ended December 31, 2010, a decrease of $16.0 million or 47.7%, as compared to the prior year.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
The following table sets forth the condensed consolidated results of operations and percentages of total revenue for the years ended December 31, 2009 and December 31, 2008 (amounts in thousands):
Total Revenues
Total revenues for the year ended December 31, 2009 were $667.7 million as compared to $671.6 million for the prior year, a decrease of $3.9 million, or 0.6%, as compared to the year ended December 31, 2008. The primary driver of the decreased revenue in 2009 was a same store revenue decline of 11.5%. Revenue generated from a gaming establishment we served was included in same-store revenues if it contributed cash advance or ATM revenue during both the current and prior year reference periods. Same-store revenue does not include reverse interchange revenue generated in connection with ATM transactions, check services revenue or other revenue. This decline was somewhat offset by the inclusion of the operating results of CGS and CSI for the first three and seven months of 2009, respectively as compared to the same periods of 2008. CGS was acquired on April 1, 2008 and CSI on August 1, 2008. Segment changes in revenue are further discussed below:
Cash advance revenue for the year ended December 31, 2009 was $289.3 million, a decrease of $37.2 million, or 11.4%, as compared to the year ended December 31, 2008. This decrease was primarily due to lower credit usage by patrons at gaming establishments. This had a negative impact on our financial results as revenue generated from a credit card cash access transaction is generally more profitable than revenue generated from an ATM transaction. The number of credit card cash access transactions declined by approximately 0.5 million or 4.1% in 2009, and revenue per transaction also decreased on a year-over-year basis. This decrease was partially offset by the inclusion of three and seven months of operations, in 2009 but not in 2008, as a result of the 2008 acquisitions of CGS and CSI.
ATM revenue for the year ended December 31, 2009 was $326.0 million, an increase of $36.8 million, or 12.7%, as compared to the year ended December 31, 2008. The increase was primarily attributable to gaming patrons performing a higher percentage of ATM transactions as compared to credit card cash access transactions. Although the number of ATM transactions decreased by 1.3 million or 1.5%, the ATM revenue per transaction increased due to a higher average surcharge assessed per ATM transaction. This increase in ATM revenue for 2009 was compounded by the inclusion of three and seven months of operations, in 2009 but not in 2008, as a result of the 2008 acquisitions of CGS on April 1, 2008 and CSI on August 1, 2008, respectively.
Check services revenue for the year ended December 31, 2009 was $38.5 million, a decrease of $3.8 million, or 9.1%, as compared to the year ended December 31, 2008. This decrease was primarily attributable to the decrease in the number of check services transactions by 0.2 million or 3.1% largely driven by the loss of customers in this segment. This decrease was partially offset by the inclusion of three and seven months of operations, in 2009 but not in 2008, as a result of the 2008 acquisitions of CGS and CSI. Check services revenue was also impacted by a long-term trend whereby consumers are moving from physical checks to electronic forms of transactions. As a result of this trend and the roll-off of customers lost in 2009, we expect check services revenue to be lower in 2010 than it was in 2009.
Other revenues for the year ended December 31, 2009, were $13.9 million, an increase of $0.3 million, or 2.1%, as compared to the year ended December 31, 2008. This increase was primarily due to additional revenue from GRS. We do not expect GRS to contribute material revenue to 2010 and beyond.
We provide our cash access products and related services almost exclusively to gaming establishments for the purpose of enabling gaming patrons to access cash. As a result, our business depends on consumer demand for gaming.
Costs and Expenses
Cost of revenues (exclusive of depreciation and amortization) for the year ended December 31, 2009, was $501.8 million, an increase of $8.8 million, or 1.8%, as compared to the year ended December 31, 2008. The increase was due primarily to increased commission-related expenses, which are the single largest cost element of cost of revenues. The increase in commissions in 2009 was due primarily to:
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the additional commission expenses resulting from the CGS and CSI acquisitions included in the first three and seven months of 2009 but not included in the first three and seven months of 2008, respectively.
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the migration of transactions from credit card cash access transactions to ATM transactions, which have a higher proportion of commission expense to revenue than do credit card cash access transactions.
Operating expenses exclusive of depreciation and amortization for the year ended December 31, 2009 were $76.0 million, a decrease of $8.0 million, or 9.5%, as compared to the year ended December 31, 2008. The decrease in operating expenses was driven primarily to the elimination of expenses that were assumed as part of the acquisitions of CGS and CSI. In 2009, we continued to incur high external legal expenses driven by various litigation matters. External legal expenses were approximately $5.1 million in 2009 as compared to $4.2 million in 2008.
During the fourth quarter of 2009, we received a final settlement check for the VISA Check/Master Money Antitrust Litigation for $2.8 million, and in 2008, $0.4 million was received related to the same matter. Monies received for the VISA Check/Master Money Antitrust Litigation in 2009 and 2008 have been recognized as a reduction to operating expenses.
Depreciation and amortization expense for the year ended December 31, 2009 was $17.9 million, an increase of $1.8 million, or 11.4%, as compared to the year ended December 31, 2008. This increase was due primarily to the increase in depreciable assets and amortizing intangibles resulting from the acquisitions of CGS and CSI.
Primarily as a result of the factors described above, operating income for the year ended December 31, 2009 was $72.0 million, a decrease of $6.6 million or 8.4% as compared to the year ended December 31, 2008.
Interest expense, net, was $18.0 million in 2009, a decrease of $9.9 million, or 35.6%, as compared to 2008. The decrease resulted from significantly lower interest rates compared to the prior period, lower average outstanding borrowings partially offset by a higher average draw on the Bank of America Treasury Services Agreement (“Treasury Services Agreement”). The average balance drawn on this agreement in 2009 was $358.7 million as compared to $319.2 million for the year ended December 31, 2008. The lower interest rates resulted in substantially lower cash usage fees of $2.1 million in 2009. Interest income was also lower due to lower interest rates earned on invested cash balances during 2009 as compared to 2008.
Income tax expense was $20.6 million, a decrease of $2.8 million or 12% for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The provision for income tax reflected an effective income tax rate of 38% for 2009 as compared to 46% for 2008. The decrease in our effective income tax rate was primarily due to a decrease in the expense related to the expiration on non-qualified stock options and their related impact on income tax. Such expenses are not deductible for income tax purposes and therefore, their occurrence results in a relatively higher effective income tax rate.
Primarily as a result of the foregoing, net income was $33.6 million for the year ended December 31, 2009, an increase of $10.1 million or 42.8%, as compared to the prior year.
Critical Accounting Policies
The preparation of our financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in our consolidated financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Based on this definition, we have identified our critical accounting policies as those addressed below. We also have other key accounting policies that involve the use of estimates, judgments and assumptions. You should review the notes to our consolidated financial statements for a summary of these policies. We believe that our estimates and assumptions are reasonable, based upon information presently available; however, actual results may differ from these estimates under different assumptions or conditions.
Goodwill. We have approximately $185.1 million in net unamortized goodwill on our consolidated balance sheet at December 31, 2010 resulting from our acquisitions of other businesses. We account for goodwill in accordance with Financial Accounting Standards Board (“FASB”) guidance, which requires an annual review of goodwill and other non-amortizing intangible assets for impairment. Our most recent annual assessment was performed as of October 1, 2010. It was determined that no impairment adjustment was necessary. The annual evaluation of goodwill and other non-amortizing intangible assets requires the use of estimates about future operating results of each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates, which could significantly affect our results of operations.
Income Taxes. We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. We account for income taxes in accordance with FASB guidance whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based upon differences between financial statement carrying amounts of existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. We also follow FASB guidance for the accounting for uncertainty in income taxes as recognized in our consolidated financial statements. The effect on the income tax provision and deferred tax assets and liabilities of a change in rates is recognized in income in the period that includes the enactment date. We believe that it is more likely than not that we will be able to utilize our deferred tax assets. Therefore we have not provided material valuation allowances against our recorded deferred tax assets.
Revenue Recognition. We recognize revenue when evidence of an arrangement exists, services have been rendered, our price is fixed or determinable and collectability is reasonably assured. We evaluate our revenue streams for proper timing of revenue recognition.
Cash advance revenue is comprised of upfront patron transaction fees assessed at the time the transaction is initiated and typically a percentage of the face amount of the credit card cash access transaction. Cash advance revenue is recognized at the point that a negotiable instrument is generated.
ATM revenue is comprised of upfront patron transaction fees assessed at the time the transaction is initiated and a percentage of interchange fees paid by the patron’s issuing bank. These issuing banks share the interchange revenue, or reverse interchange, with us to cover the costs we incur to acquire the ATM transaction. Upfront patron transaction fees are recognized when a transaction is authorized and reverse interchange is recognized on a monthly basis.
Check services revenue is generally contractually based upon a percentage of the face amount of total checks warranted. Check services revenue is recognized on a monthly basis.
Central Credit revenue is based upon either a flat monthly, unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated. This revenue is recognized on a monthly basis. Revenue derived from our patron marketing products and services is recognized upon completion of services.
Western Money derives substantially all of its revenue from the sale of cash access devices such as jackpot and redemption kiosks and derives the balance of its revenue from the provision of certain professional services, software licensing, and certain other ancillary fees associated with the sale of, installation and operation of those devices. Revenue is recognized as products are delivered and/or services are performed.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued an update to the Fair Value Measurements and Disclosures topic as reflected in the Codification. This update adds new requirements for disclosures about transfers into and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. This guidance is effective for the Company beginning December 15, 2009, for most disclosures and for periods beginning after December 15, 2010, for the new Level 3 disclosures.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2010 and 2009, respectively:
Our principal source of liquidity is cash flows from operating activities, which were $68.9 million and $91.0 million for the years ended December 31, 2010 and 2009, respectively. Cash flows from operating activities decreased approximately $22.1 million. Changes in working capital increased cash flow from operations by approximately $21.0 million and $22.0 million for the years ended December 31, 2010 and 2009. Non-cash expenses include $30.6 million and $35.5 million for the years ended December 31, 2010 and 2009, respectively.
Net cash used in investing activities totaled $24.5 million and $7.2 million for the years ended December 31, 2010 and 2009, respectively, an increase of $17.3 million. In 2010, we acquired Western Money for $15.4 million. We had no acquisitions in 2009. We also had capital expenditures in 2010 of $9.1 million and $7.2 million in 2009.
Net cash used in financing activities was $68.8 million and $74.4 million for the years ended December 31, 2010 and 2009, respectively. During the year ended December 31, 2010, we repaid $25.0 million against our senior subordinated debt and $16.0 million against our credit facilities as compared to repayment of $16.0 million of our credit facilities in 2009. In 2010, the Company repurchased $33.5 million worth of shares of common stock as compared to $61.3 million in 2009. (See Note 8 Capital Stock to our financial statements for a detailed explanation of our repurchases of common stock.)
Borrowings
Second Amended and Restated Credit Agreement and Notes
On November 1, 2006, GCA and Holdings entered into a Second Amended and Restated Credit Agreement with certain lenders, Bank of America, as Administrative Agent and Wachovia Bank, N.A., as Syndication Agent (the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement amended and restated the First Amended and Restated Credit Agreement that previously governed the terms of GCA’s existing senior secured credit facilities to provide for a $100.0 million term loan facility and a $100.0 million five-year revolving credit facility, with a $25.0 million letter of credit sublimit and a $5.0 million swingline loan sublimit. The Second Amended and Restated Credit Agreement also contained an increase option permitting GCA to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $150.0 million in additional term loan or revolving credit commitments.
The Second Amended and Restated Credit Agreement significantly amended and restated the terms of the First Amended and Restated Credit Agreement to, among other things, reduce the rate at which interest accrues on certain borrowings under the senior secured credit facilities and modify certain other terms, conditions, provisions and covenants in connection with the senior secured credit facilities.
Principal, together with accrued and unpaid interest, was due on the maturity date, November 1, 2011. GCA had the right to prepay the loans and terminate the commitments at any time, without premium or penalty, subject to certain qualifications set forth in the Second Amended and Restated Credit Agreement. Furthermore, the Second Amended and Restated Credit Agreement contained mandatory prepayment provisions which, under certain circumstances, obligated GCA to apply defined portions of its cash flow to prepayment of the senior secured credit facilities.
Pursuant to the Second Amended and Restated Credit Agreement, the senior secured credit facilities were secured by substantially all of the assets of the Company, GCA and GCA’s wholly-owned domestic subsidiaries other than Arriva Card, Inc. (“Arriva”), and were guaranteed by the Company and all of GCA’s wholly-owned domestic subsidiaries other than Arriva.
The Second Amended and Restated Credit Agreement contained customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults, which are subject to important exceptions and qualifications, as set forth in the Second Amended and Restated Credit Agreement.
On March 10, 2004, GCA completed a private placement offering of $235.0 million of 8.75% senior subordinated notes due 2012 (the “Notes”). All of GCA’s existing and future domestic wholly owned subsidiaries are guarantors of the Notes on a senior subordinated basis. In addition, effective upon the closing of our initial public offering of common stock, Holdings guaranteed, on a subordinated basis, all of GCA’s obligations under the Notes.
Interest on the Notes accrues based upon a 360-day year comprised of twelve 30-day months and is payable semiannually on March 15th and September 15th. On October 31, 2005, $82.3 million or 35% of these Notes were redeemed at a price of 108.75% of face, out of the net proceeds from our initial public offering. GCA may redeem all or a potion of the Notes at redemption prices of 104.375%, on or after March 15, 2008, 102.19% on or after March 15, 2009, or 100.00% on or after March 15, 2010. On May 3, 2010, GCA redeemed prior to their maturity $25.0 million in the aggregate principal amount of the Notes at a redemption price of 100% of the principal amount of such Notes. As of December 31, 2010, the Company had $127.8 million in borrowings outstanding under the indenture governing the Notes.
The following is a summary of our contractual cash obligations as of December 31, 2010, including the Notes and under the Second Amended and Restated Credit Agreement:
(1)
Estimated interest payments are computed using the interest rate in effect at December 31, 2010 multiplied by the principal balance outstanding after scheduled principal amortization payments. For the senior secured credit facility and the senior subordinated notes the rates assumed are 1.39% and 8.75%, respectively.
(2)
Included in purchase obligations are minimum transaction processing services from various third-party processors that we use.
(3)
On March 1, 2011 we refinanced all of our indebtedness under the Second Amended and Restated Credit Agreement as well as defeased the Notes as described below. The required principal payments under the New Senior Credit Facility will be $525,000 per quarter beginning June 2011 and also will require an excess cash flow payment that is based on full year end earnings and our leverage ratio in effect at that time.
On March 1, 2011, the Company refinanced all of its indebtedness outstanding under the Second Amended and Restated Credit Agreement and defeased its obligations under the senior subordinated notes with proceeds from the New Senior Credit Facility as described below.
New Senior Credit Facility
On March 1, 2011, GCA, together with its sole stockholder, Holdings entered into a Credit Agreement (“the Credit Agreement”) with certain lenders, Deutsche Bank Trust Company Americas, as Administrative Agent and Wells Fargo Securities, LLC., as Syndication Agent. The New Senior Credit Facility established by the Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility. The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swingline loans. The Credit Agreement also contains an increase option permitting GCA to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $50.0 million in additional term loan commitments. All $210 million of available borrowings under the term loan facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, no amounts under the term loan facility may be reborrowed. In addition, $4 million of available borrowings under the revolving credit facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, amounts under the revolving credit facility may be reborrowed.
The term loan requires principal repayments of one quarter of 1% of the aggregate initial principal amount of term loans, or $525,000 per quarter as well as annual mandatory prepayment provisions based on an excess cash flow sweep equal to a fixed percentage of excess cash flow (as defined in the Credit Agreement). The remaining principal is due on the maturity date, March 1, 2016. GCA may prepay the loans and terminate the commitments at any time after the first year, without premium or penalty, subject to certain qualifications set forth in the Credit Agreement. Furthermore, the Credit Agreement contains mandatory prepayment provisions which, under certain circumstances, such as asset or equity sales, obligate GCA to apply defined portions of its cash flow to prepayment of the New Senior Credit Facility.
Borrowings under the New Senior Credit Facility bear interest at either (x) a specified base rate plus a 4.50% margin, or (y) LIBOR plus a 5.5% margin. The base rate minimum is 2.50% and the LIBOR minimum is 1.50%. Interest in respect of base rate loans is payable quarterly in arrears and interest in respect of LIBOR loans is payable in arrears at the end of the applicable interest period and every three months in the case of interest periods in excess of three months. Interest is also payable at the time of repayment of any loans and at maturity.
The New Senior Credit Facility is unconditionally guaranteed by the Holdings and each direct and indirect domestic subsidiary of GCA. All amounts owing under the New Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by GCA and a first priority perfected security interest in all other tangible and intangible assets owned by GCA and the guarantors.
The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults.
The significant financial covenants are:
Interest Coverage Ratio (as defined in the Credit Agreement)
Total Leverage Ratio (as defined in the Credit Agreement)
Excess Cash Flow Sweep (1)
(1)
GCA is required to pay a percentage of Excess Cash Flow, as defined in the Credit Agreement, which is based upon the Total Leverage Ratio, as defined in the Credit Agreement.
Deferred Tax Asset
As of December 31, 2010, the Company had a net deferred income tax asset of $131.5 million. We recognized a deferred tax asset upon our conversion from a limited liability company to a corporation on May 14, 2004. Prior to that time, all tax attributes flowed through to the members of the limited liability company. The principal component of the deferred tax asset is a difference between our assets for financial accounting and tax purposes. This difference results from a significant balance of acquired goodwill of approximately $687 million that was generated as part of the conversion to a corporation plus approximately $98 million in pre-existing goodwill carried over from periods prior to the conversion. Both of these assets are recorded for tax purposes but not for financial accounting purposes. They are amortized over 15 years for tax purposes, using the Company’s current earnings, this results in annual pretax income being approximately $52.3 million lower for tax purposes than for financial accounting purposes. At an estimated blended domestic effective tax rate of 36.4%, this results in tax payments being at a maximum of approximately $19.0 million less than the provision for income taxes shown on the income statement for financial accounting purposes. Given the Company’s current estimates, this is an expected aggregate of $158.6 million in cash savings over the remaining life of the portion of our deferred tax asset related to the conversion. These deferred tax assets may be subject to certain limitations. We believe that it is more likely than not that we will be able to utilize our deferred tax asset. However, the utilization of this tax asset is subject to many factors beyond our control including our earnings, a change of control of the Company and future estimations of earnings.
Other Liquidity Needs and Resources
In November 2010, we entered into a Contract Cash Solutions Agreement with Wells Fargo to supply us with currency needed for normal operating requirements of our domestic ATMs. The maximum allowable average daily limit is $400 million, but Wells Fargo has agreed to allow us to exceed this amount by $50 million on a calendar day but not more than four times per calendar year and subject to certain additional conditions and limitations. On December 17, 2010, we terminated the Amended Treasury Services Agreement with Bank of America, our vault cash provider for a significant portion of 2010. Under the terms of the Contract Cash Solutions Agreement and the Amended Treasury Services Agreement, we paid a monthly cash usage fee based upon the product of the average daily dollars outstanding in all ATMs multiplied by a contractually defined cash usage rate. This cash usage rate is determined by an applicable LIBOR plus a mutually agreed upon margin. We are therefore exposed to interest rate risk to the extent that applicable LIBOR increases. On December 31, 2010, the currency supplied by Wells Fargo pursuant to the Contract Cash Solutions Agreement was $368.4 million.
We also need supplies of cash to support our foreign operations. For some foreign jurisdictions, such as the United Kingdom, applicable law and cross-border treaties allow us to transfer funds between our domestic and foreign operations efficiently. For other foreign jurisdictions, we must rely on the supply of cash generated by our operations in those foreign jurisdictions, and the cost of repatriation is prohibitive. For example, Global Cash Access (Canada) Inc. (“GCA Canada”), the subsidiary through which we operate in Canada, generates a supply of cash that is sufficient to support its operations, and all cash generated through such operations is retained by GCA Canada. As we expand our operations into new foreign jurisdictions, we must rely on treaty-favored cross-border transfers of funds, the supply of cash generated by our operations in those foreign jurisdictions or alternate sources of working capital.
We believe that borrowings available under the New Senior Credit Facility, 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. Although no additional financing is currently contemplated, we may seek, if necessary or otherwise advisable and to the extent permitted under the terms of the New Senior Credit Facility, additional financing through bank borrowings or public or private debt or equity financings. We cannot ensure that additional financing, if needed, will be available to us, or that, if available, the financing will be on terms favorable to us. The terms of any additional debt or equity financing that we may obtain in the future could impose additional limitations on our operations and/or management structure. We also cannot ensure that the estimates of our liquidity needs are accurate or that new business developments or other unforeseen events will not occur, resulting in the need to raise additional funds.
Off-Balance Sheet Arrangements
In November 2010, we entered into the Contract Cash Solutions Agreement with Wells Fargo to supply us with currency needed for normal operating requirements of our domestic ATMs. On December 17, 2010, we terminated the Amended Treasury Services Agreement with Bank of America, our vault cash provider for a significant portion of 2010. Under the terms of the Contact Cash Solutions Agreement and the Amended Treasury Services Agreement, all currency supplied by Wells Fargo and Bank of America, respectively remains the sole property of Wells Fargo and Bank of America at all times until it is dispensed, at which time Wells Fargo or Bank of America obtain an interest in the corresponding settlement receivable. Because the cash supplied to us under the Contract Cash Solutions Agreement and Amended Treasury Services Agreement is never an asset of ours, supplied cash is not reflected on our balance sheet. At December 31, 2010, the total currency obtained from Wells Fargo under the Contract Cash Solutions Agreement pursuant to this agreement was $368.4 million. Because Wells Fargo 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 paid to Wells Fargo and Bank of America for cash usage during the year pursuant to the Contract Cash Solutions Agreement and Amended Treasury Services Agreement are reflected as interest expense in our financial statements due to the following considerations:
•
the Contract Cash Solutions Agreement and Amended Treasury Services Agreement operate in a fashion similar to a revolving line of credit, in that amounts are drawn and repaid on a daily basis;
•
the resource being procured by the Company under the terms of the Contract Cash Solutions Agreement and Amended Treasury Services Agreement is a financial resource and in the absence of such an arrangement, the Company would be required to obtain sufficient alternative financing either on balance sheet or off balance sheet in order to meet its financial obligations;
•
the fees of the Contract Cash Solutions Agreement and Amended Treasury Services Agreement are assessed on the outstanding balance during the applicable period and include a base rate which is tied to LIBOR and a margin, similar to a credit spread; and
•
the fees incurred by the Company under the Contract Cash Solutions Agreement and Amended Treasury Services Agreement are a function of both the prevailing rate of LIBOR as dictated by the capital markets and the average outstanding balance during the applicable period as previously noted. The fees do not vary with revenue or any other underlying driver of revenue such as transaction count or dollars processed as is the case with all costs classified as cost of revenue such as interchange expense, and processing fees.
The Company also includes the fees paid under the Contract Cash Solutions Agreement and Amended Treasury Services Agreement as interest in its calculation of the ratio to fixed charges in Item 15 Exhibits.
As of December 13, 2010, we rely on Wells Fargo to supply cash for substantially all of our domestic ATMs. Under the Contract Cash Solutions Agreement, Wells Fargo is not obligated to supply us with more than $400 million in cash at any given time, however, to satisfy our ATM cash supply needs, Wells Fargo has agreed to supply us with up to $50 million in excess of this limit for a calendar day up to four times per calendar year and subject to certain additional conditions and limitations. To the extent that Wells Fargo is unable to supply us with cash either to satisfy our agreement with Wells Fargo or in excess of the $400 million, due to liquidity constraints or otherwise, we would have to obtain an alternate source of cash. Foreign gaming establishments supply the currency needs for the ATMs located on their premises.
As of December 31, 2010, we had approximately $2.8 million in standby letters of credit outstanding relating to our obligations under our amended and restated sponsorship agreement with Bank of America and relating to certain licensing requirements.
Effects of Inflation
Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation. Our non-monetary assets, consisting primarily of our deferred tax asset, goodwill and other intangible assets, are not affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our operating expenses, such as those for salaries and benefits, armored carrier expenses, telecommunications expenses and equipment repair and maintenance services, which may not be readily recoverable in the financial terms under which we provide our cash access products and services to gaming establishments and their patrons.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to foreign currency exchange risk. We operate and conduct business in foreign countries and, as a result, are exposed to movements in foreign currency exchange rates. Our exposure to foreign currency exchange risk related to our foreign operations is not material to our results of operations, cash flows or financial position. At present, we do not hedge this risk. At present, we do not hold any derivative securities of any kind.
In November 2010, we entered into a Contract Cash Solutions Agreement with Wells Fargo to supply us with currency needed for normal operating requirements of our domestic ATMs. The maximum allowable average daily limit is $400 million, but Wells Fargo has agreed to allow us to exceed this amount by $50 million on a calendar day but not more than four times per calendar year. On December 17, 2010, we terminated the Amended Treasury Services Agreement with Bank of America, our vault cash provider for a significant portion of 2010. Under the terms of the Contract Cash Solutions Agreement and the Amended Treasury Services Agreement, we paid a monthly cash usage fee based upon the product of the average daily dollars outstanding in all ATMs multiplied by a contractually defined cash usage rate. This cash usage rate is determined by an applicable LIBOR plus a mutual agreed upon margin. We are therefore exposed to interest rate risk to the extent that applicable LIBOR increases. On December 31, 2010, the currency supplied by Wells Fargo pursuant to the Contract Cash Solutions Agreement was $368.4 million. Based upon the average outstanding amount of currency to be supplied by during 2010, which was $337.8 million, each 1% increase in applicable LIBOR would have a $3.4 million impact on income before taxes and minority ownership loss over a 12-month period.
Our senior secured credit facilities under the Second Amended and Restated Credit Agreement bore interest at rates that can vary over time. We had 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. At December 31, 2010, the weighted average interest expense, inclusive of the applicable margin of 112.5 basis points, was 1.386%. Based on the outstanding balance on the senior secured credit facility of $81.0 million on December 31, 2010, each 1% increase in the applicable LIBOR would add an additional $0.8 million of interest expense over a 12-month period. At December 31, 2010, we had $0 drawn under the revolving credit portion.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2010
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2010
Consolidated Statements of Cash Flows for the three years ended December 31, 2010
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Global Cash Access Holdings, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Global Cash Access Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Global Cash Access Holdings, Inc. and subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Las Vegas, NV
March 14, 2011
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(amounts in thousands)
See notes to consolidated financial statements.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(amounts in thousands, except earnings per share amounts)
See notes to consolidated financial statements.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(amounts in thousands, except shares)
See notes to consolidated financial statements.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(amounts in thousands)
See notes to consolidated financial statements.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Global Cash Access Holdings, Inc. is a holding company, the principal asset of which is the capital stock of Global Cash Access, Inc. Unless otherwise indicated, the terms “the Company,” “Holdings,” “we,” “us” and “our” refer to Global Cash Access Holdings, Inc. together with its consolidated subsidiaries. Holdings, was formed on February 4, 2004, for the purpose of holding all of the outstanding capital stock of Global Cash Access, Inc. (“GCA”) and to guarantee the obligations under our senior secured credit facilities.
The Company is a provider in the United States and several international jurisdictions of cash access products and data intelligence services and solutions to the gaming industry. The Company’s services and solutions provide gaming establishment patrons access to cash through a variety of methods, including automated teller machine (“ATM”) cash withdrawals, credit card cash access transactions, point-of-sale (“POS”) debit card cash access transactions, check verification and warranty services and money transfers. In addition, the Company also provides products and services that improve credit decision-making, automate cash operations and enhance patron marketing activities for gaming establishments. These services are provided to patrons at gaming establishments directly by GCA or through one of its subsidiaries.
The Company also owns and operates a credit reporting agency for the gaming industry through a wholly-owned subsidiary, Central Credit LLC (“Central Credit”), which provides credit information services and credit reporting history on gaming patrons to various gaming establishments. Central Credit operates in both international and domestic gaming markets.
In April 2008, we completed the acquisition of Certegy Gaming Services, Inc. (“CGS”), an enterprise providing cash access and check products and services to the gaming industry similar to GCA. The results of operations of CGS have been reflected in the applicable business segment financial information following this acquisition. In August 2008, we completed the acquisition of Cash Systems, Inc. (“CSI”), a provider of cash access and related services to the gaming industries similar to GCA. The results of operations of CSI have been reflected in the applicable business segment financial information following this acquisition. In May 2010, we completed the acquisition of Western Money Systems (“Western Money”), a manufacturer of redemption kiosks devices. The results of operations of Western Money have been reflected in the applicable business segment financial information following this acquisition.
We announced on February 28, 2008, that we intended to exit the Arriva Card, Inc. (“Arriva”) business. The results of operations for the Arriva line of business have been classified to discontinued operations for the six months ended June 2009, and the year ended December 31, 2008. The Company determined that as of July 1, 2009, the results of operations for the Arriva line of business were no longer material, and the results of operations for the six months ended December 31, 2009 have been classified in continuing operations.
Innovative Funds Transfer, LLC (“IFT”) formerly known as QuikPlay, LLC was a joint venture that was formed on December 6, 2000 and owned 60% by GCA and 40% by International Gaming Technology (“IGT”). IGT is one of the largest manufacturers of gaming equipment in the United States. GCA was the managing member of this entity and IFT was consolidated in the Company’s consolidated financial statements prior to April 19, 2010, at which time GCA and IGT dissolved IFT. The dissolution of IFT did not have a material impact on the consolidated financial statements of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications for non-controlling interests as per FASB guidance have been made within the consolidated financial statements of the prior years in order to conform to the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all balances on deposit in banks and financial institutions. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances may at times exceed the federal insurance limits. However, the Company periodically evaluates the creditworthiness of these institutions to minimize risk.
Restricted Cash and Cash Equivalents
As part of certain of our sponsorship agreements, we are required to maintain minimum deposits as collateral for any potential chargeback loss activity occurring as a result of the sponsorship arrangements. All interest received on these deposits is also recorded to restricted cash and cash equivalents. As of December 31, 2010, the total balance of restricted cash and cash equivalents was $0.5 million.
ATM Funding Agreements
The Company obtains all of the cash required to operate its ATMs through various ATM Funding Agreements more fully described in Note 3. Some gaming establishments provide the cash utilized within the ATM (“Site-Funded”). The Site-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by GCA and GCA is liable to the gaming establishment for the face amount of the cash dispensed. In the consolidated balance sheets, the amount receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities. As of December 31, 2010 and 2009, the Company operated 1,510 and 1,456 ATMs, respectively, that were Site-Funded.
For our non-Site-Funded locations, up until December 13, 2010, GCA obtained the necessary cash to service these machines through the Bank of America Amended Treasury Services Agreement (“Treasury Services Agreement”). On December 17, 2010, GCA terminated the Treasury Services Agreement with Bank of America. On November 12, 2010, GCA entered into the Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”). Under the terms of these agreements, neither the cash utilized within the ATMs nor the receivables generated for the amount of cash dispensed through transactions on the ATMs are owned or controlled by GCA. These amounts have been netted and reflected in the consolidated balance sheets. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense in the consolidated statements of income. The Company recognizes the fees as interest expense due to the similar operational characteristics to a revolving line of credit, the fact that the fees are calculated on a financial index and the fees are paid for access to a capital resource.
Settlement Receivables and Settlement Liabilities
In the credit card cash access and POS debit card cash access transactions provided by GCA and GCA Canada, the gaming establishment is reimbursed for the cash disbursed to gaming patrons through a negotiable instrument. GCA receives reimbursement from the patron’s credit or debit card issuer for the transaction in an amount equal to the negotiable instrument issued to the gaming establishment plus the fee charged to the patron. This reimbursement is included within the settlement receivables on the consolidated balance sheets. The amount of unpaid negotiable instruments are included within settlement liabilities on the consolidated balance sheets.
Warranty Receivables
In the check services transactions provided by Central Credit, Central Credit warrants check cashing transactions performed at gaming establishments. If a gaming establishment chooses to have a check warranted, it sends a request to a check warranty service provider, asking whether it will warrant the check. The gaming establishment then pays the patron the check amount and deposits the check. If the check is dishonored by the patron’s bank, the gaming establishment invokes the warranty, and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. All amounts paid out to the gaming establishment related to these items result in a warranty receivable from the patron. This amount is recorded in other receivables, net on the consolidated balance sheets. On a monthly basis, Central Credit evaluates the collectability of the outstanding balances and establishes a reserve for the face amount of the expected losses on these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the consolidated statements of income. The Company writes off all warranty receivables that are older than one year in age.
A summary activity of the reserve for warranty losses for the two years ended December 31, 2010 and 2009 is as follows (amounts in thousands):
Discontinued Operations
On February 28, 2008, the Company announced its intention to exit the Arriva business. Accordingly, the operations for Arriva have been classified as discontinued operations for the six months ended June 30, 2009 and for the 12 months ended December 31, 2008. In July 2009, it was determined that the Arriva business was no longer significant and therefore not included in discontinued operations for the second half of 2009.
Unamortized Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of the senior secured credit facility and the senior subordinated notes are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Unamortized debt issuance costs are included in prepaid and other assets on the consolidated balance sheets.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation, computed using the straight-line method over the lesser of the estimated life of the related assets, generally three to five years, or the related lease term.
Repairs and maintenance costs are expensed as incurred.
Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of income.
Property, equipment and leasehold improvements are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when undiscounted future cash flows do not exceed the asset’s carrying value. As of December 31, 2010, the Company does not believe any of its property, equipment, or leasehold improvements are impaired.
Acquisitions
The Company accounts for business combinations in accordance with the accounting standards, which requires that the assets acquired and liabilities assumed be recorded at their estimated fair values. The Company completed its acquisition of Western Money in May 2010, in which 100 percent of the outstanding common shares of Western Money were acquired for a purchase price net of cash of $15.4 million. A final purchase price allocation has not been completed pending a determination of the fair value of intangibles. This acquisition did not have a material impact on the consolidated financial statements of the Company as of and for the year ended December 31, 2010.
The Company completed its acquisition of CGS in April 2008, in which 100 percent of the outstanding common shares of CGS were acquired for a purchase price net of cash of $20.8 million. In connection with this acquisition, the Company allocated the purchase price as follows: property and equipment of $1.6 million, intangible assets of $12.3 million, negative net working capital of $4.6 million and goodwill of $11.5 million. The Company recognized $1.7 million, $2.0 million and $1.3 million of amortization on CGS customer contracts in 2010, 2009 and 2008, respectively. The intangible assets of $12.3 million were assigned to customer contracts and are being amortized on an accelerated basis over their estimated useful lives as follows:
The following table shows the estimated annual amortization of the customer contracts (in thousands):
The Company completed its acquisition of CSI in August 2008, in which 100 percent of the issued and outstanding shares of CSI were converted into the right to receive cash in the amount of $0.50 per share and provided CSI with the funds to repay all of its outstanding convertible promissory notes, for a purchase price of $30.1 million. In connection with this acquisition, the Company allocated the purchase price as follows: property and equipment of $0.8 million, intangible assets for $14.4 million, negative net working capital of $0.8 million and goodwill of $15.7 million. The Company recognized $2.1 million, $2.4 million and $1.2 million of amortization on CSI customer contracts in 2010, 2009 and 2008, respectively. The intangible assets of $13.2 million were assigned to customer contracts and are being amortized on an accelerated basis over their estimated useful lives as follows:
The following table shows the estimated annual amortization of the customer contracts (in thousands):
There were no acquisitions during the year ended December 31, 2009.
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations.
The Company accounts for goodwill in accordance with FASB guidance, which addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This guidance also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company tests for impairment annually, or more often under certain circumstances. The Company does not believe that any of its goodwill is impaired as of December 31, 2010 and 2009 based upon the results of our impairment testing.
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2010 are as follows (in thousands):
The changes in goodwill to the cash advance, ATM and Check Services reportable segments of $6.4 million, $2.5 million and $0.7 million, respectively, during the 12 months ended December 31, 2009 are due primarily to an adjustment to the deferred tax asset acquired at acquisition of CSI as allocated to those segments. The changes in goodwill to the Central Credit and Other reportable segment during the year ended December 31, 2010 are due primarily to the acquisition of Western Money. All goodwill has been allocated to its respective reporting units, per the table above.
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests, if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
In performing the annual impairment test, we utilize the two-step approach prescribed under ASC 350. The first step requires a comparison of the carrying value of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units for Step 1, we use a combination of the income approach and the market approach. The income approach is based on a discounted cash flow analysis, or DCF method. This method involves estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value, using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The forecasted cash flows are based on our most recent budget and for years beyond the budget, our estimates are based on assumed growth rates. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the weighted-average cost of capital, or WACC, of market participants relative to each respective reporting unit. The market approach considers comparable market data based on multiples of revenue or earnings before taxes, depreciation and amortization, or EBITDA.
If the carrying value of a reporting unit exceeds its estimated fair value, we are required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit’s estimated fair value to its assets and liabilities. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying amount of goodwill, an impairment charge is recorded.
We conducted our annual impairment test for our reporting units during the fourth quarter of 2010 and no impairment was identified.
Key assumptions used in estimating fair value under the discounted cash flow approach included a discount rate of 12.5%, projected compound average revenue growth rates of 2% to 4% and terminal value growth rates of 2.0%. The discounted cash flow analyses for our segments included estimated future cash inflows from operations and estimated future cash outflows for capital expenditures.
Key assumptions used in estimating fair value under the market approach were based on observed market multiples of enterprise value to revenue and EBITDA for both comparable publicly-traded companies and recent merger and acquisition transactions involving similar companies to estimate appropriate controlling basis multiples to apply to each of the reporting units. Based on the multiples implied by this market data, we selected multiples of revenue of 0.5 to 2.3 times and multiples of EBITDA of 6.5 to 7.4 times.
The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation.
Other Intangible Assets
Other intangible assets consist primarily of customer contracts (rights to provide processing services to gaming establishment customers) acquired through business combinations and acquisitions, capitalized software development costs and the acquisition cost of our patent related to the “3-in-1 rollover” technology acquired in 2005. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018. Excluding the patent, other intangibles are amortized on a straight-line basis over periods ranging from 3 to 10 years.
Other intangibles consist of the following as of December 31, (in thousands):
Amortization expense related to these intangibles totaled approximately $6.9 million, $8.1 million and $7.2 million, for the years ended December 31, 2010, 2009 and 2008, respectively. There were disposals of fully amortized intangible assets of $0.5 million and $2.3 million in 2010 and 2009, respectively.
At December 31, 2010, the total amount of net book value of depreciable intangible assets was approximately $26.4 million. The anticipated amortization expense related to other intangible assets, assuming no subsequent impairment of the underlying assets, is as follows (in millions):
The Company accounts for the costs related to computer software developed or obtained for internal use in accordance with FASB guidance, which establishes that computer software costs that are incurred in the preliminary project stage should be expensed as incurred. Costs incurred in the application development phase and any upgrades and enhancements that modify the existing software and result in additional functionality are capitalized and amortized over their useful lives, generally not to exceed three years. These costs consist of outside professional fees related to the development of our systems. The Company capitalized $0.1 million, $1.1 million and $0.2 million, of development costs for the years ended December 31, 2010, 2009 and 2008, respectively.
Chargebacks
The Company has established an allowance for chargebacks on credit and debit card cash access transactions based upon past experience with losses arising from disputed charges by customers. Management periodically reviews the recorded balance to ensure the recorded amount adequately covers the expected losses to be incurred from disputed charges. The recorded allowance for chargebacks is included within accrued expenses on the consolidated balance sheets and had a balance of $0.1 million and $0.1 million as of December 31, 2010 and 2009, respectively. The Company expensed $0.3 million, $0.1 million and $0.3 million in chargeback losses on credit and debit card cash access transactions for the years ended December 31, 2010, 2009 and 2008, respectively.
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.
The carrying amount of cash and cash equivalents, other receivables, net, settlement receivables and settlement liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of GCA’s borrowings are estimated based on quoted market prices for the same issue or in instances where no market exists the quoted market prices for similar issues with similar terms are used to estimate fair value. The fair values of all other financial instruments, including amounts outstanding under the ATM funding agreements, approximate their book values as the instruments are short-term in nature or contain market rates of interest. The following table presents the fair value and carrying value of GCA’s borrowings (amounts in thousands):
(1)
Level 1 indicates that the fair value is determined by using quoted prices in active markets for identical investments. Level 2 indicates that the fair value is determined using pricing inputs other than quoted prices in active markets such as models or other valuation methodologies. Level 3 indicates that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment. Significant management estimates and judgment are used in the determination of the fair value of level 3 pricing inputs.
Inventory
Inventory, which consists of finished goods such as redemption kiosk devices, work-in-progress and raw materials, is stated at lower of cost or market. The cost of inventory includes cost of materials, labor, overhead and freight. Inventory is accounted for using the average cost method. Inventory as of December 31, 2010 and 2009 was $3.9 million and $0, respectively. All inventory was acquired as part of the Western Money acquisition in May 2010.
Revenue Recognition
The Company recognizes revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company evaluates its revenue streams for proper timing of revenue recognition.
Cash advance revenue is comprised of the fee charged to patrons for credit card cash access and POS debit card transactions. Revenue recognition occurs at the point a negotiable instrument is generated by the gaming establishment cage for the patron’s transaction or cash is dispensed from an ATM.
ATM revenue is comprised of upfront patron transaction fees or surcharges assessed at the time the transaction is initiated and a percentage of interchange fees paid by the patron’s issuing bank. These issuing banks share the interchange revenue (reverse interchange) with GCA to cover the cost incurred by GCA to acquire the ATM transaction. Upfront patron transaction fees are recognized when a transaction is initiated and reverse interchange is recognized on a monthly basis based on the total transactions occurring during the month.
In general, check service revenue is comprised of a fee based upon a percentage of the face amount of total checks warranted, and is recognized on a monthly basis.
Central Credit revenue is based upon either a flat monthly, unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated. This revenue is recognized on a monthly basis based on the total transactions occurring during the month. Revenue derived from our patron marketing products and services is recognized upon completion of services.
Western Money derives substantially all of its revenue from the sale of cash access devices such as jackpot and ATM enabled redemption kiosks and derives the balance of its revenue from the provision of certain professional services, software licensing, and certain other ancillary fees associated with the sale of, installation and operation of those devices. Revenue is recognized as products are delivered and or services are performed.
Cost of Revenues (Exclusive of Depreciation and Amortization)
The cost of revenues (exclusive of depreciation and amortization), represent the direct costs required to perform revenue generating transactions. The principal costs included within cost of revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor and check cashing warranties.
Advertising Costs
The Company expenses advertising costs as incurred. Total advertising expense, included in operating expenses in the consolidated statements of income, was $0.1 million, $0.1 million and $0.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is management’s practice and intent to reinvest the earnings in the international operations of our foreign subsidiaries, U.S. federal income taxes have not been provided on the undistributed earnings of any foreign subsidiaries except for GCA Macau. Some items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Foreign Currency Translation
Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each year. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income on the consolidated statements of income. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive income on the Company’s consolidated balance sheets.
Use of Estimates
The Company has made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes. The actual results may differ from these estimates. The significant accounting estimates incorporated into the Company’s consolidated financial statements include:
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the estimated reserve for warranty expense associated with our check warranty receivables;
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the valuation and recognition of share-based compensation;
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the valuation allowance on our deferred tax asset; and
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the estimated cash flows in assessing the recoverability of long-lived assets.
Earnings Applicable to Common Stock
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 resulting from assumed stock option exercises. The weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share is as follows at December 31, (amounts in thousands):
Stock-Based Compensation
Share-based payment awards result in a cost that is measured at fair value on the award’s grant date. Stock options expected to be exercised currently and in future periods are measured at fair value using the Black-Scholes model with the expense associated with these awards being recognized on the straight-line basis over the awards’ vesting period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimates.
The estimated per share weighted-average fair value of stock options granted during 2010, 2009 and 2008 was $4.24, $1.38 and $3.24, respectively.
We have estimated the fair value of options granted at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions in the years ended December 31,:
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility for options granted in 2010 was based upon our historical volatility. The expected dividend yield is based on the Company’s historical practice of not paying dividends.
Stock-based compensation related to time-based restricted shares is calculated based on the closing market price of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid, if any, on the Company’s common stock prior to vesting of the restricted stock.
Recently Issued Accounting Pronouncements
In January 2010, The FASB, Financial Accounting Standards Board, issued an update to the Fair Value Measurements and Disclosures topic as reflected in the Codification. This update adds new requirements for disclosures about transfers into and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. This guidance is effective for the Company beginning December 15, 2009 for most disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures.
3. ATM FUNDING AGREEMENTS
Bank of America Treasury Services Agreement
On December 19, 2007, GCA entered into the Treasury Services Agreement that allowed for the Company to utilize up to $360 million in funds owned by Bank of America to provide the currency needed for normal operating requirements for the Company’s ATMs. For use of these funds, the Company paid Bank of America a cash usage fee equal to the average daily balance of funds utilized multiplied by the one-month LIBOR rate plus a contractually defined margin.
Wells Fargo Contract Cash Solutions Agreement
On November 12, 2010, the Company executed the Contract Cash Solutions Agreement with Wells Fargo for a pilot period which began on November 18, 2010, and expired on December 13, 2010. Upon expiration of the pilot period of the Contract Cash Solutions Agreement, full transition of vault cash services from Bank of America to Wells Fargo occurred, and on December 17, 2010, the Company terminated the Treasury Services Agreement with Bank of America.
The Contract Cash Solutions Agreement allows for the Company to utilize up to $400 million in funds owned by Wells Fargo to provide the currency needed for normal operating requirements for the Company’s ATMs. For the use of these funds, the Company pays Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate.
The Company recognized the fees that it paid to Bank of America and Wells Fargo for cash usage pursuant to the Treasury Services Agreement and Contract Cash Solutions Agreement, respectively, which are reflected as interest expense in our financial statements for the following reasons:
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the Treasury Services Agreement and Contract Cash Solutions Agreement operate in a fashion similar to a revolving line of credit in that amounts are drawn and repaid on a daily basis;
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the resource being procured by the Company under the terms of the Treasury Services Agreement and Contract Cash Solutions Agreement are a financial resource and in the absence of such an arrangement, the Company would be required to obtain sufficient alternative financing either on balance sheet or off balance sheet in order to meet its financial obligations;
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the fees of the Treasury Services Agreement and Contract Cash Solutions Agreement are assessed on the outstanding balances during the applicable period and include a base rate which is tied to LIBOR and a margin; and
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the fees incurred by the Company under the Treasury Services Agreement and Contract Cash Solutions Agreement are a function of both the prevailing rate of LIBOR as dictated by the capital markets and the average outstanding balance during the applicable period as previously noted. The fees do not vary with revenue or any other underlying driver of revenue such as transaction count or dollars processed as is the case with all costs classified as cost of revenue such as interchange expense and processing fees.
Pursuant to the Contract Cash Solutions Agreement, the limit on the maximum allowable currency is $400 million. Wells Fargo has agreed to supply the Company with up to $50 million in excess of this limit for a calendar day up to four times per calendar year and subject to certain additional conditions and limitations.
At December 31, 2010 and 2009, the outstanding balance of ATM cash utilized by GCA from Wells Fargo and Bank of America was $368.4 million and $428.3 million, respectively. For the years ended December 31, 2010, 2009 and 2008, the cash usage fees incurred by the Company were $1.8 million, $2.1 million and $9.3 million, respectively. The cash usage fee is included within interest expense on the Company’s consolidated statements of income.
The Company is responsible for any losses of cash in the ATMs under its agreements with Bank of America and Wells Fargo. The Company is self insured related to this risk. For the years ended December 31, 2010, 2009, and 2008, the Company has incurred no material losses related to this self insurance.
Site-Funded ATMs
The Company operates ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. GCA is required to reimburse the customer for the amount of cash dispensed from these Site-Funded ATMs. The Site-Funded ATM liability is included within settlement liabilities in the accompanying consolidated balance sheets and was $28.6 million and $37.3 million as of December 31, 2010 and 2009, respectively. The Company operated 1,510 and 1,456 Site-Funded ATMs, as of December 31, 2010 and 2009, respectively.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following as of December 31, (in thousands):
5. BENEFIT PLANS
Defined Contribution Plan
The Company has a retirement savings plan (the “401(k) Plan”) under Section 401(k) of the Internal Revenue Code covering its employees. The 401(k) Plan allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 100% of their income on a pre-tax basis through contributions to the plan. As a benefit to employees, the Company matches a percentage of these employee contributions. Expenses related to the matching portion of the contributions to the 401(k) plan were $0.5 million, $0.5 million and $0.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Equity Incentive Awards
In January 2005, the Company adopted the 2005 Stock Incentive Plan (the “2005 Plan”) to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and thus to promote the success of the Company’s business. The 2005 Plan is administered by the Board of Directors but may be administered by our Compensation Committee. The administrator of the 2005 Plan has the authority to select individuals who are to receive options or other equity incentive awards under the 2005 Plan and to specify the terms and conditions of grants of options or other equity incentive awards, the vesting provisions, the term and the exercise price.
Generally, stock options and restricted stock granted under the 2005 Plan (other than those granted to non-employee directors) will vest at a rate of 25% of the shares underlying the option after one year and the remaining shares vest in equal portions over the following 36 months, such that all shares are vested after four years. Unless otherwise provided by the administrator, an option granted under the 2005 Plan generally expires ten years from the date of grant. Stock options are issued at the closing market price on the date of grant.
As of December 31, 2010, the Company had reserved 16,248,120 shares of common stock for the grant of stock options and other equity incentive awards under the 2005 Plan. On the first business day of each fiscal year beginning with the fiscal year commencing on January 1, 2006, annual increases will be added to the 2005 Plan equal to the lesser of: 3,800,000 shares, 3% of all outstanding shares of our common stock immediately prior to such increase, or a lesser amount determined by our Board of Directors.
A summary of award activity under the Company’s 2005 Plan as of December 31, 2010 and changes during the three years then ended are as follows:
In addition to the 2005 Plan, the Company granted our former Chief Financial Officer an option to acquire 722,215 shares of common stock as part of his employment agreement in 2004 (the “Hagerty Plan”). This option had an exercise price of $8.05 per share and would expire 10 years from the date of grant. Under the terms of the Hagerty Plan, 25% of the shares subject to the Hagerty Plan vested on July 12, 2005 and 1/48 of the shares subject to the Hagerty Plan vested on the 12th day of each month thereafter. Upon termination of Mr. Hagerty’s employment with the Company in July 2007, all of the shares subject to the Hagerty Plan immediately vested. During the years ended December 31, 2007 and 2006, Mr. Hagerty exercised his option to acquire 27,000 and 100,000 shares of common stock. At December 31, 2007, Mr. Hagerty had the option to acquire 595,215 shares of common stock. This option expired in January 2008.
In February 2008, under the 2005 plan, our Board of Directors approved the grant of options to issue 4.1 million shares of common stock to existing employees, newly hired employees and certain non-employee members of the Company’s Board of Directors. These shares vest over a four-year period. The estimated total fair value of the awards at the date of grant was $12.2 million. In February 2009, our Board of Directors approved the grant of options to issue 2.8 million shares of common stock to existing employees, newly hired employees and certain non-employee members of the Company’s Board of Directors. These shares vest over a four-year period. The estimated total fair value of the awards at the date of grant was $4.1 million. In February 2010, our Board of Directors approved the grant of options to issue 1.4 million shares of common stock to existing employees, newly hired employees and certain non-employee members of the Company’s Board of Directors. These shares vest over a four-year period. The estimated total fair value of the awards at the date of the grant was $6.4 million.
Stock Options
Stock options granted typically vest at a rate of 25% of the shares underlying the option after one year and the remaining shares vest in equal portions over the following 36 months, such that all shares are vested after four years and allow the option holder to purchase stock over specified periods of time, generally ten years, from the date of grant, at a fixed price equal to the market value on date of grant.
The following tables summarize additional information regarding the options that have been granted under the 2005 Plan and the option grant to our former Chief Financial Officer upon commencement of his employment in 2004:
The weighted-average grant-date fair value per share of the options granted during the years ended December 31, 2010, 2009 and 2008 was $4.24, $1.38 and $3.24, respectively.
During the year ended December 31, 2010, we recorded $6.3 million in non-cash compensation expense related to options granted that are expected to vest. As of December 31, 2010, there was $10.8 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 1.2 years.
During the year ended December 31, 2009, we received $2.9 million in cash from the exercise of 432,116 options. During the year ended December 31, 2009, we recorded $6.1 million in non-cash compensation expense related to options granted that are expected to vest.
During the year ended December 31, 2008, no options were exercised. During the year ended December 31, 2008, we recorded $7.1 million in non-cash compensation expense related to options granted that are expected to vest.
Restricted Stock
The Company began issuing restricted stock to employees in the first quarter of 2006. The vesting provisions are similar to those applicable to stock options. Because these restricted shares are issued primarily to employees of the Company, many of the shares issued will be withheld by the Company to satisfy the statutory withholding requirements applicable to the restricted stock grants. Therefore, as these awards vest the actual number of shares outstanding as a result of the restricted stock awards is reduced. These shares will vest over a period of four years. Prior to vesting, the restricted stock has rights to the dividends declared and voting rights, therefore they are considered issued and outstanding.
A summary of non-vested share awards for the Company’s time-based restricted shares as of December 31, 2010 and changes during the two years then ended are as follows:
During the years ended December 31, 2010, 2009 and 2008, we recorded $1.6 million, $2.4 million and $1.9 million in non-cash compensation expense, respectively, related to the restricted stock granted that is expected to vest. As of December 31, 2010, there was $1.3 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 1.1 years.
6. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office facilities and operating equipment under cancelable and non-cancelable agreements. Total rent expense was approximately $0.9 million, $0.6 million, $0.6 million, for the years ended December 31, 2010, 2009 and 2008, respectively.
At December 31, 2010, the minimum aggregate rental commitment under all non-cancelable operating leases for the years then ending was (in thousands):
Litigation Settlement Awards
VISA Check/MasterMoney Antitrust Litigation. The VISA Check/MasterMoney Antitrust Litigation began in October 1996 with the filing of lawsuits by certain retailers and retail trade associations against VISA U.S.A. Inc. (“VISA”) and MasterCard International (“MasterCard”).
In the action against VISA and MasterCard, plaintiffs claimed, among other things, that VISA and MasterCard, individually, and in conspiracy with each other and with their member banks, have violated the federal antitrust laws by forcing merchants who accept VISA and/or MasterCard-branded credit cards for payment also to accept VISA and/or MasterCard-branded debit cards for payment (the “Honor All Cards Policy”), and by conspiring and attempting to monopolize a market for general purpose point of sale debit cards. The plaintiffs claimed that the defendants’ actions caused merchants to pay excessive fees on VISA and MasterCard signature debit and credit transactions and on on-line PIN debit transactions, and have injured competition, merchants and consumers.
On June 4, 2003, the plaintiffs entered into separate settlement agreements with VISA and MasterCard. Under terms of the settlements, VISA and MasterCard agreed to eliminate their “Honor All Cards Policy”, to lower debit card fees for an interim period by one-third and to refund over $3 billion to merchants who accepted their cards from October 1992 through June 2003. As the Company accepted VISA and MasterCard branded debit cards during this covered period (i.e. October 25, 1992 through June 21, 2003), we were members of the covered class and entitled to settlement under the agreement.
In December 2007, the Company’s claim award was affirmed by the court. We engaged a third party to assist us in the preparation of the claim and collection of any award due to us in this action. For this service we agreed to a collection fee that would be deducted from any amounts received. The Company received $0.4 million, $2.8 million and $0.4 million, which it recognized as a reduction to operating expenses in the accompanying consolidated statements of income for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, the Company does not expect any additional payments against this claim.
Karim Maskatiya and Robert Cucinotta were members of the Company’s Board of Directors through the dates of their respective resignations of May 7, 2008 and May 20, 2008. On January 5, 2009, the Company commenced an action in the State of Nevada District Court, Clark County, against USA Payments and USA Payment Systems (together “USAP”), companies owned or controlled by Messrs. Maskatiya and Cucinotta in connection with various disputes relating to the Amended and Restated Agreement for Electronic Processing, pursuant to which USAP provided the Company with transaction processing services. In October 2009, USAP paid the Company $1.8 million pursuant to an executed settlement agreement and agreed to the settlement of all claims and matters between the parties.
Litigation Claims and Assessments
On March 22, 2010, an action was commenced by Sightline Payments, LLC in the United States District Court, District of Nevada, against Holdings and GCA. The complaint alleges antitrust violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act. The plaintiff seeks damages in the amount of $300 million and that such damages be trebled. On August 9, 2010, the District Court issued an Order and Judgment granting the Company’s motion to dismiss this action. On August 13, 2010, Sightline Payments, LLC filed a Notice of Appeal of the Order and Judgment granting the Company’s Motion to Dismiss and this appeal remains pending. The Company maintains insurance that will provide for reimbursement of certain of the expenses associated with this action. At this stage of the litigation, the Company is unable to make an evaluation of whether the likelihood of an unfavorable outcome is either probable or remote or the amount or range of potential loss; however, the Company believes it has meritorious defenses and will vigorously defend this action. On April 16, 2010, the Company commenced an action in the District Court of Nevada, Clark County, against the three current principals of Sightline Payments, LLC, all of whom are former executives of the Company. The Company alleges misappropriation of trade secrets, breach of contract, breach of duty of good faith and fair dealing and seeks damages and declaratory and injunctive relief. The Company has received a temporary restraining order barring the defendants in this action from making any continued disclosure of the Company’s proprietary and confidential information.
On July 7, 2010, an action was commenced by Automated Systems America, Inc. in the United States District Court, Central District of California, against Holdings, GCA and certain current employees of GCA. The complaint seeks a declaratory judgment of invalidity, unenforceability and non-infringement of certain patents owned by the Company and alleges antitrust violations of Section 2 of the Sherman Act, unfair competition violations under the Lanham Act and tortuous interference and defamation per se. The plaintiff seeks damages in excess of $2 million, punitive damages, and a trebling of damages associated with the allegations under Section 2 of the Sherman Act. On March 3, 2011, the Company filed a motion to dismiss this action. The Company maintains insurance that may provide for reimbursement of some of the expenses associated with this action. At this stage of the litigation, the Company is unable to make an evaluation of whether the likelihood of an unfavorable outcome is either probable or remote or the amount or range of potential loss; however, the Company believes it has meritorious defenses and will vigorously defend this action.
Commitments
TSYS Acquiring Solutions, Inc. (“TSYS”) Processing Commitments. The Company obtains transaction processing services for Electronic Payment Processing from TSYS. Under terms of this agreement, GCA is obligated to pay TSYS monthly processing and hosting fees during the term of this Agreement which expires in June 2013.
7. BORROWINGS
Senior Secured Credit Facility
On November 1, 2006, GCA and Holdings entered into the Second Amended and Restated Credit Agreement with certain lenders, Bank of America, N.A., as Administrative Agent and Wachovia Bank, N.A., as Syndication Agent.
The Second Amended and Restated Credit Agreement significantly amended and restated the terms of GCA’s existing senior secured credit facilities to provide for a $100.0 million term loan facility and a $100.0 million five-year revolving credit facility, with a $25.0 million letter of credit sublimit and a $5.0 million swingline loan sublimit. The Second Amended and Restated Credit Agreement also contained an increase option permitting GCA to arrange with existing lenders and/or new lenders to provide up to an aggregate of $150.0 million in additional term loan or revolving credit commitments.
Borrowings under the Second Amended and Restated Credit Agreement bore interest at LIBOR plus an applicable margin, which is based on the Company’s Senior Leverage Ratio (as defined under the Second Amended and Restated Credit Agreement). At December 31, 2010 and 2009, the applicable margin was 112.5 and 87.5 basis points, respectively, and the effective rate of interest was 1.39% and 1.11%, respectively. Principal, together with accrued and unpaid interest, was due on the maturity date, November 1, 2011. GCA had the ability to prepay the loans and terminate the commitments at any time, without premium or penalty, subject to certain qualifications set forth in the agreement. Furthermore, the Second Amended and Restated Credit Agreement contained mandatory prepayment provisions which, under certain circumstances, obligate GCA to apply portions of its Excess Cash Flow (as defined under the Second Amended and Restated Credit Agreement) to prepayment of the senior secured credit facilities.
As of December 31, 2010, the scheduled quarterly amortization payments on the term loan portion of the Second Amended and Restated Credit Agreement were $250,000 through September 30, 2010. In December 2010, the Company repaid $15.3 million of the term loan thereby reducing the balance on this financial instrument to $81.0 million with the remaining balance of the term loan and any outstanding amounts under the revolving credit loans due to be repaid on November 1, 2011.
Pursuant to the Second Amended and Restated Credit Agreement, the senior secured credit facility was secured by substantially all of the assets of GCA and GCA’s wholly-owned domestic subsidiaries other than Arriva, and was guaranteed by the Company and all of GCA’s wholly-owned domestic subsidiaries other than Arriva.
The Second Amended and Restated Credit Agreement contained customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults, which are subject to important exceptions and qualifications, as set forth in the Second Amended and Restated Credit Agreement. Additionally, there was a covenant related to maximum allowable capital expenditures. The Company believes it was in compliance with all of its debt covenants that were applicable as of December 31, 2010.
As of December 31, 2010 and 2009, the Company had $81.0 million and $97.0 million, respectively, in borrowings under the term loan and $0 under the revolving portion. As of December 31, 2010 and 2009, the Company had $2.8 million and $4.1 million, respectively, in letters of credit issued and outstanding. The letters of credits issued and outstanding reduce amounts available under the revolving portion of the Second Amended and Restated Credit Agreement.
On March 1, 2011, the Company refinanced all of its indebtedness under the New Senior Credit Facility (See Note 12- Subsequent Events.)
Senior Subordinated Notes
On March 10, 2004, GCA completed a private placement offering of $235 million 8.75% Senior Subordinated Notes due March 15, 2012 (the “Notes Offering”). On October 14, 2004, we completed an exchange offer of the notes for registered notes of like tenor and effect. The Notes Offering resulted in proceeds to the Company of $228.3 million net of issuance costs and offering expenses. Interest on the notes accrues based upon a 360-day year comprised of twelve 30-day months and is payable semiannually on March 15th and September 15th. Proceeds of the Notes Offering were utilized to finance in part the redemption of ownership interests in us by First Data Corp and pay related fees and expenses.
All of the Company’s existing and future domestic wholly owned subsidiaries are guarantors of the notes on a senior subordinated basis. Under terms of the indenture, up to 35% of these notes may have been redeemed before March 15, 2007, at a price of 108.75% of face, out of the net proceeds from an equity offering. In October 2005, the Company redeemed $82.25 million of these notes plus $7.2 million of redemption premium, with the proceeds of its initial public offering (“IPO”) of equity securities. The Company may redeem all or a portion of the notes at redemption prices of 104.375% on or after March 15, 2008, 102.188% on or after March 15, 2009 or 100.000% on or after March 15, 2010.
As of December 31, 2010 and 2009, the Company had $127.8 million and $152.8 million in borrowings outstanding under the Notes Offering. At December 31, 2010, we believe that we were in compliance with all of our covenants under the Notes Offering.
On March 1, 2011, the Company defeased our obligations under the Senior Subordinated Notes (See Note 12- Subsequent Events.)
Minimum Aggregate Repayment Schedule
At December 31, 2010, the minimum aggregate repayment (excluding excess cash flow payments) for all borrowings for the years then ending was (in thousands):
8. CAPITAL STOCK
In September 2005, the Company completed an initial public offering of 16,064,157 shares of common stock at $14.00 per share. Existing stockholders sold 7,064,157 of these shares and the remaining 9,000,000 shares were sold by the Company. In October 2005, the underwriters exercised their option to purchase an additional 1,053,568 shares of stock from the Company and 1,165,656 shares of stock from the existing stockholders. The net proceeds to the Company from this combined equity offering were $130.9 million after deducting underwriting discounts. On October 31, 2005, the Company used $90.3 million of the net proceeds to repay $82.25 million of senior subordinated notes and to pay a redemption premium and accrued interest on the repaid notes. Also on October 31, 2005, the Company used $20.0 million of the IPO proceeds to repay $20.0 million of the term loan portion of the Company’s then existing credit facility.
Preferred Stock. The Company’s amended and restated certificate of incorporation allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of December 31, 2010, we had no shares of preferred stock outstanding.
Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of December 31, 2010, we had 85,006,446 shares of common stock issued and outstanding.
Common Stock Repurchase Program. On February 23, 2010, the Company’s Board of Directors authorized the repurchase pursuant to Rule 10b-18 under the Securities and Exchange Act of 1934, as amended, of up to an additional $25.0 million worth of the Company’s outstanding common stock, subject to the compliance with such contractual limitations on such repurchases under the Company’s financing agreements in effect from time to time, including but not limited to those relating to the Company’s senior secured indebtedness and senior subordinated notes. For the year ended December 31, 2010, The Company repurchased 2.0 million of its shares of common stock pursuant to this repurchase authorization for an aggregate purchase price of $7.7 million.
On April 8, 2010, the Company repurchased in a privately negotiated transaction 3,105,590 shares of its outstanding common stock from various entities affiliated with Summit Partners, L.P. for an aggregate purchase price of $25.0 million at a purchase price of $8.05 per share of common stock. Charles J. Fitzgerald is a managing partner of Summit Partners, L.P. and until his term expired on April 29, 2010, was a member of the Company’s Board of Directors. The Company funded this repurchase with cash on hand. This repurchase was made pursuant to a new authorization by the Board of Directors of the Company in March 2010, separate from the $25.0 million share repurchase program previously made on February 23, 2010.
Treasury Stock. In addition to open market purchases of common stock authorized under the Common Stock Repurchase Program, employees may direct the Company to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. For the year ended December 31, 2010, the Company repurchased or withheld from restricted stock awards 116,750 shares of common stock at an aggregate purchase price of $0.8 million to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards.
The following table provides the treasury stock activity occurring in 2010 (number of shares and cost in thousands):
9. RELATED PARTY TRANSACTIONS
Karim Maskatiya and Robert Cucinotta were members of our Board of Directors through the dates of their respective resignations of May 7, 2008 and May 20, 2008. 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 the Company entered into these agreements, Infonox was controlled by Karim Masakatiya and Robert Cucinotta, who were also then members of our Board of Directors, and during a portion of the period presented, Infonox was controlled by family members of Mr. Maskatiya. These family members of Mr. Maskatiya owned a majority of the ownership interests and controlled the Board of Directors of Infonox until the closing of the sale of Infonox to Total System Services, Inc. on November 4, 2008.
In June 2009, the Company repurchased 5,785,602 shares from Robert Cucinotta, which is believed to be all of the shares previously held by Mr. Cucinotta. In June 2009, Karim Maskatiya disposed of a number of shares in open market transactions, which is believed to be all of the shares previously held by Mr. Maskatiya.
Prior to obtaining processing services from TSYS, the Company obtained processing services, pursuant to the Amended and Restated Agreement for Electronic Payment Processing from USA Payments and USA Payment Systems (together “USAP”), a company controlled by Messrs. Maskatiya and Cucinotta. On January 5, 2009, the Company commenced an action in the State of Nevada District Court, Clark County against USAP in connection with various disputes relating to the Amended and Restated Agreement for Electronic Payment Processing. In October 2009, USAP paid the Company $1.8 million pursuant to an executed settlement agreement and agreed to the settlement of all claims and matters between the parties.
On April 8, 2010, the Company repurchased in a privately negotiated transaction 3,105,590 shares of its outstanding common stock from various entities affiliated with Summit Partners, L.P. for an aggregate purchase price of $25.0 million at a purchase price of $8.05 per share of common stock. Charles J. Fitzgerald is a managing partner of Summit Partners, L.P. and until his term expired on April 29, 2010, was a member of the Company’s Board of Directors. The Company funded this repurchase with cash on hand. This repurchase was made pursuant to a new authorization by the Board of Directors of the Company in March 2010, separate from the $25.0 million share repurchase program previously made on February 23, 2010.
Messrs. Maskatiya and Cucinotta previously controlled and may still control or own all or a portion, directly or indirectly, MCA Processing LLC, an assembler and distributor of redemption devices. From time to time in the past, GCA had procured those devices from MCA Processing, LLC, for usage by or sale to its customers.
Michael Rumbolz, who serves as a member of our Board of Directors, also serves as a member of the board of directors of Herbst Gaming, LLC (“Herbst”). The Company provides various cash access products and services to Herbst. Mr. Rumbolz receives both cash and equity compensation from Herbst in consideration for serving on the board of directors of Herbst, however, none of this consideration is tied in any manner to the Company’s performance or obligations under its cash access agreements with Herbst. In addition, Mr. Rumbolz was not involved in the negotiation of the Company’s cash access agreements with Herbst.
The following table represents the transactions with related parties for the years ended December 31, (amounts in thousands):
The following table details the amounts receivable from or (liabilities to) these related parties that are recorded as part of other receivables, net, accounts payable or accrued expenses in the consolidated balance sheets as of December 31, (amounts in thousands):
10. INCOME TAXES
In July 2006, the FASB issued guidance which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of this guidance and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company was subject to the provisions of the pronouncement as of January 1, 2007, and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.
We may from time to time be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company’s policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax expenses.
The income tax provision (benefit) attributable to continuing operations and discontinued operations for the years ended December 31, is as follows (amounts in thousands):
The following table presents the domestic and foreign components of pretax income and recorded income tax expense attributable to continuing operations for the years ended December 31, (amounts are in thousands):
The Company’s income tax provision attributable to income from continuing operations before income taxes consists of the following components as of December 31, (amounts in thousands):
The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate for the years ended December 31, is as follows:
The following table outlines the principal components of deferred tax items at December 31, (amounts in thousands):
During 2010 GCA, Inc. received a one-time dividend of $3.5 million from GCA Canada. The Company also intends to repatriate $1.4 million from Global Cash Access Switzerland A.G. (“GCA Switzerland”) in 2011. For all of our investments in foreign subsidiaries, except for GCA (Macau), S.A. (“GCA Macau”) and the aforementioned one-time repatriation events, deferred taxes have not been provided on unrepatriated foreign earnings. Unrepatriated earnings as of December 31, 2010, are approximately $3.6 million. These earnings are considered permanently reinvested, as it is management’s intention to reinvest foreign earnings in foreign operations. The Company projects that it will have sufficient cash flow in the U.S. and does not need to repatriate these foreign earnings to finance U.S. operations.
As a result of certain realization requirements under the FASB guidance on share-based payments (revised 2004), the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at December 31, 2010, 2009 and 2008 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $1.6 million if and when such deferred tax assets are ultimately realized. The Company uses the FASB guidance on income taxes ordering for purposes of determining when excess tax benefits have been realized.
As of December 31, 2010, the Company had a deferred tax asset recorded on the balance sheet of approximately $4.3 million related to foreign tax credits. Foreign tax credits can be carried forward to offset future U.S. taxable income subject to certain limitations for a period of 10 years. Approximately $0.6 million, $1.2 million, $1.0 million, $0.9 million and $0.7 million will expire in 2013, 2014, 2015, 2016 and 2017, respectively based on the years the foreign taxes were paid. As of December 31, 2010, the Company had a valuation allowance related to the foreign tax credit deferred tax asset of $1.5 million for the expected expiration of a portion of the foreign tax credit carryforwards, due to the uncertainty of future foreign source taxable income. In making such determination, we considered all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, projected future foreign source income, tax planning strategies and recent financial operations. These assumptions required significant judgment about the forecasts of future taxable and foreign source income. As of December 31, 2010, the Company re-evaluated the future ability to realize the foreign tax credit deferred tax asset based on future taxable and foreign source income. Based on this analysis, the Company believes there is insufficient evidence that the Company will utilize the foreign tax credit deferred tax asset. Accordingly, the Company is electing to deduct foreign taxes and is reversing the $4.3 million deferred tax asset and associated $1.5 million valuation allowance. This change in position relating to foreign tax credits increases the current tax provision by approximately $1.7 million.
As of December 31, 2010, the Company also has foreign tax credits available of approximately $2.6 million related to the Canadian and Swiss repatriations. Due to the uncertainty of future foreign source and taxable income, the Company is also electing to deduct these foreign taxes.
As of December 31, 2010, the Company has approximately $49.9 million accumulated federal net operating losses, inclusive of the increase in net operating loss attributable to deducting foreign taxes. The net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting in 2022.
As of December 31, 2010, we had a net deferred income tax asset of $131.5 million. We recognized a deferred tax asset upon our conversion from a limited liability company to a corporation on May 14, 2004. Prior to that time, all tax attributes flowed through to the members of the limited liability company. The principal component of the deferred tax asset is a difference between our assets for financial accounting and tax purposes. This difference results from a significant balance of acquired goodwill of approximately $687 million that was generated as part of the conversion to a corporation plus approximately $98 million in pre-existing goodwill carried over from periods prior to the conversion. Both of these assets are recorded for tax purposes but not for financial accounting purposes. They are amortized over 15 years for tax purposes, using the Company’s current earnings, this results in annual pretax income being approximately $52.3 million lower for tax purposes than for financial accounting purposes. At an estimated blended domestic effective tax rate of 36.4%, this results in tax payments being a maximum of approximately $19.0 million less than the provision for income taxes shown on the income statement for financial accounting purposes. Given the Company’s current estimates, this is an expected aggregate of $158.6 million in cash savings over the remaining life of the portion of our deferred tax asset related to the conversion. These deferred tax assets may be subject to certain limitations. We believe that it is more likely than not that we will be able to utilize our deferred tax asset. However, the utilization of this tax asset is subject to many factors beyond our control including our earnings, a change of control of the Company and future estimations of earnings.
As of December 31, 2009, the Company has provided a liability for $0.4 million of unrecognized tax benefits related to depreciation and restricted stock options associated with the initial accounting for the CSI acquisition. The recognition of this amount would not impact the Company’s effective tax rate, if recognized. As we have legacy CSI net operating loss (“NOL”) carry forwards that are required to be applied against any taxable income, the liability associated with these uncertain tax positions has been offset against the NOL carry forwards. We have not accrued any interest or penalties related to the unrecognized tax benefits. The Company anticipates that the total amount of its unrecognized tax benefits will be reduced by $0.2 million during the next twelve months.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2010, the Company’s tax years for 2007 through 2010 are subject to examination by the tax authorities. The company is currently under examination by the states of California for 2007 and 2008, and New York for 2007 through 2009. With few exceptions, as of December 31, 2010, the Company is no longer subject to U.S. federal, state, local or foreign examination by tax authorities for years before 2007. Tax year 2006 was open as of December 31, 2009.
11. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group consists of the Chief Executive Officer and Chief Financial Officer. The operating segments are reviewed separately because each represents products that can be, and often are, sold separately to our customers.
The Company operates in three distinct business segments: (1) cash advance, (2) ATM and (3) check services. These segments are monitored separately by management for performance against its internal forecast and are consistent with the Company’s internal management reporting.
Other lines of business, none of which exceed the established materiality for segment reporting, include Arriva, credit reporting services, Western Union, Casino Marketing Services, Global Recovery Services and IFT, among others.
The Company’s internal management reporting does not allocate overhead or depreciation and amortization expenses to the respective business segments. For the segment information presented below, these amounts have been allocated to the respective segments based upon relation to the business segment (where identifiable) or on respective revenue contribution.
The Company’s business is predominantly domestic, with no specific regional concentrations and no significant assets in foreign locations.
Major customers - For the years ended December 31, 2010, 2009 and 2008, the combined revenues from all segments for our largest customer, Harrah’s Operating Company, Inc. and its subsidiaries and affiliates was approximately $79.6 million, $92.8 million and $107.9 million, respectively, representing 13.3%, 14.1% and 16.1%, respectively, of the Company’s total consolidated revenues. In July 2010, Harrah’s announced its intention not to renew its agreements with us for the provision of cash access services with the Company, which expired in November 2010. Our five largest customers accounted for approximately 34.6%, 34.4% and 34.2% of our total revenue in 2010, 2009 and 2008, respectively. No other single customer accounted for more than 10% of our total revenue in 2010, 2009 and 2008.
The accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies.
The tables below present the results of operations and total assets by operating segment as of, and for the years ended December 31, 2010, 2009 and 2008 (amounts in thousands):
12. SUBSEQUENT EVENTS
Debt Refinancing
On March 1, 2011, GCA, together with its sole stockholder, Holdings entered into a Credit Agreement (“the Credit Agreement”) with certain lenders, Deutsche Bank Trust Company Americas., as Administrative Agent and Wells Fargo Securities, LLC., as Syndication Agent. The New Senior Credit Facility established under the Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility. The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swingline loans. The Credit Agreement also contains an increase option permitting GCA to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $50.0 million in additional term loan commitments. All $210 million of available borrowings under the term loan facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, no amounts under the term loan facility may be reborrowed. In addition, $4 million of available borrowings under the revolving credit facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, amounts under the revolving credit facility may be reborrowed.
The term loan requires principal repayments of one quarter of 1% of the aggregate initial principal amount of the term loans, or $525,000 per quarter as well as annual mandatory prepayment provisions based on an excess cash flow sweep equal to a fixed percentage of excess cash flow (as defined in the Credit Agreement). The remaining principal is due on the maturity date, March 1, 2016. GCA may prepay the loans and terminate the commitments at any time after the first year, without premium or penalty, subject to certain qualifications set forth in the Credit Agreement. Furthermore, the Credit Agreement contains mandatory prepayment provisions which, under certain circumstances, such as asset or equity sales, obligate GCA to apply defined portions of its cash flow to prepayment of the New Senior Credit Facility.
Borrowings under the New Senior Credit Facility bear interest at either (x) a specified base rate plus a 4.50% margin, or (y) LIBOR plus a 5.5% margin. The base rate minimum is 2.50% and the LIBOR minimum is 1.50%. Interest in respect of base rate loans is payable quarterly in arrears and interest in respect of LIBOR loans is payable in arrears at the end of the applicable interest period and every three months in the case of interest periods in excess of three months. Interest is also payable at the time of repayment of any loans and at maturity.
The New Senior Credit Facility is unconditionally guaranteed by the Holdings and each direct and indirect domestic subsidiary of GCA. All amounts owing under the New Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by GCA and a first priority perfected security interest in all other tangible and intangible assets owned by GCA and the guarantors.
The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults.
The significant financial covenants are:
Interest Coverage Ratio (as defined in the Credit Agreement)
Total Leverage Ratio (as defined in the Credit Agreement)
Excess Cash Flow Sweep (1)
(1)
GCA is required to pay a percentage of Excess Cash Flow, as defined in the Credit Agreement, which is based upon the Total Leverage Ratio, as defined in the Credit Agreement.
Sponsorship Agreement
On February 11, 2011, GCA entered into a Sponsorship Agreement with American State Bank. Pursuant to the Sponsorship Agreement, American State Bank will sponsor GCA into the credit card associations and various credit and debit networks to process ATM, credit card and debit card transactions on behalf of GCA in the United States on a non-exclusive basis. In addition, GCA has agreed to pay American State Bank a per transaction fee based upon the number of transactions processed by GCA and that are covered under the Sponsorship Agreement together with various incidental card association and credit and debit network registration fees and expenses. The initial term of the Sponsorship Agreement is for a period of five years and will automatically renew for additional one year periods unless either party gives the other party notice of its intent not to renew the Sponsorship Agreement at least 180 days prior to the expiration of the then current term of the Sponsorship Agreement. GCA is in the process of transitioning sponsorship services to American State Bank from Bank of America, the Company’s current sponsor bank.
13. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
14. GUARANTOR INFORMATION
In March 2004, GCA issued $235 million in aggregate principal amount of 8¾% senior subordinated notes due 2012 (the “Notes”). There were $127.8 million and $152.8 million in Notes outstanding at December 31, 2010 and 2009, respectively. The Notes are guaranteed by all of the GCA’s existing domestic wholly-owned subsidiaries. In addition, effective upon the closing of the Company’s initial public offering of common stock, Holdings guaranteed, on a subordinated basis, GCA’s obligations under these Notes. These guarantees are full, unconditional, joint and several. Global Cash Access (Canada), Inc. (“GCA Canada”), Global Cash Access (BVI), Inc. (“GCA BVI”), GCA Switzerland, Global Cash Access (HK), LTD (“GCA HK”), and GCA Macau; all wholly owned non-domestic subsidiaries, and IFT, a consolidated joint venture, do not guarantee the Notes. On March 1, 2011, in connection with the establishment of the New Senior Credit Facility, GCA irrevocably deposited into trust with the Bank of New York Mellon Trust Company, the trustee under the indenture, an aggregate of $133,711,666 in cash to pay and discharge the entire indebtedness on the Senior Subordinated Notes on March 27, 2011.
The following consolidating schedules present separate unaudited financial statement information on a combined basis for the parent only, the issuer, as well as the Company’s guarantor subsidiaries and non-guarantor subsidiaries and affiliate, as of and for the years ended December 31, 2010 and 2009.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
DECEMBER 31, 2010
(amounts in thousands)
*
Eliminations include intercompany investments and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
DECEMBER 31, 2009
(amounts in thousands)
*
Eliminations include intercompany investments and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2010
(amounts in thousands)
*
Eliminations include earnings on subsidiaries and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2009
(amounts in thousands)
*
Eliminations include earnings on subsidiaries and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF INCOME INFORMATION
YEAR ENDED DECEMBER 31, 2008
(amounts in thousands)
*
Eliminations include earnings on subsidiaries and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2010
(amounts in thousands)
(Continued)
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2010
(amounts in thousands)
*
Eliminations include intercompany investments and management fees
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2009
(amounts in thousands)
(Continued)
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2009
(amounts in thousands)
*
Eliminations include intercompany investments and management fees.
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2008
(amounts in thousands)
*
Eliminations include intercompany investments and management fees
(Continued)
GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE - STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2008
(amounts in thousands)
*
Eliminations include earnings on subsidiaries and management fees
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer, which are required pursuant to Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section of this Annual Report on Form 10-K includes information concerning management’s assessment of our internal control over financial reporting and the controls evaluation referenced in the certifications. The report of Deloitte & Touche, LLP, our independent registered public accounting firm, is also included below. Deloitte & Touche LLP’s report addresses their audit of our internal control over financial reporting. This section of the Annual Report on Form 10-K should be read in conjunction with the certifications and the report of Deloitte & Touche, LLP for a more complete understanding of the matters presented.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of December 31, 2010 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.
Management’s Report of Internal Control over Financial Reporting
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010. Deloitte & Touche LLP has audited our internal control over financial reporting as of December 31, 2010 as stated in their attestation report which is included herein.
Changes in Internal Control over Financial Reporting during the Quarter Ended December 31, 2010
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Global Cash Access, Inc.
Las Vegas, NV
We have audited the internal control over financial reporting of Global Cash Access Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 14, 2011 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Las Vegas, NV
March 14, 2011
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors, executive officers and corporate governance required by this Item is incorporated by reference to the section entitled “Proposal One - Election of Class III Directors” in the Company’s Definitive Proxy Statement in connection with the 2011 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2010. Information required by Item 405 of Regulation S-K is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information required by 10A-3(d) of the Exchange Act is incorporated by reference to the section entitled “Board and Corporate Governance Matters” in the Proxy Statement.
We have adopted a Code of Business Conduct and Ethics that is designed to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under. The Code of Business Conduct and Ethics is available on our website at www.gcainc.com. To the extent required by law, any amendments to, or waivers from, any provision of the Code of Conduct will be promptly disclosed to the public. To the extent permitted by such legal requirements, we intend to make such public disclosure by posting the relevant material on our website in accordance with SEC rules.
In May 2010, our Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by us of the New York Stock Exchange Corporate Governance listing standards as of that date.
We have filed, as an exhibit to this Annual Report on Form 10-K, the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under regarding the quality of our public disclosure.
Information required by this Item is incorporated by reference to the section entitled “Executive Compensation,” “Directors’ Compensation” and “Report of Compensation Committee” in the Proxy Statement.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference to the section entitled “Transactions with Related Persons” in the Proxy Statement.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference to the section entitled “Audit and Non-Audit Fees” in the Proxy Statement.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES [to be updated]
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2010
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2010
Consolidated Statements of Cash Flows for the three years ended December 31, 2010
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
All schedules have been omitted as they are either not required or not applicable or the required information is included in the consolidated financial statements or notes thereto.
3.
See Item 15(b)
(c) See Item 15(a)(2)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 2011
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott Betts and Mary E. Higgins, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant in the capacities and on the date indicated.